Critical Decision from the Federal Reserve May Affect the Bail Industry

• January 10, 2011
• by Collateral Staff
• In the News

For millions of people, the 2010 mid-term elections portend an enormous change in the attitudes of Americans with respect to the direction of the economy, social issues and the nation as a whole. Having recaptured a majority of seats in the House and narrowing the deficit with Democrats in the Senate, the Republican victory has been interpreted by both media pundits and the White House as an unabashed repudiation of national policies these last two years.

Wherever you may stand on the issues, we can say that politically speaking, only time will tell.

However, another even more substantial event occurred election week, conveniently, the day after the elections. Though much less publicized, because, truth be told, it wasn't quite as attention-grabbing as the national political mudslinging during the months leading up to elections, it is nonetheless far-reaching in its scope for ordinary Americans.

And whether you are an owner of a bail agency or a valued employee, yes, you too in all likelihood will feel the residual effects in your day-to-day operations.

In a last-ditch effort to stimulate a clearly moribund economy, Federal Reserve Chairman Ben Bernanke announced that the Fed would be implementing what is commonly called QE2, (quantitative easing, the second go around) to the tune, initially at least, of $600 billion. What this essentially means is that the Fed has announced that they will be the buyer of last resort for U.S. Treasuries - bonds, or IOUs. Since nations like China, which buys most of our debt, have indicated by word and action that they may be more reluctant to do so in the future (given their concern for the future of the U.S. dollar), the Federal Reserve, a private banking consortium, steps in to make up the difference and to ensure that the bond offerings of the U.S. government are indeed sold. The Fed's goal is to stimulate the economy, which they hope will lead to job creation and economic growth.

Given that we are bail bondsmen, not bond brokers, it would seem that these financial maneuverings on the part of Fed Chairman Bernanke have little relevance to our industry.

However, consider the following:
1. The decision by the Federal Reserve to purchase U.S. Treasuries to the tune of $600 billion (which, by the way, will likely be more than that when all is done), is in effect monetizing U.S. debt. In plain English, the Federal Reserve is printing more money (though the actual printing is done by the Treasury). Nevertheless, the act is highly, highly inflationary.

2. Bill Gross, Chairman of Newport Beach, California-based PIMCO, the world's largest bond fund, which has over $1 trillion in assets, said the following about the Fed's decision:

"I think a 20 percent decline in the dollar is possible. When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory - that is a debasement of the dollar in terms of the supply of dollars on a global basis."

3. While the Fed actions will undoubtedly increase the number of dollars circulating in the economy, those dollars will buy less and less.

4. While other industries are allowed to adjust their prices to reflect inflationary pressures, in the bail bond industry, our rates are set by the respective state insurance department. These rates do not adjust for inflation. Therefore, as inflation goes up, you still write the bonds at the same rate 10% or 8% rate, but you're earning less in real dollar terms. Your liability and bond costs remain the same, however, further eroding profits even more.

5. Assuming Bill Gross' prognostications are correct or even close, and there is a decline of 20% in the US dollar, a $50,000 bond written at the (California) industry rate of 10%, or $5,000, will buy only what $4,000 buys today. If that same bond were written at the rate of 8%, which is permitted under certain circumstances, $4,000, the real return is $3,200. Again, your bond costs alone further lessen any real nominal profits. And of course, your liability is the same.

6. However, not to be forgotten is the fact that with the economic recession, more and more of our clients are on payment plans in order to make bail premiums feasible. Receiving a $5,000 payment in full on a $50,000 bond is not as common today as it was three years ago, or even a year ago, in many cases. As the payments over time come in - assuming they do come in - what those dollars will actually buy becomes debased, and with the Fed's actions, much more precipitously at that.

To counter this, as bail bondsmen, we may consider diversifying the services we offer our clients to related businesses while remaining true to our core business, which is getting people out of jail. Every day, our actions save many people from losing their jobs, their homes, and their reputations. And I'm sure that I'm not out of line in stating that taken collectively, we enjoy helping people get their lives in order.

This article does not pretend to predict that the Fed's decision will lead to hyperinflation; that will be left to the economists - and the real test - time, to tell. And while it may be argued that in an inflationary environment, it becomes easier to pay off debts because of the injection of printed currency into the economy - and that's good for bail agencies who are owed money - it's also true that very quickly those dollars will be worth less and less.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, AboutBail.com.

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