I figured I’d have some fun and provide a different perspective on the economy. Here’s a link to today’s special from the Financial Aid Podcast – my wishful presidential address.
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An Alternative Bailout Proposal
Fundamentally, the entire credit crisis has been caused by two basic problems.
1. Too much borrowing.
2. Not enough saving.
That sounds really trite and overly simplified, doesn’t it? The fact of the matter is that it’s true. The housing crisis wasn’t caused by a surplus of houses, but by an overeagerness to lend without considering a borrower’s ability to repay. Easy credit meant demand for houses went up, and supply went up to keep pace. Now that credit is more restricted and borrowing is harder, supply is up but demand is down.
Second fact of the matter is that saving is down, considerably. The average American over the past five years has spent more than they earned to the tune of 130%, relying on easy access to, yes, credit, to fulfill their consumerist desires. With no money put aside for a rainy day, vast numbers of Americans are finding themselves underwater in a financial hurricane. In the past, when the economy has taken a downturn, Americans had some financial cushion to rely on, but with the devaluation of stocks, even things like 401(k) retirement plans have lost considerable value.
The bank bailout proposals currently floating around Congress do nothing to address either issue. Secretary Paulson’s plan calls for 700 billion – that’s700,000,000,000 – to buy poor quality assets (failed mortgages and investments) from banks and try to sell them off at a later date. If you as a banker, rationally, want to do what is best for your bank, you’ll gladly sell the Treasury all your garbage and keep the performing loans for yourself. I would, rationally, because that’s good business.
What happens to the average homedebtor who has fallen behind on their mortgage? Absolutely nothing. No help at all. Why? The bank has been relieved of its obligation to investors but the homedebtor has not. Wall Street profits, but Main Street remains underwater.
So what’s the alternative? How can we find a real solution to this mess? Clearly, bailing out Wall Street and the wealthy friends of Secretary Paulson will do nothing to help the average homedebtor.
We look to economics 101. Supply of houses still exceeds demand. You can change this equation by increasing demand or reducing supply. The general talking point behind the bailout is that banks will be willing to lend again – but it’s lending that got us into trouble in the first place. That’s like giving a bottle of Jack to an alcoholic trying to quit. Yes, the tremors stop, but the root problem remains.
Increasing demand through lending is a no-go. That leaves reducing supply. We have currently anywhere from 9 to 20 months of inventory in housing, depending on the regional market, and a healthy level of inventory is around 6 months, or so my realtor friends say. How do you get rid of a lot of houses quickly? One potential idea is to convert them into affordable housing under the HUD Section 8 program, helping families who had no shot at home ownership even with absurd lending policies actually get started. The downside to this idea, at least from some folks who’ve commented to me, is that middle class homeowners will strongly fight any mixing of income classes in their neighborhoods.
A second idea for reducing supply, radically proposed, is demolition of the existing homes. In certain cases, this might make sense, especially if there are entire neighborhoods that lay fallow. Dismantle them for supplies as much as possible, and convert that section of a city into a community park.
A third idea, and the one I like best, is to use bailout money to buy out foreclosures at fire sale prices and deed over the properties, many of which need repairs, to a private agency like Habitat for Humanity, which employs a more rigorous screening process than HUD and forces future homeowners to put in significant sweat equity to create a true sense of responsibility and ownership.
We also need economic growth. Look around America. Bridges, rail systems, roads, public schools, the entire infrastructure is rotting away. Instead of giving Wall Street a handout, let’s agree to rebuild Main Street – it needs it. These are jobs that are inherently American and can’t be outsourced or shipped overseas. These are also projects that pay a dividend over time – improved roads, schools, parks, and civic infrastructure contribute to both morale and commerce.
To trim the budget and pay for at least some of this, we need to get out of Iraq. Win or lose, right or left, Iraq is a money sinkhole. No matter how well you think we’re doing, we can’t afford it.
To address the savings issue, I’d take the lesser portion of the bailout funds and instead of paying off Wall Street, create massive tax incentives for saving. Since Congress is clearly in the mood to spend anyway, I’d waive all taxes on savings accounts, certificates of deposit, Treasury bills and bonds, and non-investment vehicles for 2 years, encouraging anyone and everyone to sock away as much money as possible. A savings account that earns a meager 3% interest looks a whole lot better when interest earned is 100% tax free. This will also have the net effect of recapitalizing depository banks, which is something they’ve been desperately trying to do on Wall Street.
Will these ideas cure the ailing economy? No. Will they help? Yes. They address the fundamental issues of supply and demand far more effectively than giving Secretary Paulson a wheelbarrow full of cash and a hug, which is about all the current proposal entails. Only time and the free market can flush out the crap that’s in our system, but by focusing the majority of money on the power base of America – us, the taxpayers – we might get some long-term good out of this.
Consider joining the Facebook group I’ve set up to protest the current bailout proposals.
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It’s simple.
Remember the SEC issuing a ban on naked short selling on July 18?
Here’s the list, in case you forgot:
Allianz SE
Bank of America Corp
Barclays PLC
BNP Paribas Securities Corp
Citigroup Inc
Credit Suisse Group
Daiwa Securities Group Inc
Deutsche Bank Group AG
Fannie Mae
Freddie Mac
Goldman Sachs Group Inc
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc
Merrill Lynch & Co Inc
Mizuho Financial Group Inc
Morgan Stanley
Royal Bank ADS
UBS AG
So far:
Allianz SE
Bank of America Corp – full
Barclays PLC – couldn’t handle Lehman, capital constrained?
BNP Paribas Securities Corp – couldn’t handle Lehman, capital constrained?
Citigroup Inc
Credit Suisse Group
Daiwa Securities Group Inc
Deutsche Bank Group AG
Fannie Mae – dead
Freddie Mac – dead
Goldman Sachs Group Inc
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc – dead
Merrill Lynch & Co Inc – swallowed
Mizuho Financial Group Inc
Morgan Stanley
Royal Bank ADS
UBS AG – in trouble?
The SEC more or less identified everyone it thinks is too weak to survive without government intervention.
Place your bets!
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The Bureau of Economic Analysis uses a wholly bogus imputed rent variable in its calculations about the health of the US economy and the health of the real estate industry.
BEA treats homeowners as businesses, which pay rent to themselves. Therefore, homeowners contribute to the real estate industry’s GSP even if not employed by the industry.
Talk about artificially inflating economic figures to make things look better than they are. This is akin to saying that if you own an iPod, you’re essentially running an iPod rental business, renting your iPod from yourself every month.
Does that make any sense at all to you? It doesn’t to me – and that means that the numbers on things like productivity, inflation, and the economic health and well being of the country are flawed.
Financial results for the second quarter are contained in the FDIC’s latest Quarterly Banking Profile, which was released today. Among the major findings:
Provisions for loan losses continue to be the main cause of falling earnings. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled 50.2 billion, more than four times the11.4 billion the industry set aside in the second quarter of 2007. Almost a third of the industry’s net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.
Noncurrent loans are still rising sharply. The amount of noncurrent loans and leases (90 days or more past due or in nonaccrual status) increased by 26.7 billion (20 percent) during the second quarter, following a26.2 billion increase in the first quarter and a $27.0 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans and leases in the last three quarters consisted of real estate loans, but noncurrent levels have been rising in all major loan categories. At the end of June, 2.04 percent of all loans and leases were noncurrent, the highest level for the industry since 1993.
Assets of insured institutions declined. Total assets of FDIC-insured institutions declined during the quarter for the first time since 2002. The 68.6 billion (0.5 percent) decline was caused by a reduction in trading assets at a few large banks. Assets in trading accounts, which increased by135.2 billion in the first quarter, declined by 118.9 billion (11.8 percent) in the second quarter. In addition, the industry’s holdings of one- to four-family residential mortgage loans fell by61.4 billion (2.8 percent). Real estate construction and development loans declined for the first time since 1997, falling by $5.4 billion (0.9 percent).
The FDIC’s Deposit Insurance Fund reserve ratio fell. Due to a significant increase in loss reserves, including reserves for failures that have occurred since June 30th, the DIF balance fell to 45.2 billion at the end of the second quarter, down from52.8 billion at the end of the first quarter. While insured deposits rose only 0.5 percent during the quarter, the decline in the fund balance caused the reserve ratio to fall to 1.01 percent as of June 30th from 1.19 percent one quarter earlier. Because the reserve ratio is now below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 requires the FDIC to develop a restoration plan that will raise the reserve ratio to no less than 1.15 percent within five years.
This is a big deal, folks. A scant 1.01% reserve is all that stands between you and massive runs on banks.
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It’s not like there’s too many walls.
It’s not like I don’t have the balls.
It’s just that I, well, I don’t know how
to live my life in the here and now.
– Matthew Ebel, This Too Shall Pass
A few folks have lamented that whenever I blog about economic issues, it’s never positive. In fact, it can be downright apocalyptic in tone. I make no apologies for the twitter stream and pile of blog posts that highlight just how unstable our economy is, but a few other folks have asked for something more than just paralyzing fear. What can we do, they ask?
That’s a good question. On a macro level, not much. The market has to correct itself, and government meddling (particularly to save preferred investors) will only prolong the misery. We’ve essentially poisoned ourselves, economically, and the only cure is to flush the poison out. The longer we take, the longer we wait to make hard choices, the more it hurts and the more permanent damage the poison does. Ultimately, I believe as I mentioned in the past that this economic downturn won’t hit bottom for a few more years – we took years to climb to the top of an absurdly overinflated peak, and we have at least the same amount of time on the ride down.
I’m punching out, it’s time to go.
My days are numbered, this I know,
but as it turns out no one burns out
’till they think they’re in control.
– Matthew Ebel, This Too Shall Pass
On a personal level, you can do a tremendous amount. First, close to home. Pare back spending. I mean it. You may or may not be feeling the effects as drastically as your fellow citizens, but pare back anyway. Learn to cook. Learn to make a decent cup of coffee at home. Learn to do more with less – and you may be surprised when you do that you’ll uncover skills, aptitudes, and pleasures you’d bypassed for convenience’s sake. I recently made strawberry mint jam with my wife and for the price of a few jars of commercial swill, we made 20+ jars of the most incredible thing you’ve probably put in your mouth recently.
Teach and share as much as you can. If you find a great bargain, tell your network about it. If you discover a new trick, or a new way to optimize something in your life, share. Teach, share, trade. Got a super low cost recipe for a great dish? Blog it. Know of a good deal coming up? Tell us all. For example, I’m a huge advocate of Craigslist and Bargainist, both of which have terrific free sections.
If you’re religious, this is a great time to unplug the television, filter out some of the distractions of daily life, and give some study time to your faith. As things get worse – and they will, before they get better – people in every community will need pillars to lean on, and those pillars aren’t just the guy or gal up at the podium. If faith sustains you and those you care about, focus on learning how to power up and recharge fast.
Help. Help as much as you can, in any way that you can, even if it’s something as minor as retweeting something. Get out of the digital world if you can and go help in the real world. Raise money for a non-profit like Second Harvest or the charity of your choice. Tutor a kid in the local school. Volunteer for a campaign like College Goal Sunday. If you’re a social media maven, change your focus from the fishbowl to using the power of the tools you have to effect change and make your patch of the world a better place.
Plug into some uplifting music and have it handy. Music is incredibly powerful and can change your mood instantly if you let it.
Most of all, understand that this is an end of an era, but not the end of the world. There is and will be a great deal of need in the days, weeks, months, years to come, a great deal of suffering and pain – as it has been for millennia, and as it will be for millennia to come, long after we’re gone. The periods of relative prosperity are tempered with periods of relative pain, but as long as we focus on the things that really matter – the people we care about and who care about us, our community (virtual and real), our patch of reality that we can call our own – we can be rocks, mountains of strength against the maelstroms of uncertainty.
I work all day and
take my time to smell the grass.
I’d run away but I know
I can’t run that fast.
Life may be short,
but boy is it a blast
and all this too shall pass.
– Matthew Ebel, This Too Shall Pass
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I’ve been reading some very insightful comments about PodCamp Boston 3 over the past few days, and this one from Chris Cavallari really stuck out.
I especially liked this:
In my talks with other podcampers, one of the issues that came out of PCB3 was the desire to actually create something at Podcamp. At this point, many of us are veterans of podcamps and new/social media, and are looking to expand our horizons. The sessions, while mostly interesting and informative, are generally rehashes of things we’ve seen and done for several years now. Many of us want some kind of track where we can physically put the skills we’ve learned and honed to good use.
Here is the challenge that faces America right now – people are making hard choices between gasoline and food, between college and electricity, between losing their house and losing their life.
We can’t do much at a single PodCamp to influence global policy, not yet. We can attempt to keep the carbon footprint of PodCamp as small as possible, as PodCamp SA did. We can’t influence ExxonMobil or the other energy companies directly yet, though new media folks are starting to work their ways into the blue chips.
What can we do?
Two things are squeezing the average Joe right now – food and fuel.
Here’s the social media challenge for PodCamp Philly, appropriate for the city of Brotherly Love, Geno’s, Pat’s, and some of the worst poverty I’ve seen in an American city.
Let’s make a social media cookbook that we can complete and distribute by the time PodCamp Philly is over. The focus? Making food as affordable as possible.
I’m reminded to say that this is open to everyone, not just people attending PodCamp Philly.
What might this entail? Between now and the close of PodCamp Philly, find, create, revise, and publish recipes using the lowest cost foodstuffs available that still satisfy basic nutritional needs and don’t resemble gruel. Use social media and real life connections to talk to a grandparent that got by during the Depression. Find old wives’ recipes and dig up ideas from old church community books. Dig deep into your community and history to find the treasures hiding just out of sight, like how to make popcorn on a stovetop or jam from scratch. How to bake a loaf of bread yourself. How to make pasta or plant an herb garden.
Let’s unite all of our networks, all of our knowledge, and all of our generations we have access to. Let’s take this information, these recipes, and blog them, with instructions and cost breakdowns. Video them and publish the videos as tutorials. Record audio walkthroughs. Let’s rip a PDF of this that can be distributed to every soup kitchen and food pantry in America, something that they can then pass on to their customers. Let’s fire up iMovie and iDVD, Libsyn and Blubrry, and make some media worth distributing. Let’s grab Chef Mark Tafoya, Jennifer Iannolo, Nina Simonds, Kathy Maister, Ming Tsai, and ask the hell out of everyone doing a cooking show in new media to help us with this goal. Let’s get Second Harvest, United Way, and every corporation with some dollars to spare to get involved and sponsor this project.
Our goal? A social media collection detailing cheap, easy, healthy food so that a parent with 5 dollars in their pocket can do at least SOMETHING other than the dollar menu at a fast food chain.
Then, at PodCamp Philly, let’s put it all together. Let’s assemble it, put up the web site, search engine optimize it, use all of our social media powers to promote the hell out of it with every service we can get our hands on, and see just how far we can lob the thing into the air.
Are you game?
I’m reminded to say that this is open to everyone, not just people attending PodCamp Philly.
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It’s hurricane season beginning today. A bunch of folks are predicting above-average activity, meaning more hurricanes than average.
We’re already at 4/gallon for gasoline.
How much would gasoline go up if we get another Katrina?
Gas before Katrina was in the2.25 range. Then it leaped to 3,3.50 in places before the markets resumed normal operation. An increase of 36%, give or take.
A similar increase today would put gasoline at $6 or so, assuming it would be available.
So this is the time of year to take the 5 gallon gas can to the local gas station, fill it up, and add a gas stabilizer to keep the fuel usable during longer periods of storage. In a Toyota Prius, 5 gallons will get you from Boston to Montreal or New York City – enough to get out of Dodge if things got unpleasant.
What are you doing to prepare for a potentially above-average activity hurricane season?
Yes, someone gave a seminar on how to avoid hiring qualified workers.
There’s a twist to this story.
[youtube]https://www.youtube.com/watch?v=TCbFEgFajGU[/youtube]
Watch the video in its entirety.
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Quoting Gillian Tett of the Financial Times:
In recent years, the concept of a “Goldilocks” economy has permeated the policymaking world. For after decades of painful economic booms and busts, politicians and central bankers have become wedded to the idea of chasing a growth rate that is neither “too hot, nor too cold, but just right” – as Goldilocks famously said, in reference to her porridge.
I’ll take a moment to make another fairy tale reference. Depending on the storyteller and the story source, there are three bears in the Goldilocks story…
… and in some of those stories, when the bears awaken, they kill her.
Not a good omen for our economy.
