2009-04-06: Software That Blew Up Wall Street
Category: finance and investments
Posted by: lnxwalt
How Michael Osinski Helped Build the Bomb That Blew Up Wall Street -- New York Magazine
I have been called the devil by strangers and ?the Facilitator? by friends. It?s not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It?s been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.
I wrote the software that turned mortgages into bonds.
So begins the most fascinating of stories. I have nothing to add. I suggest you go there and read it. Be aware that many publications remove stories after a certain time period. If it is no longer there, you just missed out.
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2009-07-20: Econolyptic Humor: 1929
Category: finance and investments
Posted by: lnxwalt
I just discovered this today. If you can't laugh at your situation (or the country's situation) you need professional help.
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2010-09-03: Econolypse: It Was The Regulators!
Regulators fell short in identifying and addressing problems, Bernanke says
Regulators fell short in using their powers "forcefully or effectively" to stop risky practices by banks and were slow to identify and address abuses in the U.S. financial system that led to global economic crisis, Federal Reserve Chairman Ben S. Bernanke told a panel investigating the financial crisis on Thursday.
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.
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2009-04-05: Stock Prices Rise. Does That Mean It's Over?
Category: finance and investments
Posted by: lnxwalt
Robert Paterson's Weblog: Stock Market - The Fundementals Have not Changed
Stock Market - The Fundementals Have not Changed
Before we go on, go read Mr. Paterson's article. Go ahead. I'll wait.
He points out that earnings are depressed, big bankers are insolvent, despite the accounting mumbo-jumbo that Congress forced the FASB to allow, and job losses continue. Nothing has changed, so the recent rise in stock prices is irrational at best.
In all these things, I believe he's being overly optimistic. If we measured unemployment by the same measure we used during the Depression, we'd get a lot more than 8.5% of the workforce out of work. Because of the lack of transparency, corporations still could be concealing large-scale losses that would wipe out their equity in the next few years. If anything, the FASB decision can only make things more opaque.
I am not an investment advisor, nor am I a stockholder. Even so, I am a fan of the "small amounts at regular intervals" investment approach. The one thing that bothers me about "get out now" is that we cannot predict when the real upturn will begin. Waiting until we're sure it has already started could mean missing the early days of an upward trend. That said, it looks to me like the economy will continue to fall for another year or so. It might be wise to heed Mr. Paterson's advice.
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2010-01-26: Bernanke May Get Second Term
Obama joins White House effort to boost Bernanke - Yahoo! News
"He has my strongest support. I think he's done a good job," Obama told ABC News.
"What we need is somebody at the Federal Reserve who can make sure that the progress that we've made in stabilizing the economy continues. I think Bernanke is the best person for that job," the president said.
With Bernanke's term expiring Sunday, Senate Majority Leader Harry Reid, D-Nev., expects a confirmation vote by the end of the week, his spokesman said. David Axelrod, a top White House adviser, said Bernanke has the votes to keep his job.
With this announcement, the President himself joins the effort to keep "Banana Boat" Ben Bernanke in office. Mr. Bernanke is the foremost expert on the Great Depression (the 1930s), and with the so-called recovery being a no-go, we may indeed need his expertise in the near future.
Yet, this ignores some serious errors in judgment. Whether it was Banana Boat Ben, Tim Geithner, or someone else, deciding to bail out the big financial companies merely rewards their reckless behavior. Yes, allowing them to fail would have caused an exceedingly deep recession, much deeper than what we are currently experiencing, but I am sure it would be ending by now.
The smaller financial institutions, the ones that were, for the most part, run more conservatively, are now facing high regulatory costs and other financial pressures that are squeezing them out of business, even as the big guys that caused the problem are able to report improved financial conditions. This is, in my view, an intentional choice that someone made. To preserve the largest institutions, even at the expense of the well-run and the local institutions that keep American small business's doors open.
Rather than this, a smart move would have been to issue an immediate freeze on foreclosures, followed by a mandatory re-pricing to market for owner-occupied residential properties. Yes, this would have wiped out most of the bigger institutions, and would have threatened many of the smaller ones also. But winding down the big guys in an orderly fashion would have benefited everyone, redirecting investment capital into local institutions that lack "market power".
In other words, re-confirming Mr. Bernanke will be seen as a reward for incompetence.
And yet, Mr. Bernanke wasn't the only one involved. The entire financial hierarchy really should be fired outright and forced to beg in front of the last surviving K-mart store.
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2009-03-11: Think Beyond Yourself
Category: management
Posted by: lnxwalt
With the economy's poor condition at the front of everybody's mind, it is easy to look only at one's own needs. I need to cut back enough to keep the doors open, so that I will continue to have an income. I need to make enough so that I can keep making the payments on my McMansion. I guess I'll have to cut some employees loose, so that I don't suffer too much.
You very well might have to cut staff. You might have to move your business to a lower-rent location. But let us not forget the employees, the customers, and the community. Make sure that you consider the impact on them in your decisions, but not to the extent that you wind up overstaffed and have to close the doors.
Your small, locally-owned business (SLOB) is not just about your needs. Your family-owned business (FOB) is not just about your family and its needs. Your owner-managed business (OMB) is not just about you. It is about all those things, but also the employees that carry out your vision, the customers who support it with their wallets, and the community around you, which is also a key part of your support network.
Face it. Because your business is small, Congress and the White House are not going to bail you out. They won't use money collected through threat and force (that is, tax money) to keep you in business. But your business, and its owners, managers, investors, and employees; together with the community around you, can help one another get through the rough patch and come out on the other side. Many businesses won't make it, and if yours is one of those, these key supporters will be the ones that help cushion the impact on you and your family.
The key takeaway here is to avoid the kind of self-absorbed thought that tends to happen in a crisis situation. You might not even recognize it, but your mind gets locked in a cycle, and you think and say the same things repeatedly. Your business won't survive if you let yourself get a wooden mind. You need to think beyond yourself--and involve employees in the thinking and planning process--to prevent that kind of slow-motion-watching-events-but-unable-to-change-them experience.
Have you ever been running or riding a bicycle and tripped or fell, and it seemed like it took ten minutes for you to hit the ground? You could clearly see what was happening, but you were powerless to change anything. That is exactly what it is like when your mind goes wooden during a crisis. You really do want to avoid that experience, and part of that is bringing these other "stakeholders" into the process of saving the business.
Do it now. Start today, while you still can.
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2010-01-16: 2010: A Year Of Challenges
Category: business startup
Posted by: lnxwalt
January is about half over and the only thing that seems clear about this year is that it will be challenging. The jobs situation is still bleak, and as long as it remains so, the economy cannot really heal. Since our national economy is transitioning from a corporation-centered economy to something that we do not yet comprehend, it could remain difficult for some time.
The national recovery effort is not having the impact that our leaders expected. And some of it was obvious already: "shovel-ready" public works projects are projects that were probably already going to be built, regardless of whether we used federal funds, state funds, or local funds. The only difference is where the taxes to pay for the projects must be raised. Thus, most contractors had probably already hired the help they needed for those projects. Poof! Billions of dollars thrown down the drain.
The financial institutions haven't been lending like they previously were. I have to admit that I haven't been in the market for a loan, not even to replace my vehicle, but even people that have been looking for financing are saying that it isn't like it was a few years ago. Certain credit card companies are dramatically shrinking their loan base--either by cutting loose customers or by reducing the credit limits available to those customers--with the effect that outstanding consumer credit is dropping quickly.
In one sense, that is a good thing. Getting out of debt, not being under the thumb of the banker, is always a good thing. Even so, very few of us can purchase a home or a newer car without financing the purchase. The credit restriction will affect the purchase of big-ticket items for the near future.
And into that situation, we find that a number of us need to launch small, locally-owned businesses, and soon. Why? It could be that a laid off worker is about to run out of unemployment insurance benefits--and the extended benefits--but still has not been hired anywhere else. It could be that a student is about to graduate from high school or college, and is not able to find a job, nor to pay for college classes. It could be that a family's landlord is about to lose the property, and the only way for the family to fund the purchase is to add another "earnings engine".
Not that starting your own business will be easy. You could face zoning-related issues, space or other resource limitations, or the failure of your family to recognize that "at home" does not always mean "available". You could face increased pressure, as your bills continue to rise and you struggle to pull in enough funds to cover them.
Whatever the source, you can expect that this year will be challenging. Perhaps things will ease up later in the year, but until then, things will get worse before they get better.
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Category: finance and investments
Posted by: lnxwalt
Glenn Atias explains the way that all of the financial turmoil was caused by a giant game, and the recovery plan is based around trying to camouflage the fact that we are not dealing with the causes. Rather than correct the problem, we have covered it up, hoping that the happy-happy times will return if no one knows that the schemers are still reaping the benefits of their schemes.
Whatever your political perspective, I still suggest you listen to this (21-22 mins) audio. I just ran across this, and thought we all needed to hear this.
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Category: finance and investments
Posted by: lnxwalt
FASB relaxes accounting rules for banks on assets
Joshua Shapiro, chief U.S. economist at MFR Inc., was more blunt, saying the FASB decision "allows financial institutions to use fictional valuations on many of their toxic assets" and further obscures their "true position."
In view of what looks like a long-term structural change, it is the height of irresponsibility to enable banks and other businesses to hide the decreased value of their holdings from the stock and bondholders who invest in them. In the case of mortgage loans, for example, the prices for the properties held as collateral for the loans are quite a bit lower than they were just a few years ago. It is deceptive to allow banks to use imaginary future values when no one has any idea how low prices might go or how long they might stay there.
I do realize that many banks and other businesses are already insolvent under mark-to-market. I also realize that this is another reason why financial institutions are hoarding cash rather than lending it as they attempt to meet their required capital levels. But this is their true condition. Rather than cover it up, we need to face the truth and deal with it.
Still, investor advocates and other critics assailed the FASB, which took the action ? with some dissension ? at a public meeting of its five-member board at its headquarters in Norwalk, Conn. The critics said the board had sacrificed its independence and buckled to pressure from lawmakers carrying water for banking industry interests.
The FASB received hundreds of comment letters opposing the moves in the two weeks since it proposed them from mutual funds, accounting firms and others contending they would damage honest financial reckoning by masking the deficiencies and risks lurking within the system.
A House panel last month wrung a pledge from FASB Chairman Robert Herz to try to issue guidelines in three weeks that would relax the mark-to-market rules to bring relief to the nation's banks in the financial emergency. The head of the House Financial Services subcommittee, Rep. Paul Kanjorski, D-Pa., had held out the threat of legislation to pressure the standard-setting board to take the steps.
And, yes, I do recognize that Congress pressured the FASB to push this through and do it quickly. This was a mistake. It may take ten or twenty years to see it, but this is going to come back to bite us. People are going to lose a lot of money because Congress wanted banks to be able to cover up their true conditions.
IceRocket: econolypse
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2009-12-16: Understanding The Roots Of The Econolypse
My first-ever podcast. Lots of "um" and "uh" fillers, but the basic concepts are there. If you are wondering what happened, why the economy collapsed, listen to this. You can also listen or download at http://lnxwalt.podbean.com/ .
Job losses from Great Recession about to get worse - Yahoo! News
When the Labor Department releases the January unemployment report Friday, it will also update its estimate of jobs lost in the year that ended in March 2009. The number is expected to rise by roughly 800,000, raising the number of jobs shed during the recession to around 8 million.
The new data will help illustrate the scope of the jobs crisis. Analysts think the economy might generate 1 million to 2 million jobs this year. And they say it will take at least three to four years for the job market to return to anything like normal.
"It's going to take a long time to dig out of this hole," said Julia Coronado, senior U.S. economist at BNP Paribas.
Even as the pundits proclaim an end to the recession, jobs continue to be a problem. "Yes, but they are a lagging indicator," you'll hear them say, "look at GDP instead." GDP, unfortunately, isn't really the best measure. A measure of the economy should capture the impact on the "average joe". Yet, according to the article, GDP has risen for two consecutive quarters.
Have you seen it? No? Neither have I, and neither have any of the people I talk with. GDP growth may be happening, but it is a Mardi Gras mask, hiding a hideous and deformed face behind a comic smile.
What I find surprising is that the article nowhere alludes to the drastic change in the nature of the industries still existing in our nation, which equals an equally drastic change in the number and types of jobs that may become available over the next several years. We have literally shipped the bulk of our manufacturing overseas, along with technical support, billing, and other usage of "call centers". We are very nearly at the point where we'll all work at that big blue discount store, selling each other imported goods made with slave labor. (I'm reminded of a scene in Demolition Man, where Sylvester Stallone's character learns that "all restaurants are Taco Bell.")
The people who worked at Chrysler? The ones who've lost their jobs will never regain them. The ones still working are likely to lose their jobs in the next year or two. General Motors? Not quite as bad, but not much prospect of returning to the go-go years of a Cadillac Escalade and a Chevrolet Suburban in every driveway, either.
A decade ago, we thought "tech jobs" would save us. But that doesn't seem to be the case. Semiconductors were gone even then, computer hardware followed suit. Software jobs? Moving overseas with surprising alacrity, after first importing underpaid foreigners to this country in order to reduce industry pay levels.
Finance jobs? Many of them remain, but increasingly, they report to overseas bosses and owners. It is only a matter of time before everyone except the paid-on-commission sales agent will be overseas.
In every case, it was poor management and cost-cutting strategies that lost the jobs. American management is simply awful. I often wonder why our management hasn't yet bankrupted every single business, putting unemployment levels near 100%. They are that clueless.
The solution, as I see it, is to get back to smaller, locally-owned businesses (SLOBs), who sell locally-produced products and services and provide local jobs. Instead of buying products that were shipped 5,000 miles, we need to be buying products that come from within 100 miles of our doorsteps. We need to be pressuring our state and local governments to stop trying to entice large, out-of-area corporations (LOOACs) to open a local branch, and to provide part-time, low-wage jobs, and to allocate those resources to building and growing SLOBs that will provide local jobs (hopefully better paying jobs than the LOOACs).
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2009-04-11: Fed Helps Banks Deceive Stock And Bondholders
Federal regulators have told the largest U.S. banks to keep quiet about their performance on government stress tests. They fear investors could punish companies with nothing to brag about.Fed to banks: Keep mum on stress test results: Associated Press Business News: US:BAC - MSN Money
In letters to the 19 banks undergoing tests of their financial strength, regulators told the companies not to disclose their performance during upcoming earnings announcements, according to industry and government officials who requested anonymity because they are not authorized to discuss the process.
This is another example of moving backwards, away from honesty and openness and back toward "state secret" treatment of anything negative. Yes, investors might pull their funds if they knew just how bad off some of the banks are. Isn't it enough that the "mark to market" rule has been repealed? Already, banks will no longer have to inform investors that there is little likelihood of receiving full value on outstanding loans if they go bad (because the value of the collateral has diminished so much and is likely to remain below its former appraised value for a decade or more). Now, even with much of their weakness already hidden, banks that are so weak that they fail a "stress test" are being told to conceal this from their investors.
I don't get it. Everyone knows by now that the economy is weak and the banks are worse. Large banks are especially weak. I would not put any faith in the announcements that BigBank X is making money. But investors invest. That is what they do. They may pull funds out of weak banks and then bid up shares in stronger banks. They may even pull their funds out and hold onto them for a few months. But we know that investors invest, and honest information from the banks and companies they invest in may result in reallocation of their investments, but not in the complete absence of investment. In other words, being open and honest is likely to hasten the end of the crisis as the weak sisters fold and the strong banks grow.
I mean, do you honestly think the government announcement is going to come before they shut down the weakest banks and pump more money into the rest to prop them up? By the time anything is made public, investors will have lost even more of their investments. If the government takes an 80% stake in a particular institution, the stockholders who used to own 100%, suddenly find their investment's value crushed by four-fifths.
We call this the econolypse, because it is revealing things about the economy that were formerly hidden. Our financial system did not just get this way. This has been building up over a period of twenty years or more. Banks and other financial companies were in this dismal condition for five to ten years, but it was all swept under the carpet. They were hiding their condition from their stockholders (also known as "financial reporting irregularities" whenever they became too blatant), investing in "guaranteed safe" high-return investments like credit cards, payday loans, and the now infamous subprime mortgage loans. They were gambling big time that the real estate market would continue to rise. So everything looked rosy, but underneath the petals was the decaying inner core we see today.
Are you prepared to go back to being blissfully unaware that the financial companies you deal with are putting your home, your job, and everything you have at risk in a reckless pursuit of higher bonuses? Or would you rather have the gamblers called out by name and thrown in jail so that this can't be repeated in two, five, or ten years? This administration, like the former administration, appears to be committed to covering up just how clueless America's big financial companies are, when they should be handing them spatulas and teaching them how to flip burgers.
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Tags: econolypse, great collapse
2010-01-16: CNBC Editor Tries To Justify Wall Street Payouts
How long before the compensation-cranks come after YOUR salary? And mine? Nobody wants to cut a pro quarterback’s pay when he throws a passel of interceptions. Congress didn’t demand steep pay cuts for workers at the automakers when they lost billions and got a government bailout; laid-off workers got 98 percent of pay for two years, and the union refused to give that up until late into the crisis of late ’08.Kneale: The Real Numbers on Wall Street Pay - CNBC
Yet on Wall Street, bonuses fell 40 percent in 2008 as the world melted down. Thousands were laid off, lost most of their accumulated wealth, saw their stock holdings plummet in value and watched their options become worthless.
Isn’t that already punishment enough? Surely it cuts down on moral hazard: these guys lost so much of their own wealth they will shy away from crazy risk for years to come.
Dennis Kneale actually has some good ideas, but he buries them in his defense of Wall Street's pay excesses.
Simply put, Dennis, we all know that the companies that brought down our economy are not really well. What we've done is permit them to cover up their desperately weakened conditions in the hope that many of their contingent liabilities never have to be paid out. And, for those firms that got bailout funds (including but not limited to TARP funds), taxpayers provided and may be continuing to provide backup capital to protect them against further losses due to those liabilities.
It simply isn't possible to justify paying these bonuses when the industry as a whole is still on life support.
And that is before we face up to the weakness of the case for such bonuses at all. In theory, these are supposed to align the interests of executives with the interests of shareholders. And, in the case of many financial firms, the biggest bonuses are not paid to executives, but to the traders who conduct the business upon which company profits are earned. But the truth is, the best way to align interests is to:
- pay part of each person's compensation in common stock
- seek to pay out fairly high dividends upon each share, so that stock ownership isn't about gambling on share price appreciation, but is about sharing in the fortunes of a (hopefully) successful, well-run business
We already know, from the poor performance of corporate America over the past two to three decades, that bonuses don't work. We know that whenever performance craters, boards of directors move the goal posts, so that managers still "win". We know that management stops focusing on strong and sustainable business operated in cooperation with the employees that make it all happen, instead concentrating on short-term game-playing (such as mergers and restructuring), whenever their pay is partially based on stock price growth.
If you have had a real job, you certainly figured out that most of your upstream is useless. Whether you work for a consumer-focused company or one that deals primarily with other businesses, top managers generally have no clue about what the business does for its money. Bonus-giving rewards those who generally have no better success at their jobs than they would throwing the money down at the roulette tables in Las Vegas.
I urge you to go read the article, however, because he has some really good ideas, such as the clawbacks and direct shareholder approval of compensation packages. His ideas fail, however, whenever the majority of shareholders are institutions (e.g., mutual funds, insurance companies) or insiders (including lower-level employees, who may face retailiation if their votes were known).
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2010-01-25: [Econolypse] Do We Still Believe These Guys?
GDP revision shows 6.3% decline in fourth quarter - MarketWatch
The U.S. economy experienced its most violent contraction in a generation during the fourth quarter, with real gross domestic product plunging at a 6.3% annualized seasonally adjusted rate, the Commerce Department reported Thursday in its third estimate of quarterly growth.
GDP hadn't fallen so much since the first quarter of 1982. It was the third largest decline in GDP in 50 years.
Economists believe the current quarter, which ends March 31, was nearly as bad. Current projections look for GDP to fall at a 5.1% annual pace. Since 1947, GDP has never fallen by more than 4% for two quarters in a row.
Amazingly, sites like MarketWatch look at these things and think that somehow, the economy is going to turn right around and start growing again. Tell me again why people trust their analysis. I think I missed something.
So here's the story. 70% of the economy is consumer spending. More than 10% of the workforce is out of work (some estimates say more than 20%). So that is an automatic loss of between 7 and 14% of our economy's earning power. Now, of course, there is unemployment insurance and the underground economy, which help to prevent that part of our workforce from starving to death.
Still you've got to wonder about those on-the-air financial pundits who tell us that things are about to change for the better. How could that be? The banks and other finance-related industries didn't fix their problems--they used tax money to cover up their weakened condition, together with accounting rule changes that allow them to pretend that the market value of the real estate (collateral for the loans they've made) hasn't fallen--and will not "recover" for long. Companies like GM haven't dealt with their problems, either--neither fuel-consumption, nor repairs & maintenance costs, nor emissions, nor the high prices of their products relative to most people's incomes, nor even the high compensation of their executive ranks relative to the people who actually make their products--and will not "recover" for long. (I wouldn't be surprised if Chrysler went into Chapter 7 bankruptcy later this year.)
And on top of all that, we have these massive job losses. In many cases, only low-skill, low-wage service (including retail and restaurant) jobs are available, so those who can get replacement jobs are taking 60% to 80% losses in their incomes. Let me tell you, it is quite different making $8,000 per year than it is making $64,000 per year. If I was an investor, I'd be putting my money into ramen noodle factories. I'm not an investor, in part because I view the markets as being manipulated. If I want to give money away, I'll buy a state lottery ticket. At least I'll know that 50% of the money goes to the schools.
No, the econolypse--the unveiling of the incompetence and manipulation that is at the core of our financial system--continues. We will see its effects return to the stock market in another year or two. In the meantime, we had better be preparing for a future in which only a few people have corporate jobs. We need to be unshackling homeowners from bothersome restrictions that would prevent them from launching business enterprises in their homes. We need to be eliminating the tax incentives given to draw corporations into our towns and cities (which amount to money taken from individuals and small businesses [those least able to afford to pay higher taxes] and given to large, out-of-area corporations [LOOACs] that could easily live without the subsidies).
Be aware that this past quarter saw a really sharp contraction, and that this current quarter is likely to see a similarly sharp contraction. Over a year or so, at these rates, the economy would lose about 1/20 of its size. And continued over a couple of years, some of us would be in danger of living in third world conditions.
Wake up! Get yourself going with your own small, locally-owned business (SLOB) and with your own home-based garden. Get active in your local government, pushing hard for a community garden and food bank. Don't forget to work for some kind of locally-based energy independence. Get active in your local church or synagogue, pushing for a "we're all in this together" effort to keep the whole congregation alive. We've seen a little bit of a rough time, but nothing like what our nation saw in the 1930s (nor, by my own memory, what we saw in the late 1970s through middle 1980s).
Turn off the television. Shut the newspaper. Avoid that news site. Not that I'm encouraging you to be ignorant. Instead, I'm urging you to be careful what information you allow to reach you. We already know that most of our news sources are tainted with someone's spin. It will get even worse as things become more and more clearly broken. The only way you'll be able to think clearly is if you make it a point to skip those news sources that you know to be filled with spin.
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2009-12-04: What's Up With Technorati?
Category: management
Posted by: lnxwalt
Like a lot of bloggers who are not at "A list" level, a lot of my traffic used to come from a small number of alternative search engines that focus on the blogosphere. Specifically, Technorati used to bring about 5 - 10% of the traffic, IceRocket 2 - 5%, and occasionally Sphere or someone else would bring visitors to read the content.
With Technorati, it was frustrating, because I often found that someone else was able to get more links and traffic with my content. That is, spammer blogs and scraper blogs filled the results. So I was initially glad to see Technorati cleaning out its index. But something funny happened in the process. My work disappeared almost entirely from Technorati.
Now, I have to say that Technorati wasn't ever a place where it was easy to find relevant articles, simply because their pages for any "tag" you look for were always clogged with dozens of identical posts, to the point where it wasn't even possible to find the original. In other words, whenever I chose to use Technorati to search for blog articles about something, it was a long, drawn-out process of going through hundreds of results to try and find the ones that were someone's actual writing instead of a scraper looking for ad revenue.
Still, Technorati's best point was the size and breadth of its index and its focus on blogs, as opposed to corporate (and government) PR pages. By flipping through its pages, one could find a lot of content, whether good, bad, or ugly. I'm hoping that, now that they seem to have cleared out most of the spammers and scrapers, they'll have an awakening to the need to get back to broadening their index. I can get "A list" results by seeing who Scoble links on Twitter.
I should point out that IceRocket, which has always had a more focused, cleaner index than Technorati's, has also been more difficult to get into recently. For example, I write a lot about the effects of the econolypse here. If you were to search either Technorati or IceRocket, you would not see many posts from Owner-Managed Business appearing in the results. But I think that few of the others write with the same quality--borne of a long and difficult collegiate process in pursuit of my BA in Business--or the same consistent coverage of the topic. (Yes, I'd have to say that Robert Paterson does a better job by both measures. In fact, Mr. Paterson's blog is considered "recommended reading".)
Technorati (and IceRocket, for that matter), need to be on their toes. Google is already the number one general search engine. Their blog search is not well-promoted, but should they do so, the blog-specific engines will have to do a lot better than they already do (albeit IceRocket has always served a pretty accurate results set, even if it is only a subset of blogs out there).
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2010-02-19: State Gov't Pensions Have $1B Gap To Fill
Category: Politics and Government
Posted by: lnxwalt
Study: States must fill $1 trillion pension gap - Yahoo! News
The Pew Center on the States released a survey Thursday of state-administered pension plans, retiree health care and other post-employment benefits in all 50 states that blamed a decade's worth of policy decisions for leaving them shortchanged.
The result for some states will be "high annual costs that come with significant unfunded liabilities, lower bond ratings, less money available for services, higher taxes and the specter of worsening problems in the future," the study said.
The cost of the trillion-dollar shortfall, which will be paid over the coming decades, is about $8,800 for each American household. The study did not include many city, county and municipal pension plans, which are thought to have similar underfunding.
The article says that an estimated $1 trillion dollars in unfunded state pension liabilities will have to be made up through some sure-to-be unpopular actions. It also says that local governments were not included in this study, but it is thought that they have a similar shortfall to cover. Also, Y!News articles don't stay up very long. In about ten days, you may not be able to find it again.
Are there similar unfunded liabilities in the federal government? Yes, there are. For one, Social Security is unfunded. Sure, there is a so-called fund for Social Security benefits. But that fund consists of federal bonds--IOUs--which are promises to pay back funds out of then-current tax revenues. In the case of borrowing from Social Security, this is done without openly admitting that the funds are being borrowed for current spending. It looks like we'll be in repayment mode later this year (2010) or early next year, so expect to see sudden growth in the federal deficit.
So how do we fix this? Well it didn't happen overnight, and a solution won't either. We got into this situation because it is politically popular to have benefit programs and military endeavors, but politically unpopular to raise people's taxes in order to pay for them. We'll either have to cut way back on the programs and endeavors, or we'll have to raise taxes sharply.
There is a third option: make a foolish move. What kind of foolish move? Well, one way would be to turn on the printing presses and inflate the currency rapidly, so that repaying these liabilities (in then-current dollars) would not be so expensive. This, of course, would scare foreign investors, including China. They would watch the value of their assets (dollars held as a result of American imports of their products and bonds held as a result of their funding our government's overspending) plummet, and they wouldn't be too happy about it. Another way is to default on some or all of the obligations. This may be inevitable, given the size of the deficit in proportion to National Income (NI), as measured by GDP. But that would mean that many exporting nations would refuse to do business with us, and many others would only use a cash-only basis. If the size of the shock to a foreign economy is large enough, it could even cause a war.
This, by the way, is more of the econolypse showing through. The econolypse, for those who haven't been paying attention, isn't just the present economic meltdown. The econolypse is the revealing of what has been going on behind the scenes in the economy. The negative effects we're experiencing are just symptoms of a deep and systematic disease. And unfortunately, both the present administration and the former have failed to deal with the roots of the sitatuation--instead, they have sought to bring back the veneer of prosperity which existed a few years ago (but which concealed a rotten carcass). States, particularly California, failed to set aside adequate reserves during the go-go years, when anyone with a pulse was offered a home loan, real estate prices were growing rapidly, and consumers borrowed on their homes in order to spend-spend-spend. Further, states looked at the situation and thought it would be permanent, so they based their financial futures on ever-increasing tax revenues. When the house of cards began to collapse, their dreams of always-upward revenues were broken. Now, we are left with figuring out how to pay benefits we promised to people who have already done the work for which the benefit was earned.
Personally, I'd like to see us raise and dramatically simplify taxes1, as well as sharply curtail government spending. There is always some group that benefits from an agency's existence, so it isn't easy to close them. But we'll have to close and consolidate some agencies, stop performing some functions, and tell a lot of people who had safe and secure jobs that they no longer have them. It will take years of stick-to-it persistence.
1 I favor absolutely no deductions or credits of any kind, for anyone, with two or three brackes: For those who earn under $20,000 per year (index these bracket amounts to inflation), zero tax. For those who earn $20,000 to $250,000 per year, 25% of each dollar above $19,999 should go to federal taxes. For those who earn over $250,000, I could support a third bracket at 35% of every dollar over $250,000. For corporations, I favor taking pay for managers and executives out of post-tax income (meaning no deduction for the corporation, so no subsidies from taxpayers for the company's management). I also favor taking debt repayment (bonds, notes, et cetera) out of post-tax income, because it isn't right for the rest of us taxpayers to subsidize corporations' unsound capital structures.
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Category: finance and investments
Posted by: lnxwalt
After a year of holy hell we may be witnessing an economic miracle: The Bank of America, so recently on life support, comes up with $45 billion in hard cold cash to repay TARP in less than a year. I mean this is one of the most amazing turnarounds since the 1969 Mets.Les Leopold: Wall Street's Latest Ponzi Scheme: Bailout Repayments?
Not only are the big Wall Street players repaying the bailout funds more rapidly than expected, but our president tells us that we, the taxpayers, are going "to actually reap billions in profits."
Time to celebrate? Or are the big banks paying back TARP with funny money and accounting tricks?
I, too, am wondering where these big banks that were so horribly broke are suddenly getting the money to pay back the TARP funds. It certainly isn't like they are making money by lending money to consumers and small businesses like we expect banks to be doing. Where are the banks getting this money?
The author of the linked article points out that the banks have access to all sorts of taxpayer-funded capital, and posits that they very well could be shuffling money from less-restrictive government funding to pay off the more-restrictive TARP funds.
What "Banana Boat Ben" Bernanke's Federal Reserve and Tim Geithner's Treasury Department need to be doing is shutting down these humongous banks, and favoring local and regional banks which will not be able to endanger the whole financial system the way that the larger ones did.
Think about it. If the corner market got into financial problems, would the government step in, saying the food supply to that neighborhood is threatened by the impending failure of said establishment? No, of course not. Neither should they step in to save overly-large financial institutions, but should instead allow the institutions' stockholders and bondholders to bear all the risk (in exchange, of course, for assisting those investors' efforts to "claw-back" excess compensation should those institutions fail).
If Joe's Market closes its doors, the Sheriff puts up a bunch of legal notices on the windows, and the banks and suppliers go after Joe and his spouse for any unpaid bills. If BigBankCo closes, taxpayers cover the losses, and the managers and investors lose only the right to get anything in the future. Yet, Joe is trying to make an honest living, while BigBankCo lives by sticking it to the company's customers (and the more BigBankCo sticks it to customers, the larger the bonuses get).
I often put it this way: If you or I tried to do the same things the banks and insurance companies do, we would be in prison. It isn't that any particular company in the financial industry is crooked, but the whole business is based upon dishonest practices. The funds that the bank lends are do not belong to the bank, they are your deposits and mine. Placing our money at risk by lending it out would be bad enough, but the bank lends in its own name, as though those funds truly belonged to the bank. Can you say, conversion?
Therefore, it is not out of the realm of possibility that the speculations of the above article could be substantially true. Obviously, I do not know, not having access to the banks' internal financial records. But thinking people (which should include you and I) ought to be asking questions and not simply accepting the answers they give us.
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2009-03-02: Stimulus Or Uncontrolled Spending?
Twitter / John McCain: #1. $1.7 million for pig o ...
#1. $1.7 million for pig odor research in Iowa
I am sure that any farmer who works around pigs wishes they smelled better. So there is probably a place for this research. But in an "economic stimulus" bill? What are our Congressmembers thinking?
$300,000 each for "world trade centers" in Montana and central Nebraska? $167,000 for the Gene Autry Cowboy Museum (the Autry National Center for the American West) in Los Angeles?
These guys are congregating around the money pot the way people congregate around the "male enhancement products" salesman at a perverts' convention. Hey, Congress--LISTEN UP! How about skipping everyone's pet projects and focusing on truly stimulating the economy?
How about taking back all the money and the bonuses that went to incompetent bankers and using that to help people who have lost homes and jobs? Let's see--extend unemployment benefits another three to six months and give the newly homeless deposit money for rental housing versus continuing to borrow from overseas to give it to the same banks and financial companies who failed to see and prevent the crisis to begin with? Which one should we do?
Here's more that we can do with that money:
- Allocate some portion of unemployment benefits toward job skills retraining. Continue to pay those who find no jobs available and return to college or vocational school.
- Offer funding and other assistance to those who are unemployed and wish to become business owner-operators. Now, this isn't just so that people will open twelve million new Herbalife or Amway dealerships. The individuals would need to show that these businesses could possibly succeed, removing them from the unemployment rolls.
- I have said before that our current employer-based health care insurance system is an embarrassing failure. With all the layoffs in our economy, a larger proportion of us will be without medical / dental / vision care insurance. Instead of throwing good money after bad (can anyone say "Citibank"?), include a basic medical / dental / vision care plan as part of unemployment insurance. Not something so ritzy that people will try to get fired so they can get health care, but something that will help people get by until they can replace their former employer-paid plans with something else.
- Force the big banks and insurance companies into bankruptcy liquidation. They are losing billions of dollars and draining our treasury. Get rid of the mess quickly and locally-based banks and businesses will arise within a couple of years to take up the slack. If we keep going the way we are going, this crisis could last a decade or more.
- Stop trying to prop up real estate and stock prices. Let them both fall to their natural level. How does this stimulate the economy? Simple: it will get all of the financial devastation of falling home valuations out of the way, so that people can rebuild their financial lives based on sound valuations.
- Finally, announce loudly that Washington is not responsible for individual Americans' financial health and futures. The individuals and their families are responsible for their own finances. Make it a policy of the law that dependence upon government intervention is to be discouraged and disincentivized in all activities of the federal government.
This will do as much or more to "stimulate" the economy as all of these government spending projects will do. The fact is, spending $332,000 on the design and construction of a school sidewalk will help school district employees and construction contractors a little, but the regular people in that community will see little or no effect of that money on their pocketbooks. A so-called world trade center in central Nebraska (Kearney?) will do nothing to increase tourism or to increase exports of beef, corn, soybeans, or pork, the major products of that area.
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Unexpected drop in jobless rate sparks optimism - Yahoo! News
Two years of steep job cuts all but ended last month, unexpectedly pulling down the unemployment rate and raising hopes for a lasting economic recovery.
Federal figures released Friday showed that the rate fell from 10.2 percent in October to 10 percent as employers shed the fewest number of jobs since the recession began two years ago. The government also said far fewer jobs were lost in September and October than first reported.
Oh, to be paid to write this tripe! No need to know a thing about the economy, or about Christmas-season hiring patterns. Just write what they give you. No one will know.
The problem? Last year, retailers were doing quite poorly, and hiring patterns reflected it. This year, retail sales are somewhat better, and retailers expecting an increase have hired heavily. On December 27th or 28th, retailers could very well release all of these new hires and more.
I do notice that the report mentions sharply-decreased layoffs. But we do not yet know whether Christmas sales will be high enough to keep shopping mall owners in business. Remember, they charge a fixed rental fee, plus a percentage of sales. They also typically (like most other real estate plans) are highly-leveraged. As the banks are starting to feel a little more secure, they are turning the screws on their customers, both individuals and businesses alike. Meanwhile, they still are not really lending to the smaller businesses that provide the majority of employment in our nation.
In short, it is smoke and mirrors until we see greater consumer spending and greater business investment in local economies (including hiring).
Think like a detective for a minute. If you wish to find out how the economy is doing, do you let some spinmeister from the government tell you? Remember a couple of years back, when someone asked then-President Bush a question about rising fuel prices, and his reply was "I haven't heard that"? The government, and its leaders do not have a clue about what is happening out in the real world. Well, what about the news readers ("anchor") on the big networks? Well, we already know that all they are is news readers. They aren't gathering and interpreting economic data themselves, so they can only tell us what someone else has told them. No, the way to understand what the economy is doing is to listen where small business owners and managers congregate and discuss the situations and conditions they are facing. Long before the banks got caught off-base, businesspeople were remarking about the proliferation of mortgage brokers and real estate agents. Businesses were seeing customers at fast food restaurants paying with credit cards, a sure sign of impending disaster, if not nationally, at least for the individual doing the purchasing. People were refinancing their homes to buy new vehicles or to pay for vacations. Strangely enough, none of the government leaders, important and influential economists, or network news readers understood this until the recession was in full swing. How can we rely upon them, then?
Ever since the econolypse started, hidden things in the economy have been exposed, including the utter cluelessness of our political elite. The same bozos who believed (and still do, apparently) that certain institutions are "too big to fail", and are therefore subject to extraordinary taxpayer investment and coddling in order to keep them open, are now saying that their numbers were inaccurate (shocking!), and everything is okay. Now, all that remains is to see whether Americans are still living under the spell of the media voices.
You want to know what the economy is really like? Tell your twenty-something to get a job. Heck, your best bet is to hire him yourself. At least then, you know he isn't spending all day on his XBox or PS3, because he will be busy complaining that you are working him too hard for the little that you're paying him. Another thing you can do is do a little reading. In the first few pages of that book is more wisdom than the major parties and their economist droids together can muster.
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Category: finance and investments
Posted by: lnxwalt
Obama denies bailout funds for automakers - Autos- msnbc.com
Two people familiar with the plan said bankruptcy would still be possible if the automakers failed to restructure. Those officials spoke on condition of anonymity because they were not authorized to make details public.
An exasperated administration official noted that the companies had not done enough to reduce debt; in some cases, it actually increased during this restructuring and review process. GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in first- and second-term debt, mainly to banks. GM owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion.
We've seen the administration's unswerving support for the greedy, unscrupulous, incompetent bankers and other financial companies that caused the economic crisis. If your business consists of shell games worthy of a carnival huckster, the government will bail you out if your business is large enough. Now we see the other side--companies that produce real jobs for real American workers are on their own--especially smaller businesses, but even huge enterprises like GM.
This from someone whose campaign was about "I'm one of you". Yes, we can. Change we can believe in.
Analysis: Obama tougher on autos than banks
President Barack Obama is dealing with the beleaguered auto industry more sternly than he has with bailed-out banks and insurers as he takes the nation another step into uncharted government regulation of industry.
The administration is tightening its oversight of bailed-out financial companies, too, but it has generally been more lenient in terms of time, personnel and other factors. Nor has Obama demanded that financial-sector workers and unions make more "painful concessions," although that sector is far less unionized than the auto industry.
Union contracts, it appears, are not as sacrosanct in the administration's opinion as the one it has left intact at AIG, which provided politically radioactive retention bonuses to employees.
Look. Everyone knows that Detroit has needed some truly radical change for a decade or more, and that the auto companies' managers and employee unions have resisted those changes because it would mean fewer people, lower compensation, and a less-structured, more flexible way of organizing their efforts. What is just as obvious is that the banks and Wall Street are in need of at least as much restructuring, and that the current administration proposals merely encase the status quo in a protective cocoon of regulation. The big banks and other large financial enterprises will still be run recklessly, only now they'll have protection by saying "government regulations require us to ...".
I am not even arguing for continued subsidies to the automakers. Surely, if either or both GM and Chrysler vanish, Ford's sales will go up, along with Honda, Toyota, and other remaining automakers. What I am saying is that the big bankers (and not the small ones, by the way) got us into this mess, but the government is pouring trillions of dollars into their rescue. The big auto companies are partly casualties of the bankers' actions, but the government begrudges them a billion here or a billion there.
What's more, there are thousands of well-run, locally-owned banks who only need for the government to allow the big banks to collapse under weight of their mismanagement. An orderly shutdown of the big banks and insurance companies would allow the better-managed locally-owned firms to take the lead in their local areas, spurring their local economies out of recession.
I certainly hope that the administration's financial people wake up one morning with brains in their heads, and that the result is that they stop rewarding incompetent financial executives.
As always, the opinions expressed are mine alone, and not those of any company, organization, government agency, or employer. I don't speak for them, and they don't speak for me.
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Category: Politics and Government
Posted by: lnxwalt
Social Security, Medicare dwindling in recession - Yahoo! Finance
Social Security and Medicare are fading even faster under the weight of the recession, heading for insolvency years sooner than previously expected, the government warned Tuesday.
Medicare already is paying out more money than it receives, something that happened for the first time last year. And Social Security will be by 2016, a year sooner than had been projected, the trustees' annual report said.
As I regularly say here, the reason we call this "the econolypse" is because it is revealing the things about our economy that are hidden, much as the apocalypse will be. Social Security could only have continued working if the working population continued to expand faster than the retired population. Given that the working population is set for a pretty drastic decrease just as the retired population grows dramatically, the coming collapse is pretty close to unavoidable.
Why? Well, think about how Social Security and Medicare work. A certain percentage of your pay is collected for the Social Security and Medicare funds. Because these funds are not needed right away, the government exchanges dollars for bonds--promises to repay the funds with interest--and quietly spends the money today. At some point in the future, there will be fewer people contributing to the funds and more people withdrawing from the funds. At that point, the funds will start bond-redemption. The government will have to pay the bonds off using then-current tax revenues.
Thus, workers in that time will face pretty hefty tax increases. This means they will work more and receive less. This could lead to some social unrest as ordinary workers experience the confiscatory taxation that only previously affected higher-earning brackets.
Every few years, there is another plan to "rescue" Social Security. Here's why most of them won't work:
- Raise the retirement age: This will have some impact. It works by delaying the time when retirees can draw benefits. Fewer people, drawing benefits for fewer years will work. However, there are many people who will suffer catastrophic illness and wind up draining both their finances and those of their family members simply because Medicare wasn't available to them. Our present corporation-focused employment model expects companies to "use up" their employees, who then retire for a few well-earned years of relaxation before they die. If we make it clearly unlikely that most employees will ever get free from "Mr. Slate", will they be as productive? Will they still allow Mr. Slate to use them up, seeing that they will have to work longer (until death for most people)?
- Reduce benefits: This is self-limiting. If benefits are reduced too much, it will be like eliminating the program, because most people will still have to work full-time just to have a place to stay and food to eat. Remember that Social Security's main purpose is to make it possible for older workers to leave their jobs, so that there will be more openings for younger workers. We have not seen the riots that Europe had when their young adults were unable to obtain employment in the 1980s and early 1990s. Nor have we seen the unrest we would suffer if we canceled everyone's retirement plans.
- Tax more of the benefits: This is another form of the reduce benefits ploy. Either pay retirees enough so they don't have to work, or stop playing games and let them work full-time. Giving it to them and then taking part of it back is merely a deceptive way of reducing benefits.
- Increase withholding: Raising taxes means that the Social Security "fund" will be larger. In theory, it means that there will be more money stored up for future retirees. In reality, all that money is immediately spent--exchanged for bonds or IOUs from the Treasury--and paying future retirees will get even harder if they are theoretically owed more money. Why? Because when the time comes to redeem these bonds, the funds needed will come from only one source: then-current tax revenues.
- Divert part of Social Security into the stock market: This was President Bush Jr's solution. Each individual was going to have his or her own investment account, paid for out of a portion of the Social Security taxes he or she is paying. The current down phase is not really a reason not to go that way. The primary reason that I can see is that most people have no idea about what investing is all about. They would be completely dependent upon the very same huge financial companies that are on taxpayer-funded life-support now; depending on companies that got into trouble in part because they were less than scrupulously honest. This idea would have invited the largest (dollar value) combined theft in history.
- Change its role: Convert Social Security into "welfare for the old". That is, use a means test and only those who are below a certain line get assistance. We may have to do this. But for all of us who have contributed over the years, it can be distressing to find that a central part of your anticipated retirement income is now unavailable to you.
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2009-11-17: Is Economic Hardship The Key To Racial Harmony?
The recession hit Henry County, for years one of the nation?s fastest growing areas, at a time when it was already struggling to come to terms with startling demographic change. In 1990, the county was almost 90 percent white. Now, as its population has more than tripled to 192,000, according to 2008 census estimates, the white percentage of the population has shrunk to 60 percent.The county?s elected government is still all white and Republican, and some leaders and newcomers alike have tried in various ways to make local board and governments more diverse. But nothing else has worked to remove barriers as quickly as economic hardship.?There used to be a lot of racial tension here, but everybody knows that we need each other to survive this recession,? said Eugene Edwards, the president of the Henry County branch of the National Association for the Advancement of Colored People. ?People now, they seem to be starting to care for one another.?A Racial Divide Is Bridged by Recession - NYTimes.com
I have always heard that during hard times, each ethnic group "sticks together" to try to deflect as many losses as possible into someone else's community. And yet, according to this NY Times article, the opposite is happening in one country in Georgia. Is this an aberration, or is it the beginning of a new pattern? It is hard to say. The article does point out that in much of the country, blacks are suffering far more than their white neighbors.
Frankly, I think that as Americans, we are one people. Our ancestry doesn't matter as much as our character and our willingness to reach out and help others without regard to their ethnic backgrounds.
This recession was caused, in my opinion, by the actions of people high up in large, out-of-area corporations (LOOACs) with "eyes wide shut" in Washington. The LOOACs and their managers did not worry about whether their greed would hurt more blacks than whites, or men more than women. To them, we are prey, and it matters not what little subdivision we might classify ourselves under.
Neither is the cure to be found in white-owned businesses, black-owned businesses, Hispanic-owned businesses, women-owned businesses, but in the overall mass of small, locally-owned businesses (SLOBs) of whatever classification the owners might be. This econolypse isn't just a really bad economic period. It is the unveiling of the things that were going on under the covers all along.
Unless we like having the legs knocked out from underneath our economy, we must learn the lesson that we must never concentrate too much power in the hands of any particular group. Democrats or Republicans, publicly-traded corporations or unions, Greenpeace or Exxon, congresspeople or judges, soldiers or spies, too much power in their hands threatens us all. For this reason, I encourage as many people as I can to get involved in city hall and to work in a small, locally-owned business. We won't solve every problem (there isn't any utopia), but we can sure avoid some of the problems that large and powerful organizations of every type bring upon us.
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Tags: econolypse, racerelations
2009-11-17: Is Economic Hardship The Key To Racial Harmony?
The recession hit Henry County, for years one of the nation?s fastest growing areas, at a time when it was already struggling to come to terms with startling demographic change. In 1990, the county was almost 90 percent white. Now, as its population has more than tripled to 192,000, according to 2008 census estimates, the white percentage of the population has shrunk to 60 percent.The county?s elected government is still all white and Republican, and some leaders and newcomers alike have tried in various ways to make local board and governments more diverse. But nothing else has worked to remove barriers as quickly as economic hardship.?There used to be a lot of racial tension here, but everybody knows that we need each other to survive this recession,? said Eugene Edwards, the president of the Henry County branch of the National Association for the Advancement of Colored People. ?People now, they seem to be starting to care for one another.?A Racial Divide Is Bridged by Recession - NYTimes.com
I have always heard that during hard times, each ethnic group "sticks together" to try to deflect as many losses as possible into someone else's community. And yet, according to this NY Times article, the opposite is happening in one country in Georgia. Is this an aberration, or is it the beginning of a new pattern? It is hard to say. The article does point out that in much of the country, blacks are suffering far more than their white neighbors.
Frankly, I think that as Americans, we are one people. Our ancestry doesn't matter as much as our character and our willingness to reach out and help others without regard to their ethnic backgrounds.
This recession was caused, in my opinion, by the actions of people high up in large, out-of-area corporations (LOOACs) with "eyes wide shut" in Washington. The LOOACs and their managers did not worry about whether their greed would hurt more blacks than whites, or men more than women. To them, we are prey, and it matters not what little subdivision we might classify ourselves under.
Neither is the cure to be found in white-owned businesses, black-owned businesses, Hispanic-owned businesses, women-owned businesses, but in the overall mass of small, locally-owned businesses (SLOBs) of whatever classification the owners might be. This econolypse isn't just a really bad economic period. It is the unveiling of the things that were going on under the covers all along.
Unless we like having the legs knocked out from underneath our economy, we must learn the lesson that we must never concentrate too much power in the hands of any particular group. Democrats or Republicans, publicly-traded corporations or unions, Greenpeace or Exxon, congresspeople or judges, soldiers or spies, too much power in their hands threatens us all. For this reason, I encourage as many people as I can to get involved in city hall and to work in a small, locally-owned business. We won't solve every problem (there isn't any utopia), but we can sure avoid some of the problems that large and powerful organizations of every type bring upon us.
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Tags: econolypse, racerelations
2009-11-17: Is Economic Hardship The Key To Racial Harmony?
The recession hit Henry County, for years one of the nation?s fastest growing areas, at a time when it was already struggling to come to terms with startling demographic change. In 1990, the county was almost 90 percent white. Now, as its population has more than tripled to 192,000, according to 2008 census estimates, the white percentage of the population has shrunk to 60 percent.The county?s elected government is still all white and Republican, and some leaders and newcomers alike have tried in various ways to make local board and governments more diverse. But nothing else has worked to remove barriers as quickly as economic hardship.?There used to be a lot of racial tension here, but everybody knows that we need each other to survive this recession,? said Eugene Edwards, the president of the Henry County branch of the National Association for the Advancement of Colored People. ?People now, they seem to be starting to care for one another.?A Racial Divide Is Bridged by Recession - NYTimes.com
I have always heard that during hard times, each ethnic group "sticks together" to try to deflect as many losses as possible into someone else's community. And yet, according to this NY Times article, the opposite is happening in one country in Georgia. Is this an aberration, or is it the beginning of a new pattern? It is hard to say. The article does point out that in much of the country, blacks are suffering far more than their white neighbors.
Frankly, I think that as Americans, we are one people. Our ancestry doesn't matter as much as our character and our willingness to reach out and help others without regard to their ethnic backgrounds.
This recession was caused, in my opinion, by the actions of people high up in large, out-of-area corporations (LOOACs) with "eyes wide shut" in Washington. The LOOACs and their managers did not worry about whether their greed would hurt more blacks than whites, or men more than women. To them, we are prey, and it matters not what little subdivision we might classify ourselves under.
Neither is the cure to be found in white-owned businesses, black-owned businesses, Hispanic-owned businesses, women-owned businesses, but in the overall mass of small, locally-owned businesses (SLOBs) of whatever classification the owners might be. This econolypse isn't just a really bad economic period. It is the unveiling of the things that were going on under the covers all along.
Unless we like having the legs knocked out from underneath our economy, we must learn the lesson that we must never concentrate too much power in the hands of any particular group. Democrats or Republicans, publicly-traded corporations or unions, Greenpeace or Exxon, congresspeople or judges, soldiers or spies, too much power in their hands threatens us all. For this reason, I encourage as many people as I can to get involved in city hall and to work in a small, locally-owned business. We won't solve every problem (there isn't any utopia), but we can sure avoid some of the problems that large and powerful organizations of every type bring upon us.
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Tags: econolypse, racerelations
ALL BUSINESS: Bank creditors still sitting pretty - Yahoo! Finance
"The sum total of the policy responses to this crisis has been to defend the bondholders of distressed financial institutions at the public expense," said John Hussman, who runs an investment firm in Ellicott City, Md.
Hussman is among critics who say bank bondholders shouldn't be shielded from all that has gone wrong in the past two years. "When one lends money to a financial institution, one also assumes the risk and responsibility of bearing the losses," Hussman observed.
This is an example of what is wrong with these bailouts. The bailouts protect those who intentionally put their companies and assets at risk in pursuit of higher returns. The bailouts put the cost of dealing with their bad bets on the rest of us, exactly where they should not be.
I believe that the bondholders should get a haircut. Actually, Congress should revoke the bailouts unless the bondholders make concessions, just the way the President is proposing for GM and its bondholders.
In other news, the Federal Reserve and the Treasury are seeking a "super-regulator" for overly-large financial organizations like AIG. Instead of just breaking them up into sensible and understandable pieces, we are supposed to believe that this new agency will be able to do what our current agencies could not: foresee the effects of the actions of the companies they regulate.
SEC chairman sees independent role for agency
The creation of a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year is a central idea in discussions of the regulatory overhaul.
The administration presented to Congress Thursday an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis that toppled once-mighty institutions and wiped out trillions of dollars in investor wealth. Treasury Secretary Timothy Geithner didn't specify where the authority as systemic regulator should reside, but the administration is expected to support awarding that power to the Federal Reserve.
On top of that, we have had a big problem with "regulatory capture", which is what happens when those who have the most at stake (i.e., regulated industries) gain excessive influence over the processes and decisions of the regulatory agency. Federal agencies intervening to prevent state regulators from enforcing state consumer protection laws is just one recent example of this.
There are a few things that, I believe, would be helpful. First of all, state regulators should get pre-eminence, as long as their requirements are at least as strict as federal requirements. In fact, the state regulators should get the ability to enforce federal regulations. I believe that OSHA works this way with state occupational safety agencies. Secondly, there should be rigid separation between different financial industries. Cross-industry companies should be broken up (by litigation, if necessary). A lot of the damage the economy has suffered appears to be caused by companies that understood one area entering an area outside their expertise. And finally (and most importantly), instead of adding another superfluous regulator, split up companies that get too big. As soon as one begins to think of any institution as "too big to fail", that organization is too big to leave in one piece.
Think about what these things mean. Marketing subprime mortgages to financially-weak borrowers probably violated some states' laws. That this was allowed to continue is solely because power was concentrated in Washington DC, instead of dispersed to state governments that are quite a bit closer to the area of conflict between victimized citizens and greed-crazed bankers. AIG is supposedly an insurance company, but got into trouble because they got into credit default swaps, a completely different business. And Citibank's size has prevented regulators from shutting it down and selling the assets to another company the way they would have "rescued" your hometown bank.
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2009-07-11: Foundation of Business Failure: Finance Games
Foundation of Business Failure: Finance Games
Restaurants on the Ropes - Rick Newman (usnews.com)
Other eateries are in a pickle. Fancy restaurants that had long waits a few years ago are now begging for customers and offering sales. Midpriced casual dining outlets are losing customers to cheaper fast-food joints. Even some dollar-menu franchises are suffering if they?re overdependent on mall traffic or clustered in regions where the economy is weakest. A key factor is debt: With sales down everywhere, many companies that borrowed heavily to remodel, expand, or buy other franchises now find that interest payments gobble up a nerve-wracking amount of cash flow.
One of the things they teach you in business school is that well-run companies try to balance their WACC to create the most efficient capital structure for the business. At least, they taught this at Cal State San Bernardino. This is probably true in big businesses, such as the LOOACs that got into money troubles and caused this recession. It is definitely not true for smaller businesses. By this, I mean that the most efficient financial structure for a smaller business is one that is composed mostly of equity investment, with a limited amount of debt financing in the mixture. Then again, watching the shipwreck of the economy caused by risky financing policies in major corporations and banks, one must consider that maybe this is also the best financial structure for larger corporations, too.
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Well-run smaller businesses try to minimize and avoid debt. Certainly, they do not expect to completely avoid the use of debt-financing, but they do recognize that even small amounts of debt dramatically increase the riskiness of their profit streams and endanger their ability to pay their bills and their employees.
US News and World Report tells us about some large restaurant chains that owe money and may have trouble repaying it unless the economy changes in the next few months. The lesson we should learn is that one borrows based on his present expectations, but no one knows what the future will bring. I conclude that there is some benefit from borrowing for expansion or remodeling, but that we have to also watch for the impact if our expectations turn out to be overly optimistic.
There are trends in the general environment that you and I cannot see until they splash upon the beach of public perception. This is what happened to the companies on this list. They borrowed funds for expansion, remodeling, or whatever. Then, the world changed around them, affecting their ability to remain profitable and to generate the cash-flow necessary to service their debts. If these companies, with hundreds or even thousands of outlets and paid expert forecasters, could fail to accurately predict the economic environment of today, it is very likely that you will also fail in that. A wise business-person will seek to reduce borrowing, sometimes even if it means slower expansion or reducing the near-term return to stockholders. (Of course, this also means that well-run businesses should seek to attract more long-term oriented investment instead of short-term "up the stock price" investment, but any sensible person knew that years ago.)
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2010-08-31: Double-dipping: Thinking About The Recession
what-the-double-dip-recession-will-look-like: Personal Finance News from Yahoo! Finance
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 bankTM.
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:
- real estate brokers and real estate agents
- mortgage brokers, mortgage bankers, and others who make loans secured by real estate
- escrow and title companies
- legal professionals (e.g., attorneys) specializing in real estate
- notaries public
- 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:
- retailers
- investment bankers
- tax-dependent organizations, such as governmental entities
- 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.
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2009-07-11: Economy: The Numbers Lie
The true measure of a nation's economy is in the workplaces, homes, and lives of average, ordinary people, those in the middle of the economic scale. It is not in aggregates that pack multi-millionaires and billion-dollar corporations into the numbers.
Why do I mention this? Because the government and the mainstream media act as though only large businesses and their managers truly matter. When large banks like Citibank got into trouble because of bad real estate loans, no one really tried to help those who'd been suckered in by the "refinance your home to pay off your bills" and similar come-ons--at least not for their own benefit--instead the focus was squarely on saving the banking system's largest and most poorly-run institutions.
Now the crisis is over. Individuals and families are still suffering, and will continue to suffer for the next year or two, but the biggest banks are profitable again and investors are no longer panicking. The MSM, acting as the propaganda voice of the political and corporate elite, is telling us that the whole thing is over. But is it?
Are individuals and families benefiting from more wide-spread employment yet? Remember that consumer spending is about 68% - 70% of our GDP. This is the same GDP that, according to ShadowStats.com's chart below, has fallen about 5% in the first half of 2009. Consumer spending is severely limited without increased employment, so a quick turn-around is not likely. Another way to look at it is to compare inflation-adjusted per capita income for the middle class over time. However, it is perhaps easier, if less accurate, to use the aggregate per capita income numbers. [XLS file]
I submit to you that the depression-recession is both worse and better than what you have heard on television. It is worse, because the government's figures were altered to make things look better than they really are (the most recent time this happened was during the Clinton administration, but they were hardly the first). So when government figures say that 15% of the workforce is unemployed once you include "discouraged workers", the true number could top 20%. When government figures say that the inflation rate is -2% annualized, it could actually be 6% annualized When government figures say that GDP is on track to drop by 2% this year, it could actually be working toward a 5% drop this year.
I honestly think more people are jobless, homeless, and hopeless than the published reports let on. I think the hype about the failing banks scared a lot of people, especially employers and managers, who reacted by cutting a lot of staffers loose. Creditors reacted by becoming hyper-aggressive in their collections activities, canceling accounts, raising interest rates, and changing their terms to be even more onerous and oppressive than they already were. And this knocked a lot of people who were in borderline financial situations into the seriously distressed camp.
On the other hand, the reason the government and the media are panicking isn't because Mr and Ms Average American are hurting. It is the financially above-average that own most stocks and bonds and which support most political organizations, including both major parties and pressure groups like Greenpeace and the US Chamber of Commerce. When those contributors are hurting, they can generate a lot of interest from the broadcasters and from various political pressure groups. When someone said the banks were about to melt down, the whole elitist apparatus freaked out, and that's what the government reacted to. This means that things very likely did not change that much for those of us in the average and below-average income groups.
Sadly, it seems that the economy isn't declining as precipitously as it was. Not that I want it to decline, but such a decline is necessary to erase the accumulated destructive effects of the past twenty or thirty years, effects such as the still-inflated real estate pricing and the low savings rate, the import-over-domestic orientation in purchasing, and the exaggerated influence with our government that large corporations have relative to that of individuals and smaller businesses. Unless these things are fixed, this little recession is just a foretaste of what lies ahead for us. I do not want us to go through a similar time. I would rather see the economic and political deadwood cleaned out and both our economy and our political system rebalanced with a stronger emphasis on individuals, small groups, and small businesses, and a much-reduced role for bigger organizations and corporations, whether call themselves AARP or Xerox.
The one thing that is certain (all the rest is speculation) is that large corporate organizations (e.g., National Educators Assn or GM) have too much influence in our country, far in excess of their contributions. That is true whether we rely upon the pre-digested numbers that we get from the mainstream media or we use someone else's measurements.
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Category: personal finance
Posted by: lnxwalt
Fed: household debt, net worth post declines - Yahoo! News
U.S. households, hit by declining home values and stock market losses, have cut back on their debt levels for the first time on record as loans remain scarce amid what appears to be a deepening recession.
I recently had a discussion with someone who told me that pyramiding debt was good for the economy. Well, when 70% of our economy runs on consumer spending, it definitely does have an impact. But debt brings increased susceptibility to the effects of economic distress, whether personal or regional or national. Why? Because debt means you have more bills to pay each month. And over time, debt means that you have less ability to purchase the things you want, because an increasing fraction of your "disposable" income is already taken.
Increased debt can also signal other problems:
- I want it now! Debt is frequently the result of being unwilling to wait and save up for purchases. The discipline really helps?sometimes, you realize you didn't want product X as much as you thought, and by saving up for it, you have funds to use toward something you really do want?and disciplined, controlled spending tends to lead toward a better personal economy.
- Out of sight, out of mind! Debt frequently happens when someone buys a product on a "no payments until 2010" plan and then waits until the time period ends before starting to pay for the purchased item.
- As seen on TV. Advertising-driven purchasing is good for the advertiser, but may not always be good for the consumer. (Disclaimer: we do have ads on some of our Web properties and will add more in the near future. We believe that advertising can be useful if potential purchasers use it as part of their product research. We do not encourage mindless response to any advertising anywhere.)
- My friends have this, now I want it. Peer pressure is a powerful tool for enforcing conformity. We warn our teens about it, but no high school ever had as much of it as any workplace. Because Joe bought a new vehicle, now you have to get one, and because you get one, Jane will also get one. Your mom was right: "If Joe jumped off a bridge, would you also jump?"
- I can't pay my bills, so I'll use the card. Often, debt is used to continue the lifestyle one is accustomed to living, even after the person's income is reduced below the amount that could support that lifestyle.
The other important thing about this, since these articles tend to vanish after a week or two, is that declining home values are also cutting people's net worth. It would be interesting to see whether Americans' indebtedness is dropping faster than our net worth. After over a year of economic bad news, it surprises me that people are just now starting to get serious about surviving this crisis.
We need to understand that it will be decades before we finish paying off the money the government borrowed to bail out incompetent bankers (and insurance companies, and stock brokers, and ...). Decades. Expect taxes to take a bigger share of your paycheck than they have recently taken, because the government also needs to pay off its loans and get out of debt.
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Category: finance and investments
Posted by: lnxwalt
Obama Announces Moves to Aid Small Businesses - NYTimes.com
The administration?s plan included provisions increasing loan guarantees for small business to 90 percent of the loan value to encourage banks and other lenders to extend credit, and waiving the Small Business Administration?s loan fees and requiring banks that received federal bailout money to report each month how much small-business lending they did.
That is great, but the loan guarantees still require banks to make the loans in the first place. This lending is frozen right now, because the largest financial institutions thought they could somehow wish away risk and derive ever-increasing profits. Combined with their 2005 manipulation of the bankruptcy law to prevent many of their victims from escaping their trap, the banks thought they truly had a "license to print money". It turned out that it was all built on smoke and mirrors, but no one outside the industry (certainly not their stockholders!) could see it because they were so opaque about their internal activities.
The White House said in a statement that the Obama administration believed that the country's "economic recovery will be driven in large part by America?s small businesses" and noted that small companies had generated some 70 percent of net new jobs annually over the last decade.
Well congratulations on stating the obvious. How about this part: Economic recovery will be funded by America's small banks, savings banks, and credit unions, and not by the big guys. The sooner that the big guys shut their doors, the sooner we can get started fixing the mess they made over the past several years.
Democrats keep blaming the Republicans. I heard Rep. Barney Frank say something along those lines on television recently. Only, the parade of lies and favoritism that led to this dates back before "W" was elected to the White House. Some of the causes can be traced back to the 1980s and earlier. One frequently-mentioned thing the Democrats did was push Fannie Mae and Freddie Mac to back riskier loans. It was well-intentioned: intended to boost homeownership among lower-income and ethnic minority Americans. However, we are paying for it now.
What the Republicans did was trust too much in market self-correction. The history of the financial industries in the 1920s and 30s shows that given the opportunity to increase profits and concentrate power through illicit manipulation and deception, it happens far more often than we would like to believe. So when the Republicans pushed through the end of restrictions dating back to the Depression, they were wrong.
Remember? We saw federal agencies pressuring state regulators, working to exempt federally-chartered institutions from state consumer-protection regulations. We saw federal regulators looking the other way while the institutions under their watch imposed consumer-hostile on everyday Americans. It is no wonder the very rich used overseas banks instead.
It is those institutions that are now so badly upside down that concern for their capital ratios prevents them from making loans. Do we really think that a few billion is going to change their minds when they are trillions of dollars in the hole?
Look, the problem with the economy is government activities. Government created the conditions, by commission and by omission, for this to happen. And now government is intervening to prevent the institutions which brought this upon us from being destroyed for their incompetence.
Back to the question: Is this really going to help?
The move may have a symbolic effect of restoring the confidence of small business owners. But SBA-guaranteed loans are only a very small fraction of the financial resources America's small, locally-owned businesses (SLOBs) need. This will not directly affect most owner-managed businesses (OMBs).
Mr. President, I speak as a private citizen, and not as the owner of a business in formation or as an employee of any particular organization. Please, stop protecting those incompetent thieves. Force the big banks, insurance companies, hedge funds, mutual funds, and investment banks that are in the worst trouble into Chapter 7 liquidation, so that the rest of us can get past the negatives and move on to rebuilding our economy around personal savings and the small, locally-owned businesses / owner-managed businesses / family-owned businesses that made America great.
Rather than continuing to back badly-managed banks, let them go! If banking as we know it goes away, it will be replaced by something locally-based (or Internet-based, but online businesses are local because they come into your home or office). What we know is that we cannot allow those banks to continue draining away our economic life-blood. Ask yourself how much money would could have given to every man, woman, and child in our country if we hadn't given it to the badly-run big banks instead.
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2009-03-02: Big Tax Increases Coming To Middle Class
Barack Obama's Expensive Domestic Agenda Will Cost America's Middle Class - WSJ.com
This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can't possibly raise enough revenue to fund Mr. Obama's new spending ambitions.
Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.
I think I pointed out that the bottom 40% of American, income-wise, pay somewhere around 7% of taxes. The problem with that is that it gives people the impression that government spending is "free", because it costs them almost nothing. Since government spending is always about spending funds seized from someone by threat of force, we really should ensure that everyone pays at least 10% of their gross income toward maintaining the nation. I would go with exempting everyone who grosses below $20,000 from taxation. Now, I realize that Social Security and Medicare together are a larger part of lower-income people's taxation than income taxes. Even without directly paying the full 15% of gross income (about half is deducted from employees' paychecks, while employers pay the rest of it), That 7-8% does not get refunded, while much of the income tax collected from the lowest-income workers is returned to them in a lump sum.
Getting back to the President's spending agenda, the highest-income people already pay over a third of their taxable income to the federal government as income taxes, and then still have to pay state income taxes, sales taxes, property taxes, and the like. Suppose you paid 35% to the federal government, and 15% to the state. That is one-half of your annual taxable income in taxes. Actually, I think California's current top rate is about 12%, so a California resident could top out at 47%. Again, that is before considering sales tax, property tax, or any of the other taxes that these people are paying.
Now, I am as critical of the corporate bonus culture as anyone. But the bonuses are not big enough and there aren't enough people getting them to pay off these massive bailouts. Instead, it is likely to slide down the income scale to the $50,000 per year earner and possibly as low as the $35,000 per year earner. Only the very lowest-income people are not likely to see a tax rate increase here. This is a GREAT reason to urge restraint in spending the so-called stimulus package. Cutting out some of the pork barrel spending might save some middle income and lower-middle income people part of their incomes.
The article also points out two other things that are pretty doggone important economically:
- The recession has affected people at the top also. There will be fewer really high earners, and even those people will earn less than they did even two or three years ago. This, naturally, means that efforts to recover expenditures with tax increases are going to penetrate deeper into the middle of the spectrum, possibly below the fiftieth percentile.
- A number of supposed high-income taxpayers are actually owners of small or middle-sized businesses that are set up using a structure (such as partnerships, proprietorships, or "S" corporations) that enables the business' income to be declared as personal income. Tax increase on this group of taxpayers will have a speedy and severe impact on employment. This has long-term implications for America's economic future.
All in all, it looks like President Obama, the Messiah, is stumbling badly right out of the gate. In part, because his bailout and mortgage relief policies are merely the failed policies of George W. Bush's presidency. These have already failed, will continue to fail, and will cost all of us enormous amounts of money.
His tax policies are going to make it less rewarding to earn more money. Where is the point where someone faced with an investment decision or business startup decides that the potential upside is too small? I doubt that the point is the same for everyone, but the Kennedy and Reagan proved that lower tax rates could result in higher tax revenues--a narrower slice of a bigger pie--collected by the government.
Mr. President, we want you to succeed. If you succeed, we all succeed. But so far, you appear to have chosen the worst advisors, aides, and assistants. If you want to fix the economy, take all the big, bankrupt banks, and actually force them into Chapter 7 bankruptcy. Take all the foreclosed properties and put them up for auction. Yes, you'll only get pennies on the dollar, but that is what many of the properties were always worth (sensible value, not inflated value) anyway. And in the process, you'll help real estate hit its bottom years earlier than the current dragging-out process can produce. Take all the companies asking for handouts and reclaim executive bonuses going back five years--it is obvious that the funds were not really earned, since the profits were illusory. Finally, get the federal government out of K-12 education, so that local funding and local control can again make our schools great. For the most part, get out of local government, too. Let cities and counties once again tax for themselves and decide how their funds are used instead of letting the money flow to Washington and then come back with strings attached.
Our economy's hope is for individuals and small businesses to be free to make the best choices for their own futures. Local is the key. Local funding, local control, local ownership, local operations, local labor. Centralization helped cause this crisis. More centralization is not going to solve it.
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The big banks on Wall Street, propped up by taxpayer money and government guarantees, have had a record year, making record profits while returning to the highly leveraged activities that brought our economy to the brink of disaster. In a slap in the face to taxpayers, they have also cut back on the money they are lending, even though the need to get credit flowing again was one of the main points used in selling the public the bank bailout. But since April, the Big Four banks -- JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo -- all of which took billions in taxpayer money, have cut lending to businesses by $100 billion.Meanwhile, America's Main Street community banks -- the vast majority of which avoided the banquet of greed and corruption that created the toxic economic swamp we are still fighting to get ourselves out of -- are struggling. Many of them have closed down (or been taken over by the FDIC) over the last 12 months. The government policy of protecting the Too Big and Politically Connected to Fail is badly hurting the small banks, which are having a much harder time competing in the financial marketplace. As a result, a system which was already dangerously concentrated at the top has only become more so.Arianna Huffington: Move Your Money: A New Year's Resolution
Now, I don't want to tell you how to run your life, but it truly does make sense to avoid any dealings with the big banks, investment banks, mortgage lenders, and insurance companies who precipitated the current recession and unleashed the econolypse. The government response has been to shore up the big financial institutions, at the expense of weakening many of the smaller institutions.
And, no, I do not blame this all on President George W. Bush. He and Vice-President Cheney, along with the Federal Reserve, Congress (which includes former members Barack Obama, Joseph Biden, and Hillary Clinton), and the big financial institutions, along with former President William J. Clinton and former Vice-President Gore all contributed to it. (Why do we still call a sustained nearly 20 percent unemployment rate over much of the last two years of a recession? Take a look at the U6 numbers at the BLS site.)
But by far, the biggest part of triggering this meltdown is the big financial institutions, which eagerly rushed into unproven and speculative financial instruments in their pursuit of ever-higher profits (and executive bonuses). These are the ones that promoted the bankruptcy elimination act, and these are the ones that rushed to get federal assistance to prevent state consumer-protection restrictions from being applied to nationally-chartered institutions. By 2005, it was pretty obvious that this was going to end badly, when nearly all the commercials on the radio were for banks and mortgage brokers.
We then spent billions of dollars padding their bottom lines, just so they could continue to pay bonuses to their executives. It surely couldn't be so they would continue to lend to consumers and small businesses. If that was its purpose, it didn't work.
And yet, there are lots of smaller banks, savings banks, and credit unions that were not involved in the behavior that caused the recession. These local institutions are being hurt two ways. First of all, their less-well-behaved competitors got bailouts, so the local institutions are being punished for being small and well-run. Secondly, the current economic climate is squeezing everyone, banks included, and your hometown bank does not have the kind of resources (even without counting the bailout funds) that the big guys have available for weathering the crisis.
By moving some of your funds into small, local financial institutions (and please choose carefully, because some of the smaller institutions are also teetering), you can help reward those institutions for their wise stewardship. Build up positive balances, if you can, so the institution will have the wherewithal to spur small, locally-owned business (SLOB) growth by helping to finance their needs.
Look, I am not a financial advisor, but I do know that the big banks' interests are diametrically opposed to yours and mine. You have to decide what is best for you, both in the short-term and the long-term, and then decide accordingly.
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Tags: Econolypse
2009-12-21: Accountability: What About The Cheerleaders?
Capitalism 2.0 >> Whatever Happened To Pollyanna?
The real reason I started this thread is because of accountability. Yes, accountability. For the first time in history we've experienced an episode that has been well documented in a democratic, not-easily-corruptible manner. Because of blogs like this and thousands others, there can be no claim that "no one predicted all this". Not that any of us had the entire picture -- we did not. But in aggregate, a small group of internet "bloggers" seem to have predicted the current state of affairs with striking accuracy.
And what of all the blurry eyed optimists? Well, not only do we have their comments of record in blogs and other extracts, preserved in the web's wayback machine for eternity. But we also have thousands of hours of video documentary in the form of youtube and metacafe and others. Here we can see what all these pundits, shills and outright con artists have said over the years. We can watch the "economists" from the NAR lying quarter after quarter after quarter in the face of overwhelming evidence contrary to their rosy view of a "spring rush in 2007!"
This brings up an important point. This economic mess we are in isn't "just something that happened". It happened, in part, because people pretended that their actions and those of those in real estate and financial industries and in the agencies which should have been regulating them would not and could not cause the party to end. That is, people went on telling others to borrow against their properties and to put the money into the stock market. They told people that real estate always goes up, never down, and pressured those whose incomes or credit were marginal to accept loans because "this may be your last chance" to own your own residence. They told people to buy multi-unit rental properties, then refinance and take out equity in order to add more and more properties.
When things changed, the change was sudden, catching many people off-guard. Even many who recognized the signs were not able to change course and avoid the shipwreck. So saying that no one could have foreseen the mess is demonstratably untrue. What I want to see is who said what and when. I want them to have to acknowledge that their pet theories were wrong about this. And chief among those who must eat their words are the public policy wonks, television economists, politicians from both sides of the aisle, and various investment speakers (including the "no down payment" real estate gurus).
No, this was thoroughly predictable, just as the storm that is currently buffeting the East Coast was predicted. Anyone with basic financial knowledge knew that increased debt meant increased susceptibility to wild swings when the economy rises or falls. Anybody with basic financial knowledge knew that real estate prices were growing far faster than personal incomes--in fact, personal incomes have been basically stagnant for at least a decade--in an unsustainable race to grab as many dollars as possible in a dwindling time period. It was clearly visible that the party had to end, and soon.
Even widely-read commenters like Bill Fleckenstein could see that the party was going to end soon. So why didn't our regulators? Why didn't the Federal Reserve see that the party was ending soon? Why didn't the people on CNBC, MSNBC, and countless financial news programs? I don't know the reason, and they probably don't either. But miss it they did, and now many of them are cheerleading the whole "green shoots" and "recession is over" message.
Nice try. Let's see. Are real estate prices around 1/3 or less of the median income in most of the country? That is, are real estate prices affordable yet? No? Well, are more people getting hired or starting profitable businesses than are losing their jobs or businesses? Are more openings being created each month than the number of people entering the workforce? Are real wages at least keeping up with prices? Are some people being brought back into the above-ground economy (because of an increasing number of opportunities and pay scales that warrant a close look at a real job) and leaving the underground economy?
Think about this: around 70% of the economy is consumer purchases. Most consumers spend all they can earn or borrow, but when ten to twenty-two percent of the workforce is unable to obtain employment, it doesn't sound like consumer purchases are going to rise any time soon. In fact, it sounds to me like there are probably some long-term changes in spending and saving patterns going on here. Given the nearly zero interest rates that consumer deposits are earning, it doesn't make a lot of sense to keep a lot of cash in the bank. It also doesn't make much sense to go into debt to buy most things. On the other hand, stuffing dollar bills into your mattress is a sure way to attract robbers.
This means that there are about three ways to allocate one's surplus funds that make any sense:
- Lend your money to people you know, in the hope that it will come back when you need it.
- Use excess funds to start side businesses, ventures that can earn a small, but steady, income stream for you.
- Donate your excess funds to religious and charitable organizations. This isn't because of tax benefits (although those benefits do exist for those who itemize their deductions and give more than a certain percentage of their taxable income; see a tax advisor to find out how it works), but because storing funds is both risky and costly. Better to devote those funds to helping others. It makes sense to support local ministries (especially those ministering to homeless and addicted individuals / families and those in abusive situations) and overseas groups that carry the Christian good news message (and provide food, water, vocational training, and youth education alongside the good news message) into nations and cultures that are caught up on traditions and belief systems which hold them down (on earth and afterward)..
... And, of course, putting funds into small, locally-owned financial institutions (SLOFiI), which can then help finance the activities of individuals and small, locally-owned businesses in that area.
But I would really like to see those whose cheerleading helped lead Americans into this mess like sheep to the slaughter exposed, and in some cases, prosecuted. Like those who talk up gold without telling you that they are getting paid for doing it, those who talked up real estate or investments without revealing their paid connections should face whatever legal penalties the law provides. (Note: I am not a lawyer, not an investment advisor, nor am I an investor at all [other than some US savings bonds that are directly pulled from my paycheck]. What I write is motivated from a desire to see others freed from dependence upon big financial institutions and the control of big corporations. I've never even earned an advertising payout.)
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Tags: Econolypse
2010-02-14: Economists: Some Jobs Lost Forever
Survey: 25% of jobs lost won't come back- Market Dispatches - MSN Money
More than 2 million of the jobs that were erased from the economy over the past two years are probably gone for good.
According to a survey from The Wall Street Journal, 25% of the 8.4 million jobs eliminated since the recession began will need to be replaced by other types of work in growing industries.
This is an interesting admission. Some of the jobs lost are not your usual business-cycle hire-too-many then layoff-too-many jobs. Some jobs that would be part of the economy's stable bedrock that are gone for good.
I still question the idea of most job losses during this econolypse being cyclical. There were a lot of jobs tied to the financial services / real estate bubble that will stay gone until the next time a bubble hits those fields. Those jobs, then, aren't cyclical; they are symptomatic. The auto industry is very cyclical, but most of the job losses there are probably permanent. With Chrysler's likely failure later in 2010 or early in 2011, even more of these losses are likely. Technical support (call center) jobs were already moving offshore, as were programming jobs. Airlines have been merging and cutting jobs since 2001, at least. Other manufacturing jobs lost were also mostly just exported overseas, and therefore, are not coming back.
I see a few construction / real estate jobs and some freight jobs (trucking, warehousing, railroads, port workers) as being the primary cyclical jobs that will return. Also, some of the higher-priced retailers and restaurants will recover and start hiring again. Other than that, I'd guess that nearly all the jobs lost in this recession are gone for good.
As far as economic recovery goes, I would not expect even their 3% forecast to come true this year, simply because seventy percent of the economy consists of consumer purchasing, and a good twenty percent or more of consumers are under severe financial stress. Without higher sales, retailers won't hire more workers and won't buy more merchandise. Without more merchandise coming into stores, wholesalers won't hire more workers and won't buy more merchandise and trucking companies won't buy more trucks or hire more workers to work in their warehouses or drive their trucks. Without more merchandise heading for wholesalers, manufacturers won't hire more people to work on the assembly lines, and there will be fewer people employed in railroads and in shipping ports.
This situation really seems more similar to the 1930s than anyone wishes to admit. There was a period in the 1930s when unemployment wouldn't go below 24%, no matter what they did. According to ShadowStats, unemployment is over 20% now, or if you use the government's U6 number, it is around 16% recently, 21% in California. You do have to be aware that the numbers used back then are not strictly comparable to today's values, however. What we have today is more like the beginning (that is, 1930) of what they had back then.
My point, however, is that these economists are belatedly starting to realize that something else is going on. First they were late to recognize the impending recession. Then, they were late to recognize the recession's onset. Next, they are still quibbling over the causes of this particular recession (and yes, I believe it is more than just the business cycle, although the cycle is a part of it). Finally, they are late to recognize that some of the job losses are forever. And they are still clinging to the fantasy that recovery is coming this year.
If 70% of GDP consists of consumer spending, and sixteen percent of consumers are unemployed or underemployed, it isn't likely that this part of the economy is going to grow very much until jobs recover. And yet, businesses won't hire people to produce goods and services that they cannot sell, so consumer spending is very much the tail that wags the dog.
Now to lay out a way for the desired economic recovery to take place:
We start with restoring justice. Many of our financial companies, like other corporations, are amoral. The only way to corral them into performing their duties in a moral and ethical manner is to arrest and imprison executives and to claw-back ill-gotten gains.
- First, any consumer debt that is more than a year past due, we cancel immediately, with the exception of federally-guaranteed student loans. The chances of collecting those debts are small, anyway. This takes some pressure off of consumers. It will also force some of the most unscrupulous lenders out of business.
- Secondly, we cap consumer interest rates at fifteen percent, with a state's lower rate cap taking precedence. We require that federally-chartered financial institutions comply with the state consumer-protection laws where the affected consumer lives.
- Third, we stop turning a blind eye to corporations that abuse consumers or their employees. A few SWAT-style raids on corporate headquarters buildings, followed by marching CEOs in leg irons and orange jumpsuits before TV cameras, and prosecutors asking for asset forfeitures and the noose--you'd be surprised how many companies will suddenly change their behavior. This is the most important part. In order to succeed at respawning economic growth, we need to arrest and charge hundreds of CEOs, managers, officers, and directors.
- Fourth, have the AG issue an opinion letter that consumers' information is the proprietary property of those consumers and may not be sold or otherwise disclosed without their prior written consent, nor sent across national borders with or without consent. Have federal prosecutors "saber rattle" about charging companies that have consumer data going to divisions or contractors that are outside of US jurisdiction, and then watch all the call centers and credit processing centers suddenly moving back into this country.
- Fifth, cancel all federal subsidies to large corporations. Then take those whose workforce (inclusive of outsourced labor) is predominantly overseas and extract "workforce impact fees" to offset the salary, benefits, and taxes that are not being paid because of overseas work. Announce (and carry out) stepped up arrests and prosecutions of managers in firms that knowingly hire illegal aliens (including those who should know, but choose not to).
- Sixth, we declare certain industries vital to our defense, including semiconductors, computers, software, and other high-tech fields. Because of this, we then mandate that a certain percentage of the US market (that is, sales of that product or service) must consist of companies which are at least 50% domestic-owned, whose products are made in domestic factories, using domestic labor and parts. You'll say, "That sounds like protectionism. You're not conservative!" To which I say, I'm not pro-corporation, if that's what you mean. I'm pro-small business, because that is good for the American people, and I am pro-American people. Protecting the future of America's people may require some restrictions on imports, which is what China, Japan, Taiwan, Korea, and nearly every other country on earth does. I don't want to stifle improvement or competition, thus I don't want to push imports out of the market.
- Seventh, and lastly, restructure the laws, so that Stalinist-structured, top-down, you-work-for-peanuts-so-the-CEO-can-have-a-bonus management costs company shareholders a percentage of profits (on top of other taxes, and not offset-able) which must be reported in bold print on the first page of the annual report and the 10-K.
The story of the 1800s and early 1900s was that a few, generally-unscrupulous people were able to get control of most of the wealth and resources of our nation. The story of the mid-to-late 1900s was mostly how we moved to block the unfair and anti-competitive actions of those wealthy few. Now, we are faced with having to rein in the behavior, not of the wealthy, but of the high-income managers who now run the companies. If we allow them to do so, they would send the last job overseas, then when we couldn't buy their products and services, they would move themselves and their companies out of the country and watch the collapse from afar.
(No, wealth and income are not the same thing. Wealth is how much more you own than you owe. Income is how much is coming in every year.)
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2009-07-20: What's This About A Jobless Recovery?
Category: finance and investments
Posted by: lnxwalt
What's This About A Jobless Recovery?
If you're like me, you hear talk about a jobless recovery and about employment being a "lagging indicator" and you think someone must be on some high-priced dope. Everyone knows, from Adam Smith on down, that the true measure of the economy is the status of the average person and his / her family.
Part of the problem is that there is really no formal definition of what a recession is, what a depression is, what a recovery is, or what a boom is. The NBER uses one formula, while most economists use an even fuzzier and less accurate concept: two consecutive quarters of declining GDP.
From Wikepedia:
The NBER uses a broader definition of a recession than do many economists. The traditional definition of a recession is two consecutive quarters of a shrinking gross domestic product (GDP). In contrast, the NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.". Dates of recessions are determined by identifying the date of the most recent peak in GDP to the most recent trough in GDP. The duration of this negative trend in GDP is the length of the recession. Dates of economic expansion can be similarly determined.
The thing is, GDP is not necessarily a reliable indicator, because a decline in most people's income can be masked by a dramatic short-term increase in income for a much smaller number of people. This is the root of "layoffs syndrome", in which CEO lays off a certain percentage of the company's workforce, piling more work on top of the remaining employees. This causes a temporary spike in productivity (same revenue distributed over fewer employee hours) for a couple of years, but is often unsustainable over a longer period of time. However, the temporary spike results in a short-term increase in profit, earnings-per-share (EPS), and therefore, stock price. Generally, the CEO gets a bonus and stockholders get paper profits. Two or three years later, the boost is gone, so the CEO must do it again. Because there are limits to how much work someone can perform, particularly over a sustained period, this technique becomes less effective over time and the company must eventually be sold to a competitor once it has sufficiently damaged its productive capacity.
Mind you, economists (at least those who took Intermediate Macroeconomics in college, as I did) already know this, but it is inconvenient. If an economist talks about this, he upsets the politicians. Politicians like a single number that can be used to quantify amorphous concepts like economic growth. "GDP grew 2/10 of 1% last month" sounds good coming from the anchorman's lips. "1/3 of Americans did not get a raise the past three years" does not sound so good. And yet, both can be true at the same time. Which one, I ask, is a better measure of how the average person experiences the economy?
This, then, is my point. Never mind that around 70% of GDP is consumer spending, so having between 10 and 20% of the workforce unemployed means that the kind of debt-fueled burst in consumer spending that the government is pretending is "normal" is not going to happen. Never mind that people lost paper wealth in their homes, their investments, and their retirement funds. Never mind that we use a convenient fiction that certain very large banks are solvent because the FDIC cannot afford to close them and pay off depositors. Never mind that there would be widespread depositor losses if that ever happened. I say there is no recovery until employment starts recovering because that's when it reaches the everyday person. Until then, the recovery is just not real.
The kind of of obfuscation that is implicit in calling a recovery before there is job growth is part of the reason why this econolypse was necessary in the first place. This economic collapse is not, as some would have us believe, about a sudden change in the economy. It is merely the revealing of things that were happening for a decade or more and had long since reached their end. Revealing is the meaning of apocalypse, one of the two parent words of econolypse.
When there was suddenly a boom in the mortgage brokerage industry, in the midst of an unprecedented string of price increases for residential real estate, everyone should have seen this coming. We didn't because we never really thought about it. All those guys who said to refinance your home and use the money to invest in stocks and bonds, didn't that set off any alarms? No? Well it should have. The boom in prepaid credit cards and in pre-approved credit offers that were flooding the mailboxes of anyone who still had a pulse, that didn't tip you off that something was wrong? What about the payday loan places that suddenly opened up on every street corner? That didn't tell you something? What about the bankruptcy elimination act that passed somewhere around 2004? That didn't alert you that something was wrong? You see now why the econolypse had to happen? All these things and more were going on, so that most of us were getting deeper and deeper in debt, buying and refinancing our homes to fund our lifestyles, and nobody thought about the fact that economic growth was probably negative for the prior decade once we account for the debt-fueled overspending that went on.
This, of course, clashes with the political claims of the Democrats. Bill Clinton presided over a period of economic growth and he even balanced the budget. The truth is, this fake growth started under Clinton's watch and continued under Bush Jr's watch, interrupted only by the post 9/11 recession. It actually may have started under Bush Sr's watch, after the recession that led to his electoral failure, but that would mean that it continued through all eight years of President Clinton's watch, a Democrat, (and six or seven years of Bush Jr's administration) without any kind of common-sense intervention to stave off the all-too-predictable collapse that resulted. Don't even get me started on the voodoo math behind the so-called balanced budget.
So what have we learned? Apparently nothing. But we should have learned that real economic growth comes from avoiding indebtedness. It comes from reducing spending and setting aside some funds for savings and investments. It comes from designing and producing products locally and selling those products to buyers near and far. It comes from favoring individuals, families, and small, locally-owned businesses (SLOBs) over large, out-of-area corporations (LOOACs), both in purchasing decisions and before authorities (e.g., judges and congresspeople).
Earlier, I wrote:
Think about it. The economy was bubbling up, based on unsustainable prices for real estate, unsustainable amounts of debt, and unsustainable levels of spending. All of those things need to be reduced sharply and to stay down. Yet, the whole premise of the recovery plans is that spending, lending, and real estate prices are going to return to their former levels. This is madness, I think, madness.
The still-growing power of large corporations in the White House, the halls of Congress, governors' mansions, legislatures, and courtrooms around the nation is the largest single threat to our long-term economic health. Generally, if a company has 20 offices around the country and one of those offices is in your town, they don't particularly care whether their actions are good for your city's residents. If they have 500 offices in nations around the world, they don't particularly care whether their actions are good for your country's residents. The way to force them to care is to take away their ability to influence government officials to write laws that benefit them or to enforce those laws in ways that are more beneficial to them.
So there is no such thing as a recovery until and unless regular people are again obtaining employment. Anyone who says otherwise is an incompetent idiot and deserves to be sent to some third world nation as an "economic advisor".
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Recipe for Disaster: The Formula That Killed Wall Street
The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation?the degree to which one variable moves in line with another?and measuring it is an important part of determining how risky mortgage bonds are.
This is a large part of what just happened. It is not all of it, by any means. There was surely a lot of misconduct, a lot of ignoring industry standards meant to prevent such risky lending. The three times income rule, for example, ensures that the buyer is not paying for more home than he or she can afford. When you see home prices above $150,000, you know that prices are too high for more than half of us. The higher the price goes above that, the fewer potential buyers should be able to qualify for loans. Only the very highest-income people should ever be able to buy a $300,000+ home. But instead, average income people were paying $200,000 or more for homes. Lower-income people were paying $150,0000 or more for homes.
Having been a lower-income homebuyer, I know that most of us really are better off buying our residences, rather than renting them. Simple things really matter, such as being able to start a church or a little business out of your home without being in violation of your lease. Even being able to plant a little garden in the back yard is a blessing that many renters, especially apartment-bound renters, will never experience. I say this to make it clear that I strongly support efforts to increase home ownership among lower-income individuals and families, even if I am strongly against the way the government tried to accomplish this.
Taking a lower-income person and giving him a high-interest-rate loan with a principal balance that is more than he will earn during his lifetime is really not in that person's best interests. It is also not in the best interests of the lender or investor who is the ultimate source of funds. Why? Because the borrower becomes little more than a slave, struggling in vain to repay this out-sized loan. Meanwhile, the investor is caught unaware when dozens or hundreds of these loans go bad at once. Only the originator and servicer of the loans benefits from this, except that during a period of rising home prices, the investor will usually recoup 100% of the loan value once properties go to auction.
This kind of scheme is why the last twenty to thirty years have been so financially pernicious. Wise and observant people always said this was a toxic mixture, waiting for its chance to undermine the whole system. Reading the daily news headlines, it looks like those people were right. It was harmful and unfair to the borrowers who end up kicked out of their homes after struggling to pay their bills and maintain the properties. It was harmful and unfair to the investors (particularly those whose retirement funds were invested in mortgage pools without their knowledge), whose funds were placed in higher risk than they were told about.
The large financial institutions that specialized in creating these mortgage pools and selling portions of them (either through the CDO market or indirectly through the CDS market) were too large to be left unsupervised. Similarly government-sponsored entities like Fannie Mae and Freddie Mac (and Sallie Mae), grew too large. When Sallie Mae started pushing non-federal loans, I thought they were too big--they had saturated their primary market and were looking to continue reaping high returns elsewhere. Likewise, when Fannie and Freddie started holding onto loans instead of packaging them for sale, I thought they were running out of air and were trying to continue their high returns by capturing another part of mortgage funding. At that point, the only thing to do is break them up into competing companies or slap strict restrictions on what they were allowed to do and how large they were allowed to grow.
Indeed, their very size, their very "established" nature, the centralized nature of the financial-related industries, and the very large quantity of funds that went through their fingers were in and of themselves, a recipe for disaster. Centralizing the financial system in a few large banks, investment banks, and insurance companies dramatically increased the systemic risk (that is, the scope and intensity of potential damage to the system) contained within any particular organization's failure.
When High Desert Federal Credit Union was seized by regulators, few non-members even knew about it. It has not had any noticeable impact even in its own home community (the Victor Valley in the "High Desert" (Mojave Desert) of San Bernardino County, California). Of course, even when big banks like Washington Mutual failed, deposit insurance helped make the impact minimal even for account-holders. But if they were to allow either or both of the tottering giants Bank of America or Citigroup to fail, there might not be enough money in the FDIC's funds to fully-cover everything. And there you have it--a recipe for increased systemic risk: let a few organizations get "too big to fail" and their actions will endanger every other organization in the industry.
I find it amazing to read that the whole industry was captivated by the idea that you could completely quantify risks and correlations in a single number that incompetent managers could understand. (Would you argue that they were not incompetent when they clearly failed to steer clear of this hole? Surely, if they worked at McDonald's, and performed this poorly, you would taunt and insult them for being stupid. Let us not be foolish enough to think that this was anything other than management incompetence.)
In other news, "Banana Boat Ben" Bernanke told Congress that the recession might end later this year.
Stocks up on Bernanke remarks; focus now on Obama - Yahoo! Finance
Bernanke told Congress on Tuesday the recession might end this year, and that regulators aren't planning to nationalize banks. The news alleviated some of investors' worries about the economy and the banking industry, and lifted the Dow Jones industrial average and Standard & Poor's 500 index off their lowest levels since 1997
I have no idea what Bernanke is smoking, but it is considered impolite to refuse to share it.
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2009-12-14: Rough Times Ahead: Plan Now
Obama jawbones banks to lend more, back new regs -- Yahoo! News
President Barack Obama implored top bankers Monday to help keep the fragile recovery from faltering by boosting lending to small businesses and getting behind an overhaul of financial regulation. "We rise and fall together," Obama declared. In response to the president's burst of populist jawboning, some banks pledged to increase loans and exercise more self-control over outsized compensation. But the full impact of Obama's intervention was hard to gauge: The government is losing leverage as major banks repay bailout loans. Obama's lecture to the bankers was also part of a broader election-season Democratic effort to tie sluggish bank lending to continued high joblessness — and to try to tie the banking industry to Republican efforts against Obama's financial overhaul legislation.
This should send chills down the backs of those who saw the election of President Obama as the start of the Messianic kingdom, because it shows that our president and his advisors lack even basic economics sense. They believe that our economy's state is caused by a lack of lending, while those who understand what is happening recognize that it was too much lending and borrowing that lie at the root of our situation. Not that there aren't other causes as well, but the surge of leverage over the past ten to twenty years made the economy more sensitive to small changes. What this tells us is that the government will continue to chase the wrong rabbit and stray farther and farther afield.
The proper action would have been to let the lenders whose incompetence caused most of this collapse, and letting their investors sue them (and their officers) for damages. Meanwhile, the officials whose refusal to enforce the lawenabled all of this should have been hauled before judges for their own parts in the debacle. This would have resulted in a much deeper plunge, much faster, and we would by now be a very much cash (and bank deposits) based economy with a lot of the silly frills and imports taken away.
This, of course, would have meant letting the FASB keep its accounting transparency standards ("mark to market"), instead of allowing corporations and banks to camouflage potential losses until the potential becomes actual. As I understand it, one of the things that Congress did was pressure the Financial Accounting Standards Board to alter the Generally-Accepted Accounting Practices, so that lenders whose collateral had greatly reduced market values did not have to "recognize" it until the relevant loans went bad.This, of course, means that a bank can continue to proclaim its health right up until the day the FDIC shows up to shut the doors, deceiving both depositors and investors. No wonder so many banks have failed during this econolypse.
So, we have had the Bush II administration, which misdiagnosed the problem, and then the Obama administration, which continues with treatments based on the flawed diagnosis. I will point out that in the late 1700s, after national independence, our nation made a wise choice to make it more difficult for foreign lenders to collect against US citizens. While this prevented foreign lenders from entering the domestic banking scene, it also prevented our citizens from becoming serfs to foreign firms. A simple choice like that kept us from being a "banana republic".
Anyway, there are those who feel that Mr. Obama is the messiah, the one chosen to lead us out of the wilderness of economic libertarian / conservatism and into the promised land of an enhanced safety net for those whose incomes are lower than average. People who feel that way will tend to blindly support his initiatives, whether they are wrong-headed or not. If our government continues to make poor choices, we can expect things to get much rougher over the next two to five years. Here are some areas where we are already heading the wrong way:
- Centralizing financial regulation in Washington DC, when recent history suggests that federal regulators and legislators are easily "captured" by large organizations with substantial financial stakes in regulatory outcomes. The wise thing to do would be to make financial institutions subject to state consumer protection laws, so that consumers have a better shot at influencing said outcomes.
- Financing and protecting poorly-managed financial institutions instead of aggressively shutting them down and forcing their management to face the music for their mistakes.
- Having the EPA rule that CO2 is a dangerous pollutant and the root of global warming, despite the lack of research into nature's own climate cycles. The fact that there are Viking cemeteries in Greenland from a few hundred years ago buried under permafrost today makes today's climate warmth seem a lot less threatening than alarmists promote it being. Cap and trade regulations promise to greatly increase the costs of anything that uses fuel, while the ratchet-down provisions will affect the poor among us first and worst. We should really find out for sure what part natural climate cycles play before we embark on such a course.
- The health care insurance proposal is designed to force everyone to purchase insurance. Those whose incomes are lower will find themselves faced with choosing food and shelter or choosing to comply with insurance requirements. Meanwhile, the same insurers who told us 16 years ago that "the private market" was the solution get to continue harvesting the windfall they designed.
Now, if you are one of those who believe that the way to survive a general economic depression is to buy precious metals (gold, silver, platinum, ...) or gold coins such as Double Eagles or Kruggerands, you'll have a big surprise coming when you find yourself unable to buy food with that pretty metal. You will join the political messianics, the broadcast believers, and others who did nothing to prepare. You will be lined up outside your local Kroger or Safeway store (in Southern California, that would be Ralphs/Food4Less and Vons/Pavillions) begging for something. You might even attempt to rob the store.
The saying is "you can't eat gold", and it is true. Likewise, though, if you are a survival nut, with a garden and a stash of guns in Idaho, you are also in for a surprise. When your neighbors get hungry, they'll take guns and attack you to try and get food for themselves. It isn't likely that you will have enough guns, ammunition, or shooters to continue repelling wave after wave of hungry invaders.
The only thing that has a chance of working is for you to get involved in your local government, establishing a "community garden" for all local residents to raise as much food (for personal consumption and storage, not for sale) as they wish. This can have the effect of making your town "food-sufficient" and motivating the local populace to jointly protect local food supplies from hungry transients. I would also recommend that you seek to amend local zoning laws to promote gardening and the raising of chickens and other small food, both in the community garden and in each home's back yard.
Next, start promoting (again, in your local government) the use of locally-owned suppliers, especially those who provide locally-produced products and services. Start sharing with your friends, family members, and neighbors how keeping a larger fraction of every dollar in the local community results in more (and better-paying) jobs for local residents. Start spending more money with locally-owned vendors, particularly small, locally-owned businesses (SLOBs) and less with large, out-of-area corporations (LOOACs). Buy more locally-produced goods and services instead of outside products. This doesn't mean that you should give locally-owned businesses a pass for poor quality or poor service. It does mean that when they meet or exceed the levels that outside-owned businesses provide, buy the local product from a local provider.
Most importantly, you should plan your future, not around loans and borrowing, but around saving and building for the future. Should things turn out better than I expect, having your financial house in order and helping make your community food-sufficient and more economically-stable can only help you, your children, and your grandchildren.
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2008-12-14: Who are the villains?
"What we really needed a long time ago was a recognition that there were villains apace. The evils of the financial system should have been recognized long before this," said Steinhardt, who no longer manages billions of dollars but whose counsel is sought on Wall Street and among select politicians.Investor Steinhardt asks who are the villains? | Industry Summits | Reuters
I have often wondered this myself. As long as those who have bankrupted our nation and the world are left unpunished, we are setting ourselves up for a repeat. Give the financial industries another ten or twenty years, which should be about the time we've paid around 2/3 of this bailout off. They'll return with another scandal.
Why? Because we haven't reacted appropriately to this scandal. And scandal it is?this is about how financial corporations mislead investors and borrowers alike, in order to divert huge amounts of money into the hands of management. And indeed, it isn't just financial corporations that have done this?but the financial corporations collapsed the economy.
If this had occurred in any previous administration after the Second World War, the Department of Justice would be deputizing lawyers and accountants worldwide. The greedy cretins who caused this crisis would be sitting in jail on no-bail warrants, while we'd be hearing their names on the news nightly. Does anyone else remember the way our nation pounced on Charles Keating of Lincoln Savings, after its failure? It turned out that most of the S&L failures of the 1980s were caused by rising short-term interest rates, when their main assets were 30-year fixed-rate mortgages. But this situation is different, because most of this crisis is directly caused by their misdeeds.
The villains are both upper management people and middle management staffers in these companies as well as in the federal agencies who were supposed to be supervising them, and yes, both Congress and presidents William J. Clinton and George W. Bush, too. It is among this group of individuals that prosecution should be occurring. (I realize that congress-members and presidents have some immunity from prosecution, as long as they did not take bribes. That said, there are plenty of agency heads and bureaucrats that could wear orange jumpsuits.)
Remember, the misdeeds of this group of individuals and companies did not just bring down the economy. They also brought down the auto industry. Yes, the Detroit automakers have been very poorly run for many years. They would have come to this point some time in the next decade with or without the help of the finance industry. But the finance industry, along with the oil price spike last year and earlier this year, are the "proximate causes" of the Big 3's collapse.
As for "change", the way to have change is to prosecute the wrongdoers and those who should have prevented their actions but did nothing. I'm not sure who is being nominated for Attorney General, but I certainly hope whomever it is will be aggressive in seeking indictments, arrests, and imprisonment for the people involved in causing this. That person should also aggressively seek disgorgement of profits and bonuses, using it to pay off some of the trillions of dollars we are borrowing from overseas to try to clean up this mess. And finally, the new AG needs to seek to void mortgages and other consumer credit contracts which are heavy-handed, one-sided, or exploitative. Let lenders take their losses and repay their own borrowings without the vigorish (usury) they extracted from low-income Americans, as the Bible tells us.
Finally, you and I need to face the fact that we ourselves are partially responsible for this, too. We need to almost entirely stop buying things on credit. Either save up for the item, or go without it. Simplify your life?eliminate debts, slash the monthly services you pay for, cut your energy consumption, reduce or even eliminate unneeded shopping excursions? and you also will be among those who recover quickly from the crisis. You can then help your friends, relatives, and neighbors to get out of the hole. It took decades to get into this mess, and it may take a decade to get out, but you should be able to recover a lot more quickly, if you act NOW.
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Tags: bailout, econolypse, economic collapse, economic recovery, economy
Category: Politics and Government
Posted by: lnxwalt
Worried Consumers Continue To Shun Credit : NPR
Borrowing by consumers for revolving credit, including credit cards, fell at an annual rate of 13.3 percent in September, the same as August. This category has declined for a record 12 straight months.
Borrowing for non-revolving loans, including auto loans, dropped at an annual rate of 3.7 percent in September after edging up 0.1 percent in August. The August gain reflected the surge in car sales as consumers rushed to take advantage of the government's Cash for Clunkers program.
The $14.8 billion overall decline in borrowing left total consumer credit at $2.46 trillion in September. The 7.2 percent annual rate of decline followed a 4.8 percent drop in August. The Fed's report doesn't include mortgages or other loans secured by real estate.
Since the government's whole "recovery" plan is to restimulate the excessive spending, lending, and borrowing that caused the collapse in the first place, this indicates that the so-called recovery doesn't really exist. But on a longer-term basis, this is positive news, or at least it could be.
What is not clear is whether declining borrowing is due more to consumers switching from consumption to debt-reduction and saving versus banks deciding to reduce or restrict lending activities. Over the past year or two, a number of credit card holders, for example, found that their accounts were being cancelled--not just past-due accounts, either--which reduced the amount of credit that was available for them to utilize. If the reduction in lending is the primary driver of the reduction in borrowing, then the insanity of the past twenty years, going back at least to the time of the Clinton White House, will be repeated, with similar (but even more intense) results in the future.
Please, Mr. President, listen. You cannot build a sustainable economy on consuming all your income and borrowing to fund even more consumption. Back when political conservatives still had some principles, they tried to convince President Clinton of this. (When President Bush came in and conservatives blindly supported him even though he violated the very principles they stood for, they lost those principles.) The only way to have a sustainable and growing economy is to set things back on an even keel. My suggestions:
- Stop mollycoddling banks and other financial industries. The key to protecting Americans from the same sort of financial shenanigans that brought about the current recession is to make sure that banks and their executives face strong and quick financial penalties for dishonest or overly-risky acts. For financial corporations, this would be involuntary dissolution and bankruptcy. For the execs, this would be asset forfeitures, passport seizure, and getting one's picture on national television wearing a government-provided orange jumpsuits and jailhouse fraternity bracelets.
- Stop protecting large out-of-area corporations (LOOACs), whether banks, for-profit entities, non-profits, or advocacy groups. As groups of "natural persons", they should have few special rights as organizations. Instead, they should get most of their rights through the cooperative actions of their investors, employees, board members, managers, donors, and other "members". For example, there is no constitutional reason why a corporation (and that means any of the above-listed entities) should be able to lobby either Congress or the executive branch, because their members already have said power. If this had been in place, Ms. Clinton and Mr. Biden could not have been influenced to take away consumers' bankruptcy protections against abusive lenders.
- Loudly, publicly, and frequently, you need to make the case that buying products and services overseas means thirty year-olds living at home because they cannot get a decent-paying job. Start by requiring that all military and government purchases shall utilize domestic1 labor, under locally-based management. This means that buying a new computer system will not be sending even more money to China, but instead into the pockets of American taxpayers.
- Seeing that small, locally-owned businesses (SLOBs) create the majority of new jobs in this country, fund a small business initiative that will help potential owner-managers to obtain the skills (training, education), finances, and contacts / contracts they need to get started. This would be similar to what the SBA is doing with their SBDCs, but on a larger scale.
- Restructure the tax system to make it simpler and easier to comply with.
- For a start, get rid of ALL special-interest deductions and credits, including the mortgage interest deduction, because these distort the market, complicate the tax code, and enable deceptive financial industry companies to push otherwise inferior products with "tax advantages".
- There are or were companies selling "tax loss" investments, so that buyers can use this loss to offset earnings from other activities. Bzzzt! Wrong answer. If you cannot reasonably expect a profit, taxpayers shouldn't subsidize your investments.
- The mortgage interest deduction is particularly odious, because it inadvertently steers people toward bad loans by making them less likely to quibble over terms like interest rates. (The reporter should know this or should be assigned to another beat... like fashion or celebrities.)
- This would include making sure that capital investments (buildings, computers, etc) are deducted over their realistic expected lifetimes rather than some out-of-thin-air term created via IRS rules. For a company buying standard Windows computers, for example, they are outdated in two years and nearly unusable by the fourth year.
- The home office deduction should consider how you would utilize the space if you were not running a business there. I realize that most such deductions would be disallowed under that standard, but we want the tax code to encourage people to make realistic business decisions, not make otherwise bad decisions for the sake of tax benefits.
- There should be three tax rates, and only three: the first $20,000 of income should be taxed at 0%. Income between $20,001 and $50,000 should be taxed at 20%. Income above $50,000 should be taxed at 35%. These rates assume zero deductions or special tax credits and a government that doesn't continue taxing its citizens to pay for the unsupervised and irresponsible investments of the financial industry.
- Work toward stopping the collecting federal taxes to give to state and local governments. They have their own taxing powers. Let them use their powers to raise enough funds for their needs. This includes schools: let each state figure out how to adequately fund its schools, without relying upon Uncle Sam's wallet to do so. This primarily affects two kinds of communities. The first is the one where they don't do any extra taxing, because everything they do is covered by federal transfers. They'll have to raise taxes to cover the costs of their communities' needs. The second kind of community has an already-high tax structure, and utilizes federal transfers to prevent their citizens from slashing their budgets. This kind of community will have to decide whether to chase its citizens away or thin out its workforce.
Incidentally, has anyone else noticed telemarketers claiming to represent some unit Bank of America have been making a lot of calls to residences lately? I believe these are scammers, because I am sure that no one at BoA is stupid enough to train the public to give private financial information to callers who may or may not be whom they claim to be. I recently spent several months working out of state and our office's phones got dozens of "important information for homeowners" recorded solicitations each day. Let me make it clear: you do not know who it is on the other end of an incoming call (caller identification is of little use with telemarketers) nor do you know whether they represent the company they tell you they represent. Therefore, you should never give any kind of financial or payment information to such callers.
1 I would assume that we would use North America (USA, Canada, Mexico, the Caribbean, Greenland, and the Central American countries) as our "domestic" zone.
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2009-08-31: Recovery Coming Later This Year?
Category: finance and investments
Posted by: lnxwalt
The financial sites are full of cheer as they loudly proclaim that the recession will soon end. Like everyone else, I want the pain to end. But I also want the patient to fight off the underlying cause, lest there be a quick relapse.
With that, let me list some reasons why the economy is not quite ready to rebound, reason why a rebound will lead to an even worse slump two years down the road.
- Housing prices are still too high. In most of the country, home prices are still higher than three times the average homebuyer's income. Unless we're all going to live in Joplin, MO, we'll have to wait for a couple of years more.
- Financial institutions are too corrupt and deceitful. A big part of the econolypse has been discovering what they were doing behind the scenes all the time. Corrupt? Deceitful? How:
- Financial institutions were over-confident and proud. They had just pushed through a law that made it more difficult to shed debts in bankruptcy court. Some mortgage brokers were pushing the idea that homeowners should tap their equity in order to invest, that is, borrow money against their homes and use the money to buy stocks and bonds. Suddenly, they and other financial industries were shown to be vulnerable.
- Everyone knew the party would inevitably end, but no one wanted to miss the last dance. Therefore, they headed into the crisis "full speed ahead". That is, lenders continued to entice borrowers to add more debt. One credit card bank, for example, filled the airwaves with humorous commercials that ended with the tagline, "What's in your wallet?" These commercials appear to have recently tapered off. Why would they push this campaign as the economy slowed? Because credit cards were like licenses to print money, thanks to the bankruptcy elimination reform law.
- Consumer spending is still weak, and it is the biggest chunk of our economy. About 70% of our GDP consists of consumer spending. Much of that was funded through debt. Refinance your home mortgage, spend the proceeds. Get a new credit card, spend money until it is nearly maxed out. All of that is gone, baby, gone!
- Too many people are still in debt. A healthy economy is not based solely on debt, but on increased earnings and savings. The U.S. economy has not been healthy for many years--perhaps twenty years or more--which explains why the economic collapse is sparking a deleveraging. Debt piled upon debt, with no attention paid to eventually paying them off, that is our problem. Now we are suddenly finding that our creditors are demanding accelerated repayment, because their creditors are likewise demanding their funds back. This is the banking crisis that everyone suddenly freaked out about in late 2008. The banks are, or were, bankrupt. The bailouts were there to prevent them from defaulting on their debts.
- Unemployment is still high, and job losses are continuing.With large numbers of people out of work, high housing prices, and high debt levels, we really don't have the ability to sustain the economy at its former level right now.
- Bills are coming due for past and present government spending. State governments are already having to face their problems. Well, except California, which is deadlocked between those who want to spare government from pain by raising taxes on individuals and families during a time when those individuals and families are struggling to stay in their homes and avoid losing their cars. Later this year, or early next year, most of the fifty states will no longer be able to reshuffle their accounts to avoid making serious cuts. Teachers, police, fire fighters, social workers, accountants, lawyers, and paper-pushers of all kinds will have to be let go. If they are not let go, states will have to raise taxes and consumer spending will drop even more, erasing the illusion of recovery.
- California, a state with more than 1 in 4 Americans living there, has for many years paid for some of its services through bonds. We have two statewide elections each year, and there are usually state and local bond issues being voted on each time. Only now, California is broke, and no one wants to lend us any more money. Does anyone seriously think that with the state and many of its citizens marching headlong toward bankruptcy, the rest of the country will be unaffected?
I want to note as a Californian that our state is in really bad condition. If we don't change something, I could see where the 1930s-era migration from the "dust bowl" to California might be reversed, with impoverished, formerly-well-off California residents being forced to flee eastward in search of housing, work, and food. Raising taxes, by itself, won't fix the problem, because we've already shown that we can spend any amount we have and still owe money. Yet, I can't tell you whose jobs I would want to eliminate.
«About 70% of our GDP consists of consumer spending. Much of that was funded through debt. Refinance your home mortgage, spend the proceeds. Get a new credit card, spend money until it is nearly maxed out.»
As long as job losses continue, as long as salary cuts keep happening, people are probably going to spend less. Since consumer spending is 70% of our economy, and since much of that spending for the past 20 years or more has been financed through borrowing, don't be fooled by pundits and politicians who talk about the economy changing this year. America and Americans need to first learn to live within our means and to even put money away for the future. This is a major shift, going from being focused on present pleasure to being focused on building for the future.
I do not know for certain, but I believe that failing to let the economic restructuring play itself out fully will result in a second (and worse) crisis within another 2 or 3 years. We need to let enough financing-related (and spending freely-related) corporations go belly-up that we dry up excessive demand that enables prices to rise higher than they should.
I suggest that we have a debt-jubilee, a day where all previous consumer debt held by corporations is discharged. This would be our acknowledgement that we gave corporations and their contract gobbledegook too much leeway in dealing with the individuals and families that make up our nation.
As for the President's health insurance proposal, he needs to stop kowtowing to the insurance companies. Create a "BasiCare" plan that consists only of basic medical, dental, vision, and dental care. This plan would be 100% tax-paid, cover every US resident including those who are here illegally, and the procedures covered would not be available through insurance companies. Supplemental insurance would be available from insurance companies to cover anything not in the BasiCare plan. He should stop being foolish enough to think that mandating that everyone buy insurance is going to work. (Auto insurance should have shown us that when people have to choose between auto insurance and eating or auto insurance and having a roof over their heads, they drop the insurance. They'll do the same when it is health insurance being considered.)
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Paul Krugman, for example, argued in the New York Times that the US is on the verge of making the same mistake that we made in 1937--growing complacent about a fragile recovery and cutting off economic stimulus too soon. In 1937, the removal of stimulus helped plunge the economyback into recession and Krugman is worried the same thing will happen this time around.stop worrying about a double dip recession it has never happened before: Tech Ticker, Yahoo! Finance
The two classic "double-dips" that most people point to--in the 1930s and the early 1980s--were really comprised of two separate recessions. More importantly, the second recession in each case was caused by aggressive government action, which Rupkey doesn't see happening in this case.
There's plenty to lose sleep over, Rupkey says, but a double-dip is unlikely. Barring external shocks and policy errors, economies just don't behave that way.
It really bothers me when professional economists tell us things like this. Not only because the economy is not yet turning around by any sensible measure, but because they should be aware that there is a whole lot more going on during this econolypse than just a severe recession or even a depression. If even economists haven't figured out what is happening, how can we expect government leaders to understand it?
New York Times columnist Krugman is simply wrong. Roosevelt, like Hoover, took an activist, intervention-oriented attitude toward the economic crisis of the 1930s. Despite all his efforts, the only thing that saved us was the second world war. If anything, we should be amazed that we carried on for about sixty-five years almost entirely on the strength of the growth in demand that was spurred by that war.
Neither was the so-called "Great Depression" unprecedented. There were two or three similarly deep economic panics between the end of the Civil War and the beginning of the First World War. I believe it was the recurring pattern of deep lows and intense highs that helped spur the creation of the Federal Reserve, as well as the federal income tax.
What we need to understand now is that this is not just another recession. This is a time of transformation similar to the industrial revolution. A hundred and forty years ago, some people were already being displaced as some of the mechanization and industrialization developed during the Civil War was applied to civilian occupations, including farming. Just as the steam locomotive showed that burning fossil fuels could replace human and animal labor, farmers and manufacturers were finding that mechanization could help them reduce their need for laborers, too.
I do want to point out that I am not a historian, and most of this is recounted from memory of things I have read. In other words, some details are almost certainly wrong (like the economists' views), but at least the overall point is true: there is a major economic change going on that is only loosely connected to the econolypse and the recession. It was going on underneath the covers for the past ten or twenty years, but now that the economy is on the skids, the transformation is starting to show.
Many people decried the loss of farming jobs eighty to one hundred fifty years ago. But despite their protestations, the job losses continued. Teens and twenty-somethings would recognize the lack of opportunity for themselves in their hometowns, and would migrate to urban areas, seeking factory jobs. The rise of large industrial corporations was accompanied by the rise of large financial institutions, which took advantage of the concentration of borrowers to concentrate financing activities. The descendants of these large financial institutions survive today, relics of an age when they had large corporations as their primarly clients.
What is really needed today is some dialogue about how to help small, locally-owned businesses (SLOBs) take advantage of this transformation and help their owners, employers, and communities to not only ride out the recession, but be poised to benefit from whatever shape the economy will take next.
The days of buy, buy, buy, and charge it, charge it, charge it, those days are ending. The days of depending on some large company for a community's employment needs are likewise ending. People need to stop trying to live a now-dead dream of luxurious pleasure and to get back to working and saving.
One area that people should be changing now in order to prepare themselves for what lies ahead is to dump the mainstream media: most newspapers, radio stations, television stations, music, movies, and so on. This is because the companies behind them are economically tied to persuading you to spend money you need to be saving. They are economically tied to preserving an economic and social order that is about to sink beneath the waves. If you and I allow them to do our thinking for us, we also will sink beneath the waves.
It isn't important that a real double-dip recession has not happened before. What is important is that our so-called recovery is built on illusion. By funneling lots of money into the banks and changing the rules so that "unrealized" losses caused by the decline in real estate values (and the resale values of various financial instruments) does not have to be "recognized" on financial companies' financial reports, we have enabled them to say, "we're okay now, everything is fine". But everything is not fine.
Banks are still holding billions or trillions of dollars worth of mortgage loans, tied to properties that have lost 20% or more of their paper value. The narrow margins that they live on could never sustain that kind of loss, should more property owners go into default. Now, there are two big overhangs that are about to explode onto the scene: residential rental real estate, and commercial rental real estate.
Residential rental real estate: There has long been an idea that the way to wealth is to get a loan, buy a property, and then, once the debt is paid down a little, refinance that property to get the deposit to buy another one. In this way, the assets of a real estate rental business would steadily grow, assuming that vacancy rates stay low enough to keep rates high enough to enable the landlord to keep the process going. Naturally, cost-control is a key part of that strategy, too, as excessive costs for repairs and maintenance could quickly turn a profitable property into a money-loser. But an underlying assumption is that real estate prices will not suffer major declines, nor sustained declines that might undermine the landlord's equity and prompt lenders to demand accelerated repayments.
The current situation has many landlords teetering on the edge of violating their loan agreements. But what's more, many times, landlords get short-term loans, expecting to refinance again in a few years. Bummer, because lenders are no longer lending the way they previously lent. There are a whole lot of those loans just waiting to blow up in 2010 and the next few years.
The same sort of situation faces commercial rental real estate. In this industry, it is typical for rental rates to be partly comprised of a percentage of tenants' gross sales. In some cases, tenants' sales have declined three years running. Many tenants have closed their doors. Some of the big shopping mall operators are in Chapter 11 bankruptcy, hoping to delay the inevitable. But is occupancy rates stay low, and the sales of those occupants stay low, so do landlords' incoming cash, although their outgoing cash is relatively fixed.
What do lenders do? If they apply loan modifications to very many of these loans, they once again become subject to government takeover. If they do not, they have to recognize the losses on their financial reports, and again become subject to government takeover. In this case, even well-run banks may be pushed into insolvency. The FDIC is already clawing at straws, trying to keep its head above water.
This is going to hurt taxpayers (you and I) most, of course, as the wave of bank failures picks up later this year and continues apace for the next two or three years. One aggravating factor, of course, is that the FDIC didn't shut down the biggest banks, the ones at the root of the recession, but instead worked with Treasury and the Federal Reserve to bail most them out without closing them down. This leaves a whole lot less available for rescuing smaller banks who get struck by the accelerating real estate collapse.
Here's another reason why the recovery will prove fragile. About seventy percent of the gross domestic product consists of consumer spending, but there are millions of American who have lost their jobs and millions more who replaced better-paying and / or full-time jobs with low-paying part-time retail / restaurant /service jobs. And even there, employers are looking to cut labor costs. I've even read of an experiment where a fast food drive through does its order-taking via a foreign-based call center.
If even minimum wage fast food jobs are moving overseas, there isn't going to be any growth in the main part of the economy for some time--until we figure out something that we can do to bring income-producing economic activity back to our workforce.
So the "double-dip" may not, in fact, be a return of the recession. It may be the head-on collision of the economic transformation hitting us full-force after the government, the banks, and the media all tell us how well things are going.
The important thing, I think, is that we get to work building and strengthening small, locally-owned businesses (SLOBs), particularly those that use local resources to produce the goods and services that we need. If we continue to obsess with big banks and big businesses, we'll lose before we ever know it.
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Category: personal finance
Posted by: lnxwalt
Foreclosures rise 5 percent from summer to fall - Yahoo! News
The number of households caught up in the foreclosure crisis rose more than 5 percent from summer to fall as a federal effort to assist struggling borrowers was overwhelmed by a flood of defaults among people who lost their jobs.Unemployment is the main reason homeowners are falling into trouble. While the economy is likely out of recession, the unemployment rate ? now at a 26-year high of 9.8 percent ? isn't expected to peak until the middle of next year.
Insurers dropping Chinese drywall policies - Yahoo! News
Thousands of homeowners nationwide who bought new houses constructed from the defective building materials are finding their hopes dashed, their lives in limbo. And experts warn that cases like the Ivorys', in which insurers drop policies or send notices of non-renewal based on the presence of the Chinese drywall, will become rampant as insurance companies process the hundreds of claims currently in the pipeline.
At least three insurers have already canceled or refused to renew policies after homeowners sought their help replacing the bad wallboard. Because mortgage companies require homeowners to insure their properties, they are then at risk of foreclosure, yet no law prevents the cancellations.
Well, if you consider that around 70% of the economy is consumer spending, and consumer spending is still being crimped by existing unemployment and continuing job losses, the recession is a long way from being over. That point may come next year or the year after that. But it isn't here yet.
That is before the problems caused by substandard building materials--Chinese-made drywall--used in recent construction. Foreclosures surged, and are poised to do so again. And on top of that, insurers are about to put a number of people out of their homes.
And the government, with the help of the mainstream media, is telling us that the worst is over. It is over on Wall Street and in bank and insurance company boardrooms. For regular people, we have some more roughness ahead. Here are some clues:
- The EPA is poised to regulate carbon dioxide emissions as though this necessary trace gas was a dangerous pollutant. Over the next few years, factories will have to invest in expensive and unproven "capture" equipment, as well as paying for underground disposal. Vehicles will given CO2 quotas, raising their prices. Fuels will gain "carbon surcharges" to discourage use. Since the use of energy-consuming equipment is the primary difference between present-day society and that of the mid-1800s, you can expect some significant declines in living standards to follow. If Congress passes the climate bill, the effect will likely be even worse.
- Real estate prices are still too high in major population centers, including California and Nevada on the West coast, and New York, New Jersey, and Connecticut on the East coast. When a substantial fraction of the populace can again afford to own their own dwelling units (not necessarily single-family detached housing), and I'm talking about 40% to 60% or more, without having to depend on long-term loans to complete the purchase, then housing will be in balance. But remember that many of those will also require a loosening of restrictive zoning and CCRs in order to enable the new owners to derive maximum benefit from their properties.
- We're still supporting and subsidizing big corporations and financial institutions at the expense of individuals and families and the smaller, locally-owned businesses (SLOBs) that provide most people's jobs. These same big companies are shedding American jobs, replacing them with low-wage (and often low-skilled) foreign labor. This is going to continue to eat away the American middle class, leaving only managers and investors feeling good about their futures.
- We are still expecting our school system to be a job-training enterprise. The function of schools has always been to give a common base set of skills that would enable employers to start from a known state and train their newly-hired employees to do the job. Unfortunately, we have given away our industrial base, and with it any need for a common skillset. Each employer needs a slightly different set of skills, different in emphasis and in the overall balance, and the schools are not set up to provide anything like this. Meanwhile, each state and federal administration commits more and more resources to centralizing and "standardizing" something that needs to be as decentralized and destandardized as possible. What this means is that high school and college graduates will be worse and worse prepared for the workplace, as jobs require less and less of "the mushy middle" and more and more specialized knowledge and skills. It means that employers have to retrain their employees, attempting to wash out all the garbage they absorbed in the school system while teaching the employees the background and basics necessary to perform the job. This is in the now, but will only get worse as time goes on.
- The economic distress has motivated an unexpectedly large number of people to retire early, because they could not maintain or obtain suitable employment. This will move forward the year that Social Security starts to run a deficit and taxes must be raised to cover the difference (redeeming the bonds that Social Security's surplus has purchased over the years). Remember that the size of the population by age groups is such that we could see one retiree for every three workers. In plain terms, for every $1,000.00 in the average retiree's monthly benefit check, this would require the average employee to pay $333.33 in monthly direct and indirect taxes to support that retiree. Any other government needs will also need to be raised through taxation. It will also mean that large numbers of retirees will be drawing down their retirement funds (often heavily invested in stocks and bonds), affecting securities prices, rates of return, and even the kinds of securities that will be offered. A lot of the current twenty and thirty-somethings will see stifling taxes paired with miserable investment returns. Admittedly, this is a long, long way off, and not really germane to the near-term economic environment.
- The current medical insurance plan that Congress is debating will dramatically increase prices and waits for service, without making it substantially easier for lower-income workers to partake in the medical system's benefits. Nearly everyone in the middle and lower income brackets is already stretched to near breaking. Mandating the purchase of health insurance smacks of fascism--not socialism, Mr Glenn Beck, fascism--placing government enforcement mechanisms behind the marketing efforts of selected privately-owned enterprises. Most of us who are not currently covered cannot afford to obtain coverage without taking a major hit to our lifestyles (like say, living under a bridge instead of in a domicile), but the bill will make us lawbreakers and force government agencies to pursue financial penalties and jail time against us. The other thing this will do is suck up a huge amount of our economic resources, meaning that many businesses will suffer revenue declines as people reshuffle their spending to comply with the requirements. (Don't get me wrong. I am not defending the status quo, which is quite unacceptable. However, the only sensible way to go is to remove the private insurance companies from what I call "BasiCare", rolling that level of coverage into an agency that is owned by the several state, commonwealth, and territorial governments [in order to comply with the Constitution's restrictions on federal power] and making its premiums fully taxpayer-paid.) This vast subsidy to an industry (health insurance) that has failed to live up to its promises is going to hurt the economy, even though providing health care to all is sure to bring positive economic impacts.
I am not a financial advisor, so do not change your plans based on what I write. Instead, consider what I am saying and do your own research to decide for yourself what is your most advantageous course of action. In fact, I suggest you start doing that for everything. Don't allow supposed "experts" to do your thinking. Even if the decision later turns out to be the wrong one, you should make up your own mind and make your own decisions. Whatever it is: whom to vote for, what vehicle to buy, where to live, what color pants to buy, what time your ten year-old should go to bed, and much more should be your decision and yours alone.
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Category: finance and investments
Posted by: lnxwalt
Fed officials warn weak recovery won't spur jobs - Yahoo! News
Why the Dow is So High But Consumers are So Low « Oddly Together
Unemployment likely will remain high for the next several years because the economic recovery won't be strong enough to spur robust hiring, Federal Reserve officials warned Tuesday.
...
In separate speeches, Janet Yellen, president of the Federal Reserve Bank of San Francisco, and Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity.
"With such a slow rebound, unemployment could well stay high for several years to come," Yellen said. "In other words, our recovery is likely to feel like something well short of good times."
And that, my fine readers, is the problem. When 70% of the GDP consists of consumer spending and consumers aren't spending because of job losses, it takes more than a decline in the numbers lost each month to bring about a recovery. Until people start getting new jobs or at least feeling stable in the new world of work, they are not going to spend more money.
The Federal Reserve's regional bank presidents all know this. It is a fundamental requirement--below entry-level--for their jobs. The purpose of their speeches, then, must not be to inform, but to persuade. The Fed, like the government that created it, is approaching the recession from entirely the wrong angle. Their emphasis on "saving the banking system" means that those whose reckless pursuit of profit threw the whole nation's economy out of balance are also the very ones who receive taxpayer-backed bailouts. The financial industries, those who caused the crisis, would have been better served if a few hundred managers and deeply-involved employees were marched before the cameras in orange jumpsuits and leg irons. The remaining people whose actions caused the crisis would have mostly sought plea deals.
Would this have made credit more available? Probably not, but whether you are an individual or a business, you are probably overusing credit anyway. And your overuse of credit threatens your personal (and business) financial stability. The concept of "financial leverage" is probably foreign to you, but it refers to the way that adding debt to a firm's capital structure can make good times much better at the expense of making bad times worse. The debt makes profits more responsive to changes in revenue. Sales go up 3%? Profits might rise 5% or more. Why? Because once the debt and operating costs are paid off, the rest (however large or small that is) goes into profit. On the other hand, when sales drop, the fact that debt payments are relatively fixed means that it is easy to be thrown into a loss situation.
As I mentioned above, people were using loans too readily. A person or organization receiving a loan is trading future income for present spending. This is why California is in such deep trouble. In addition to the state's never-ending appetite for spending, the state is faced with coming up with the dough to make payments on money borrowed for *past* spending. And this is also what is happening with many of us: as incomes diminish, payment on debt is more or less fixed, taking an ever-larger proportion of one's income. It means that many more people will have to go through the bankruptcy process (and Congress is going to have to revisit the anti-consumer provisions they added to the Bankruptcy Code in 2005 or face an incumbent-free House of Representatives).
It seems to me that asset prices are still far in excess of sensible values, while we continue to ship our productive capacity overseas to low-wage countries. The result of this is likely to be a severe asset price deflationary spiral that stops consumers from buying non-essential items (they won't have the funds to do so anyway) and knocks us on our collective economic rump. As the "circular flow of income" stops flowing, holders of debts (that is, financial institutions like banks) and owners of taxable properties (that is homeowners and car-owners) alike will be squeezed to the breaking point by the lack of payments flowing in and the fixed or growing payments they are required to outflow. Yes, that sounds a lot like today, but this is just a practice run.
We see that the Federal Reserve, for instance, found that its monetary tools grew less effective as interest rates approached zero. Now imagine what happens when consumers won't spend or borrow, but won't put any money into banks, either. Banks will find that people will likely become less enamoured with electronic payments--because banks will crank up the fees, since they won't be able to generate any interest income--and unwilling to leave funds in their bank or other financial institution accounts.
I want to interject something here: When I took "Financial Institutions and Capital Formation" at California State University's San Bernardino campus, the instructor (who advised some of the newly-independent Baltic nations on forming financial markets and institutions) said that bank safety funds like the ones administered by the FDIC had a 100% record of failure, given a sufficiently strong financial crisis. It won't take a 25% failure rate to collapse the FDIC's funds. Remember that our banks use fractional reserves. When they accept a deposit, the reserve a portion of it and then lend a portion out, which becomes a new deposit in that bank or another one. And the process repeats. So an original deposit of $100 can end up as several times as much in the banks' ledgers. The reserved value, on the other hand, can never exceed 100% of the original value. Be aware also that this added value on the banks' ledgers is equal to the principal value of the loans they make that are derived from that original deposit. It all works, as long as consumer and investor confidence allows banks to avoid paying back all deposits at once.
If ever there was a 100% run on all the banks, most of us would not receive our full deposits back, nor would borrowers be able to repay the full value they owed. This is not an excuse to pull your funds out of the banking system. Remember that our money only has value because the banking system and the government says it does. Fortunately, that megasize bank run isn't likely to happen, but if it ever did, everyone would suffer, with nothing that we could do to ameliorate the pain. If someone tells you to buy gold as preparation, ask yourself how buying gold is going to help you if the banking system collapses. (Answer: it probably isn't going to help.) Now, let's get back to our topic.
The regional presidents of the Federal Reserve went out of their way to say that the recovery could take years before it starts replacing jobs, even though they know (and we do, too) that there won't be a recovery until the job losses stop. Why do you think they are saying this, then? Could it be that they are hoping to persuade you and I to once again borrow money we don't have any realistic expectation of repaying, perhaps using our now-depressed-value homes as collateral? After all, a return to the heyday of borrowing and payments would be a quick way to restore our financial sector to profitability, even if it comes at the expense of those individuals and families that do business with them. Could it be politically profitable to be able to announce the end of the recession, even as a tenth or more of the people who formerly had jobs remain jobless? This would be a major feather in the new administration's cap. So I ask you, does it seem strange to you that these political, financial, and regulatory leaders, people who should know better, are throwing their hopes for a recovery on a return to the very things that caused the problems? Wouldn't they be remembered in a better light if they supervised a true restructuring, such that the asset price bubble could never recur, and neither could the abuses that the financial sector perpetrated, nor the lapses in oversight that the regulators allowed?
With a limited time in office (eight years maximum, assuming he wins re-election after the first four years), a wise executive would seek to make the longer-term changes that enhance his legacy, rather than concentrating on re-election. That is, the President should be pushing the Fed, the Treasury, various federal agencies, and Congress, toward the singular goal of getting rid of the things that caused our present crisis and preventing a recurrence. Mollycoddling too-big banks is not going to accomplish this. Nor will pulling all the little regulators (SEC, CFTC, NCUA, FDIC, etc) into one big agency, remembering how the federal agencies prevented state agencies from tackling the burgeoning crisis earlier in the decade, before the wave crested and broke on the shores of overleveraging.
Why the Dow is So High But Consumers are So Low « Oddly Together
On the one hand, goverment bailout may well have prevented global economic diaster; lessons learned from the Great Depression were appropriately applied. On the other hand:
1. The government remains the driving force of recovery.
2. The fundamental economic problems facing most Americans remain.
3. There is no substance behind the Dow?s rise, which is fueled by false hopes.
4. Old business practices are back; one new fad is to bundle together insurance polcies as investments.
5. Economic recovery is still kilometers out of reach and will remain so as long as consumer debt chokes spending.
The true beneficiaries of government stimulus spending are many of the institutions responsible for the econolypse. Where is the moral hazard?
Joe Wilcox writes the above. It is a worthwhile article to read. Follow his links. See the full story. In it, he shows that even a former government official admits that the fundamental conditions in society and the economy still point to quite a far run of "recession" before a true recovery begins. Following the links, you'll find "There is no recovery now, and there isn?t going to be one in the foreseeable future." He's right. Don't let those who pronounce untruths for selfish reasons deceive you into piling on the debt again. This is not the time for it.
NOTE: I am not a fan of any politician (other than Ronald Reagan) or party. Do not mistake this for some kind of anti-Obama screed. The situation started before I ever heard of Barack Obama, and its roots date back before his involvement in politics. His only connection is that he continues to follow the road blazed by his predecessors.
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The Credit Card Accountability, Responsibility and Disclosure Act of 2009, which President Obama eagerly signed into law last week after urging Congress to rush it to his desk, is intended to prove that Washington won't stand by and allow the public to be abused by greedy money-changers.Two Democrats in the House and Senate combined voted against the bill (both represent South Dakota, one of the capitals of the credit card world). And overall, more than twice as many Republican lawmakers, with their presumably free-market orientation, voted to pass the measure as voted to reject it, which gives some sense of the breadth of congressional anger at the banks.As a result, there will be no more interest rate increases without ample notice. There will be no interest charges on already paid balances or rate increases based on a drop in a card holder's overall credit score.Political Economy: Ending the Free Lunch - Yahoo! News
Over the past several years, I have repeatedly stated that our banks are no different than mafioso, except that they use lawyers instead of leg-breakers, to enforce their pillaging of Americans' pocketbooks. For instance, I have decried the misbehavior of mortgage lenders, some of whom are said to have enticed their customers to falsify on loan documents, and the lengths to which they have gone to pursue ever-increasing profits. I have hated on the credit card companies, crooks that they are, and the deceptive and exploitative actions they have taken in order to drain our wallets. I have openly disliked the payday loan outfits and other consumer financial exploitation firms have sliced their way through people's economic resources like so many swashbuckling pirates.
Honestly, from what I can see, the act's primary problem is that it does not go far enough, and it does not mandate that federally-chartered financial firms obey state as well as federal consumer-protection laws. Neither does it deal with flaw one in consumer contracts.
That said, I rejoice in the thought that it will not only curtail abuses by financial companies against consumers, but will also curtail the growth of consumer loans.
If we are going to see our economy grow over the long term, we have to shift the balance back from borrowing to boost spending over to saving, investing, and building small, locally-owned businesses (SLOBs). This won't be pleasant to those who have grown used to huge bonuses for increasing the debt loads of US consumers. Neither will it be pleasant to those who have grown used to using consumer credit as a way of living above their income levels. It will be a time of cut-backs, of involuntary shedding of assets which cannot be supported on the individual's current income.
This is one of my frustrations as a former conservative. A lot of liberals believe that George W. Bush was a conservative. Either that, or they somehow believe he was a libertarian. (I say was, even though he's still alive, because he's no longer part of the political scene.) Conservatism is a set of principles, many of which are sound. A real conservative tries to live by these principles and to see the government live by them as well. In Mr. Bush's reaction to 9-11, his administration took an increasingly dim view toward the Constitution. Unfortunately, most so-called conservatives followed his lead because they did not want to agree with the liberal opposition.
Mr. Bush's administration knew that many of our consumer-protection laws were championed by none other than the great Teddy Roosevelt. A true conservative would have sought to aggressively enforce these laws, seeing in this the opportunity to root out corruption (You do know that corporate executives give money to political campaigns, don't you?), and to stave off additional laws by truly enforcing the existing laws. He didn't do it, because he was much more of a moderate, not much different from Bill Clinton. Like most moderates, he wasn't motivated by principles, not really having any specific set that he bore allegiance to.
That's why I am an independent Constitutionalist today. I believe that the proper role of the federal government is defined by a narrow reading of the Constitution, as amended, and that the roles of the states should be far broader than they currently are. Specifically, many of the federal laws and rules & regulations that explicitly supersede state-level laws and rules & regulations (I'm talking specifically about misusing the interstate commerce clause to prevent states from protecting or caring for their citizens) are illegitimate.
Many states saw the economic crisis coming and tried to forestall it with regulation and enforcement actions against bad actor financial companies. In nearly every case, the federal government claimed pre-eminence, and stopped the states from punishing the companies that are now bankrupting our nation. I want the states to be the leaders in this area, simply because most state governments are far more receptive to the needs of their residents than Washington DC is.
This is good, but it is too little, too late, for many of us. Personally, I want to see 500 to 1000 of the execs and managers who ran these companies marched before the cameras in leg irons and orange jumpsuits. I know it won't happen. (Isn't corruption wonderful?) But I still wish for it.
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Tags: econolypse
2009-06-14: Here's A Clue: This Isn't Just Another Recession
Category: finance and investments
Posted by: lnxwalt
Employed see tough times, too - USATODAY.com
People who still have jobs are faring worse than at any time since the Great Depression, a USA TODAY analysis of employment data found. Furloughs, pay cuts and reduced hours are taking a toll on workers who so far have escaped job cuts.
The employed worked fewer hours in May ? an average of just 33.1 hours a week ? than at any time since the Bureau of Labor Statistics began counting in 1964. Part-time work is at a record high. Overtime is at a record low.
The magnitude of job losses ? 6 million jobs gone, a 9.4% unemployment rate ? has overshadowed the groundbreaking nature of the nation's employment troubles, especially the financial decline of those still working.
Sometimes, we have to wonder what planet our elite economists and politicians live on. The tone of this USA Today article reflects the complete surprise that these leaders are experiencing. Yes, that is correct--these people are surprised that this is hurting those who haven't lost their jobs almost as much as it hurts those who did lose their jobs. In some cases, employers are reclaiming hard-won benefits and pay scales, all without trimming their bizarrely bloated executive compensation.
If you have ever had a job anywhere, you know that there is no single person in any organization whose output is worth more than twenty times as much as any other organizational member. There is plenty of room to debate multiples, but hardly anyone would say that a multiple in excess of 20 is accurate.
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I think that employees understand that there is pain throughout the economy, just as employers do. If lower-level employees feel that they are made to bear a disproportionate share of this pain, they will be harder to work with in the future. It always surprises me when LOOAC management believes that their employees will not remember. This is what doomed Circuit City, I believe. The company fired their best, highest-paid employees, telling them they could re-apply for their jobs, but the pay would be lower than before.
When this passes, which may be a while, corporate America (LOOACs) will not want to restore pay and benefits that were cut during the recession, except where those cuts affected top management. I believe that more people that are (or were) employees need to be taking the reins of their own lives and finances by establishing and building their own small, locally-owned businesses (SLOBs), owner-managed businesses (OMBs), and family-owned businesses (FOBs).
But this also requires some changes in the way Americans spend their money. If you work fairly near where you live, you need to start seeking out businesses that are local to your area, companies that employ local residents, pay local taxes, support the local Little League and Junior All-American teams, and actively contribute to the local area's well-being. If you travel, you need the generic national brand stores, because at least you know what you're getting.
Also look for products and services that are produced in your area. If not in your area, at least look for in-country production, rather than out-of-country. Decide on a figure, such as 50%, and make an effort to place that much of your purchase dollars with locally-owned businesses. On top of that, try to spend that much of your money on products that are made in-country, rather than outside of the country.
I'm trying to reach 75% local purchases and 75% in-nation production. It is a hard target to reach, because much of what is available is foreign-made, carried in chain stores that don't even have local purchasing operations. But if most Americans made similar efforts, it would launch an economic and social transformation even more far-reaching than the current recession. For one thing, Main Street would gain the upper hand over Wall Street: a small business-driven Main Street is a decentralized Main Street, while Wall Street is all about centralization. With SLOBs seeking to build relationships with locally-owned banks, the era of corporate dinosaurs will end without a catastrophic meteorite strike.
Remember this: big corporations (that is, LOOACs) equals concentration of wealth, mass disenfranchisement, and large-scale corruption on the federal level and possibly state and local levels. Smaller businesses (that is, SLOBs, OMBs, and FOBs) equals wide dispersion of wealth, active participation by large segments of the population, and locally-controlled resources (unable to bribe federal and state officials). Choose current comfort (that is, LOOACs) or long-term benefit (SLOBs). I'm firmly on the side of SLOBs.
Unfortunately, the economic rescue efforts to date have mostly focused on saving the LOOACs that caused the crisis in the first place. Even the new energy plan is expected to promote large and centralized "alternative energy" production, which is both expensive and unreliable, instead of focusing on equipping every home with its own energy-production and energy-storage facilities. Overall, home-focused energy is more expensive. But its advantage is that there probably isn't going to be a region-wide or state-wide blackout due to clouds or lack of winds. Taking a drive through certain areas of California, one regularly sees windmill farms where the windmills aren't turning because the wind speed is too high or too low to be useful.
Rather than bailing out corrupt and incompetent bankers, we could have used those trillions to help smaller businesses invest in equipment, buildings, and inventory necessary to soak up many of the workers that are being spilled by corporate America. It would still have been painful, but it would also have resulted in much faster absorption of stimulus money into the economy. And best of all, we would not be fighting the natural trend of the economy to rid itself of uncompetitive enterprises such as the large financial companies.
This is not just another business cycle. This is a deep restructuring. If we ignore the needed changes (or if the government's continuing effort to oppose them succeeds), we will face a much larger calamity down the road, only it will be condensed into a much shorter, much deeper downswing and a long pause before any upswing begins. Like most Americans, I've grown fat. I don't want to face the potential of starvation when our interconnected economy breaks down. I'd much rather fix it now and avoid hunger.
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2009-02-28: Financial Post Criticises Messiah Obama's Plan
See "Obama the Messiah" image.
President Obama's speech, burdened with never-ending calls for state action, contains the seeds of at least four crises, says Terence Corcoran.
The President is following in FDR's footsteps. He is attempting to take bold action to give Americans confidence that someone knows what is going on and how to fix it. Like with Roosevelt, his plan will fail to correct the situation. Under Roosevelt, of course, the economy recovered because of the second world war. I certainly hope that this recession is not going to lead in that direction.
Mr. Obama is clearly using the current economic mess as cover for scores of leftist programs and projects.... they will drive the United States into a succession of trillion-dollar increases in the national debt, on bailouts, stimulus and health care. Nothing wrong with debt in principle, but it's a recipe for a fiscal nightmare if the debt and interventions undermine growth. No growth, no tax revenue to pay down the debt, equals debt spiral.
Debt is a claim against future income. Thus, while there may not be anything wrong with debt per se, the truth is that taking on debt today equals raising taxes and possibly lowering our children's incomes. There is a limit to how much debt we can pile up before we condemn our children and grandchildren to lives of third world-style poverty.
There is a some question among econo-junkies about either hyperinflation or deflation. Since no one has a crystal ball, no one really knows whether either one is ahead. Personally, I hope that we just have continued minor distress for a few months.
The thing is, a lot of the people that are debating these things are going over to the lunatic side--storing up years of food and ammunition, turning their homes into fortresses. Yes, it is a good thing to look ahead and to prepare. However, you need to understand that your family of five will not succeed in holding off a hundred hungry neighbors. For that reason, it makes more sense for your local municipality to do the "disaster preparation" activities. Not necessarily the guns part, but certainly food and drinking water, and certainly a secure, water resistant, fire resistant storage facility in which to put these things.
The crisis came about because we stopped rewarding prudent financial management. Much of our economy (about 70%) in recent years was based around consumer spending, with little incentive for consumers to defer that spending and instead to save up for the items they desired. (Personal experience tells me that if I say I'll save up for something, there is a high chance that I will not buy the item. By the time I have enough, either the item is no longer available, or I am not interested. Or many times, something will come up and that money will go to take care of the need.) Saving instead of spending is usually in my best interest, and I would expect that to be true of others, too.
Americans dumped saving for spending, but when that was not enough, we saw that home values were continually climbing. We started pulling some of that accumulated valuation out of the home and spending it. Now, I realize that we call this imaginary value 'equity', but it never really exists until you sell your home--it is imaginary. The borrowing boom helped us keep things going several years longer than otherwise possible.
We also stopped returning any of the fruits of production to labor--the very thing that had made our economy the world's wealthiest--and instead gave those fruits to a very small group of managers and financiers. We rewarded management for tearing down companies, exporting the productive operations that gave the organization a reason to exist, and leaving a hollow shell led by marketing and intellectual property-slash-legal divisions. For this kind of idiocy, Corporate America and its financial equivalents deserve to perish in this crisis they brought upon us, but they will persuade our government to lay waste to your and my finances to try and save their hides.
I'd guess that the home equity loan trick kept the economy going for ten years or more. And the goal of these bank bailouts, insurance bailouts, and other government bailouts is to keep them going until we once again start piling on the debt (and bankers start making the loans that enable us to do so). But they are not dealing with the real problem. The problem is two-fold: residential real estate is far overvalued, and because it went up so long, most homeowners owe far more than the sensible value of their properties. We really need to help real estate prices fall even faster and let the consequences hit the bankers who had to know this made no sense even while they continued to profit from it. Yes, some homeowners will probably be evicted in the process. But within a couple of years, many of them could again buy homes, this time for something much closer to the homes' true values.
I say this as someone who was a homeowner and had the home foreclosed. (I won't go into the shenanigans that the bank pulled except to say that the management of one of the big NY banks should be in prison.) Losing that house really was the best thing that could have happened to me. Payments were high and rising, the seller had concealed some things and the insurer that should have covered it said that they did not have to pay because of fraud. The burden of maintenance alone was more than we could afford. Talk to others who have lost homes or are about to lose them, and you will hear them say "well, the front bathroom doesn't flush and we don't have the money to have it fixed"....
Let me tell you what you as a distressed homeowner need. You need to let someone else pay for repairs for a couple of years until the cost of buying a home is low enough that you can once again afford to pay for buying and maintaining a home. You need to be setting money aside so that you have a sensible down payment. And you probably need to look at getting something with a little backyard where your kids and dog can play and you can have a little garden. You need to live somewhere that does not have a "homeowner association" that regulates what you can do--because you need the ability to work in your little workshop fixing your stuff or making things you can sell for extra cash. You need to be in an area where you don't have to turn your home into a fortress. And finally, you need to live where the state and local government are not going to punish you for buying a home.
Right now, I have a little backyard with a little garden. It isn't on the kind of scale that would enable us to survive any kind of social breakdown. And the home is rented, so the county isn't slapping us with thousands of dollars in property tax every year. I do not have to worry about the plumbing, the electrical, or the roof. And I am not stressed out over the collapse of the banks. No, I have no savings yet, but I'm working on cutting my costs and spending to make it possible to put a little bit aside. The big thing is that--as a homeowner, it was constant stress trying to meet all the payments and obligations that go with it--as a renter, I have a lot less stress than I had before.
If home prices fall another 50 to 75%, it could make sense for me to become a homeowner again. I honestly do not see the present strategy (bailout the bankers and try to keep real estate prices from dropping to their natural level, along with big spending projects meant to put a little cash in our pockets and get us spending again) as dealing with any of the causes. This is a new idea? This is the same thing that "the failed Presidency of George W. Bush" tried to do. Deal with the causes--job exports, executive compensation plans that help them avoid the pain that employees and investors feel, overly-high asset prices (including real estate), high debt, high returns to capital but low returns to labor--and it will take a few years, but the economy will fix itself.
If we want to again be an economic leader (no longer the leader because Europe and China and possibly Russia are also going to be leaders), we have to reward those who work hard, those who save, those who start and own small, locally-owned businesses (SLOBs), and the local banks and financial institutions that help to finance them. We have to reward production and productivity, not "passive investment" concepts such as real estate pyramiding or multi-level marketing.
«reward those who work hard, those who save, those who start and own small, locally-owned businesses (SLOBs), and the local banks and financial institutions that help to finance them. We have to reward production and productivity, not "passive investment"»
One final thing. This article in the Financial Post shows only a partial understanding of what is happening. For example, while Obama's energy plans are likely to fail, the failure is more about centralization than anything else. Let me give you an example: a few years ago, a local cement company kept its costs in control because they found a way to produce some of their power from the waste heat of their production process. Instead of sending that heat up in the air unused, they tapped into it. Now, a government mandated process tends to move everyone to the same small list of approved processes. Competing local cement companies used more modern processes (lower heat) and were not able to offset rising electricity prices that way. Building big solar powered electric generation plants cannot replace the current coal and oil and gas-burning plants. However, individual homeowners can install solar or wind-powered electrical generation equipment on their homes; for those homeowners that doe this, it can be financially viable. The fact is, a number of energy specialists claim that the oil will run out. Whether it is ten years or fifty years, if we know that oil will run out, we should be finding non-oil-based ways to power our economy. (It is true that the whole CO2 cap idea is idiotic. It is based on a supposedly science-based fringe group's prognostications. But the science behind it is still being explored and debated. Among other things, global temperatures (as measured by satellites) stopped rising in 1998, were flat until about 2005, and have been dropping ever since. No one has any idea why, nor any idea whether this is the beginning of a new trend. There have been some changes in the sun's output over that period, but again, no one has any idea what connection if any this has to global climates.)
... such talk is code for undermining corporate America, the place where the money is made to pay dividends and taxes.
Corporate America has undermined real America through things like excessive executive compensation, job exports, and a relentless focus on making quarterly forecasts while ignoring the long-term good of their organizations, their employees, the communities in which the organization has facilities, and the investors whose money is tied up in company stock. Investors, at least any investors with sense, know that something is funny. They know that what they are being told bears little relation to companies' dividends. This is why they focus more on stock prices than on dividends. If you focus on stock prices, all that really matters is the psychological attitude of other investors. If you focus on dividends, you have to try to understand what is going on inside of large corporations.
The fact is, executives' compensation is an expense, so the more that gets spent on it, the lower the profit upon which the company is taxed. So, yes, we taxpayers do subsidize it, just as we subsidize the compensation of every other employee. We tax individuals on revenue, not on profit. By taxing businesses on profit, we do subsidize every allowable expense. In other words, President Obama is not wrong in what he claims, although he seems to be foretelling a legislated cap on executive compensation. This is another issue entirely, but as long as corporate America has its hands in the public's pocketbook, they are subject to all sorts of formerly unthinkable regulations.
Corporations arose because of a set of government incentives for such businesses. The next wave is the return of focus to SLOBs (small, locally-owned businesses) in every community. Instead of selling the communities' souls to get a large out-of-area corporation (LOOAC) to open a minimum-wage retail store, communities will help locally-owned producers and locally-owned retailers establish themselves and build their businesses to the point where many of the chain retailers will be unnecessary. Instead of everything being made overseas, locally-based production will again be taking place in the United States of America.
Whether Mr. Obama's policies are corporate-friendly is not the issue anymore. The issue is going to be whether his policies prevent localities from focusing on rebuilding their economies around locally-owned businesses.
Mr. Obama continued to promote the idea that the problem with the U. S. economy is bankers who are unwilling to provide credit.... All accounts suggest credit is available, but many people don't want it. The economy first needs willing borrowers and investors, but both have been panicked into inaction by a succession of government policies that are making the financial problems worse, feeding fear and recession.
What country does this guy live in? The reason that Detroit came running to Congress for money is because people could not buy cars. We can see that because even Toyota reports lower sales. Why can't people buy cars? Because they cannot obtain loans. I understand having different political and economic beliefs than Obama does. I certainly do not agree with the things he's announced so far. But anyone who claims that the problem is spooked buyers and not spooked lenders is someone who cannot be relied upon to know what is happening.
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2010-04-19: Economic Recovery? I Doubt It
I am seeing a lot of crowing that we are in a recovery. I do not believe a word of it. Here's why:
Symptoms
*** Jobs are not a "trailing indicator", but are in fact one of the most accurate measures of how the everyday American experiences life. GDP, unfortunately, is badly skewed by throwing millionaires and billionaires in with thousandaires and hundredaires. So as soon as stock prices start rising, the wealthiest people start spending again, but it is two or three years later before the average Joe on the street is finally able to move out of his mother-in-law's place.
In this case, the jobs we lost were higher-paid. Financial services, automobile manufacturing, recreational vehicle manufacturing, and new/used car dealerships--most of the jobs lost in these industries are gone forever. Retail, fast food restaurants, education, government--in the first two fields, job gains may remain for a while, but people in these industries earn a fraction of what jobs in the now-closed industries above earned. In education and government, deep and lasting cuts are almost guranteed within the next two or three years, simply because there aren't enough private-sector jobs earning enough to pay enough in taxes to support the people working in those fields.
*** Real wages, or inflation-adjusted wages, have not increased in decades, and anecdotal evidence suggests that they have declined over the past fifteen to twenty years. Of course, the government changed the formula it uses to determine this around 1994, so some of the negative trends that the earlier calculation might have shown are muted by the current calculation. See ShadowStats for more information on that.
This means that the average Joe on the street hasn't had a noticeable raise since Bill Clinton was President. The lowest income people in the economy have, in fact, experienced a gradual pay cut, as prices have risen, but their wages have not kept pace.
*** Real estate prices are still insanely high, relative to people's incomes. The government's stabilization program was focused on stopping the price slide, because inflated real estate values are a huge part of many banks' portfolios.
We should also mention the AARP generation, a good number of whom are property owners as well as active voters, as a reason why the Bush and Obama administrations chose to prevent real estate prices from "right-sizing". Whatever the motivation, this will continue to price many families out of the market for owning their own SFDH (single-family detached housing) units, and as long as that remains true, we are all poorer for it.
*** Lack of criminal prosecutions against those in the financial and real estate industries (as well as publicly-traded corporations in other industries) is also an issue. I'm not a lawyer, not a police officer, not an accountant. But I'd be surprised if an energized and motivated DOJ couldn't bring 100 or more prosecutions in 18 months time against managers, officers, directors, advisors, and investors in these firms.
Now, the issue here is that everyone has seen how much cheating benefited these companies and their officers and investors. The rest of us will be spending the next thirty years paying for the resulting bailouts, on top of our already-existing responsibilities. Without aggressive prosecution, confidence in the economy will remain weak. When we see 100 or more corporate officers in orange jumpsuits and leg irons, we will know that we have turned the corner.
*** Corporate lobbying and political schmoozing. When I'm at work, I can easily spend 10, 12, or even more hours each day, six days a week, trying to make a living. I don't have much time or energy afterward to try and persuade a Congress-member to vote a certain way on an issue. Presumably, you don't either. You're more concerned with getting Junior fed, with his homework done and his bath taken, before his bedtime. Corporations have nearly-unlimited resources, and are therefore able to advocate for their points of view while you're trying to put bread on the table.
As long as politicians refuse to write and pass an amendment to our Constitution that eliminates "corporate personhood" and the rights that implies, we all know that the "playing field" is uneven. If you know that the government and the legal system are under the control of someone whose goal is to drain you of all your resources, will you be confident in the economy? No? Why not?
Remedies
What I'd really like to see is a renewed focus on helping people build small, locally-owned businesses (SLOBs), and a stern resolution to let LOOACs (large, out-of-area businesses) pay their own way. A resolution that will stop subsidizing the costs of importing goods from low-wage countries and stop ignoring companies right here that employ undocumented labor because it allows them to pay illegally low wages.
But realistically, this isn't likely unless the above-mentioned constitutional amendment passes. As long as corporations are legally persons, the right to petition for redress of grievances will allow them to continue to control Congress and the President--no matter who is in office--and through their control of the elected branches, they'll also control the courts.
Financial overhaul: I haven't read the administration's overhaul bill, but from what I have read about it, it neglects the very things that are necessary:
- Require compliance with state consumer-protection laws in the individual consumer's state. Establish criminal penalties for non-compliance, and allow states to prosecute violations.
- Remove enforcement powers from the Federal Reserve, which is not actually a government agency, and give them to an agency of the Treasury Department.
- Consolidate the seven dwarves, the alphabet soup of financial rule-making and enforcement agencies, excepting the FASB, into this Treasury-based agency.
- Reinstate "mark-to-market", the accounting rule which the FASB repealed under Congressional pressure, and alter other accounting rules to make accounting statements a more transparent, current, and accurate statement of a firm's financial condition in the present and the near future.
- Restore Glass-Steagall restrictions separating commercial, consumer, and investment banking from one another and from insurance (and reinsurance). Restrict financial firms' activities to a home state and its contiguous (touching) states. For example, a California bank would be allowed to expand into Nevada, Arizona, and Oregon, but not Washington or Utah.
- Financial institutions get a maximum of five years to shed holding companies and no-longer-allowed businesses and locations.
- Require "skin in the game". Loans and investments must be partly made from a firm's invested capital. This should put stockholders on the brake pedal. But to further discourage overly risky actions, corporate officers and upper management should also have some of their financial resources on the hook. This is not necessarily direct exposure (which could put their interests in competiton or opposition to the interests of stockholders), but perhaps making some of their assets available for recovery in the event of collapse.
Certainly, bringing goods from more than 500 to 1000 miles away should be expensive enough that local businesses, with local labor and local suppliers have an even shot at landing the sale. By this I'm referring to fuel subsidies, highway subsidies, and other ways that we take tax money and use it to lubricate the export of American workers' jobs.
Indeed, this country needs a profound focus on a common-sense energy policy. I'm not talking about a lunacy-based policy based on fear of carbon dioxide, either. I'm talking about the coming oil shortage, and its effect on transportation, keeping our homes warm, and even our agriculture. I'm talking about homes that are in areas where there is plenty of insolation (incoming solar radiation), but which have no system to capture some of that energy and put it to use. I'm talking about homes that are not highly-insulated , and which therefore require more energy to heat and cool. I'm talking about cities whose building codes forbid wind turbines, not because of safety, but because of aesthetics.
Adam Smith, the father of economics, recognized that the returns on doing business properly belong to those whose labor went into producing the product or service. A portion is rightly diverted to the provider of capital (in most cases, through providing money; capital itself is the land, buildings, equipment, tools, etc which are provided by the money and which are used to produce the product or service for sale, not the money itself) as a reward, and some portion is then paid to the managers and foremen who direct the laborers in their tasks of production. We have it backwards: management first, stockholders and lenders second, workers last.
What do these things have to do with recovery? Simple: the economy has been undergoing a radical transformation for several years. This economic crisis accelerated it, which is why two of the three US auto makers required taxpayer bailouts (and Chrysler is so gravely wounded that it isn't likely to see the end of 2011 in my opinion). There are whole industries that have lost many of the companies that were a part of said industry. Those companies, those jobs, are not coming back. Telling laid-off workers that going to college will help them obtain replacement jobs is false at best, and at its worst, a damnable lie. What we need is to recognize where we are and what our options are for undoing this mess we're in.
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Tags: recovery, economy, recession, econolypse
2009-01-05: Why Are You Here?
Category: management
Posted by: lnxwalt
One of the most important questions that the owner or manager of a small, locally-owned business (SLOB) needs to answer is why do you do this? Why do you expose yourself to the risks and uncertainties, to the pressures and stresses that come with business ownership? Why are you not working at that big box store near the local shopping mall, like all your friends?
Think about this for a moment. Is it about money? If it is, a management position in a large company usually pays more than running a SLOB, at the expense of having to conform to the company's expectations. Is it about control? It is true that working for someone else's company subjects you to their control, but you know now from running your own business that you are still subject to some external control (government regulations, taxes, competitor actions, customer desires / requests, your spouse or domestic partner, and even any business partners). Maybe you operate a business because you do not like the scheming and intrigues that are common in larger entities. Or you do it because no one else would take you. Or you do it because you believe this is what you should be doing.
You need to be aware of your reasons, because the world is being shaken right now by the effects of allowing large, out-of-area corporations (LOOACs), including banks and other finance-related corporations, to become dominant and to act without sufficient oversight. Almost everything you thought you knew is now wrong. You have to know what motivates you, because you should be circling the wagons and preparing for a drawn-out fight.
That the government has borrowed trillions of dollars in an attempt to bail out those banks and corporations is disturbing. If your business was about to fail, they would not step in. Yet, your business and your personal finances are going to be tapped for the next thirty years to pay for bailing out the LOOACs whose irresponsible behavior caused the crisis to begin with. This is just added pressure that you are facing.
Some of the lenders and brokers who urged people to borrow against their home equity are now gone. Many others are partly taxpayer-owned. This isn't to say that any specific entity was part of the problem, because it was industry-wide. I watch with humor when some of them try to deflect the blame onto someone else--you were part of the business of lending money for assets with inflated values, now man up and admit your part in causing this crisis--and then talk to us about how to untangle this mess.
For most of us in smaller businesses, we are not out there pushing loans on unsuspecting buyers. We are, however, affected by the fallout. So what can we do?
First, we need to return to our first principles. Why are you in business? Who are you trying to benefit? What is it that you offer that isn't available at the big competitor down the street? How are your pricing and sales policies, your purchasing policies, and your employee policies different from competitors' policies, and how does this set you apart from those competitors?
Second, you are running a small, LOCALLY-OWNED business. You need to be aggressively local. Whenever you can, use LOCAL suppliers, use LOCAL advertising, hire LOCAL people, support LOCAL schools and sports teams, engage your LOCAL governments in a dialog about how to strengthen LOCAL businesses, use a LOCAL bank, and even consider special pricing for LOCAL customers. It used to be that a large Southern California amusement park had special pricing all the time for people whose identification had their LOCAL city on it (and seasonal discounts for residents of most of Southern California). If the mouse house can do it, why can't you? Are you able to offer LOCALLY-made products and LOCALLY-generated services to your customers?
An important part of this is recognizing that using LOCAL suppliers, LOCALLY-produced products, and LOCAL personnel strengthens your LOCAL economy. If your town's economy can keep a larger fraction of the funds spent there, you and other LOCAL business owners stand a better chance of surviving this economic collapse ("econolypse", as some bloggers have called it). Your town has a better chance of keeping its roads paved, of keeping its populace housed, of keeping its residents fed, and of avoiding the civil disorder which has characterized most nations during times of severe economic distress.
Thirdly, you, your family, and your business (including employees) need to focus on survival. What do you do when sales drop? You certainly cannot just sit there and let things happen to you. Get up and do something about it. Be aware, however, that most of your competitors will be doing some of the same things, like hiring commissioned salespeople to try to drum up more business, or cutting back on the quality of ingredients used in production, or cutting employee work hours. You have to do things that your competitors are not doing (yet) in order to out-compete them for your customers' dollars. And above all, you should be emphasizing that spending money with you helps build the local economy, that spending money with LOOACs sends much of the funding outside the community. Let your customers know that it is in their interest to support locally-owned businesses like yours.
Finally, you have to expand your mission. Your purpose is not just about YOU. It is not just about YOUR business or YOUR family. Your purpose is broader. You have a God-given purpose, even if you do not know it, and in some small way, your actions should change the world around you.
A study released this morning seeks to weigh the benefits of SAT test preparation, and concludes that gains from such courses can be small, but that small gains often matter to admissions offices.Colleges Acknowledge SAT and ACT Score Cut-Offs in Admissions - The Choice Blog - NYTimes.com
For years, there has been a debate going on--on one side, there are those who feel that standardized tests should not matter at all, merely one's historical educational performance--and others say that testing is better correlated with future college performance than high school grades are. The institutions, for their part, mostly claim to balance test scores and other factors including previous academic performance.
This report is notable because it contains an admission of test-score cut-offs.
As part of the report, which was commissioned by the National Association of College Admission Counseling, researchers asked nearly 250 colleges whether they used SAT or ACT scores as a cut-off for admission. Of those that accept the SAT, 1 in 5 said they used particular scores on the test as a ?threshold? for admission, at least in some cases; among those using the ACT, 1 in 4 described similar cut-offs.Colleges Acknowledge SAT and ACT Score Cut-Offs in Admissions - The Choice Blog - NYTimes.com
At first glance, it makes sense. Test scores are said to track intelligence as well as predict future performance in college. Cutting off those whose scores fall below a certain level helps colleges reserve scarce resources for those who are most likely to take advantage of them. But there is a darker side to this: having the financial resources to do test-prep courses increases scores relative to those who do not take test-prep courses. (This seems to say that we might be better off replacing high school with test-prep courses.) Further, there are those who do poorly on the tests, whether because of anxiety, exhaustion, or simply an inability to "get" tests, who would perform better in college than their test scores predicted.
When we in smaller businesses--owner-managed businesses (OMBs), small locally-operated businesses (SLOBs), and family-owned businesses (FOBs)--think of college, we think primarily of two things: the high cost of sending Junior to State U., and the lack of job-training displayed by the graduates we hire. Both of those are function of trying to make college fit into a role for which it was not designed. College is not about job-preparation. College, at least as far as its effect on the workplace, is about learning enough about a field to have the requisite background knowledge, along with a broad enough knowledge to bring outside perspectives, so that a graduate can ask questions and challenge assumptions.
You should never expect a college-trained employee to hit the ground running when you hire him. He's not there for that. During and after the on-the-job training that you give him, the college graduate is supposed to cause you to question your assumptions. Why do you do things the way that you do them? What is the underlying purpose? Is this the best way to accomplish that purpose?
On the other hand, someone with industry experience is going to be a lot faster to start contributing directly to the bottom line. But you'll first have to untrain his prior experience out of him and then retrain him on the way you do things in your business before you see maximum productivity, and even then, his productivity is likely to be capped--he won't have the proper background to challenge your assumptions or the industry-wide assumptions that undergird the things you do in your business and the way those things get done. In short, soon after he starts working, he will hit his maximum impact, and will probably never be any more effective at helping the business make money, which is the purpose of every employee.
While politicians, parents, school counselors, and the collges themselves continue to promote college as job-training, we will continue to struggle with a selection process that fails to divert those who are not attending for the broadening process and querying perspective that college is (but instead are looking for a vocational / trade / technical training program). Standardized testing helps to select those who have spent their years asking questions instead of meekly accepting whatever their teachers spoon-fed them, although short-term test-preparation courses can make up for some of the ingrained knowledge that comes from such an inquisitive mindset.
«politicians, parents, school counselors, and the collges themselves continue to promote college as job-training»
On the other hand, high school educational performance is merely about passively absorbing whatever is spoon-fed to a student. MJ, for example, challenges what an instructor says, often remembering the instructor's exact words months later to use in his queries. This caused him no end of troubles in the school system. But he is doing better than many of his peers, and this is mainly because he does not sit back and wait for someone to dish out a little dab of knowledge.
In short, this debate happens mostly because colleges have allowed themselves to be misrepresented. College is not at all about getting a better job once you get out--that should happen, but it is a result of the graduate's ability to improve a company's performance through not accepting whatever is handed to him--college is about having the knowledge and inclination to shake things up and hopefully improve the businesses, schools, government agencies, and societies that a graduate finds himself within.
The sooner that we can get past the lie that college is about job-prep, the sooner we can stop loading our children down with $100,000 debts before they hold their first full-time jobs. Once you know that college is not there to help you get a job, you'll think much more before you accept a loan in order to pay for your books and classes. Small business, especially, needs to lose this deception--the way to weather this economic depression, this econolypse, is to stop doing the things that got us into this mess--we need to change as much as the big guys, and we have a lot less resources available to make it through the change period.
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Tags: education, small business
2009-01-11: Prescription For Financial Reform
Category: Politics and Government
Posted by: lnxwalt
We know this economic crisis will be repeated unless we change some things. Here is my proposal. It is very sketchy, and will have to be refined and fleshed out in future postings. I would turn comments on again, but I still do not have the time to moderate them properly.
First of all, let me say that the true causes of this crisis are still being debated. Is it the culmination of years of government fiscal policies that suddenly stressed the financial markets, causing the foreclosure crisis? Is it the culmination of years of deregulation and unregulation, causing the foreclosure crisis and the subsequent financial crisis? Is it the result of years of monetary policies that culminated in the foreclosure crisis and subsequent financial crisis? Is it years of politicians' interference encouraging certain financial institutions to get too big and endanger the entire financial system? Is it just another example of corporate greed gone wild?
I submit that it is all of those things and more. More importantly, the fact that we are still debating what went wrong shows that no one really knows what is going on in our financial system. Therefore, I recommend re-training for everyone in the financial world and for all those who regulate the financial world. This includes politicians in federal office.
CSUSB, College of Business and Public Administration
ACCT 430. Financial Theory and Practice
Financial management with application to capital markets, financial planning, capital budgeting, capital structure, portfolio selection and managerial problems. Prerequisites: FIN 313 and 314.
ACCT 432. Financial Institutions and Capital Formation
Structure, operations, portfolio compositions and problems of financial intermediaries and markets. Prerequisites: FIN 313 and 314.
ACCT 433. International Business Finance
Financial operations of multinational businesses with emphasis on foreign exchange mechanics, funds transmission, financing instruments, institutions and markets, capital investment decisions and special problems facing a firm in this unique environment. Prerequisite: FIN 313.
ACCT 435. Investment Analysis
Analysis and forecasting of security markets, industry studies, portfolio construction. Prerequisites: FIN 313, 314, and 430.
Secondly, we should be reforming the economic incentives and disincentives we have built into our system. For example, making mortgage interest tax-deductible serves to encourage people to accept bad loans. If the only reason to buy a home, or even the tie-breaker, is tax-related, do not do it! Buying a home should only be done when it makes sense for the individual or family involved. If it takes a tax kickback for the purchase to become worthwhile, that means it does not make sense to buy that house. Second, if real estate agents and brokers work for the seller, then there should be an offsetting person (who is not on commission) who works for the buyer, even before the buyer chooses which home to bid on.
Mortgage brokers? Their incentive is to get you the highest dollar loan they can, often with high interest and points, because they often get a percentage off the top (and a bonus for how many loans they close). This is generally going to be some adjustable-rate mortgage, which is almost never good for the borrower. (If you can barely afford the payments at X%, how will you afford them at X+2%?) Now some would say that these brokers were a part of the problem, and I would agree, but they were much more a symptom of the problem. Real estate prices are out of line with the incomes of real people who work for a living, and have been (in some areas like Southern Calfornia) for many years. Still, the mortgage broker should work for the buyer, and be paid to obtain financing on terms that benefit the buyer.
Third, as I've already mentioned, real estate pricing is far too high for the income level of the buyer. Now one way to respond would be to limit lenders' loan amounts to three-times the median income for residents of the area, minus the down payment. This means that, if prices are thirty thousand dollars higher than this level, the buyer has to come up with an extra $30,000 or the price must come down.
I can see a downside potential here. Say, some Hollywood types want to buy up a lot of homes in a low-income area. They pay cash, substantially more than competing buyers can be loaned, and they'll be able to quickly obtain the land. I am not sure how to prevent this scenario, either.
But this is primarily meant to deal with lenders making loans that go 'underwater' in a few years, when the economic climate changes. If the prices cannot rise too high, the buyer is less likely to overextend and default. This also helps to thin out the real estate "flipper" crowd. If, for example, San Bernardino's median income is $31,000 per year, the loan limit of $93,000 makes it unlikely that a flipper will be able to make much profit there. And at that level, flippers are actually harmful to the community. Better for someone who really intends to live there for a few years, someone who will get involved in the school board, the water and trash and sewer issues, and most importantly, community economic development and securing the community against crime.
Fourth, too much of our national dialog on the real estate and financial industries has been dominated by large corporations. We really need to remove the so-called right of political redress from groups and corporations. It should be reserved only for individual citizens--natural persons, not organizations--and that includes the right to contribute to campaigns and political parties. Keep all groups out, and many of the issues that cause political constipation will be quickly swept away, as if we had taken a national fiber laxative.
Fifth, there is not enough transparency in our financial system. When a contract is signed, both parties need to fully-understand what they are agreeing to perform. No party should have the ability to alter the contract or its terms unilaterally. Even things like corporate financial statements, which have to comply with rules known as GAAP (Generally-Accepted Accounting Practices), often obscure important information from investors and lenders. Certainly, those who owned stock in the banks would like to have known that the banks were investing in risky derivatives.
Partly, that is why we have accounting firms, is to make sure that those statements truthfully and conmpletely state the financial condition of the firm. But far too often, even the accountants and auditors do not know about the risks. Again, we have the bond rating firms and companies like Dun and Bradstreet, in part, because they should be serving to help individuals and businesses quantify the risks involved in dealing with the companies behind the bonds. As we have seen recently, this has not been the case.
I suggest that bond raters should not be paid by bond issuers. I recognize that this would make prospective buyers (of bonds) have to pay for the rating information. I also recognize that small buyers, such as individuals, would not pay. The effect could be to tip the advantage even more to institutional investors like mutual funds. Again, I have no plan for how to prevent that.
Sixth, individual Americans are accumulating far too much debt, and not saving money at all. We have become mere spectators in life, buying whatever the commercials tell us to buy, with our new credit card (which was also heavily-advertised). We need to make it more difficult to borrow money unnecessarily, and easier (and more profitable) to save it. We need to enable Americans to have a long-term perspective on personal and family economics. It cannot be slap-dash, like the bailouts have been.
Have you noticed how the government has changed its mind repeatedly about how they will use the $700 billion in bank bailout money? First, it was going to be used to buy toxic debts from the banks, so their balance sheets would look better. Then it was going to be used to buy those debts at book-value instead of current value. Then it was going to be used to invest in the banks and bolster their capital. Finally, I believe that some of it went to the automobile makers' bailout.
If we are going to "incentivize" individuals and families to save and invest for their future, we have to make it clear that this is the way to go. We have to change multiple things at once, such as our divorce and custody laws, so that it is far easier for each member of the family to remain together than it is to break apart. I say this because too many divorces leave one ex-partner destitute, while the other partner is often able to put the squeeze on for even more money. Child custody is usually the avenue used for destroying the non-custodial ex-partner's finances, when the objective should be to benefit the child--to require that both parents remain involved in the child's life--and not to use the child as a bank. We have to make it clear that each employee is primarily responsible for his or her own retirement, and then make it easy to do something about it.
It means that we have to clamp down on college and vocational training expense. Why? Because we have to reward parents who save for little Johnny's college bills. It means we have to smack down over-compensated corporate executives. We need to reform the way we pay people for working. If some people work full time, but have no benefits and make under $20,000, and others get paid a thousand times as much for being less involved in productive activities, what does that say to our next generation? Instead of growing up wanting to build, to create, to make things, they decide they want to sit in an office and play with spreadsheets all day. They decide that they want to work on Wall Street, shuffling around impossibly large amounts of money at a time (often rewarding speculators rather than creators). We should be celebrating those who labor--who work--day in an day out, not those who are necessary but parasitic, like stockbrokers and CEOs.
It means that we have to honor and enforce parents' leading role in educating their children, rather than subordinating it to the school system. Little Johnny is not the property of the state, to be subjected to mind-numbing repetition and indoctrination at its will. Little Johnny is a citizen of his family's household, and they bear primary responsibility for his health, welfare, and education. It does not mean that we should not have schools, that we should not have educational standards, or that we should not have compulsory attendance (with an allowance for home schooling providing that the students continue to meet the standards). Instead, it means that we should recognize that we have, by outsourcing everything related to education, removed parents from their leading role in shaping their descendants.
Finally, the US government's constant deficits and the continual expansion of the money supply beyond what organic growth would support will bite us if we do not figure out how to stop it. Just as American citizens need to learn to live within our means and still put some aside for the future, so does the government. In the government's case, it is even more urgent, because of the politically-sensitive Social Security and Medicare funds. One of the key things we can do is transform Social Security from a guaranteed retirement benefit into a kind of welfare for the aged. That is, there should be income tests and perhaps asset tests to determine whether a new retiree can collect. Now, most of us who have contributed all these years will not be happy about it. But we are already pretty sure that anyone under fifty-five will not collect a dime from Social Security the way it is currently structured. Let us acknowledge that it was a Ponzi scheme all along, so we can stop lying to people.
The most important part of that is making sure that Americans understand that there was never any such thing as a separate fund for Social Security, where our FICA taxes would sit in a bank account until the time of repayment. Instead, any money that is not used for immediate payouts (to current retirees) is used to buy government bonds. Now, this means that the government has more money to spend today, in exchange for having to repay it out of general tax revenues in the future. As soon as we have a large number of long-lived retirees being supported by a decreasing number of employed workers, things start to shift--suddenly, taxes have to go up in order to pay for all the retirees. So what happens when three workers are supporting two retirees? Suddenly, the portion of taxes each worker pays toward retirement will rise to about 2/3 of the amount the retirees are getting. This is on top of paying for schools, parks, roads, and the military. This is on top of the government retirement system, which is also tax-paid. This is on top of repaying all the other borrowings of the government.
Yes, GWB was right about one thing: the so-called Social Security fund is nothing but IOUs. That being said, can you imagine what would have happened if we had taken those revenues and given it to Wall Street? We'd be struggling to pay our existing retirees right about now, let alone the future retirees.
I know I said 'finally', but there is one more thing we have to do. We have to prosecute and imprison the management of the various banks, insurance companies, and other financial-industry companies whose ineptitude and corruption caused this crisis. The one thing we know from past experience is that continuing aggressive prosecution of white collar crimes is necessary to prevent those crimes' volume from overwhelming the system. We need to treat this as a mega-gnarly conspiracy to commit fraud, locking hundreds or thousands of involved individuals away for a decade or more. And not to some dorm room, fence-free prison. These guys need the whole thing: steel bars, concrete walls, guards with rifles and shotguns, group showers, and some guy known as Bubba who wants to share their bunk with them. We need to have people see this on television and online--crime does not pay, or if it does, it doesn't last long before the repayment plan kicks in.
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