Deke responds:
Thank you. Flattery’ll get you everywhere.
Actually, I’ve been dwelling more on big-picture economics for the past few months, which to me look a lot like a freight train full of fireworks crashing into a warehouse full of dynamite.
In my spare time, I’ve been trying to reconcile a nation that consumes so much more than it produces with an economy fueled by debt: two debt-financed wars, debt-financed stimulus checks, a monumental debt-financed bailout, and debt-financed campaign promises waiting to be kept.
And that's not all. We're also facing staggering levels of leverage in capital markets, consumer credit excesses, low savings rates, and astronomical trade and budget deficits, all funded with fiat money created out of thin air, the government hatching wealth on printing presses (hell, it no longer even has to to print money; now, it just keeps adding zeroes on computer screens). Credit contraction; deflation of real estate, stock, and commodities values; runaway government borrowing; hyperinflation of the money supply -- it's the predictable perfect storm that results from bankers and bureaucrats running an economy based on a paper currency that's tied to nothing of real value.
(I saw an analysis recently. It added the tens of trillions in federal financial guarantees to the hundreds of trillions worth of derivative instruments on the books of the megabanks -- and these are all paper trades, where one party’s asset is another’s liability -- and totaled the financial risk to the U.S. economy, alone, at a quadrillion dollars. It was the first time I’d ever seen the number; now you’ve seen it too.)
Anyway, I’d been focused on the broad view -- until, that is, the lame-duck feds issued the "final" rules on enforcing the Unlawful Internet Gambling Enforcement Act (UIGEA), passed in 2006. The Bush Administration moved forward with the ban the second week of November, even though it claimed it wouldn’t impose any new regulations after November 1. And the regulations were to be in place by January 19, 2009, though after a great hue and cry from opponents, the deadline was postponed till December 1, 2009.
The onus of UIGEA’s enforcement, of course, falls squarely on the shoulders of the banks and other financial institutions, which will be prohibited from processing payments from credit cards, checks, or electronic funds transfers to settle online wagers. And since these institutions’ payments systems are set up to do everything but comply with this law, it will create an enormously expensive and time-consuming hardship for the same institutions the feds are attempting to "bail out" and "jump start" to free the economy from its gridlock.
An additional situation is that UIGEA didn’t bother to define "Internet gambling." The bill, as I wrote in the previous QoD, was "sneaked into law as an addendum to an act that attempts to protect 361 U.S. seaports from potential terrorist threats, approved by committee and sent to the president without a formal vote or even debate, so early in the morning just before a five-week recess that most legislators weren't even there for its approval, probably never read the text, and possibly didn't know it was even happening." Thus, the authors of the UIGEA rider merely referred to existing federal laws that restrict the transfer of gambling funds and information across state lines, which are open to different interpretations and, some claim, are actually contradictory.
Thus, here we have the spectacle of compelling banks to enforce a law prohibiting conduct that Congress has yet to define.
This is, no doubt, the final ignominy of an administration obsessed beyond all rationality with Internet gambling, to the extent that it would pound the banks over the head with a sledgehammer at the same time it’s pumping them full of painkillers to alleviate their migraines.
Now, clearly, the Bush Administration is playing politics here, trying either to sneak through these rules to pay off friends and supporters -- major league sports, bricks-and-mortar casinos, morality lobbyists -- or to hope that the incoming administration, preoccupied with cleaning up all the messes it’s leaving, doesn’t get around to lifting the ban.
So, do I think that the Obama Democrats will let the rules fly? Well, let’s take a look.
First, plain common sense dictates that rational regulators would immediately repeal a law requiring private institutions to enforce an unenforceable law.
In addition, the Obama transition team is preparing a list, and checking it twice, of regulations and policies being implemented during the Waning Days of Bush, as all incoming administrations do. Any regulations imposed for overtly political reasons will probably be put out of their misery, swiftly and painlessly. The UIGEA qualifies.
It’s also true that Democrats tend to be less concerned with morality than Republicans, especially as it relates to business. Indeed, Barney Frank, the Democrat representative from Massachusetts and the chairman of the House Financial Services Committee, is a staunch opponent of the Internet gambling ban; his committee approved legislation that not only would have killed UIGEA, it would have also replaced the proposed rules with a formal process to define the term "unlawful Internet gambling." (That bill failed to clear the House or Senate.)
It’s true, too, that the government will need all the "revenues" (the euphemistic term for government confiscation of wealth through taxation, regulation, and penalization) it can get its grubby paws on, which could mean a concerted effort to "legalize" -- in other words, regulate and tax -- online gambling.
This is, admittedly, problematic, given the decentralized offshore operations of the Internet casinos, sports books, and poker sites (and the recent $20 million cheating scandal at Ultimate Bet and AbsolutePoker draws the regulation challenge in sharp relief). Still, the next Congress will reportedly play by "pay-as-you-go" rules, meaning that any legislator who introduces a bill that costs money to implement will have to show where that money is coming from; under those circumstances, all eyes will be on new sources of "revenue," like online gambling.
The likeliest scenario, from what I can see, is the same one responsible for the explosion of American casinos over the past: state politics. In fact, the Treasury Department’s 121-page brief on the enforcement of UIGEA specifically exempts intrastate cyber gambling. Even under the draconian Bush regulations, the states -- which can’t, after all, inflate their way out of fiscal difficulties by printing money -- appear to be at liberty to legalize online gambling within their own borders, which means hosting online gambling sites and allowing state residents to play. The handcuffs would finally come off Nevada, New Jersey, Mississippi, Connecticut, and others, which have waited for the crusaders in this administration to finally play out their losing hand. California, suffering from a massive budget crisis, could lead the way.
Build intrastate sites that offer poker and poker tournaments, blackjack and blackjack tournaments, and video poker and players will come. We could see the next wave of wide-open gambling before the UIGEA issue is laid to rest.
And I’m not ignoring the allusion to sports betting in your question, but that’s an answer for another day.
