Fed Chairman "Banana Boat" Ben Benanke finally admits what we've known for years: Financial corporations ran wild because regulators did not force them to stay within the lines, and that caused the great recession. This, by the way, is the reason why the President's new financial reforms will not solve the problem: regulators have had the powers they need since the 1930s, but periodically choose not to use them, whether for philosophical reasons or because of corporate lobbying activities.

Instead of concentrating more power in an easily-corrupted federal regulatory agency, the best solution would have been to require these companies to comply with consumer-protection laws in every state and make it a mandatory ten-year prison term for the CEO if they don't comply. Now, neither my proposal nor the fed's new powers will prevent institutions from loading up with risky financial instruments. We already know that they create "off-the-books-entities" that they secretly own in order to invest in whatever they aren't allowed to own. Collapses at such entities have been key factors in some accounting scandals over the past several years.

We could make things ever more Byzantine, with regulators that regulate the regulators, who are in turn regulated by still more regulators. That still will not prevent the nation's financial regulation agencies from choosing to ignore their missions and allow misconduct to go unpunished. Mr. Bernanke is a very smart man--said to be the world's foremost expert on the Great Depression's causes and cures--but I have to disagree with anyone who thinks that adding a few new regulations is going to fix a problem caused by failure of regulators to do their jobs.

Dell has fallen a long way. At one time, the darling of computer buyers everywhere, Dell is facing a sharp backlash over a quality scandal. Dell is behind HP in the PC market, and continuing to lose ground. Dell even launched a line of Linux-powered computers, but those products are typically launched months behind comparable Windows products.

What is wrong with Dell? Quite simply, Dell is a publicly-traded corporation--one which once led the industry--and is therefore absorbed by the flaws common to most such entities:

• Dell cannot focus on the long-term, building its reputation for quality and value by actually offering quality and value, because its shareholders want ever-increasing profits. Dell needs to get back to its roots, selling top-quality products at reasonable prices. That is likely to mean that its products vanish from Wal-Mart stores, but then, knowledgeable computer support technicians usually advise consumers to avoid any brand they see in Wal-Mart or similar chains, because if price is the only driver, quality goes down the toilet.


• Dell's direct-purchase operation and its related finance company cannot focus on helping customers buy Dell products, but instead try to be the high-tech equivalent of the old Fingerhut sales and captive consumer finance business. Instead of the financing arm being a profit center, it should be merely a way to help consumers buy more Dell products, but that will require a complete change in management and direction within that organization.


• In a world where the lowest costs come from laying off domestic employees and hiring overseas workers to perform the work for as close to zero cost as possible, Dell is trying to lower its costs as a way to increase profits. Dell needs to manage its costs, but not to the extent that it hostilizes its workforce or dumps US workers in order to hire lower-cost foreign workers.


• Because Dell's Linux line is always so far behind its Windows lines, sales are likely to be abysmally low. And yet, all most Linux buyers want is out-of-the-box hardware compatibility and no requirement to pay for a Windows license they are not going to use. Dell could very nearly corner the market for Linux buyers by offering that on every product it sells. If they stopped exclusively recommending Windows products and advertised their Linux compatibility, their Linux (and no-OS) market would likely begin to grow, too.


• A big chunk of Dell's sales are to the enterprise market. In that market, organizations are looking to purchase large numbers of identical computers that meet some internal standard at the lowest possible per-unit cost. Dell may need to move more toward semi-customized (and therefore higher margin) products, at the expense of fewer units being sold at a time.

Remember, Dell was once one of those small, can-do companies, the kind you see on the cover of Inc magazine. They thrived, I'm sure, because they were not a big corporation, and they were therefore more willing to offer both quality and value to their customers. I'd like to see the old Dell return and get rid of the Dell that fills its products with crapware applications (trial software, garbage applications, and some that might even be justifiably called 'spyware').

I'd like to call Dell's customer service and speak to a helpful and motivated US citizen who can communicate with me and is willing and able to resolve my problems. I'd like to purchase a computer and not have to spend hours or even days getting rid of crapware. I'd like to buy a computer and find that Firefox and Chrome are preinstalled by default. I'd like to buy any model Dell makes without an operating system (OS), and without paying for a Windows license. I'd even like to stick a Ubuntu or Fedora GNU+Linux install disc into that computer and have everything (sound, video, WiFi, Bluetooth, etc) work just as well as it would under the leading proprietary operating system (i.e., Windows). At least with recent Linux versions, Broadcom WiFi cards have been very iffy. Better to avoid such products entirely, since some competitive products are just as good and have fully functional drivers for Linux.

Not that computers compatible with Linux will solve all of Dell's problems. Dell, like other computer makers is in a very low margin business, computer hardware, where the licensing cost of Windows is too high relative to the price of their products. In order to help defray some of thse costs, they and their competitors install the software we call "crapware" along with hooks into various online services in exchange for payments from the companies behind these products. Linux machines can help with that part, but Dell has more going on.

Dell was late to push its products into retail stores, where many people still go first to purchase computers. And unfortunately, in that environment, Dell's products look and perform like HP's products, which look and perform like Gateway/eMachines' products, and the stores' priority is to push the latest Windows/Microsoft Office software, not Dell's hardware. One thing that I think Dell needs is its own environment, where they can showcase their own distinctive products, rather than being a generic tool to showcase Windows. Maybe developing products that run Android or ChromeOS can help them there.

And of course, Dell has been in the news recently over the way it mishandled customers who purchased computers with defective motherboards. From what I've read, the motherboard issue wasn't even Dell-caused, but they improperly attempted to limit warranty claims and repair / replacement costs that the motherboards were causing. (I don't personally know this. It is just my understanding from the news stories I've been reading.) Whether true or not, the stories are not helping Dell's reputation at all.

Again, these types of problems are not exclusive to Dell. They are common to most larger corporations. Dell is just the one chosen to be in the newspapers and on the radio right now.

This article may disappear after a while. In essence, it lays out a set of conditions which might indicate that the recession is returning to bite us again. Then it lists eleven areas where it could be expected to show.

The problem with articles like this, of course, is that they quite often only gloss over the surface of the situation. The great bailout was never intended to solve the underlying causes of the recession, but instead, to hide the damage long enough to cause consumers and investors to regain their confidence and therefore revive a rally that shouldn't have happened to begin with. You see, here in California, housing prices began an irrational rise in the late 1970s or early 1980s. Real estate values rose so quickly that the state constitution was amended to limit the growth in property taxes. It is that real estate price growth that joined with other conditions to precipitate the crisis.

But in the late 1970s and early 1980s, it wasn't a crisis. At that point, our local governments--cities, towns, and counties--learned that rapidly-increasing real estate prices, especially when accompanied by high turnover, meant more money in their coffers. The state government learned that this also led to higher income tax revenues, which led to an unimaginable growth in the size of the state government, the school system, and local governments. All of this was based on using increasing real estate values as a "magic piggy bank."

It was utterly predictable that this would have to come to an end. What is not yet clear is whether the current period is that end or merely an interruption, similar to (but more intense than) the one in the early 1990s. If this is the end of the irrational increase in real estate prices, look for everything that has been tied to that magic piggy bank to slide with it. People extracting money from their homes were a big part of automobile sales in the 1990s through the 2000s and also:

• electronics and computers


• vacations, travel, and tourism


• investments in stocks and bonds


• second homes, residential rentals, and commercial real estate

They also played a big role in funding the budget growth of schools and colleges. The K-12 schools in California absorb around one-half of the state's budget. That money doesn't reach the classrooms--teachers often buy the supplies that they use out of their own pockets along with some of the supplies their students use--but is consumed by an ever-increasing number of highly-paid administrators. But the ability to fund that growth up to this point has largely come about because of the increased tax revenue which has its roots in the real estate magic piggy bank^TM.

That piggy bank may be going away soon (but no one knows for sure when it will happen), as real estate prices that soared far beyond any reasonable value come crashing back to earth. The result of this would be a horrendous time for everyone in the nation, along with many people in other parts of the world.

• Every bank, savings & loan bank, and credit union in the nation would suddenly find themselves "upside-down" as long-term values for nearly every property on their books plummet below the institutions' carrying values.


• Industries devoted to pumping up real estate sales and prices will suddenly be wiped out:
  
  
  
  1. real estate brokers and real estate agents
  
  
  2. mortgage brokers, mortgage bankers, and others who make loans secured by real estate
  
  
  3. escrow and title companies
  
  
  4. legal professionals (e.g., attorneys) specializing in real estate
  
  
  5. notaries public
  
  
  6. state and local government property tax assessors
  
  


• Those whose prosperity depends upon people withdrawing from their magic piggy banks and purchasing products and services will also suffer, including:
  
  
  
  1. retailers
  
  
  2. investment bankers
  
  
  3. tax-dependent organizations, such as governmental entities
  
  
  4. colleges, trade and vocational schools, and the K-12 school system
  
  
  
  

Personally, even with all the bailouts meant to camouflage it, I do not believe the recession has ended. What we've shown is that one can temporarily cover it up with great effort. We have not even begun to deal with the underlying issues and causes.

Among the things we haven't dealt with is the financial industries' incentive issues. We know they have very extreme incentives to increase revenue, but there appear to be few incentives for them to act on the behalf of their customers, the investors whose money they are gambling with. Tim Bray wrote a very accurate summary of this issue as part of a book review.

We haven't dealt with the incentives for local governments whose budgets depend upon property tax revenues to encourage gratuitous valuation increases and to channel (through their building permits and business licensing processes) local resources into real estate-related activities and industries. They should be all about making life better for their current and future residents, independently of how that affects real estate values.

We haven't dealt with federal tax policies that encourage people to ignore the true costs of buying and owning property. There are two main reasons why the mortgage interest deduction is a bad idea. First of all, if taxpayers are subsidizing your interest, most people are not going to rigorously examine the terms and rates. When they don't do this, they often miss other potentially-toxic terms in the contract. Secondly, it probably is not such a good idea to use taxes paid by those who do not have mortgages to subsidize those who do. That's totally a reverse Robin Hood situation: making lower income people, who cannot afford to own homes, subsidize the purchase by those who can afford to own homes.

I have to say that I do not own any real estate and currently have no plans to purchase any. Neither do I own any stock or bonds (other than some US government bonds purchased with a payroll deduction) and I have no current plans to buy any. I am not an investment advisor and this is not investment advice. This article is copyright © 2010, Walt Hucks and OTP.

Background: James Robertson has recently written and linked items about the collapse of many ad-based businesses, including magazines. While my viewpoint is not quite the same as his, I have to admit that advertising-dependent businesses have a much leaner future ahead than they have had in the past sixty-five years.

Last year, I spent some time working in West Plains, MO USA. This is a small town, about thirty miles away from the Arkansas state line. I stayed in a hotel there, and drove seven minutes to get to the office each day. During that seven minutes, counting commercials on the radio, signs, billboards, bumper stickers, fliers stapled to utility poles, and business logos painted on doors, windows, and vehicles, I counted over 100 ads. That is an incredible number, but it tells us that advertising has gotten a reputation for drawing in customers, who spend money. But what does this proliferation tell me? It tells me that the number of advertisers is proliferating, as are the number of outlets or media which are being used to convey those ads. It tells me that these ads are necessarily less effective on an individual basis than they formerly were reputed to be, for we would all be in the worst possible financial shape if even 5% of these advertising touchpoints (that is, individual exposures of one ad to one consumer) resulted in a purchase.

Advertising is very much less effective than we have been told. As the number of possible ways to reach potential customers skyrockets, the number of advertisements increases and consumers are forced to become less and less susceptible to the wiles of the pitchman. Advertisers, in turn, become more and more desperate to cut through the clutter and through consumers' defenses, so they go to greater lengths to make ads "personalized" and invasive.

Think about it: you buy the newspaper, and it has dozens of ads, paid for by dozens of advertisers. Same thing for buying a magazine. You turn on the radio and they hardly even play music during the peak "drive time" hours, because they are hitting you with one commercial advertisement after another. There are billboards one after another, with advertisement after advertisement. You turn on the television after you get home and there are ads after ads. If you change channels, you can find whole programs that are one big ad and you can even find networks that are merely a series of ads. You go online, and every site (including some parts of this one) hosts ads. The result is that--out of necessity--people are becoming advertising resistant.

Now, the newspaper and magazine industries were once high-flying fields where there was plenty of money. The local newspaper had their own printing plant, the largest distribution network in town, and employees ranging from ten to seventy years old. The reason they could afford to do all those things was high margins, based around advertisers bidding up limited space within their pages. What we have seen over the past forty years is that newspaper advertisers started cutting back, as they moved into radio, television, and then cable television ads. At the same time, these other media began to erode newspapers' readership with their greater immediacy and richer content.

With magazines, I don't think we've seen the great magazine shootout yet, but within the next few years, a few large magazine publishers will try to "save the industry" by consolidating a number of independent operations into their own, offering advertisers single-point ad purchasing. Like with terrestrial (broadcast) radio, this strategy will thin out the varying points of view that was the industry's strong point, alienating readers (listeners in the case of radio) and beginning a steep descent into the abyss of bankruptcy.

Indeed, the newspaper business had done something similar. A few large companies had bought up many of the formerly-independent papers. Those companies, then, had trouble paying on the debt they ran up during the purchasing sprees. In order to cut costs, they then cut local reporters and concentrated on the same wire service stories that were available everywhere. It is almost like the industry is killing itself.

But getting back to advertising-dependent businesses, I think the over-pervasiveness of advertising is dramatically reducing the financial return to advertisers, which makes them want to pay less for each ad, which ultimately sends ad-dependent businesses (whole industries full of them) into the waste bin. Those who own and manage such advertising-dependent businesses should take heed to this warning and try to develop other revenue streams.

The article gives six things that the author believes are holding back the real estate market. It is a good read.

I think, however, that real estate is headed downhill, and rightly so, until prices more closely match people's incomes in each community. In areas where the job market consists primarily of low-paying service jobs, home prices need to decline to levels unseen in twenty or thirty years. I'm not saying that they will--the only thing I can accurately predict is that there will be someone waiting to get paid when my paycheck comes--but it is necessary to restore balance to our economy.

Now, I happen to think that the days of easy-to-obtain credit are ending. We think they've already ended, but people are still financing the purchase of vehicles that cost a year's income. When this financial shakeout finishes, we might not have a bank on every corner waiting to issue high-interest credit cards to college students and others who can least afford them. Instead, we may find ourselves needing to save up most or all the money required for our purchases.

If this does occur, we cannot expect it to pass the real estate market without stopping to knock prices way, way down. In essence, the past sixty-five years have been an aberration in which easier access to loans enabled real estate prices to rise far above their natural levels, which served to attract more "investment" in real estate, which served to raise prices even further. The mortgage interest deduction (on the federal tax forms) merely served to accelerate this trend, as people stopped paying attention to their interest rate and other important terms of their loans because they felt that the costs were borne by taxpayers in general, and not by the individual purchasers in particular.

I have to make it clear, this is speculation, just like so-called real estate investing is really speculating. Neither I, nor anyone else, have knowledge of what will happen in the future or even any realistic way of assessing likelihoods. Real estate prices could begin recovering tomorrow and reach new highs by the end of the year. Or they could collapse so low that even the poorest renter can afford to buy his dwelling place. I happen to think that real estate prices are too high, and have been too high (at least in California) since the late 1970s or early 1980s, and that therefore, a once-in-a-generation price adjustment is ahead.

I remember you as a young child, so full of life and energy. You were a real boy, running and jumping and wrestling and laughing and talking. I am proud to have been a part of raising you. I am proud to have helped you improve your reading and math skills, to have sat you down in front of a computer, to have exposed you to Linux and FreeBSD, and to have enrolled you in college classes years before your peers.

When some of your teachers believed you had no future, I knew better. God made you and placed within you gifts and talents that set you apart. He placed within you the dreams you are now leaving to pursue.

You will face challenges unlike any you've ever known. You'll be tempted to give up, to run back home like a scared puppy. Don't do it. This is a defining moment in your life, and you're going to have to overcome all these challenges in order to build the kind of character that will get you through real life.

As a Christian believer, it is important to understand that real men, real servants of Christ, are not perfect in any way, but we know we have to depend upon him who is perfect for everything we expect to accomplish. I urge you, therefore, to make time for the Bible, for prayer, and for other believers as part of your daily life.

Finally, don't be afraid to prioritize, to pare away things that are unnecessary (even if they are desirable), in order to devote scarce resources to the things that are necessary to accomplishing the mission. Always know that I'm behind you and I'm proud of you.

This is a personal note. Doubtless, you've already experienced the child going away to college. I'm new to this.