By Alyce Lomax and Dayana Yochim
The Motley Fool
November 7, 2008
You know things are dire when the National Debt Clock can't keep up with government spending. But that's what happened in October, when the counter on the corner of 44th Street and Sixth Avenue near Times Square maxed out at $10 trillion.
Welcome to office, President-elect Obama! Hope you don't mind picking up the tab!
Maxed-out America is due for a debt diet At least part of the problem will be remedied in 2009: A new debt clock will be installed -- one with a counter that can tally dollar amounts up to one quadrillion -- that's a one with 15 zeros.
As for dealing with the hangover from the spending that got us here, well, that's now in the hands of newly elected Barack Obama. And man oh man, does he have his work cut out for him.
Here's a look at some of the ideas Sen. Obama discussed during his campaign in the area of government spending, fiscal policies, and the national debt -- and what we see as potential implications for investors.
The plan for growth and restraint Paying down the monstrous national debt while funding new and existing projects will require a deft balancing act. Obama has said he will handle the give-and-take by adhering to budget rules that demand new spending be paid for in one of two ways: through cuts to other programs, or with new revenue -- "new revenue" being a less hot-button way of saying "taxes."
One major spending initiative under an Obama administration focuses on getting businesses back into hiring mode. According to his campaign platform, we could see:
A $3,000 tax credit for each employee hired in 2009 and 2010.
Sweeteners for small businesses, such as allowing small businesses to expense as much as $250,000 until the end of 2009.
Capital gains tax cuts on small-business investments.
Obama has also said he favors infrastructure projects -- roads, bridges, schools, and such -- to create work in an economy that is rapidly bleeding jobs. For investors, that bodes well for companies that have some relationship to infrastructure, such as construction and project-management companies like Fluor (NYSE: FLR) and KBR (NYSE: KBR).
Another major spending plan is a $25 billion "Jobs and Growth Fund." In addition, Obama has proposed a 90-day moratorium on foreclosures for "homeowners acting in good faith," as well as a $25 billion stimulus package for state governments -- to give them less reason to raise property taxes. States are also suffering from the housing crisis, since plunging home values translate into falling tax revenues; California recently admitted it was facing a big cash crunch and asked for federal assistance.
To free up cash for spending proposals, Obama has suggested reducing the number of troops in Iraq, raising taxes on high-income filers, doing away with corporate loopholes, and carefully vetting earmarks -- as well as demanding more transparency for them to begin with.
How Obama's policies might play out in your portfolio So far, there are indications that some stock sectors may do well under Obama's spending proposals. In addition to infrastructure, alternative energy is certainly another area that may benefit from Obama's being in office. Companies like solar concerns First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWRA) could benefit from government funding of alternative-energy research.
A Democratic presidency is typically good for unions, and that means automakers such as General Motors (NYSE: GM), Chrysler, and Ford may luck out despite their recent dire straits. The Big Three are instrumental to Detroit, are heavily unionized, and represent a huge chunk of jobs -- in other words, voters -- with health-care benefits. The chances of getting some financial love from the government look good -- although expecting that to translate to long-term stock performance certainly isn't a given.
The flip side, of course, is that businesses heavily targeted by unions may not fare as well in the next four years. Sorry, Wal-Mart, Whole Foods Market (Nasdaq: WFMI), and Starbucks (Nasdaq: SBUX) -- your attempts to avoid unionization may become increasingly difficult.
Of course, as history tells us, it will be interesting to see how campaign promises translate into policy reality, and how that will affect investors' strategies. However, the Fool will be here tracking the environment and gauging the best ways investors can make money in their portfolios.
Sunday, November 9, 2008
Friday, October 24, 2008
Dave Ramsey's Thoughts on the Elections
Dave, which bozo should I vote for in this election? Who’s going to fix the economy? Who’s going to give me the most money?
Well, I’m here to remind you that you’re going to fix the economy because your personal economy is up to you. It's not Washington's job to fix what's going on with you. If you are waiting on Washington to change something, you've got a long wait!
You’re going to give yourself money as a result of your hard work and persistence. Waiting for money to be taken from others and given to you is a spirit of envy, and it's wrong.
I’m not here to tell you who to vote for. But I am here to tell you that the government doesn’t have the capacity to fix your problems. Washington is full of bozos, and I am doing my part to send a lot of them home!
This economic mess is a reality, but we can each only control one thing—our reactions. Does this stuff define you? Only if you let it. The weird thing about the economy is that YOU are the economy! I learned this the hard way. I got my real estate license when I was 18 years old. By the time I was 21, interest rates had risen to 17% fixed-rate … and I still sold houses. How? Because I worked hard.
As bad as USA Today meant a recent article to be about what we think of the suffering economy and upcoming election, I think it’s rather encouraging that no one thinks that President Bush or Barack Obama or John McCain can fix the economy!
This may be the beginning of the biggest level of prosperity this nation has ever known if we don’t look to a candidate to fix our lives. How about we say, "I’m going to vote for the candidate who’s going to fix the nation. I’m going to fix my life, so leave me alone and let me do my own thing."
Don't react based on fear or panic. Don’t look to Washington to fix your problems. Why would you do that? At what point did Bill Clinton fix any of your problems? At what point did he cause you to prosper? At what point did George Bush end your career or cause you to prosper? When did Ronald Reagan fix your problems? Guess what? I liked Reagan the most, and while he was in office, I hit rock bottom and filed bankruptcy—but it wasn’t Reagan’s fault. It was mine.
So when you go to the polls in a few days to cast your vote, don’t get caught up in following a political party or candidate without knowing the issues they support. Do your research so you can make educated decisions.
Well, I’m here to remind you that you’re going to fix the economy because your personal economy is up to you. It's not Washington's job to fix what's going on with you. If you are waiting on Washington to change something, you've got a long wait!
You’re going to give yourself money as a result of your hard work and persistence. Waiting for money to be taken from others and given to you is a spirit of envy, and it's wrong.
I’m not here to tell you who to vote for. But I am here to tell you that the government doesn’t have the capacity to fix your problems. Washington is full of bozos, and I am doing my part to send a lot of them home!
This economic mess is a reality, but we can each only control one thing—our reactions. Does this stuff define you? Only if you let it. The weird thing about the economy is that YOU are the economy! I learned this the hard way. I got my real estate license when I was 18 years old. By the time I was 21, interest rates had risen to 17% fixed-rate … and I still sold houses. How? Because I worked hard.
As bad as USA Today meant a recent article to be about what we think of the suffering economy and upcoming election, I think it’s rather encouraging that no one thinks that President Bush or Barack Obama or John McCain can fix the economy!
This may be the beginning of the biggest level of prosperity this nation has ever known if we don’t look to a candidate to fix our lives. How about we say, "I’m going to vote for the candidate who’s going to fix the nation. I’m going to fix my life, so leave me alone and let me do my own thing."
Don't react based on fear or panic. Don’t look to Washington to fix your problems. Why would you do that? At what point did Bill Clinton fix any of your problems? At what point did he cause you to prosper? At what point did George Bush end your career or cause you to prosper? When did Ronald Reagan fix your problems? Guess what? I liked Reagan the most, and while he was in office, I hit rock bottom and filed bankruptcy—but it wasn’t Reagan’s fault. It was mine.
So when you go to the polls in a few days to cast your vote, don’t get caught up in following a political party or candidate without knowing the issues they support. Do your research so you can make educated decisions.
Wednesday, October 15, 2008
I'm Not Running Against John Kline
In response to those who have contacted me regarding my alleged write-in campaign against John Kline, I am not waging a write-in campaign against the Congressman. I do not live in his district so I cannot even vote for him. My previous post in response to "Why Kline Voted Yes" on the bailout bill has caused an inadvertant error in the blogosphere. There is another guy running a write in campaign against Kline, and it was mistakenly attributed to me because of my post.
While I seriously disagree with the Congressman on this particular issue - he has been a stellar conservative on other issues like opposing earmarks and opening up domestic drilling. If I lived in his district, he would still have my vote.
For those who came here to see the "goods" on the Congressman and why I would wage a write-in campaign against him, I'm sorry to disappoint.
As for a future Congressional bid in Minnesota's 4th Congressional District, I won't rule that out in the future. No write-in this year - Ed Matthews has my vote!
Jeffrey S. Williams
National Debtbusters
While I seriously disagree with the Congressman on this particular issue - he has been a stellar conservative on other issues like opposing earmarks and opening up domestic drilling. If I lived in his district, he would still have my vote.
For those who came here to see the "goods" on the Congressman and why I would wage a write-in campaign against him, I'm sorry to disappoint.
As for a future Congressional bid in Minnesota's 4th Congressional District, I won't rule that out in the future. No write-in this year - Ed Matthews has my vote!
Jeffrey S. Williams
National Debtbusters
Monday, October 13, 2008
Debtor Nation
Look at the graph to the right. I find it quite peculiar that the Personal debt (in trillions) equals the size of the National Debt. Food for thought.
Debtor Nation
The graphic to the right, from a column on the debt that is crushing the middle class in today's Detroit Free-Press, pretty much says it all.
Over the past few weeks as the economic crisis has come into hideous focus, we've spent a lot of time blaming Wall Street executives and a lot of time blaming Congress, both deservedly so.
One area we haven't spent enough time focusing on is the millions of Americans who helped get us into this mess by taking on more debt than they could afford. There are many sad and tragic stories among this group, of course, and while we don't want to dismiss or denigrate them, it's fair to point out they represent only a small portion of those who've gotten into trouble by overextending themselves financially.
More important still is to recognize the millions upon millions of Americans who've managed their finances prudently, lived within their means, and continued to make payments on time even as they are saddled with the burden of bailing out those who did not.
Credit card companies and other businesses will always be there to ply us with sweet nothings about low interest loans and the like. Too often over the last twenty years, however, it seems more and more Americans have fallen victim to that siren song and rejected the truism which our fathers, grandfathers, and even Founding Fathers lived by: there's no such thing as a free lunch.
At its core, then, this is a story about individual freedom and individual choices. Nobody put a gun to the head of the 28 year-old University of Michigan graduate in the Detroit Free-Press story and forced him to buy a house with a $150,000 mortgage - any more than someone forced his fiancee to ring up $15,000 in credit card debt.
The most nauseating part of this debacle is that the United States government - which long ago perfected the habit of living beyond its means - was an active participant in helping some Americans shed the inhibition of fiscal prudence and embrace the notion we can afford it all - even when we know we can't.
The true irony, of course, is that because some Americans exercised their individual freedoms irresponsibly in the last decade we've now all become less free, assuming you measure such things by the number of additional taxpayer dollars committed to Washington's coffers ($700+ billion) and by unprecedented expansion of the U.S. government into what was previously considered the "private sector."
Debtor Nation Posted by TOM BEVAN
The graphic to the right, from a column on the debt that is crushing the middle class in today's Detroit Free-Press, pretty much says it all.
Over the past few weeks as the economic crisis has come into hideous focus, we've spent a lot of time blaming Wall Street executives and a lot of time blaming Congress, both deservedly so.
One area we haven't spent enough time focusing on is the millions of Americans who helped get us into this mess by taking on more debt than they could afford. There are many sad and tragic stories among this group, of course, and while we don't want to dismiss or denigrate them, it's fair to point out they represent only a small portion of those who've gotten into trouble by overextending themselves financially.
More important still is to recognize the millions upon millions of Americans who've managed their finances prudently, lived within their means, and continued to make payments on time even as they are saddled with the burden of bailing out those who did not.
Credit card companies and other businesses will always be there to ply us with sweet nothings about low interest loans and the like. Too often over the last twenty years, however, it seems more and more Americans have fallen victim to that siren song and rejected the truism which our fathers, grandfathers, and even Founding Fathers lived by: there's no such thing as a free lunch.
At its core, then, this is a story about individual freedom and individual choices. Nobody put a gun to the head of the 28 year-old University of Michigan graduate in the Detroit Free-Press story and forced him to buy a house with a $150,000 mortgage - any more than someone forced his fiancee to ring up $15,000 in credit card debt.
The most nauseating part of this debacle is that the United States government - which long ago perfected the habit of living beyond its means - was an active participant in helping some Americans shed the inhibition of fiscal prudence and embrace the notion we can afford it all - even when we know we can't.
The true irony, of course, is that because some Americans exercised their individual freedoms irresponsibly in the last decade we've now all become less free, assuming you measure such things by the number of additional taxpayer dollars committed to Washington's coffers ($700+ billion) and by unprecedented expansion of the U.S. government into what was previously considered the "private sector."
A Historical Perspective
click on the graph for larger view
If you look at the debt level through Eisenhower and after Eisenhower, you will see the influence of John Maynard Keynes "General Theory" on the policies of U.S. Presidents, Senators and Congressmen. It comes as no surprise that the debt started rising during the Kennedy Administration, as he was the first President known to have embraced the "General Theory." It was Richard Nixon who once declared "We're all Keynesian's now." As Congress approves more and more spending, and Presidents sign the spending bills, it is no wonder we are in the mess we're in.
Sunday, October 12, 2008
How fast is it growing?
How fast is it growing?
In 9 days, the debt increased by $241,657,749,631.13
This shows an average daily rate of $26,850,861,070.13.
At the current rate, the debt would balloon to an increase of $9,800,564,290,597.45 - essentially doubling the current debt.
And the politicians in Washington want to spend more of your hard earned dollars.
In 9 days, the debt increased by $241,657,749,631.13
This shows an average daily rate of $26,850,861,070.13.
At the current rate, the debt would balloon to an increase of $9,800,564,290,597.45 - essentially doubling the current debt.
And the politicians in Washington want to spend more of your hard earned dollars.
Newest National Debt Statistics Posted - Sept 08 - end of Fiscal Year 2008
From www.TreasuryDirect.gov
Debt Held By Public (Oct. 9, 2008) - $5,994,929,606,697.25
Intragovernmental Holdings - $4,271,453,039,846.37
Total Debt (Oct. 9, 2008) $10,266,382,646,543.62
Interest payment (September 2008): $19,883,186,641.26
Interest payment (Fiscal Year 2008): $451,154,049,950.63
Gifts to reduce the public debt (August 2008): $83,570.84
Gift to reduce the public debt (FY 08 To Date): $2,146,846.54
Debt Held By Public (Oct. 9, 2008) - $5,994,929,606,697.25
Intragovernmental Holdings - $4,271,453,039,846.37
Total Debt (Oct. 9, 2008) $10,266,382,646,543.62
Interest payment (September 2008): $19,883,186,641.26
Interest payment (Fiscal Year 2008): $451,154,049,950.63
Gifts to reduce the public debt (August 2008): $83,570.84
Gift to reduce the public debt (FY 08 To Date): $2,146,846.54
Friday, October 10, 2008
ICELAND BANKRUPT!
Iceland is all but officially bankrupt
By Eric Pfanner
International Herald Tribune
Thursday, October 9, 2008
REYKJAVIK: People go bankrupt all the time. Companies do, too. But countries?
Iceland was on the verge of doing exactly that on Thursday as the government shut down the stock market and seized control of its last major independent bank. That brought trading in the country's currency to a halt, with foreign banks no longer willing to take Icelandic krona, even at fire-sale rates.
As the meltdown in the Icelandic financial system quickened, with the government seemingly powerless to do anything about it, analysts said there was probably only one realistic option left: for Iceland to be bailed out by the International Monetary Fund.
"Iceland is bankrupt," said Arsaell Valfells, a professor at the University of Iceland. "The Icelandic krona is history. The IMF has to come and rescue us."
Prime Minister Geir Haarde, who had warned this week of the threat of "national bankruptcy," said Thursday that Iceland's finance minister, Arni Mathiesen, would be in Washington this weekend for the autumn IMF/World Bank meetings. He declined to say whether Iceland was seeking a rescue package from the international lender.
"We will certainly keep this option open, but we have not yet made a decision," Haarde said Thursday at a news conference.
The IMF managing director, Dominique Strauss-Kahn, said in Washington that he had activated an emergency funding system, last used during the Asian financial crisis of the late 1990's, to help countries in crisis. Though not mentioning Iceland by name, he said: "We are ready to answer any demand by countries facing problems."
Iceland has approached Russia about a loan of €4 billion, or $5.5 billion, to help see it through the crisis, but Haarde said no agreement had been reached.
An IMF intervention in Iceland, which would necessarily involve accepting a series of harsh measures to restore fiscal and monetary stability, would underline the extraordinary reversal in the country's fortunes after a decade-long, debt-fueled binge by the country's banks, businesses and some private citizens. The banks, while avoiding the toxic mortgage securities that have humbled Wall Street, expanded aggressively at home and abroad. When credit tightened and the krona fell this year, they were unable to finance their debts.
In these circumstances, going to the IMF "is probably the only thing Iceland can do," said Richard Portes, an economist at the London Business School.
Events have moved so fast that the full import of national bankruptcy has yet to sink in here. It's happened before, of course, but in places like Argentina and Thailand, not a country that likes to think of itself as close to Europe.
And on an island raked by icy North Atlantic winds and dotted with volcanoes and geysers, where people live with the threat of earthquakes and maritime disasters, few residents seem to be losing their cool over the financial crisis - yet. But some have suffered deep losses, and others are simply bewildered at how things could have gone so wrong so quickly.
"There is a lot of fear in society and there are people who are losing everything," Bubbi Morthens, an Icelandic rock favorite, said Wednesday after singing at an impromptu midday concert in central Reykjavik intended to lift people's spirits.
Like many of his compatriots, Morthens did well when Iceland was riding high, accumulating considerable wealth. But when the government seized control of Iceland's third-largest bank, Glitnir, last month, Morthens said he lost his life savings, which he had invested in the bank's stock.
On Thursday, the government seized Kaupthing Bank, the country's largest lender, effectively completing the nationalization of the banking system after the previous takeover of Glitnir and the No.2 lender, Landsbanki.
Meanwhile trading in the currency froze up Thursday, according to Bloomberg News, citing dealers at Nordea, a big Scandinavian bank. The last trade was made at 340 krona to the euro, Nordea said - less than half what the Icelandic currency was worth at the start of the week.
Haarde said the Central Bank of Iceland had set up a special system to handle currency transactions, so that Icelandic companies could conduct international business.
"We are gradually moving through this crisis," he said, sounding surprisingly unworried for the leader of a country facing economic and financial disaster. "There are still a few issues to resolve but that is the nature of these kinds of things."
Problems with the krona have been at the core of the government's inability to control the crisis. Without a viable currency, there is no way to support the banks, which have done the bulk of their business in foreign markets. There is also no way to bring down inflation or interest rates, both already in double digits before the crisis intensified in recent days.
Valfells and Portes said that once the situation is stabilized, the best way forward would be for Iceland is to give up on the krona and adopt the euro instead.
How could Iceland, which is not even a member of the European Union, adopt the currency?
One option would be to simply "peg" its currency to the euro. In that case, Iceland would also hand over control of monetary policy, including the setting of interest rates, to the European Central Bank in Frankfurt.
But fixing the currency to the euro could be difficult for Iceland, given that its central bank probably lacks the necessary reserve to defend such a level if the currency were to come under renewed attack, Portes said.
That leaves another option: applying to join the European Union and adding Iceland to the euro zone. Because Iceland is already part of the European Economic Area, a looser trading bloc, it already abides by many EU rules.
Still, such a move would be politically challenging. The conservative Independence Party, headed by the prime minister, has been dead set against it. Another member of that party, which is governing in a coalition with the pro-EU Social Democrats, is the central bank chairman, David Oddsson, a former prime minister.
They are supported by the powerful fishing industry, which mostly wants to stay out of the euro and to keep Europe at a comfortable distance. Fishing has been the focus of many clashes between Iceland and its European neighbors - most heatedly with Britain, in what became known as the Cod Wars of the 1950s to the 70s. The two countries clashed repeatedly over Iceland's move to extend exclusive fishing rights into waters that had long been trawled by British vessels, too.
Tension with Britain has flared anew during the current crisis. It centers on accounts, worth an estimated 8 billion pounds, that Britons hold in the Icelandic banks; while the British government has guaranteed private savers' accounts, charities and local government organizations fear that they will lose their money. The government of Prime Minister Gordon Brown of Britain has used powers granted under anti-terrorism laws to freeze British assets of Landsbanki until the standoff is resolved.
"We do not consider this to be a particularly friendly act," Haarde said, adding that he had tried to defuse the situation in a telephone call with Brown on Thursday.
For all the worries, this capital city of 120,000 people still displays the fruits of the decade-long economic boom that followed the deregulation of Iceland's financial sector in the 1990s - hip cafés, lobster restaurants and stylish shops selling outdoor gear.
But the days when the economy seemed capable of gravity-defying feats are gone. So are the days when investors went on an international buying spree, adding some of the biggest names of the British and American retailing industries to their portfolios. Gone too, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik.
"It's difficult; the landscape is very difficult," said Franch Michelsen, a watch dealer in central Reykjavik, as he took a break Wednesday from cleaning his shop window.
Some ordinary Icelanders face a similar problem to the one that brought down the banks. In recent months, many mortgages were taken out in foreign currencies - marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits.
Now, with the Icelandic krona plunging, homeowners suddenly have to pay back far more expensive euro or dollar values of their mortgages. At the same time, house prices are falling.
The Reverend Karl Sigurbjornsson, the bishop of Iceland, who leads the state-sponsored Lutheran church, says he worries about how the prospect of financial suffering will affect a society that "was led to believe that it was unlimited growth forever."
"What will happen when the dust settles?" he asked. "A lot of people will be very angry. It will be a challenge for our society."
By Eric Pfanner
International Herald Tribune
Thursday, October 9, 2008
REYKJAVIK: People go bankrupt all the time. Companies do, too. But countries?
Iceland was on the verge of doing exactly that on Thursday as the government shut down the stock market and seized control of its last major independent bank. That brought trading in the country's currency to a halt, with foreign banks no longer willing to take Icelandic krona, even at fire-sale rates.
As the meltdown in the Icelandic financial system quickened, with the government seemingly powerless to do anything about it, analysts said there was probably only one realistic option left: for Iceland to be bailed out by the International Monetary Fund.
"Iceland is bankrupt," said Arsaell Valfells, a professor at the University of Iceland. "The Icelandic krona is history. The IMF has to come and rescue us."
Prime Minister Geir Haarde, who had warned this week of the threat of "national bankruptcy," said Thursday that Iceland's finance minister, Arni Mathiesen, would be in Washington this weekend for the autumn IMF/World Bank meetings. He declined to say whether Iceland was seeking a rescue package from the international lender.
"We will certainly keep this option open, but we have not yet made a decision," Haarde said Thursday at a news conference.
The IMF managing director, Dominique Strauss-Kahn, said in Washington that he had activated an emergency funding system, last used during the Asian financial crisis of the late 1990's, to help countries in crisis. Though not mentioning Iceland by name, he said: "We are ready to answer any demand by countries facing problems."
Iceland has approached Russia about a loan of €4 billion, or $5.5 billion, to help see it through the crisis, but Haarde said no agreement had been reached.
An IMF intervention in Iceland, which would necessarily involve accepting a series of harsh measures to restore fiscal and monetary stability, would underline the extraordinary reversal in the country's fortunes after a decade-long, debt-fueled binge by the country's banks, businesses and some private citizens. The banks, while avoiding the toxic mortgage securities that have humbled Wall Street, expanded aggressively at home and abroad. When credit tightened and the krona fell this year, they were unable to finance their debts.
In these circumstances, going to the IMF "is probably the only thing Iceland can do," said Richard Portes, an economist at the London Business School.
Events have moved so fast that the full import of national bankruptcy has yet to sink in here. It's happened before, of course, but in places like Argentina and Thailand, not a country that likes to think of itself as close to Europe.
And on an island raked by icy North Atlantic winds and dotted with volcanoes and geysers, where people live with the threat of earthquakes and maritime disasters, few residents seem to be losing their cool over the financial crisis - yet. But some have suffered deep losses, and others are simply bewildered at how things could have gone so wrong so quickly.
"There is a lot of fear in society and there are people who are losing everything," Bubbi Morthens, an Icelandic rock favorite, said Wednesday after singing at an impromptu midday concert in central Reykjavik intended to lift people's spirits.
Like many of his compatriots, Morthens did well when Iceland was riding high, accumulating considerable wealth. But when the government seized control of Iceland's third-largest bank, Glitnir, last month, Morthens said he lost his life savings, which he had invested in the bank's stock.
On Thursday, the government seized Kaupthing Bank, the country's largest lender, effectively completing the nationalization of the banking system after the previous takeover of Glitnir and the No.2 lender, Landsbanki.
Meanwhile trading in the currency froze up Thursday, according to Bloomberg News, citing dealers at Nordea, a big Scandinavian bank. The last trade was made at 340 krona to the euro, Nordea said - less than half what the Icelandic currency was worth at the start of the week.
Haarde said the Central Bank of Iceland had set up a special system to handle currency transactions, so that Icelandic companies could conduct international business.
"We are gradually moving through this crisis," he said, sounding surprisingly unworried for the leader of a country facing economic and financial disaster. "There are still a few issues to resolve but that is the nature of these kinds of things."
Problems with the krona have been at the core of the government's inability to control the crisis. Without a viable currency, there is no way to support the banks, which have done the bulk of their business in foreign markets. There is also no way to bring down inflation or interest rates, both already in double digits before the crisis intensified in recent days.
Valfells and Portes said that once the situation is stabilized, the best way forward would be for Iceland is to give up on the krona and adopt the euro instead.
How could Iceland, which is not even a member of the European Union, adopt the currency?
One option would be to simply "peg" its currency to the euro. In that case, Iceland would also hand over control of monetary policy, including the setting of interest rates, to the European Central Bank in Frankfurt.
But fixing the currency to the euro could be difficult for Iceland, given that its central bank probably lacks the necessary reserve to defend such a level if the currency were to come under renewed attack, Portes said.
That leaves another option: applying to join the European Union and adding Iceland to the euro zone. Because Iceland is already part of the European Economic Area, a looser trading bloc, it already abides by many EU rules.
Still, such a move would be politically challenging. The conservative Independence Party, headed by the prime minister, has been dead set against it. Another member of that party, which is governing in a coalition with the pro-EU Social Democrats, is the central bank chairman, David Oddsson, a former prime minister.
They are supported by the powerful fishing industry, which mostly wants to stay out of the euro and to keep Europe at a comfortable distance. Fishing has been the focus of many clashes between Iceland and its European neighbors - most heatedly with Britain, in what became known as the Cod Wars of the 1950s to the 70s. The two countries clashed repeatedly over Iceland's move to extend exclusive fishing rights into waters that had long been trawled by British vessels, too.
Tension with Britain has flared anew during the current crisis. It centers on accounts, worth an estimated 8 billion pounds, that Britons hold in the Icelandic banks; while the British government has guaranteed private savers' accounts, charities and local government organizations fear that they will lose their money. The government of Prime Minister Gordon Brown of Britain has used powers granted under anti-terrorism laws to freeze British assets of Landsbanki until the standoff is resolved.
"We do not consider this to be a particularly friendly act," Haarde said, adding that he had tried to defuse the situation in a telephone call with Brown on Thursday.
For all the worries, this capital city of 120,000 people still displays the fruits of the decade-long economic boom that followed the deregulation of Iceland's financial sector in the 1990s - hip cafés, lobster restaurants and stylish shops selling outdoor gear.
But the days when the economy seemed capable of gravity-defying feats are gone. So are the days when investors went on an international buying spree, adding some of the biggest names of the British and American retailing industries to their portfolios. Gone too, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik.
"It's difficult; the landscape is very difficult," said Franch Michelsen, a watch dealer in central Reykjavik, as he took a break Wednesday from cleaning his shop window.
Some ordinary Icelanders face a similar problem to the one that brought down the banks. In recent months, many mortgages were taken out in foreign currencies - marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits.
Now, with the Icelandic krona plunging, homeowners suddenly have to pay back far more expensive euro or dollar values of their mortgages. At the same time, house prices are falling.
The Reverend Karl Sigurbjornsson, the bishop of Iceland, who leads the state-sponsored Lutheran church, says he worries about how the prospect of financial suffering will affect a society that "was led to believe that it was unlimited growth forever."
"What will happen when the dust settles?" he asked. "A lot of people will be very angry. It will be a challenge for our society."
Monday, October 6, 2008
Sadly, History made Sept 30 as National Debt hits $10 Trillion
History was made on Tuesday Sept. 30, 2008, the last day of Fiscal Year 2008 for U.S. Government accounting purposes, as the National Debt crept up over $10 Trillion for the first time ever. There was no fanfare, no balloons, no real mention of it in the newspapers. This was an important milestone in American history and it went by as an average day.
On Sept. 30th, the total debt amounted to $10,024,724,896,912.49
On Sept. 30th, the total debt amounted to $10,024,724,896,912.49
Thursday, October 2, 2008
A Letter to My Congresswoman
Written on Oct. 2, 2008 at 10:14 p.m.
Dear Congresswoman McCollum:
I find it amazing that you have already voted to increase our National Debt by $700 Billion, and the fact that you are even considering supporting an even bigger bill of $810 Billion is completely unthinkable.
It's bad enough that we pay nearly $500 Billion each year on the interest on our National Debt but you want to raise that to $600 Billion. How much Federal Spending is enough? I highly encourage you to vote NO on the Wall Street bailout package. It's time we have some financial responsibility back in Washington and New York. Main Street American's right here in St. Paul, your home district, cannot afford this.
In addition, I would like to know your reasoning behind the vote, and what you plan on doing to eliminate our national debt. Please put it in writing to me at:
(Edited)
Sincerely,
Jeffrey S. Williams
Constituent
Dear Congresswoman McCollum:
I find it amazing that you have already voted to increase our National Debt by $700 Billion, and the fact that you are even considering supporting an even bigger bill of $810 Billion is completely unthinkable.
It's bad enough that we pay nearly $500 Billion each year on the interest on our National Debt but you want to raise that to $600 Billion. How much Federal Spending is enough? I highly encourage you to vote NO on the Wall Street bailout package. It's time we have some financial responsibility back in Washington and New York. Main Street American's right here in St. Paul, your home district, cannot afford this.
In addition, I would like to know your reasoning behind the vote, and what you plan on doing to eliminate our national debt. Please put it in writing to me at:
(Edited)
Sincerely,
Jeffrey S. Williams
Constituent
Wednesday, October 1, 2008
Gingrich: We Need Action Now
From Former Speaker of the House Newt Gingrich in his email commentary today.
Replace Secretary Paulson and Suspend Mark to Market
by Newt Gingrich (more by this author)
Posted 10/01/2008 ET
Following Monday's failure of the Paulson plan in the House, it is imperative that our leaders not hesitate to bring stability to our financial markets.
We need action now.
The Paulson Plan - is dead. The time has come for Congress to turn its attention to a plan that does the right things the right way instead of trying to fix the wrong way of this monstrosity of a Wall Street bailout bill.
As I said to Fox News' Greta Van Susteren Monday night, and spoke about at the National Press Club on Tuesday, there are two steps that could be taken that would send a needed signal to the world financial markets that America has leaders who recognize the gravity of the crisis and are capable of putting aside narrow partisan self-interest for the good of the country.
Step One: Replace Secretary Paulson
A plan that relies on the former chairman of Goldman Sachs presiding over disbursing hundreds of billions of dollars to Wall Street is a terrible concept and inevitably will lead to crony capitalism and the appearance of - if not the actual existence of - corruption.
The American people understand this and they don't trust the Paulson plan. Congress should never have been faced with this as its only option to solve the financial crisis. Congress never should have been confronted with this bill. And one man, above all others, is responsible.
That man is Henry Paulson, who may have been a great deal maker for Goldman Sachs, but has been an utter failure during this economic crisis.
It's time - passed time, in fact - for President Bush to fire Secretary Paulson.
President Bush should replace Paulson immediately with someone more capable of forging a deal that the American people can trust. Secretary Paulson's Deputy at Treasury is Robert Kimmitt. He does not have the Wall Street background that made Secretary Paulson so difficult to trust as a negotiating partner and should be much more open to alternatives because he has less invested in the "Paulson" plan.
Kimmitt need not go through the actual confirmation process to immediately take over negotiating with Congress. The sooner Paulson is replaced as the chief negotiator for the administration, the sooner we will have a deal the American people can support.
Step Two: Suspend the Mark-to-Market Accounting Rule
The second thing our leaders should do immediately is simple and uncontroversial: Suspend the "mark-to-market" accounting rule that is exacerbating this crisis.
Under this artificial rule, the value of assets of banks moves up and down with economic conditions, regardless of their underlying worth. So in a time of economic crisis - such as the current subprime mortgage crisis - the value of bank assets gets caught in a downward spiral, causing investor panic and a drying up of credit.
In 2004, the European Central Bank issued this now eerily prescient opinion of the mark-to-market rule:
"With a real estate crisis or a stock market crash... [a bank] under [mark-to-market] accounting might aggravate the effects of the shock. Banks may be encouraged to react by panic selling and tightening lending standards, thus contributing to a further deepening of the crisis."
A Smart First Step
I've spent the past few days talking with businesspeople across the country - from Oklahoma, Georgia, Nevada and California - and they agree: this artificial accounting rule is needlessly making the financial crisis worse.
On Monday I appeared on Fox News' On the Record with Greta van Susteren and called for mark-to-market to be suspended.
I also wrote this op-ed yesterday for forbes.com urging the same course of action.
I gave a speech at the National Press Club in which I discussed in depth the need to end this problem now. You can read the text and view it here.
Then, later that afternoon, the Securities and Exchange Commission took a smart first step by issuing a "clarification" giving companies more leeway in estimating the value of mortgage related investments. You can read more here. Securities and Exchange Commission Chairman Chris Cox deserves credit for recognizing how this accounting requirement is needlessly exacerbating our current financial difficulties.
The Bush Administration's Expensive Legacy
Taking these two steps - replacing Secretary Paulson and suspending the mark-to-market rule - are absolutely necessary right now to give Congress the breathing room to develop a plan to replace the Paulson Plan and to re-establish trust with the American people.
The Bush Administration has now provided three case studies that have badly damaged the cause of conservatism.
First there was former FEMA head Michael Brown during Hurricane Katrina, whose incompetence convinced Americans that Republicans can't be trusted with governing.
Then there was Ambassador Jerry Bremer in Baghdad, whose decisions as the head of the American occupation of Iraq convinced Americans that Republicans can't be trusted to manage foreign policy.
And now we have Secretary Paulson at the Treasury, whose intransigence during the worst financial crisis since the Great Depression has convinced Americans that Republicans can't be trusted with their money.
It's a tragic and very expensive legacy. No conservative and no Republican should doubt how much it has hurt our cause and our party.
Rebuilding Public Trust with a Work Out, Not a Bailout
As I told Greta Van Susteren Monday night on Fox News, the fundamental flaw in the Paulson Plan was that it was seen by the American people as a deal designed by and for Wall Street.
Congress needs to go back to the drawing board and develop, not just a financial markets rescue bill (which should be a work out, not a bailout) but also an economic growth bill.
This economic growth package should do two fundamental things:
First of all, it needs to provide relief for our financial markets that is based on lending troubled institutions the capital to restore our credit markets, rather than buying their bad assets. The taxpayers should be asked to extend these institutions a line of credit until they can get back on their feet, rather than blindly acquire these institutions' toxic paper. This is the essential difference between a workout and a bailout.
Second, the plan should stop the flow of $700 billion each year out of our economy and into the coffers of foreign dictators by achieving energy independence. Not only would our national security be improved, but this much new energy income would cause our economy to boom and government revenues to grow.
A Final Warning: Don't Allow the House Democrats to Move the Plan Left
A lot of people are scratching their heads over what would cause House Speaker Nancy Pelosi to deliver such a bitterly partisan speech minutes before the House voted down the Paulson Plan - a plan she purported to support.
I think it's likely that Speaker Pelosi deliberately delivered her highly partisan speech at the last minute to get precisely the result that she got - the defeat of the Paulson Plan. The danger now is that she and the liberal Democrats in the House will spend the next couple days re-loading the bill with all the leftwing pork projects that Senator McCain and the House Republicans were able to remove from it.
This danger makes it imperative that Republicans unify behind Minority Leader John Boehner in resisting moving any rescue plan to the left. The stakes are too high for the American people to allow liberal Democrats to use the current crisis to line the coffers of their special interest allies.
Replace Secretary Paulson and Suspend Mark to Market
by Newt Gingrich (more by this author)
Posted 10/01/2008 ET
Following Monday's failure of the Paulson plan in the House, it is imperative that our leaders not hesitate to bring stability to our financial markets.
We need action now.
The Paulson Plan - is dead. The time has come for Congress to turn its attention to a plan that does the right things the right way instead of trying to fix the wrong way of this monstrosity of a Wall Street bailout bill.
As I said to Fox News' Greta Van Susteren Monday night, and spoke about at the National Press Club on Tuesday, there are two steps that could be taken that would send a needed signal to the world financial markets that America has leaders who recognize the gravity of the crisis and are capable of putting aside narrow partisan self-interest for the good of the country.
Step One: Replace Secretary Paulson
A plan that relies on the former chairman of Goldman Sachs presiding over disbursing hundreds of billions of dollars to Wall Street is a terrible concept and inevitably will lead to crony capitalism and the appearance of - if not the actual existence of - corruption.
The American people understand this and they don't trust the Paulson plan. Congress should never have been faced with this as its only option to solve the financial crisis. Congress never should have been confronted with this bill. And one man, above all others, is responsible.
That man is Henry Paulson, who may have been a great deal maker for Goldman Sachs, but has been an utter failure during this economic crisis.
It's time - passed time, in fact - for President Bush to fire Secretary Paulson.
President Bush should replace Paulson immediately with someone more capable of forging a deal that the American people can trust. Secretary Paulson's Deputy at Treasury is Robert Kimmitt. He does not have the Wall Street background that made Secretary Paulson so difficult to trust as a negotiating partner and should be much more open to alternatives because he has less invested in the "Paulson" plan.
Kimmitt need not go through the actual confirmation process to immediately take over negotiating with Congress. The sooner Paulson is replaced as the chief negotiator for the administration, the sooner we will have a deal the American people can support.
Step Two: Suspend the Mark-to-Market Accounting Rule
The second thing our leaders should do immediately is simple and uncontroversial: Suspend the "mark-to-market" accounting rule that is exacerbating this crisis.
Under this artificial rule, the value of assets of banks moves up and down with economic conditions, regardless of their underlying worth. So in a time of economic crisis - such as the current subprime mortgage crisis - the value of bank assets gets caught in a downward spiral, causing investor panic and a drying up of credit.
In 2004, the European Central Bank issued this now eerily prescient opinion of the mark-to-market rule:
"With a real estate crisis or a stock market crash... [a bank] under [mark-to-market] accounting might aggravate the effects of the shock. Banks may be encouraged to react by panic selling and tightening lending standards, thus contributing to a further deepening of the crisis."
A Smart First Step
I've spent the past few days talking with businesspeople across the country - from Oklahoma, Georgia, Nevada and California - and they agree: this artificial accounting rule is needlessly making the financial crisis worse.
On Monday I appeared on Fox News' On the Record with Greta van Susteren and called for mark-to-market to be suspended.
I also wrote this op-ed yesterday for forbes.com urging the same course of action.
I gave a speech at the National Press Club in which I discussed in depth the need to end this problem now. You can read the text and view it here.
Then, later that afternoon, the Securities and Exchange Commission took a smart first step by issuing a "clarification" giving companies more leeway in estimating the value of mortgage related investments. You can read more here. Securities and Exchange Commission Chairman Chris Cox deserves credit for recognizing how this accounting requirement is needlessly exacerbating our current financial difficulties.
The Bush Administration's Expensive Legacy
Taking these two steps - replacing Secretary Paulson and suspending the mark-to-market rule - are absolutely necessary right now to give Congress the breathing room to develop a plan to replace the Paulson Plan and to re-establish trust with the American people.
The Bush Administration has now provided three case studies that have badly damaged the cause of conservatism.
First there was former FEMA head Michael Brown during Hurricane Katrina, whose incompetence convinced Americans that Republicans can't be trusted with governing.
Then there was Ambassador Jerry Bremer in Baghdad, whose decisions as the head of the American occupation of Iraq convinced Americans that Republicans can't be trusted to manage foreign policy.
And now we have Secretary Paulson at the Treasury, whose intransigence during the worst financial crisis since the Great Depression has convinced Americans that Republicans can't be trusted with their money.
It's a tragic and very expensive legacy. No conservative and no Republican should doubt how much it has hurt our cause and our party.
Rebuilding Public Trust with a Work Out, Not a Bailout
As I told Greta Van Susteren Monday night on Fox News, the fundamental flaw in the Paulson Plan was that it was seen by the American people as a deal designed by and for Wall Street.
Congress needs to go back to the drawing board and develop, not just a financial markets rescue bill (which should be a work out, not a bailout) but also an economic growth bill.
This economic growth package should do two fundamental things:
First of all, it needs to provide relief for our financial markets that is based on lending troubled institutions the capital to restore our credit markets, rather than buying their bad assets. The taxpayers should be asked to extend these institutions a line of credit until they can get back on their feet, rather than blindly acquire these institutions' toxic paper. This is the essential difference between a workout and a bailout.
Second, the plan should stop the flow of $700 billion each year out of our economy and into the coffers of foreign dictators by achieving energy independence. Not only would our national security be improved, but this much new energy income would cause our economy to boom and government revenues to grow.
A Final Warning: Don't Allow the House Democrats to Move the Plan Left
A lot of people are scratching their heads over what would cause House Speaker Nancy Pelosi to deliver such a bitterly partisan speech minutes before the House voted down the Paulson Plan - a plan she purported to support.
I think it's likely that Speaker Pelosi deliberately delivered her highly partisan speech at the last minute to get precisely the result that she got - the defeat of the Paulson Plan. The danger now is that she and the liberal Democrats in the House will spend the next couple days re-loading the bill with all the leftwing pork projects that Senator McCain and the House Republicans were able to remove from it.
This danger makes it imperative that Republicans unify behind Minority Leader John Boehner in resisting moving any rescue plan to the left. The stakes are too high for the American people to allow liberal Democrats to use the current crisis to line the coffers of their special interest allies.
My Response to "Why Kline Voted Yes"
Here is my response to Janet Beihoffer, who is a great American and great conservative that I just happen to disagree with at this time. The person who forwarded this to me I wish to keep anonymous.
Janet:
_______ forwarded me your email, and, as a fiscal conservative, I have to honestly disagree with your assessment.
Part of the problem our party is facing is the fact that we talk about offering free-market solutions to government problems. We, as fiscal conservatives, are against government intervention in the private sector. The market will correct itself if we just let it.
Does that mean that some businesses will go belly up? Yes. But new businesses will be created to fill the void. Does that mean that some people will lose their homes? Probably. But these are the people who shouldn't be renting their homes from a bank or mortgage company to begin with.
Look at the housing market, to begin with. I, personally, have a credit score of approximately 600 because of bad debts that I incurred (student loans). For any type of conventional mortgage, I do not qualify because my debt service subtracted from my income, does not leave me with enough to make mortgage payments at the high interest rates I "might" qualify for. Does that mean I should go and take a mortgage from Fannie Mae or Freddie Mac and expect to stay in my home when I could not afford the mortgage to begin with?
We fiscal conservatives stress the principle of "let the market decide." If the market decides that I am a poor risk to lend money to (like a mortgage), then they have every right to deny me financing.
The problem occurred when government mandated that certain income groups or people groups (minorities and first time buyers to name two of the groups) must comprise a certain percentage of mortgages underwritten.
Since these people should not have qualified for financing to begin with, and Wall Street firms (starting with the mortgage originators and moving up) bought the "safe" mortgage-backed securities, I do not think that the U.S. taxpayers, like me, need to be on the hook for someone elses problem. The Federal government is not bailing me out from my student loan debt, despite the fact I've had occasional bouts of underemployment or unemployment that have prohibited me from paying them back right away. Still, it is not the government's fault that I took the money for school. I incurred the obligation and therefore I am left with the debt. (By the way, for the record - I never asked the Federal government for a bailout and don't expect one either. Besides, should I have made the cop out of going through bankruptcy instead of doing the right thing and just paying down my debt, student loan debt is not dischargable through bankruptcy anyway).
Essentially what I am saying is this bill, regardless of the money for ACORN or other liberal special interest groups being stripped, was a bad deal because nobody wanted to assume responsibility for anything and put we taxpayers on the hook for the whole amount. It does not matter if smaller businesses are involved or not. Further governmental intervention will not solve the problem but only make matters worse. Government (Federal, State and Local) has to just step out of the way and let the markets work.
That is a core principle of being a Republican and that is the type of fiscal responsibility we fight for in our party's platform. Why change now? Just because President Bush and Treasury Secretary Paulson have gotten away from fiscal conservatism? Believe me, that's what's gotten our party in the sad state that it's at. That's why we lost the 2006 elections so bad and that's why it has taken so long to get the momentum rolling in our direction in 2008.
As our beloved 40th President, Ronald Wilson Reagan once remarked (and I paraphrase), "Government is not the solution to our problems. Government is the problem."
Best wishes!
Jeffrey S. Williams
House District 55A Co-chair
4th Congressional District Vice Chair
(I am sending this on my own accord and not "officially" on behalf of the BPOU or 4th Congressional District)
P.S. I have CC'd (names are being withheld) and am posting a copy of it on my blog, http://nationaldebtbusters.blogspot.com I hope you don't mind.
P.P.S. Just so you don't think I'm too critical, I do want you to know that I appreciate all that you have done and continue to do for our great party. This is just an area where we might have some vehement disagreement.
Janet:
_______ forwarded me your email, and, as a fiscal conservative, I have to honestly disagree with your assessment.
Part of the problem our party is facing is the fact that we talk about offering free-market solutions to government problems. We, as fiscal conservatives, are against government intervention in the private sector. The market will correct itself if we just let it.
Does that mean that some businesses will go belly up? Yes. But new businesses will be created to fill the void. Does that mean that some people will lose their homes? Probably. But these are the people who shouldn't be renting their homes from a bank or mortgage company to begin with.
Look at the housing market, to begin with. I, personally, have a credit score of approximately 600 because of bad debts that I incurred (student loans). For any type of conventional mortgage, I do not qualify because my debt service subtracted from my income, does not leave me with enough to make mortgage payments at the high interest rates I "might" qualify for. Does that mean I should go and take a mortgage from Fannie Mae or Freddie Mac and expect to stay in my home when I could not afford the mortgage to begin with?
We fiscal conservatives stress the principle of "let the market decide." If the market decides that I am a poor risk to lend money to (like a mortgage), then they have every right to deny me financing.
The problem occurred when government mandated that certain income groups or people groups (minorities and first time buyers to name two of the groups) must comprise a certain percentage of mortgages underwritten.
Since these people should not have qualified for financing to begin with, and Wall Street firms (starting with the mortgage originators and moving up) bought the "safe" mortgage-backed securities, I do not think that the U.S. taxpayers, like me, need to be on the hook for someone elses problem. The Federal government is not bailing me out from my student loan debt, despite the fact I've had occasional bouts of underemployment or unemployment that have prohibited me from paying them back right away. Still, it is not the government's fault that I took the money for school. I incurred the obligation and therefore I am left with the debt. (By the way, for the record - I never asked the Federal government for a bailout and don't expect one either. Besides, should I have made the cop out of going through bankruptcy instead of doing the right thing and just paying down my debt, student loan debt is not dischargable through bankruptcy anyway).
Essentially what I am saying is this bill, regardless of the money for ACORN or other liberal special interest groups being stripped, was a bad deal because nobody wanted to assume responsibility for anything and put we taxpayers on the hook for the whole amount. It does not matter if smaller businesses are involved or not. Further governmental intervention will not solve the problem but only make matters worse. Government (Federal, State and Local) has to just step out of the way and let the markets work.
That is a core principle of being a Republican and that is the type of fiscal responsibility we fight for in our party's platform. Why change now? Just because President Bush and Treasury Secretary Paulson have gotten away from fiscal conservatism? Believe me, that's what's gotten our party in the sad state that it's at. That's why we lost the 2006 elections so bad and that's why it has taken so long to get the momentum rolling in our direction in 2008.
As our beloved 40th President, Ronald Wilson Reagan once remarked (and I paraphrase), "Government is not the solution to our problems. Government is the problem."
Best wishes!
Jeffrey S. Williams
House District 55A Co-chair
4th Congressional District Vice Chair
(I am sending this on my own accord and not "officially" on behalf of the BPOU or 4th Congressional District)
P.S. I have CC'd (names are being withheld) and am posting a copy of it on my blog, http://nationaldebtbusters.blogspot.com I hope you don't mind.
P.P.S. Just so you don't think I'm too critical, I do want you to know that I appreciate all that you have done and continue to do for our great party. This is just an area where we might have some vehement disagreement.
Why Kline voted Yes
Written by Janet Beihoffer, 2nd Congressional District (MN) Republican Party Chair.
My Congressman, John Kline, voted to support the solution to address our financial problems. I have read a ton on both sides and will be writing a blog post "An Everyman's Explanation of the MESS" (www.scsuscholars.com and www.looktruenorth.com) in an attempt to put in English what is really going on with this fiasco. There are three components: the mortgage industry; banks; and other. It's the "other" category that is driving the need for a solution. While the mortgage and banking topics have been in the press, what has not been explained in all the headlines, rhetoric, hype, etc. is this: there are 100's if not 1000s of companies who got into the financing business starting in the 1980's. These companies include manufacturers, insurance, brokerage, etc. - all outside of the banking industry. They are all loaning each other money for a plethora of reasons. All wanted to make their profit on loaning money. The "bailout" was not so much for the barons/bankers of Wall Street as it was for those other companies who provide jobs, pension plans, etc.
Whether or not you agree with this, it simply is.
Now for John Kline: he understood this. He also knows that the Democrats control Congress. He knows that Democrat Pelosi and company had no intention of including House Republicans in any solution - that is until Treasury Secretary Paulson called McCain back to help. McCain got the House involved; the original plan (Paulson, Dems, Paulson) included money that was going to be funneled to ACORN and other Democrat (non-profit???) support groups which in turn would be funneled back to Democrats. Once McCain and the Republican House got involved, all the perks/earmarks/subsidies were removed; golden parachutes were removed; some real oversite procedures were put in place. So Kline voted for the offered solution.
If you go here, http://kline.house.gov/index.cfm?FuseAction=NewsCenter.PressReleases&&ContentRecord_id=af90343d-19b9-b4b1-12b6-4f9196c167a3&CFID=4131912&CFTOKEN=43556962 you can read all of Kline's short post but this info is key:
“Today, members of Congress were asked to make a difficult decision. As it became increasingly clear that the financial crisis facing America was extending beyond Wall Street and threatening the jobs, homes, and retirement security of the men and women reporting for work on Main Streets throughout Minnesota and across America, we were asked to cast our vote for an imperfect, but important, solution. Unfortunately, this bill did not pass, and the crisis continues.
The result was imperfect, but it was a bipartisan solution that I believed was in the best interest of Americans.....it provided increased protection for the American taxpayer by instituting greater oversight and transparency. My Republican colleagues and I stood firm against the original, seriously flawed plan, as well as irresponsible provisions supported by my Democratic colleagues – including slush funds for left-leaning political organizations. We demanded that Wall Street finance its recovery through a federal insurance program. We also fought to ensure no golden parachutes would be available to corporate executives who made reckless decisions. But the bill failed, and we must, once again, return to negotiations." John Kline
Perfect, no; plausible,yes. Now the issue is whether or not there can be another plan that can keep the good stuff from this one as well as address outstanding issues that other Republicans want addressed. Unfortunately, our party is in the minority. The Democrats can pass any bill they want. You can bet the last dollar you have that they will include their friends in other bills. While Obama is fiddling, our economy is burning (up) and we need something. What? Phew, don't know but a stop gap measure needs to be put in place so we can regroup; then, have the government get out of the way. At least McCain is trying to do something - I know, we have our differences but...
Remember, most of the millionaires and billionaires are Democrats (Gates, Buffett, Oprah Winfrey, H'wood moguls, media barons, the Google and Yahoo mega millionaires as well as most of the dot.com mega millionaires, etc.). They won't miss the money but the rest of us will. Republicans are the party of the people. Too bad we do a lousy job of marketing that fact.
We are Americans; we solve problems when we have most of the facts.
My Congressman, John Kline, voted to support the solution to address our financial problems. I have read a ton on both sides and will be writing a blog post "An Everyman's Explanation of the MESS" (www.scsuscholars.com and www.looktruenorth.com) in an attempt to put in English what is really going on with this fiasco. There are three components: the mortgage industry; banks; and other. It's the "other" category that is driving the need for a solution. While the mortgage and banking topics have been in the press, what has not been explained in all the headlines, rhetoric, hype, etc. is this: there are 100's if not 1000s of companies who got into the financing business starting in the 1980's. These companies include manufacturers, insurance, brokerage, etc. - all outside of the banking industry. They are all loaning each other money for a plethora of reasons. All wanted to make their profit on loaning money. The "bailout" was not so much for the barons/bankers of Wall Street as it was for those other companies who provide jobs, pension plans, etc.
Whether or not you agree with this, it simply is.
Now for John Kline: he understood this. He also knows that the Democrats control Congress. He knows that Democrat Pelosi and company had no intention of including House Republicans in any solution - that is until Treasury Secretary Paulson called McCain back to help. McCain got the House involved; the original plan (Paulson, Dems, Paulson) included money that was going to be funneled to ACORN and other Democrat (non-profit???) support groups which in turn would be funneled back to Democrats. Once McCain and the Republican House got involved, all the perks/earmarks/subsidies were removed; golden parachutes were removed; some real oversite procedures were put in place. So Kline voted for the offered solution.
If you go here, http://kline.house.gov/index.cfm?FuseAction=NewsCenter.PressReleases&&ContentRecord_id=af90343d-19b9-b4b1-12b6-4f9196c167a3&CFID=4131912&CFTOKEN=43556962 you can read all of Kline's short post but this info is key:
“Today, members of Congress were asked to make a difficult decision. As it became increasingly clear that the financial crisis facing America was extending beyond Wall Street and threatening the jobs, homes, and retirement security of the men and women reporting for work on Main Streets throughout Minnesota and across America, we were asked to cast our vote for an imperfect, but important, solution. Unfortunately, this bill did not pass, and the crisis continues.
The result was imperfect, but it was a bipartisan solution that I believed was in the best interest of Americans.....it provided increased protection for the American taxpayer by instituting greater oversight and transparency. My Republican colleagues and I stood firm against the original, seriously flawed plan, as well as irresponsible provisions supported by my Democratic colleagues – including slush funds for left-leaning political organizations. We demanded that Wall Street finance its recovery through a federal insurance program. We also fought to ensure no golden parachutes would be available to corporate executives who made reckless decisions. But the bill failed, and we must, once again, return to negotiations." John Kline
Perfect, no; plausible,yes. Now the issue is whether or not there can be another plan that can keep the good stuff from this one as well as address outstanding issues that other Republicans want addressed. Unfortunately, our party is in the minority. The Democrats can pass any bill they want. You can bet the last dollar you have that they will include their friends in other bills. While Obama is fiddling, our economy is burning (up) and we need something. What? Phew, don't know but a stop gap measure needs to be put in place so we can regroup; then, have the government get out of the way. At least McCain is trying to do something - I know, we have our differences but...
Remember, most of the millionaires and billionaires are Democrats (Gates, Buffett, Oprah Winfrey, H'wood moguls, media barons, the Google and Yahoo mega millionaires as well as most of the dot.com mega millionaires, etc.). They won't miss the money but the rest of us will. Republicans are the party of the people. Too bad we do a lousy job of marketing that fact.
We are Americans; we solve problems when we have most of the facts.
Tuesday, September 30, 2008
AZ Rep. Shadegg Takes on Treasury Sec. Paulson
Ariz. Rep. John Shadegg Takes on Henry Paulson
Tuesday, September 30, 2008 11:37 AM
By: Jim Meyers
www.Newsmax.com
“The sky is not falling,” declares Rep. John Shadegg, and Congress will act to deal with the economic crisis without giving Treasury Secretary Henry Paulson a “blank check.”
The Arizona Republican writes in Monday’s USA Today: “Every Republican who voted against the Emergency Economic Stabilization Act on Monday believes that Congress must address this crisis. They take it seriously and stand ready to vote for reasonable legislation…
“Paulson’s $700 billion plan was fundamentally flawed. The bill asked for a blank check. It did not specify which assets could be purchased or the procedure by which they would be purchased…
“Secretary Paulson is getting a lesson in civics. The world he has entered is different than the wheeling-and-dealing Goldman Sachs world where he made his fortune.”
Shadegg called for the suspension of the “mark to market” accounting rule that requires mortgage-backed securities to be valued at “fire-sale prices.” That would help prevent the current crisis from reoccurring, but Shadegg said it is “incomprehensible” that Paulson and Congressional Democrats refused to include such a provision in the bill.
He also called for an increase in the Federal Deposit Insurance Corp.’s $100,000 limit on coverage to alleviate the concerns of millions of Americans, and said “it’s hard to imagine why anyone would oppose such a change.”
Rep. Shadegg, who was first elected in 1994 and has held a number of GOP leadership positions in the House, concluded: “We have ample time to reach an acceptable compromise if all parties act in good faith. The Democratic House majority can move to reconsider its bill if Speaker Nancy Pelosi will allow an amendment to improve it by making changes, including those I have outlined.
“This market can be solved in the very near future, and the market will come back.”
Tuesday, September 30, 2008 11:37 AM
By: Jim Meyers
www.Newsmax.com
“The sky is not falling,” declares Rep. John Shadegg, and Congress will act to deal with the economic crisis without giving Treasury Secretary Henry Paulson a “blank check.”
The Arizona Republican writes in Monday’s USA Today: “Every Republican who voted against the Emergency Economic Stabilization Act on Monday believes that Congress must address this crisis. They take it seriously and stand ready to vote for reasonable legislation…
“Paulson’s $700 billion plan was fundamentally flawed. The bill asked for a blank check. It did not specify which assets could be purchased or the procedure by which they would be purchased…
“Secretary Paulson is getting a lesson in civics. The world he has entered is different than the wheeling-and-dealing Goldman Sachs world where he made his fortune.”
Shadegg called for the suspension of the “mark to market” accounting rule that requires mortgage-backed securities to be valued at “fire-sale prices.” That would help prevent the current crisis from reoccurring, but Shadegg said it is “incomprehensible” that Paulson and Congressional Democrats refused to include such a provision in the bill.
He also called for an increase in the Federal Deposit Insurance Corp.’s $100,000 limit on coverage to alleviate the concerns of millions of Americans, and said “it’s hard to imagine why anyone would oppose such a change.”
Rep. Shadegg, who was first elected in 1994 and has held a number of GOP leadership positions in the House, concluded: “We have ample time to reach an acceptable compromise if all parties act in good faith. The Democratic House majority can move to reconsider its bill if Speaker Nancy Pelosi will allow an amendment to improve it by making changes, including those I have outlined.
“This market can be solved in the very near future, and the market will come back.”
Saturday, September 27, 2008
Alaska Abandons Bridge to Nowhere
The following post originally appeared on Nationaldebtbusters on Sept. 21, 2007. Since it has come back in the news again, I thought I'd repost this for your edification.
Americans for Prosperity Calls Victorious Defeat of Bridge to Nowhere a Testament to the Power of Grassroots Activism
Citizen Group Visited the Bridge to Nowhere in August 2006
WASHINGTON, Sept. 21 /PRNewswire-USNewswire/ -- On the heels of news today that the state of Alaska has officially abandoned plans to pursue the infamous Gravina Bridge to Nowhere project, Americans for Prosperity President Tim Phillips issued the following victory statement:
"The death of the Alaska Bridge to Nowhere is a testament to the power of grassroots activism. Citizen outrage against hard-earned tax dollars being wasted on questionable pet projects delivered this victory for taxpayers. To paraphrase the late Senator Everett Dirksen of Illinois, when citizen activists turned up the heat on Congress, lawmakers saw the light.
By communicating their frustration over this incredibly wasteful use of federal tax dollars, citizens created an environment in which the Bridge to Nowhere could not survive any longer.
"I applaud those hard-nosed lawmakers that helped to fight against the Bridge to Nowhere, including Senator Tom Coburn, Representative Jeff Flake, and Representative Mark Kirk.
"As we drove more than 10,000 miles across 37 states on our Ending Earmarks Express road tour last year, which visited the Bridge to Nowhere, one outraged citizen after another told us that the earmark favor factory must be shut down. By refusing to remain silent while their tax dollars were abused, citizens defeated the Bridge to Nowhere.
"This victory today is a key reason why over 1,000 citizens are committed to come to Washington, DC, as part of Americans for Prosperity Foundation's Defending the American Dream Summit on October 4-5. This Summit will be a massive show of force in support of fiscal restraint and against abuse of tax dollars. With these grassroots troops we can restore genuine fiscal restraint to Washington and bring an end to questionable earmarks like the Bridge to Nowhere."
Editors Note: Americans for Prosperity Foundation traveled over 10,000 miles across the nation on the Ending Earmarks Express road tour last year, visiting 37 states and 50 earmarks, including the Bridge to Nowhere. AFPF was the first Washington, DC-based group to visit the proposed site of the Gravina Bridge to Nowhere.
To view video of AFP President Tim Phillips speaking on the ferry from Gravina Island to Ketchikan, please visit: http://www.youtube.com/watch?v=f6q__0-krUo.
Americans for Prosperity (AFP) is the nation's premier grassroots
organization committed to advancing every individual's right to economic freedom and opportunity. AFP believes reducing the size and scope of government is the best safeguard to ensuring individual productivity and prosperity for all Americans. AFP educates and engages citizens in support of restraining state and federal government growth, and returning government to its constitutional limits.
Americans for Prosperity Calls Victorious Defeat of Bridge to Nowhere a Testament to the Power of Grassroots Activism
Citizen Group Visited the Bridge to Nowhere in August 2006
WASHINGTON, Sept. 21 /PRNewswire-USNewswire/ -- On the heels of news today that the state of Alaska has officially abandoned plans to pursue the infamous Gravina Bridge to Nowhere project, Americans for Prosperity President Tim Phillips issued the following victory statement:
"The death of the Alaska Bridge to Nowhere is a testament to the power of grassroots activism. Citizen outrage against hard-earned tax dollars being wasted on questionable pet projects delivered this victory for taxpayers. To paraphrase the late Senator Everett Dirksen of Illinois, when citizen activists turned up the heat on Congress, lawmakers saw the light.
By communicating their frustration over this incredibly wasteful use of federal tax dollars, citizens created an environment in which the Bridge to Nowhere could not survive any longer.
"I applaud those hard-nosed lawmakers that helped to fight against the Bridge to Nowhere, including Senator Tom Coburn, Representative Jeff Flake, and Representative Mark Kirk.
"As we drove more than 10,000 miles across 37 states on our Ending Earmarks Express road tour last year, which visited the Bridge to Nowhere, one outraged citizen after another told us that the earmark favor factory must be shut down. By refusing to remain silent while their tax dollars were abused, citizens defeated the Bridge to Nowhere.
"This victory today is a key reason why over 1,000 citizens are committed to come to Washington, DC, as part of Americans for Prosperity Foundation's Defending the American Dream Summit on October 4-5. This Summit will be a massive show of force in support of fiscal restraint and against abuse of tax dollars. With these grassroots troops we can restore genuine fiscal restraint to Washington and bring an end to questionable earmarks like the Bridge to Nowhere."
Editors Note: Americans for Prosperity Foundation traveled over 10,000 miles across the nation on the Ending Earmarks Express road tour last year, visiting 37 states and 50 earmarks, including the Bridge to Nowhere. AFPF was the first Washington, DC-based group to visit the proposed site of the Gravina Bridge to Nowhere.
To view video of AFP President Tim Phillips speaking on the ferry from Gravina Island to Ketchikan, please visit: http://www.youtube.com/watch?v=f6q__0-krUo.
Americans for Prosperity (AFP) is the nation's premier grassroots
organization committed to advancing every individual's right to economic freedom and opportunity. AFP believes reducing the size and scope of government is the best safeguard to ensuring individual productivity and prosperity for all Americans. AFP educates and engages citizens in support of restraining state and federal government growth, and returning government to its constitutional limits.
The Bailout Is a Band-Aid
The Bailout Is a Band-Aid: Housing Crisis Needs to Be Fixed
Thursday, September 25, 2008 4:18 PM
By: Christopher Ruddy
www.newsmax.com
Yesterday Sen. Orrin Hatch was hitting the airwaves.
The subprime crisis, he said, was the fault of the Clinton administration, who he said created the subprime mortgage crisis.
Other Republicans have been laying blame on the financial crisis on minorities and illegal immigrants who got mortgages they simply couldn’t pay. They offer no statistical proof on this point.
Nor does the usually sensible Senator Hatch offer evidence when it comes to pointing the finger at the Clinton administration.
The attempt to deflect blame for the crisis is not simply wrongheaded; I think it will compound Republican political woes and bring us disaster again in November.
Doesn’t Hatch and Co. know that Bill and Hillary Clinton voters in the swing states will decide who becomes the next president? They are wary of Obama, but love the Clintons and remember the good economic times of the’90s.
As a conservative Republican of the Reagan type, I find myself in this odd place cheering on some of the sensible things I hear from Democrats.
Barack Obama said any bailout to Wall Street must not be simply a cash payout or a loan, but be treated like an equity investment in these firms. We want our money back and then some. Yes to that, I say.
And demands by House Democrats that the secretary of the treasury alone not be given a blank check for more than a trillion dollars of our money, and that we have complete transparency in the transactions, I say yes to that, too.
Fiscal responsibility, transparency and accountability — aren’t these things Republicans believe in?
The Democratic complaints about the Bush plan shows that our government is working. The executive branch tried to put a gun to the head of Congress and told them, “Sign this check or the whole U.S. banking system will collapse.”
Congress didn’t blink.
Don’t get me wrong. I am for a bailout, but one that is sensible and is a win-win for Wall Street, Main Street investors and taxpayers like you and me.
But remember the government bailout plan proposed by the president and modifications supported by the Democrats won’t fix the underlying problem: the housing market collapse. Home prices are continuing to fall, and fewer people are buying homes than ever. Foreclosures will continue.
Unless this underlying problem is fixed, the economic symptoms will continue. There are some remedies. But before I get to them, let’s review what has happened.
The Federal Reserve under Alan Greenspan gave the U.S. economy shock treatment back in 2001 and 2002 when it lowered interest rates to 1 percent — the lowest Fed Funds rate in recent history.
By pushing the pedal to the metal and backed quietly by the White House, the Fed injected massive liquidity in the U.S. economy, creating the largest asset bubble in history, according to the Economist magazine.
Incredibly low rates by the Fed were accompanied by an acceptance of the central bank for all sorts of exotic mortgage loans. No down payments. Interest only. No job and income verification. Get the picture?
Compounding this irresponsibility was then the “greed factor” that kicked in at several levels.
First were the local banks and mortgage companies that pushed mortgages, notably adjustable rate ones that offered extremely low introductory rates, and gave them to buyers who would not be able to pay back once the rates adjusted up.
Well rates have adjusted up and the crisis hit.
Many mortgage providers also encouraged loan applicants to lie about incomes and qualifications to approve these mortgages.
Wall Street as a whole had little role at this stage. But later, Wall Street took these mortgages, which had been rolled up into collateralized debt instruments, better known as mortgage backed securities, and sold them off to investors globally.
Wall Street failed to compute the risks involved in these securities. It was a failure, not a crime.
But many Wall Street firms, hedge funds and other investments took incredible, unwarranted risks using these securities. These firms would borrow money at low rates — say 4 percent — and invest in CDOs paying 6 to 7 percent. This small difference in rates of 2 to 3 percent, the arbitrage, would throw off enormous returns, especially considering little or no money had been placed on the table to buy the securities.
I have been told that Lehman and AIG played this leveraging game, investing only $1 for every $30 they held in such toxic suggestions. Again, what they did was not a crime. They took enormous risk and reaped huge returns — for a while.
Now they want us to pay for the huge losses that ultimately fell upon them.
Washington played a role in the mess too. The White House pushed for easy money and easy lending practices, many weighted in favor of the banks and lenders and against the consumer.
Congress, dominated largely by Republicans from 1994 to 2006, did an awful job in oversight. This is especially true after President Bush took the oath of office.
When Bill Clinton was president, the Republicans acted beautifully, working diligently to keep President Clinton on a center-right economic course. The results were great.
This seems like ancient history, but it’s important to have a clear picture of how we got into this mess. It may help us get out of it.
First, we need to know the “crisis” the Bush administration presented to us just last week is not a crisis that just popped up. It was apparent to many two years ago the real estate market was in a bubble and would bust.
And when the Fed moved in 2004 and raised rates from 1 percent to 5.25 percent by 2006 — a more than 400 percent increase in two years, it also led directly to those adjustable mortgages re-adjusting at very high rates. Homeowners got struck hard — with monthly mortgage payments on medium size homes mushrooming literally overnight.
The Fed increase rates started the credit crisis. The first tremors were apparent over a year ago when the Fed took emergency steps to give banks liquidity.
It’s important to remember that most adjustable mortgages created in the boom years still have not reset – and will continue doing so through 2011.
This problem will worsen unless Washington tackled the underlying problems.
The first thing the Fed must do to reduce the continuance of the problem is drop rates. It doesn’t have much wiggle room, because the dollar needs to be protected, but a small decrease in rates could have an enormous impact on those readjusting mortgages.
The second-most-important thing to do is for Congress to give a significant tax credit for new home buyers. Congress just passed a $7500 tax credit for new home buyers, though it’s not actually a credit but a loan at no interest.
The famed economist Edward Leamer of UCLA’s Anderson School says a $25,000 tax credit to new home buyers would put an immediate end to the fall in home prices. He suggests it would spur economic activity and government tax revenues would grow, more than covering the cost of the program.
Already home prices have fallen to reasonable prices and it should be a buyer’s market. But government can spur home buyers who keep staying on the sidelines think prices will fall more.
If this is done, home prices will stabilize and likely begin rising. All of the sectors that relate to the housing market will find relief.
And, most important, the value of those mortgage backed securities will increase as the underlying mortgages become current. Foreclosures will also abate.
The key to solving the financial crisis is not to simply send a blank check to Wall Street, but to get consumers buying homes again.
Thursday, September 25, 2008 4:18 PM
By: Christopher Ruddy
www.newsmax.com
Yesterday Sen. Orrin Hatch was hitting the airwaves.
The subprime crisis, he said, was the fault of the Clinton administration, who he said created the subprime mortgage crisis.
Other Republicans have been laying blame on the financial crisis on minorities and illegal immigrants who got mortgages they simply couldn’t pay. They offer no statistical proof on this point.
Nor does the usually sensible Senator Hatch offer evidence when it comes to pointing the finger at the Clinton administration.
The attempt to deflect blame for the crisis is not simply wrongheaded; I think it will compound Republican political woes and bring us disaster again in November.
Doesn’t Hatch and Co. know that Bill and Hillary Clinton voters in the swing states will decide who becomes the next president? They are wary of Obama, but love the Clintons and remember the good economic times of the’90s.
As a conservative Republican of the Reagan type, I find myself in this odd place cheering on some of the sensible things I hear from Democrats.
Barack Obama said any bailout to Wall Street must not be simply a cash payout or a loan, but be treated like an equity investment in these firms. We want our money back and then some. Yes to that, I say.
And demands by House Democrats that the secretary of the treasury alone not be given a blank check for more than a trillion dollars of our money, and that we have complete transparency in the transactions, I say yes to that, too.
Fiscal responsibility, transparency and accountability — aren’t these things Republicans believe in?
The Democratic complaints about the Bush plan shows that our government is working. The executive branch tried to put a gun to the head of Congress and told them, “Sign this check or the whole U.S. banking system will collapse.”
Congress didn’t blink.
Don’t get me wrong. I am for a bailout, but one that is sensible and is a win-win for Wall Street, Main Street investors and taxpayers like you and me.
But remember the government bailout plan proposed by the president and modifications supported by the Democrats won’t fix the underlying problem: the housing market collapse. Home prices are continuing to fall, and fewer people are buying homes than ever. Foreclosures will continue.
Unless this underlying problem is fixed, the economic symptoms will continue. There are some remedies. But before I get to them, let’s review what has happened.
The Federal Reserve under Alan Greenspan gave the U.S. economy shock treatment back in 2001 and 2002 when it lowered interest rates to 1 percent — the lowest Fed Funds rate in recent history.
By pushing the pedal to the metal and backed quietly by the White House, the Fed injected massive liquidity in the U.S. economy, creating the largest asset bubble in history, according to the Economist magazine.
Incredibly low rates by the Fed were accompanied by an acceptance of the central bank for all sorts of exotic mortgage loans. No down payments. Interest only. No job and income verification. Get the picture?
Compounding this irresponsibility was then the “greed factor” that kicked in at several levels.
First were the local banks and mortgage companies that pushed mortgages, notably adjustable rate ones that offered extremely low introductory rates, and gave them to buyers who would not be able to pay back once the rates adjusted up.
Well rates have adjusted up and the crisis hit.
Many mortgage providers also encouraged loan applicants to lie about incomes and qualifications to approve these mortgages.
Wall Street as a whole had little role at this stage. But later, Wall Street took these mortgages, which had been rolled up into collateralized debt instruments, better known as mortgage backed securities, and sold them off to investors globally.
Wall Street failed to compute the risks involved in these securities. It was a failure, not a crime.
But many Wall Street firms, hedge funds and other investments took incredible, unwarranted risks using these securities. These firms would borrow money at low rates — say 4 percent — and invest in CDOs paying 6 to 7 percent. This small difference in rates of 2 to 3 percent, the arbitrage, would throw off enormous returns, especially considering little or no money had been placed on the table to buy the securities.
I have been told that Lehman and AIG played this leveraging game, investing only $1 for every $30 they held in such toxic suggestions. Again, what they did was not a crime. They took enormous risk and reaped huge returns — for a while.
Now they want us to pay for the huge losses that ultimately fell upon them.
Washington played a role in the mess too. The White House pushed for easy money and easy lending practices, many weighted in favor of the banks and lenders and against the consumer.
Congress, dominated largely by Republicans from 1994 to 2006, did an awful job in oversight. This is especially true after President Bush took the oath of office.
When Bill Clinton was president, the Republicans acted beautifully, working diligently to keep President Clinton on a center-right economic course. The results were great.
This seems like ancient history, but it’s important to have a clear picture of how we got into this mess. It may help us get out of it.
First, we need to know the “crisis” the Bush administration presented to us just last week is not a crisis that just popped up. It was apparent to many two years ago the real estate market was in a bubble and would bust.
And when the Fed moved in 2004 and raised rates from 1 percent to 5.25 percent by 2006 — a more than 400 percent increase in two years, it also led directly to those adjustable mortgages re-adjusting at very high rates. Homeowners got struck hard — with monthly mortgage payments on medium size homes mushrooming literally overnight.
The Fed increase rates started the credit crisis. The first tremors were apparent over a year ago when the Fed took emergency steps to give banks liquidity.
It’s important to remember that most adjustable mortgages created in the boom years still have not reset – and will continue doing so through 2011.
This problem will worsen unless Washington tackled the underlying problems.
The first thing the Fed must do to reduce the continuance of the problem is drop rates. It doesn’t have much wiggle room, because the dollar needs to be protected, but a small decrease in rates could have an enormous impact on those readjusting mortgages.
The second-most-important thing to do is for Congress to give a significant tax credit for new home buyers. Congress just passed a $7500 tax credit for new home buyers, though it’s not actually a credit but a loan at no interest.
The famed economist Edward Leamer of UCLA’s Anderson School says a $25,000 tax credit to new home buyers would put an immediate end to the fall in home prices. He suggests it would spur economic activity and government tax revenues would grow, more than covering the cost of the program.
Already home prices have fallen to reasonable prices and it should be a buyer’s market. But government can spur home buyers who keep staying on the sidelines think prices will fall more.
If this is done, home prices will stabilize and likely begin rising. All of the sectors that relate to the housing market will find relief.
And, most important, the value of those mortgage backed securities will increase as the underlying mortgages become current. Foreclosures will also abate.
The key to solving the financial crisis is not to simply send a blank check to Wall Street, but to get consumers buying homes again.
Thursday, September 25, 2008
RF: That Vote For “Change” In 06 Is Costing Us $1.6 Billion ***A Day***
This is an interesting story posted by Andy Aplikowski on Residual Forces. You may click on the title to read the whole post.
Thursday, September 18, 2008
Stocks surge on report of entity for bad debt
By TIM PARADIS, AP Business Writer
Wall Street surged higher Thursday, with the Dow Jones industrials up more than 400 points after a report that the federal government is considering creation of a repository for banks' bad debt.
CNBC said Treasury Secretary Henry Paulson is considering creation of an entity like the Resolution Trust Corp. that was formed after the failure of savings and loan banks in the 1980s.
Investors were cheered by the notion of a huge federal intervention like the establishment of RTC to acquire the real estate debt that has hobbled financial institutions and led to the intense volatility in the markets this week.
If there's an RTC-like entity, "it's going to take a lot of the bad debt off the balance sheets of these companies," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. That would alleviate many of the pressures causing the credit crisis, he said, and open up the credit markets again.
However, Fullman added, "the devil's in the details."
In late afternoon trading, the Dow soared 406.29, or 3.83 percent, to 11,015.95.
Broader stock indicators also jumped. The Standard & Poor's 500 index rose 41.54, or 3.59 percent, to 1,197.93, and the Nasdaq composite index advanced 76.52, or 3.65 percent, to 2,175.37.
Wall Street surged higher Thursday, with the Dow Jones industrials up more than 400 points after a report that the federal government is considering creation of a repository for banks' bad debt.
CNBC said Treasury Secretary Henry Paulson is considering creation of an entity like the Resolution Trust Corp. that was formed after the failure of savings and loan banks in the 1980s.
Investors were cheered by the notion of a huge federal intervention like the establishment of RTC to acquire the real estate debt that has hobbled financial institutions and led to the intense volatility in the markets this week.
If there's an RTC-like entity, "it's going to take a lot of the bad debt off the balance sheets of these companies," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. That would alleviate many of the pressures causing the credit crisis, he said, and open up the credit markets again.
However, Fullman added, "the devil's in the details."
In late afternoon trading, the Dow soared 406.29, or 3.83 percent, to 11,015.95.
Broader stock indicators also jumped. The Standard & Poor's 500 index rose 41.54, or 3.59 percent, to 1,197.93, and the Nasdaq composite index advanced 76.52, or 3.65 percent, to 2,175.37.
Friday, August 1, 2008
National Debt Statistics July 31, 2008
It's been a little while since I've spent time updating the blog, as it's been a very busy two months for me. While the Monthly Statement of the Public Debt for the month of July 2008 has not been released yet, the following reflects the total debt breakdown on July 31, 2008. More stats will come next week.
Debt held by public: $5,403,381,951,775.03
Intragovernmental holdings: $4,182,097,687,425.30
Total debt as of yesterday: $9,585,479,639,200.33
(Source: www.treasurydirect.gov)
Debt held by public: $5,403,381,951,775.03
Intragovernmental holdings: $4,182,097,687,425.30
Total debt as of yesterday: $9,585,479,639,200.33
(Source: www.treasurydirect.gov)
Thursday, July 31, 2008
Money advice from Bible gains favor as advisers like Dave Ramsey preach no debt
The following appeared in the July 29, 2008 online edition of the Chicago Sun-Times.
By JENNIFER GARZA |
SACRAMENTO BEE/Scripps Howard News Service
Before David and Maura Reza hand out the $5 weekly allowance to their children, David reads a Scripture from the Bible about money.
This is a shift for the family, which has retreated from what Maura Reza calls years of "selfish spending." Now they have turned to a higher power for managing their budget, the world of biblical financial planning.
The five children -- Brandon, Parker, Chandler, Lauryn and Aaron - squeeze around the dining room table in their spacious home to listen to their dad. They light up when Mom walks in with the cash.
"The important thing to remember is that all of this," said David Reza, opening his arms wide gesturing to everything in their house, "belongs to God."
It may not belong to the Rezas much longer. The family is in danger of losing their five-bedroom, 2,900-square-foot home. Even if they do, they believe their faith will help them with their finances.
The Rezas have turned to their church to help them climb out of debt. Courses on biblical financial planning -- which emphasize paying off debt, saving and tithing -- are now offered at more than a dozen churches in the region. More classes start in the fall.
"How we manage our money says a lot about how we feel about God," said Mark Eshoff, executive minister at Fremont Presbyterian Church, which has offered financial courses for several years. "When you are worried about money, you can't be free."
A half-dozen church leaders a week are asking about classes, more than twice as many as last year, said Pamela Christensen of Crown Financial Ministries, which is taught at several churches in the Sacramento region.
"Their people are in a crisis situation, they don't know what to do," said Christensen. "They hear about what the Bible said about debt and it makes a lot of sense."
Christensen said money is mentioned more than 2,300 times in the Bible, more than any other topic, including the oft-cited Proverbs 22:7. "The rich rules over the poor and the borrower becomes the lender's slave."
The Rezas fell into a financial hole last November when the bank foreclosed on their second home and the couple declared bankruptcy.
They later heard about biblical financial management and in June, the couple finished a 10-week course at Bayside Church in Granite Bay. For the first time, they say they are united about money.
It has not been easy.
They keep track of what they spend in a notebook. They sold some of their possessions, including an exercise machine. They cut back cable TV, quit their gym membership, unplugged a freezer in their garage and juggled work schedules to save on child care.
When their dryer started breaking down, they put a clothesline in their backyard.
"I know what we're doing is the right thing, and it's important that we are better examples for our children," Maura said as she showed her daughter how to hang a blouse on the clothesline. "But we have a long, long way to go."
Gina and Joe Macfarlane of Folsom say they have found financial peace.
"We got tired of living paycheck to paycheck," said Gina Macfarlane, who works as a bookkeeper at Lakeside Church in Folsom where the family attends. Her husband is in sales.
Believing they were not living the way God intended, they began following a program at their church that teaches the Dave Ramsey approach to finance. He is a radio talk show host who tells listeners they should be debt-free.
The Macfarlane's sold their new 2,200-square-foot Folsom home and moved into a 1,200-square-foot ranch house in an older neighborhood. They sold their BMW, their motor home and furnishings to pay off $42,000 in credit card debt.
They have followed the program faithfully for four years, and can account for every dollar of their $140,000 income. They use cash only, believing credit is not biblically sound.
The Macfarlanes plan to pay off their house soon, saying they don't want to grow old with a mortgage payment.
While paying down debt is admirable, some analysts suggest there are limits.
Dave Ramsey "creates this Mayberry world, but this is a much more sophisticated society," said Robert Manning, professor of consumer finance at Rochester Institute of Technology and author of "Credit Card Nation: The Consequences of America's Addiction to Credit."
"The reality is that we live in society with tax advantages and where credit should be used effectively - not banned."
Manning praised churches for promoting financial education but cautioned that religious groups also are acting out of self-interest. "If these people are in debt, they can't tithe, and that means the church feels it," he said.
"These programs teach that you should tithe first."
By JENNIFER GARZA |
SACRAMENTO BEE/Scripps Howard News Service
Before David and Maura Reza hand out the $5 weekly allowance to their children, David reads a Scripture from the Bible about money.
This is a shift for the family, which has retreated from what Maura Reza calls years of "selfish spending." Now they have turned to a higher power for managing their budget, the world of biblical financial planning.
The five children -- Brandon, Parker, Chandler, Lauryn and Aaron - squeeze around the dining room table in their spacious home to listen to their dad. They light up when Mom walks in with the cash.
"The important thing to remember is that all of this," said David Reza, opening his arms wide gesturing to everything in their house, "belongs to God."
It may not belong to the Rezas much longer. The family is in danger of losing their five-bedroom, 2,900-square-foot home. Even if they do, they believe their faith will help them with their finances.
The Rezas have turned to their church to help them climb out of debt. Courses on biblical financial planning -- which emphasize paying off debt, saving and tithing -- are now offered at more than a dozen churches in the region. More classes start in the fall.
"How we manage our money says a lot about how we feel about God," said Mark Eshoff, executive minister at Fremont Presbyterian Church, which has offered financial courses for several years. "When you are worried about money, you can't be free."
A half-dozen church leaders a week are asking about classes, more than twice as many as last year, said Pamela Christensen of Crown Financial Ministries, which is taught at several churches in the Sacramento region.
"Their people are in a crisis situation, they don't know what to do," said Christensen. "They hear about what the Bible said about debt and it makes a lot of sense."
Christensen said money is mentioned more than 2,300 times in the Bible, more than any other topic, including the oft-cited Proverbs 22:7. "The rich rules over the poor and the borrower becomes the lender's slave."
The Rezas fell into a financial hole last November when the bank foreclosed on their second home and the couple declared bankruptcy.
They later heard about biblical financial management and in June, the couple finished a 10-week course at Bayside Church in Granite Bay. For the first time, they say they are united about money.
It has not been easy.
They keep track of what they spend in a notebook. They sold some of their possessions, including an exercise machine. They cut back cable TV, quit their gym membership, unplugged a freezer in their garage and juggled work schedules to save on child care.
When their dryer started breaking down, they put a clothesline in their backyard.
"I know what we're doing is the right thing, and it's important that we are better examples for our children," Maura said as she showed her daughter how to hang a blouse on the clothesline. "But we have a long, long way to go."
Gina and Joe Macfarlane of Folsom say they have found financial peace.
"We got tired of living paycheck to paycheck," said Gina Macfarlane, who works as a bookkeeper at Lakeside Church in Folsom where the family attends. Her husband is in sales.
Believing they were not living the way God intended, they began following a program at their church that teaches the Dave Ramsey approach to finance. He is a radio talk show host who tells listeners they should be debt-free.
The Macfarlane's sold their new 2,200-square-foot Folsom home and moved into a 1,200-square-foot ranch house in an older neighborhood. They sold their BMW, their motor home and furnishings to pay off $42,000 in credit card debt.
They have followed the program faithfully for four years, and can account for every dollar of their $140,000 income. They use cash only, believing credit is not biblically sound.
The Macfarlanes plan to pay off their house soon, saying they don't want to grow old with a mortgage payment.
While paying down debt is admirable, some analysts suggest there are limits.
Dave Ramsey "creates this Mayberry world, but this is a much more sophisticated society," said Robert Manning, professor of consumer finance at Rochester Institute of Technology and author of "Credit Card Nation: The Consequences of America's Addiction to Credit."
"The reality is that we live in society with tax advantages and where credit should be used effectively - not banned."
Manning praised churches for promoting financial education but cautioned that religious groups also are acting out of self-interest. "If these people are in debt, they can't tithe, and that means the church feels it," he said.
"These programs teach that you should tithe first."
Friday, June 6, 2008
Newest National Debt Statistics posted - May 08
The newest National Debt statistics for May 2008 are now posted at www.TreasuryDirect.gov
As of June 5, 2008, the National Debt now stands at:
Debt Held by Public: $5,307,426,828,369.59
Intragovernmental Holdings: $4,100,067,474,477.98
Total Debt: $9,407,494,302,847.57
Interest payments, May 2008: $22,388,495,898.10
Total interest FY 2008: $266,292,148,866.57
Public Contributions
APRIL 2008 $ 511,105.60
Total FY 2008 $1,916,391.41
As of June 5, 2008, the National Debt now stands at:
Debt Held by Public: $5,307,426,828,369.59
Intragovernmental Holdings: $4,100,067,474,477.98
Total Debt: $9,407,494,302,847.57
Interest payments, May 2008: $22,388,495,898.10
Total interest FY 2008: $266,292,148,866.57
Public Contributions
APRIL 2008 $ 511,105.60
Total FY 2008 $1,916,391.41
Thursday, June 5, 2008
AP: Foreclosures hit a record high - and more coming
Thursday June 5, 4:30 pm ET
By Jeannine Aversa, AP Economics Writer
Foreclosures surge to a record high -- late payments, too, signaling worse to come
WASHINGTON (AP) -- The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too -- an alarming sign that the housing crisis and its damage to the national economy may only get worse.
Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices -- extending a vicious cycle.
Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away.
In fact, Americans' equity in their homes -- usually their single biggest asset -- now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up.
Watching their home values sink, consumers have pulled back on spending, a factor in the economy's slowdown. Buoyed by rebate checks, shoppers did get back in the buying groove in May, but analysts predict that consumers -- pounded by galloping gasoline prices -- will still be cautious.
"The economy is treading water, and the housing market is one of the undercurrents trying to pull it down," said Stuart Hoffman, chief economist at PNC Financial Services Group.
Nearly 1 percent, or roughly 447,723 loans, fell into foreclosure during the January-to-March period, the Mortgage Bankers Association said Thursday in its quarterly snapshot of the mortgage market. That surpassed the previous high of 0.83 percent over the last three months in 2007.
The report also found that more homeowners slipped behind on their monthly payments. The delinquency rate jumped to 6.35 percent -- or 2.87 million loans -- compared with 5.82 percent for the previous three months. Payments are considered delinquent if they are 30 or more days past due.
Both the rate of new foreclosures and late payments were the highest on record going back to 1979.
With prices expected to keep dropping, foreclosures and late payments "are going to continue to go up," Jay Brinkmann, the association's vice president of research and economics, told The Associated Press.
Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.
The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high. Late payments rose to 22.07 percent from 20.02 percent, the previous high.
The association's survey covers just over 45 million home loans.
More problems also cropped up with loans to more creditworthy borrowers.
The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payments rose to 3.71 percent from 3.24 percent.
The numbers were higher for those prime borrowers with adjustable rate mortgages. Initially low rates reset to much higher ones, making it difficult, if not impossible, for homeowners to keep up with monthly mortgage payments. The proportion of those loans falling into foreclosure jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.
"The number one problem is the drop in home prices," Brinkmann said. Declining prices, especially in newer built areas, "are hurting people's ability to recover when they run into trouble -- a divorce or loss of job," he said. "In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure."
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.
"These extra inventories from foreclosures complicate what is already a heavily built situation," said David Seiders, chief economist at the National Association of Home Builders.
After a five-year boom, the housing market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.
Nearly 8.5 million homeowners had negative or no equity in their homes at the end of March, representing more than 16 percent of all homeowners with mortgages, according to Mark Zandi, chief economist at Moody's Economy.com. He estimates that will increase to 12.2 million, or almost one out of every four homeowners, by the end of June.
Nearly three in 10 people say they are worried their home's value will decline over the next two years, according to a recent Associated Press-AOL Money & Finance Poll. Sixty percent said they definitely won't buy a home in the next two years. That's up from 53 percent two years ago.
As foreclosures and late payments climbed, financial companies took multibillion-dollar losses when their investments in mortgage-backed securities soured. A credit crisis spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.
All those troubles have pushed the economy to the brink of a recession. Employers, cutting costs, have eliminated more than a quarter-million jobs in the first four months of this year.
To bolster the economy, the Federal Reserve made aggressive interest rate cuts. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank's rate-cutting campaign is coming to an end.
The Bush administration has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
A congressional plan that includes a foreclosure prevention program has stalled as lawmakers figure out how to pay for it.
Associated Press Business Writer J.W. Elphinstone contributed to this report.
Mortgage Bankers Association: http://www.mbaa.org/
By Jeannine Aversa, AP Economics Writer
Foreclosures surge to a record high -- late payments, too, signaling worse to come
WASHINGTON (AP) -- The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too -- an alarming sign that the housing crisis and its damage to the national economy may only get worse.
Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices -- extending a vicious cycle.
Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away.
In fact, Americans' equity in their homes -- usually their single biggest asset -- now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up.
Watching their home values sink, consumers have pulled back on spending, a factor in the economy's slowdown. Buoyed by rebate checks, shoppers did get back in the buying groove in May, but analysts predict that consumers -- pounded by galloping gasoline prices -- will still be cautious.
"The economy is treading water, and the housing market is one of the undercurrents trying to pull it down," said Stuart Hoffman, chief economist at PNC Financial Services Group.
Nearly 1 percent, or roughly 447,723 loans, fell into foreclosure during the January-to-March period, the Mortgage Bankers Association said Thursday in its quarterly snapshot of the mortgage market. That surpassed the previous high of 0.83 percent over the last three months in 2007.
The report also found that more homeowners slipped behind on their monthly payments. The delinquency rate jumped to 6.35 percent -- or 2.87 million loans -- compared with 5.82 percent for the previous three months. Payments are considered delinquent if they are 30 or more days past due.
Both the rate of new foreclosures and late payments were the highest on record going back to 1979.
With prices expected to keep dropping, foreclosures and late payments "are going to continue to go up," Jay Brinkmann, the association's vice president of research and economics, told The Associated Press.
Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.
The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high. Late payments rose to 22.07 percent from 20.02 percent, the previous high.
The association's survey covers just over 45 million home loans.
More problems also cropped up with loans to more creditworthy borrowers.
The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payments rose to 3.71 percent from 3.24 percent.
The numbers were higher for those prime borrowers with adjustable rate mortgages. Initially low rates reset to much higher ones, making it difficult, if not impossible, for homeowners to keep up with monthly mortgage payments. The proportion of those loans falling into foreclosure jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.
"The number one problem is the drop in home prices," Brinkmann said. Declining prices, especially in newer built areas, "are hurting people's ability to recover when they run into trouble -- a divorce or loss of job," he said. "In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure."
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.
"These extra inventories from foreclosures complicate what is already a heavily built situation," said David Seiders, chief economist at the National Association of Home Builders.
After a five-year boom, the housing market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.
Nearly 8.5 million homeowners had negative or no equity in their homes at the end of March, representing more than 16 percent of all homeowners with mortgages, according to Mark Zandi, chief economist at Moody's Economy.com. He estimates that will increase to 12.2 million, or almost one out of every four homeowners, by the end of June.
Nearly three in 10 people say they are worried their home's value will decline over the next two years, according to a recent Associated Press-AOL Money & Finance Poll. Sixty percent said they definitely won't buy a home in the next two years. That's up from 53 percent two years ago.
As foreclosures and late payments climbed, financial companies took multibillion-dollar losses when their investments in mortgage-backed securities soured. A credit crisis spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.
All those troubles have pushed the economy to the brink of a recession. Employers, cutting costs, have eliminated more than a quarter-million jobs in the first four months of this year.
To bolster the economy, the Federal Reserve made aggressive interest rate cuts. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank's rate-cutting campaign is coming to an end.
The Bush administration has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
A congressional plan that includes a foreclosure prevention program has stalled as lawmakers figure out how to pay for it.
Associated Press Business Writer J.W. Elphinstone contributed to this report.
Mortgage Bankers Association: http://www.mbaa.org/
Sunday, May 25, 2008
When the economy revives, how will we know?
The following appeared on page 7D in the Sunday May, 25, 2008 issue of the St. Paul Pioneer Press.
By Jeannine Aversa
Associated Press
WASHINGTON - With any luck, the second half of this year will be better than the so-far rocky first half. The Federal Reserve chief hopes that is the case. So does President Bush.
For the rest of us mere mortals, it feels like the pain is getting worse.
When the economy begins to snap out of its funk, how will we know?
Like calling a recession, pin-pointing the turnaround can be as much art as science. Economists agree there could be some strong signals to look for, however: A calmer stock market, an end to falling home prices and more jobs being created.
We're not there yet.
The economy by all accounts is suffering through difficult times, although some economists have backed off the recession talk. Economic growth has slowed sharply and employers have cut jobs for four months in a row as problems in housing, credit and financial markets forced skittish people and businesses alike to hunker down.
Even though a Labor Department report last week showed the number of newly laid off workers filing for unemployment benefits dropped to the lowest level in a month, claims remain high enough to indiate the labor makret is sluggish.
Still, there's hope that the economy's growth will begin picking up later this year.
Experts will be looking at a variety of barometers to mark the arrival of a rebound, but it's by no means definitive or foolproof.
One important indicator is the stock market. The turbulence taht has engulfed Wall Street since last summer and hit a crisis point with the near collapse of investment firm Bear Stearns, has calmed somewhat, but the situation is still "far from normal," Fed Chairman Ben Bernanke recently observed.
The Dow Jones industrial average, for instance, has clawed its way out of a recent bottom - 11,740.15 - hit in March. However, the index is still under 13,000, well below its peak of 14,087.55 set in early October of last year. Financial markets remain fragile.
Investors are looking ahead - at the economy's prospects and individual businesses - when they make investment decisions and are buying or selling stocks.
"The canary in the coal mine is really financial markets," said Sung Won Sohn, an economics professor at California State University. "The stock market recovery almost always precedes the economic recovery by about six months or so. The exception was in the 2001 recession. Because of the dot-com crisis, the stock market was so badly battered it took a while for it to get back to full speed," Sohn said. By his count, after the 2001 recession, the stock market lagged the economic recovery by one year.
In the current bout of economic troubles, though, fallout from the 2-year-old housing collapse and subsequent credit and financial problems has driven the pullback by consumers, businesses and Wall Street.
That's why economists - this time around - will be looking for signs of stabilization in the housing market. Specifically, house prices will have to stop falling or at least decline at a slower pace in many parts of the country. As many Americans have watched their single-biggest asset - their home - shrink in value, they have become much more cautious in the spending, contributing to the economy's slowdown.
On Thursday, the Office of Federal Housing Enterprise Oversight said U.S. home prices fell 3.1 percent year-over-year in the first quarter, the largest drop in the 17-year history of tracking the data.
House-price improvements also are important to a return to stability because house prices figure into the value of a host of securities, such as mortgage securities and derivatives.
And, improving house prices also would ripple through credit markets, making lenders more willing to make loans to people and businesses. That, in turn, would help bolster confidence in financial markets, economists said.
"Until the housing and credit markets improve, businesses and consumers will be doubting Thomases - there is not question," said Brian Bethune, economist at Global Insight.
Forecasters at the National Association for Business Economics believe the worst of the housing slump and the credit crunch might end this year. The forecasters are hopeful that home sales will hit bottom this year. House prices, though, are still expected to drop this year and next. Some predict house prices won't turn up until the spring selling season of 2010.
Analysts also will be looking for zooming gasoline and other energy prices to settle down. Gasoline is approaching $4 a gallon on average nationally and oil has blown past $130 a barrel, from $100 at the beginning of the year. An easing of high food and other commodity prices also would be welcomed. High prices, especially for energy, are taking a bit out of paychecks, undermining consumer purchasing power, and putting a squeeze on businesses' profits.
Unlike the recessions in 2001 and 1990-1991, people, more so than businesses, are bearing the brunt of the economy's current woes.
"It is almost unprecedented in the post World War II perioud to have a recession be driven by a pullback in consumer spending, versus a pullback in business spending," said Mark Zandi, chief economist at Moody's Economy.com "This one is unique in that sense. Businesses are pulling back but they are more reacting to consumers." He's among those in the recession camp.
U.S. households are more in debt and under greater pressure to restrain spending. Zandi said the share of households' after-tax income that goes to serving their financial obligations was 19.3 percent in 2007. That was up from 17.9 percent in 2000 and 17.2 percent in 1989 - the years preceding the last two recessions.
In contrast, a debt-burden measure for nonfinancial businesses shows that 10 percent of their cash flow is going to interest payments on debt, Zandi said. That's down from around 25 percent in 2001 and 30 percent in the 1990-1991 recession, he said.
Against that backdrop, another barometer for economic revival would be a turn-around in sagging consumer confidence. The hope: if people cast off their gloomy mind-set, they'll be more likely to boost spending, which would energize the national economy.
The Fed has been hoping to turn consumer psychology and thus heal the economy through its most aggressive rate-cutting campaign in decades. The Bush administration is counting on those powerful rate reductions along with billions of dollars worth of rebate checks to lift the U.S. out of its slump in the second half of this year.
Fed officials viewed economic activity as "likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of the year," according to Fed documents released Wednesday. Still, economic growth for the yar as a whole is likely to be feeble.
Even if that second-half rebound happens, businesses are likely to remain cautious in hiring, waiting for signs that any recovery has real staying power. The unemployment rate, now at 5 percent, could rise to 6 percent or higher next year, some economists said.
So the job market needs to get back to full throttle before the economy is truly back on firm footing. After the last two recessions, the country was still losing jobs as the economy struggled to recover.
Some believe the country will experience a "W" shaped recovery. That's wehre the economy picks up with the help of the stimulus, loses steam as that boost fades and then picks up again in the second half of 2009.
It's hard to say with certainty how it will turn out. Each period of economic stress "has its own kind of biography," Bethune said.
By Jeannine Aversa
Associated Press
WASHINGTON - With any luck, the second half of this year will be better than the so-far rocky first half. The Federal Reserve chief hopes that is the case. So does President Bush.
For the rest of us mere mortals, it feels like the pain is getting worse.
When the economy begins to snap out of its funk, how will we know?
Like calling a recession, pin-pointing the turnaround can be as much art as science. Economists agree there could be some strong signals to look for, however: A calmer stock market, an end to falling home prices and more jobs being created.
We're not there yet.
The economy by all accounts is suffering through difficult times, although some economists have backed off the recession talk. Economic growth has slowed sharply and employers have cut jobs for four months in a row as problems in housing, credit and financial markets forced skittish people and businesses alike to hunker down.
Even though a Labor Department report last week showed the number of newly laid off workers filing for unemployment benefits dropped to the lowest level in a month, claims remain high enough to indiate the labor makret is sluggish.
Still, there's hope that the economy's growth will begin picking up later this year.
Experts will be looking at a variety of barometers to mark the arrival of a rebound, but it's by no means definitive or foolproof.
One important indicator is the stock market. The turbulence taht has engulfed Wall Street since last summer and hit a crisis point with the near collapse of investment firm Bear Stearns, has calmed somewhat, but the situation is still "far from normal," Fed Chairman Ben Bernanke recently observed.
The Dow Jones industrial average, for instance, has clawed its way out of a recent bottom - 11,740.15 - hit in March. However, the index is still under 13,000, well below its peak of 14,087.55 set in early October of last year. Financial markets remain fragile.
Investors are looking ahead - at the economy's prospects and individual businesses - when they make investment decisions and are buying or selling stocks.
"The canary in the coal mine is really financial markets," said Sung Won Sohn, an economics professor at California State University. "The stock market recovery almost always precedes the economic recovery by about six months or so. The exception was in the 2001 recession. Because of the dot-com crisis, the stock market was so badly battered it took a while for it to get back to full speed," Sohn said. By his count, after the 2001 recession, the stock market lagged the economic recovery by one year.
In the current bout of economic troubles, though, fallout from the 2-year-old housing collapse and subsequent credit and financial problems has driven the pullback by consumers, businesses and Wall Street.
That's why economists - this time around - will be looking for signs of stabilization in the housing market. Specifically, house prices will have to stop falling or at least decline at a slower pace in many parts of the country. As many Americans have watched their single-biggest asset - their home - shrink in value, they have become much more cautious in the spending, contributing to the economy's slowdown.
On Thursday, the Office of Federal Housing Enterprise Oversight said U.S. home prices fell 3.1 percent year-over-year in the first quarter, the largest drop in the 17-year history of tracking the data.
House-price improvements also are important to a return to stability because house prices figure into the value of a host of securities, such as mortgage securities and derivatives.
And, improving house prices also would ripple through credit markets, making lenders more willing to make loans to people and businesses. That, in turn, would help bolster confidence in financial markets, economists said.
"Until the housing and credit markets improve, businesses and consumers will be doubting Thomases - there is not question," said Brian Bethune, economist at Global Insight.
Forecasters at the National Association for Business Economics believe the worst of the housing slump and the credit crunch might end this year. The forecasters are hopeful that home sales will hit bottom this year. House prices, though, are still expected to drop this year and next. Some predict house prices won't turn up until the spring selling season of 2010.
Analysts also will be looking for zooming gasoline and other energy prices to settle down. Gasoline is approaching $4 a gallon on average nationally and oil has blown past $130 a barrel, from $100 at the beginning of the year. An easing of high food and other commodity prices also would be welcomed. High prices, especially for energy, are taking a bit out of paychecks, undermining consumer purchasing power, and putting a squeeze on businesses' profits.
Unlike the recessions in 2001 and 1990-1991, people, more so than businesses, are bearing the brunt of the economy's current woes.
"It is almost unprecedented in the post World War II perioud to have a recession be driven by a pullback in consumer spending, versus a pullback in business spending," said Mark Zandi, chief economist at Moody's Economy.com "This one is unique in that sense. Businesses are pulling back but they are more reacting to consumers." He's among those in the recession camp.
U.S. households are more in debt and under greater pressure to restrain spending. Zandi said the share of households' after-tax income that goes to serving their financial obligations was 19.3 percent in 2007. That was up from 17.9 percent in 2000 and 17.2 percent in 1989 - the years preceding the last two recessions.
In contrast, a debt-burden measure for nonfinancial businesses shows that 10 percent of their cash flow is going to interest payments on debt, Zandi said. That's down from around 25 percent in 2001 and 30 percent in the 1990-1991 recession, he said.
Against that backdrop, another barometer for economic revival would be a turn-around in sagging consumer confidence. The hope: if people cast off their gloomy mind-set, they'll be more likely to boost spending, which would energize the national economy.
The Fed has been hoping to turn consumer psychology and thus heal the economy through its most aggressive rate-cutting campaign in decades. The Bush administration is counting on those powerful rate reductions along with billions of dollars worth of rebate checks to lift the U.S. out of its slump in the second half of this year.
Fed officials viewed economic activity as "likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of the year," according to Fed documents released Wednesday. Still, economic growth for the yar as a whole is likely to be feeble.
Even if that second-half rebound happens, businesses are likely to remain cautious in hiring, waiting for signs that any recovery has real staying power. The unemployment rate, now at 5 percent, could rise to 6 percent or higher next year, some economists said.
So the job market needs to get back to full throttle before the economy is truly back on firm footing. After the last two recessions, the country was still losing jobs as the economy struggled to recover.
Some believe the country will experience a "W" shaped recovery. That's wehre the economy picks up with the help of the stimulus, loses steam as that boost fades and then picks up again in the second half of 2009.
It's hard to say with certainty how it will turn out. Each period of economic stress "has its own kind of biography," Bethune said.
Sometimes, our money illusions are shocking
The following Real World Economics column appeared on page 7D of the Sunday, May 25, 2008 issue of the St. Paul Pioneer Press.
By Ed Lotterman
I don't have a Ph.D., so perhaps that is why I occasionally suffer from "money delusion." But if other average Joes would be shocked by expensive fertilizer, as I recently was, some economic theories are on shaky ground.
"Money illusion" occurs when people make decisions based on nominal prices - the dolar figure printed on the invoice - rather than on "real" prices that are adjusted for inflation.
Money illusion is irrational. Many economists believe people are too samrk to be fooled by inflation in this way. Important theories depend on this belief.
I wasn't rational when I bought fertilizer one day about a week ago. I'm trying to keep alive some spruce planted in soil with a high pH. A forester friend said they might survive better if I acidified the soil around the tree.
One way to do that is with sulfur. The fertilizer-grade sulfer I bought when farming 30 years ago was a dusty powder. So I thought my current applications system - a five-gallon bucket and a tomato can - would work better if I mixed the sulfur with other ordinary fertilizer.
My local co-op mixed 50 pounds of sulfur with 300 pounds of potassium chloride. Now 350 pounds of fertilizer makes a very small pile in a pickup bed, so I was taken aback when the bill was $108.50. It was 27 cents-per-poun potash rather than 55-cent sulfur that tripped me up.
That was irrational. I am an economist. Every year I teach many students to adjust for inflation using price indexes. I make such calculations all the time. Yet I fell into the money illusion trap.
If someone had asked me what I used to pay for potash, I would have said about $90 a ton. How much higher might it be now? Perhaps it tripled, to $270 a ton.
It was exactly twice that, $540 a ton. I might have made a different decision if I had realized the bill would be that high.
Do workers make similar bad decisions about wages they accept? Do consumers ignore inflation when they consider alternate purchases or investments? Many economists, especially the monetarists and rational expectationists who are highly critical of government attempts to manage the economy, think not. Their theoretical models depend on nearly everyone being both well-informed and rational.
Would my naive money illusions change these theorists' minds? Probably not. They could argue that I was confused about a small item in our household spending, a minor hobby. A knitter returning to her craft after a hiatus of a few years similarly might be surprised by the price of yarn. But both of us, they would argue, probably know how our salaries are doing compared to inflation and how the prices of milk, bread and chicken breasts have changed.
Perhaps. Macroeconomic theories based on hyper-rationality were all the craze in the 1980s. More recently, microeconomists examining actual human behavior find that money illusion happens. Psychologist Amos Tversky provided strong evidence of this. If not for his untimely death, he would have shared the 2002 Nobel Prize for Economics with Daniel Kahneman.
This may seem neither here nor there for most people. In the meantime I need to scare up a couple bucks and run to the corner store for a gallon of milk.
By Ed Lotterman
I don't have a Ph.D., so perhaps that is why I occasionally suffer from "money delusion." But if other average Joes would be shocked by expensive fertilizer, as I recently was, some economic theories are on shaky ground.
"Money illusion" occurs when people make decisions based on nominal prices - the dolar figure printed on the invoice - rather than on "real" prices that are adjusted for inflation.
Money illusion is irrational. Many economists believe people are too samrk to be fooled by inflation in this way. Important theories depend on this belief.
I wasn't rational when I bought fertilizer one day about a week ago. I'm trying to keep alive some spruce planted in soil with a high pH. A forester friend said they might survive better if I acidified the soil around the tree.
One way to do that is with sulfur. The fertilizer-grade sulfer I bought when farming 30 years ago was a dusty powder. So I thought my current applications system - a five-gallon bucket and a tomato can - would work better if I mixed the sulfur with other ordinary fertilizer.
My local co-op mixed 50 pounds of sulfur with 300 pounds of potassium chloride. Now 350 pounds of fertilizer makes a very small pile in a pickup bed, so I was taken aback when the bill was $108.50. It was 27 cents-per-poun potash rather than 55-cent sulfur that tripped me up.
That was irrational. I am an economist. Every year I teach many students to adjust for inflation using price indexes. I make such calculations all the time. Yet I fell into the money illusion trap.
If someone had asked me what I used to pay for potash, I would have said about $90 a ton. How much higher might it be now? Perhaps it tripled, to $270 a ton.
It was exactly twice that, $540 a ton. I might have made a different decision if I had realized the bill would be that high.
Do workers make similar bad decisions about wages they accept? Do consumers ignore inflation when they consider alternate purchases or investments? Many economists, especially the monetarists and rational expectationists who are highly critical of government attempts to manage the economy, think not. Their theoretical models depend on nearly everyone being both well-informed and rational.
Would my naive money illusions change these theorists' minds? Probably not. They could argue that I was confused about a small item in our household spending, a minor hobby. A knitter returning to her craft after a hiatus of a few years similarly might be surprised by the price of yarn. But both of us, they would argue, probably know how our salaries are doing compared to inflation and how the prices of milk, bread and chicken breasts have changed.
Perhaps. Macroeconomic theories based on hyper-rationality were all the craze in the 1980s. More recently, microeconomists examining actual human behavior find that money illusion happens. Psychologist Amos Tversky provided strong evidence of this. If not for his untimely death, he would have shared the 2002 Nobel Prize for Economics with Daniel Kahneman.
This may seem neither here nor there for most people. In the meantime I need to scare up a couple bucks and run to the corner store for a gallon of milk.
Fed researchers say rate cuts risk spurring inflation
The following appeared on page 2C of the Saturday May 24, 2008 issue of the St. Paul Pioneer Press.
The Federal Reserve's interest rate reductions risk "unhinging" long-term market expectations for monetary policy and inflation, according to researchers at the Fed's district bank in Minneapolis.
Expectations for the stability of long-term interest rates are "particularly relevant given the recent conflict at the Fed between fighting rising inflation and stimulating a potentially stagnating economy," Andrew Atkeson, a consultant to the bank, and monetary adviser Patrick Kehoe wrote in a paper that appears on the Minneapolis Fed's Web site.
The economists echoes concerns of Fed district bank presidents, in cluding Richard Fisher of Dallas and Charles Plosser of Philadelphia, who recently said the central bank should avoid fueling inflation while trying to revive bank lending and economic growth following the collapse of the subprime-mortgage market.
Plosser and Fisher dissented from the decision by the central bank last month to pare the target rate for overnight loans between banks by 0.25 percentage point. The Fed has cut the rate by 2.25 percentage points to 2 percent this year in the most aggressive reductions in two decades.
The Federal Reserve's interest rate reductions risk "unhinging" long-term market expectations for monetary policy and inflation, according to researchers at the Fed's district bank in Minneapolis.
Expectations for the stability of long-term interest rates are "particularly relevant given the recent conflict at the Fed between fighting rising inflation and stimulating a potentially stagnating economy," Andrew Atkeson, a consultant to the bank, and monetary adviser Patrick Kehoe wrote in a paper that appears on the Minneapolis Fed's Web site.
The economists echoes concerns of Fed district bank presidents, in cluding Richard Fisher of Dallas and Charles Plosser of Philadelphia, who recently said the central bank should avoid fueling inflation while trying to revive bank lending and economic growth following the collapse of the subprime-mortgage market.
Plosser and Fisher dissented from the decision by the central bank last month to pare the target rate for overnight loans between banks by 0.25 percentage point. The Fed has cut the rate by 2.25 percentage points to 2 percent this year in the most aggressive reductions in two decades.
AP: Existing home sales continue slide in April
The following appeared on page 2C of the Saturday May 24, 2008 issue of the St. Paul Pioneer Press.
Existing home sales fell for the eighth time in the past nine months, a string of weakness expected to continue as the housing industry, mired in its worst slump in decades, battles falling home prices, tight lending conditions and a weak economy.
The National Association of Realtors reported Friday that existing home sales dropped by 1 percent to a seasonally adjusted annual rate of 4.89 million units, matching the all time low set in January. These records, which cover single-family homes and condominiums, go back to 1999.
The median price for an existing home dropped 8 percent, compared with a year ago, to $202,300. It was the second largest price decline on record and analysts predicted prices would fall further in the months ahead given the huge backlog of unsold single-family homes.
The number of unsold single-family homes in April rose to a 10.7 months suply at the current sales pace, the highest level since June 1985.
As prices fall, it keeps more people sitting on the fence, analysts said, because prospective buyers don't want to purchase an asset that has the potential to fall further in price if they delay making the purchase.
Existing home sales fell for the eighth time in the past nine months, a string of weakness expected to continue as the housing industry, mired in its worst slump in decades, battles falling home prices, tight lending conditions and a weak economy.
The National Association of Realtors reported Friday that existing home sales dropped by 1 percent to a seasonally adjusted annual rate of 4.89 million units, matching the all time low set in January. These records, which cover single-family homes and condominiums, go back to 1999.
The median price for an existing home dropped 8 percent, compared with a year ago, to $202,300. It was the second largest price decline on record and analysts predicted prices would fall further in the months ahead given the huge backlog of unsold single-family homes.
The number of unsold single-family homes in April rose to a 10.7 months suply at the current sales pace, the highest level since June 1985.
As prices fall, it keeps more people sitting on the fence, analysts said, because prospective buyers don't want to purchase an asset that has the potential to fall further in price if they delay making the purchase.
Friday, May 23, 2008
Dave Ramsey's Thoughts on Gas Prices
Thoughts on Gas Prices
By Dave Ramsey
www.daveramsey.com
Gasoline has gone up 26% since this time last year. SHOCKER! Since most of us are used to daily commutes, running the kids here and there for their various activities, and visiting friends and family, this price increase is affecting us. The Consumer Price Index figures say this is the number one thing that's gone up in our household budgets this year — and it's only May!
"But there's nothing I can do," some say. I say, "Oh, yes there is!"
It's time to revisit the budget.
When I tell people this, some tell me they've crunched their budgets as much as they can. Then I ask, "How much is your car payment? ... How much is your monthly cable or satellite bill? ... Is the Starbucks drive-thru a regular stop on your morning commute?"
I hate to break it to you, but new cars, cable, and Starbucks are luxuries, NOT necessities! You can easily survive with a used (and paid-for!) car, no cable reality shows, and coffee made at home. Just think of all that money you could use to pay off debt and put toward your gasoline money for the month if you did just those 3 things!
Earlier this month, an algebra teacher in Michigan sent me a great email that I read on the radio show. She wrote:
Dave, I often give my math students this calculation to figure out. A typical latte costs $3.59 for 16 oz. That's 22 cents per ounce or $28.72 a gallon! Ask your listeners if they've drank a gallon of latte lately! Read the blog
HOLY COW! If that doesn't put things into perspective, I don't know what will!
First Things First
You must remember there IS a difference between needs and wants in life. The first things at the top of your budget should be your needs: shelter, food, transportation, clothing, and utilities. If you currently go to the movie theatre every weekend or have a Hawaiian vacation at the top of your list when you struggle to pay the electric bill, your priorities are out of wack. Don't sacrifice your needs to finance your wants. If you do, it will catch up with you and you'll regret it.
Plan Ahead
You can also strategically plan ahead when running errands and commuting to work. If you go to the grocery store twice a week, reorganize your list so you only have to go once a week. If you have a lot of errands to run, plan your route ahead of time so you're not retracing your steps around town. You could also organize a carpool with some of your coworkers who live near you.
June will be here before you know it, so go have a Budget Committee Meeting right now to see where you can free up some more money — because every little bit adds up when gas is $4 a gallon!
By Dave Ramsey
www.daveramsey.com
Gasoline has gone up 26% since this time last year. SHOCKER! Since most of us are used to daily commutes, running the kids here and there for their various activities, and visiting friends and family, this price increase is affecting us. The Consumer Price Index figures say this is the number one thing that's gone up in our household budgets this year — and it's only May!
"But there's nothing I can do," some say. I say, "Oh, yes there is!"
It's time to revisit the budget.
When I tell people this, some tell me they've crunched their budgets as much as they can. Then I ask, "How much is your car payment? ... How much is your monthly cable or satellite bill? ... Is the Starbucks drive-thru a regular stop on your morning commute?"
I hate to break it to you, but new cars, cable, and Starbucks are luxuries, NOT necessities! You can easily survive with a used (and paid-for!) car, no cable reality shows, and coffee made at home. Just think of all that money you could use to pay off debt and put toward your gasoline money for the month if you did just those 3 things!
Earlier this month, an algebra teacher in Michigan sent me a great email that I read on the radio show. She wrote:
Dave, I often give my math students this calculation to figure out. A typical latte costs $3.59 for 16 oz. That's 22 cents per ounce or $28.72 a gallon! Ask your listeners if they've drank a gallon of latte lately! Read the blog
HOLY COW! If that doesn't put things into perspective, I don't know what will!
First Things First
You must remember there IS a difference between needs and wants in life. The first things at the top of your budget should be your needs: shelter, food, transportation, clothing, and utilities. If you currently go to the movie theatre every weekend or have a Hawaiian vacation at the top of your list when you struggle to pay the electric bill, your priorities are out of wack. Don't sacrifice your needs to finance your wants. If you do, it will catch up with you and you'll regret it.
Plan Ahead
You can also strategically plan ahead when running errands and commuting to work. If you go to the grocery store twice a week, reorganize your list so you only have to go once a week. If you have a lot of errands to run, plan your route ahead of time so you're not retracing your steps around town. You could also organize a carpool with some of your coworkers who live near you.
June will be here before you know it, so go have a Budget Committee Meeting right now to see where you can free up some more money — because every little bit adds up when gas is $4 a gallon!
Monday, May 19, 2008
Treasury head sees economy rebounding in late 2008
The following appeared on page 2C of the Saturday May 17, 2008 issue of the St. Paul Pioneer Press.
Treasury Secretary Henry Paulson said Friday that financial markets are "considerably calmer" now than they were two months ago. He predicted the economy will rebound by the second half of this year. In a speech to business executives in Washington, Paulson said the drag from housing, which he characterized as still the biggest risk to the economy, will soon be lessened by nearly $100 billion in economic stimulus payments to U.S. households.
"The fiscal stimulus will provide support to the economy as we weather the housing correction, capital-markets turmoil and higher energy and food prices," Paulson said in his prepared remarks.
The economy has been pushed to the brink of a recession by a prolonged housing slump, a credit crisis, soaring energy prices and more than a quarter-million layoffs over the past four months. In his remakrs, Paulson never used the word recession, although many private economists believe the country is in one.
Treasury Secretary Henry Paulson said Friday that financial markets are "considerably calmer" now than they were two months ago. He predicted the economy will rebound by the second half of this year. In a speech to business executives in Washington, Paulson said the drag from housing, which he characterized as still the biggest risk to the economy, will soon be lessened by nearly $100 billion in economic stimulus payments to U.S. households.
"The fiscal stimulus will provide support to the economy as we weather the housing correction, capital-markets turmoil and higher energy and food prices," Paulson said in his prepared remarks.
The economy has been pushed to the brink of a recession by a prolonged housing slump, a credit crisis, soaring energy prices and more than a quarter-million layoffs over the past four months. In his remakrs, Paulson never used the word recession, although many private economists believe the country is in one.
Saturday, May 17, 2008
Repo Madness
The following appeared on page 1A of the Tuesday May 13, 2008 issue of the St. Paul Pioneer Press.
Late on a car payment? Beware. Delinquencies are rising, and impatient lenders aren't waiting long to call out the tow trucks.
By Jennifer Bjorhus and Nicole Garrison-Sprenger
Pioneer Press
It's 3 a.m. - do you know where your car is? If you're late on payments, your local towing company probably does.
High and rising auto-loan delinquencies, now above 2001 recession levels by one measure, are speeding u action in the repossession lane. Some Twin Cities car and truck towing companies are reporting a significant uptick in orders from lenders, which they attribute to mounting economic ressures on stretched borrowers.
But accelerating debt collection by lenders appears to be another factor in the rise of repossessions. The country's top auto lender, for instance, said it is cracking down on delinquencies and "moving up the timeline" on recovering unpaid debt.
It's not just the auto industry that's getting more aggressive. Some department stores and retailers are accelerating action on delinquent accounts, according to a Twin Cities debt collectors association, because they too need the cash to pay bills.
All Corey Albertson knows is business is hot after a slow winter.
"Probably in the last four weeks our fax machine started kind of getting bombarded with more repossessions," said Albertson, president of American Towing and Recovery in Hastings.
Auto lenders pay Albertson $300 to $500 to tow away cars and trucks, typically after borrowers are 90 days late on payments. Like other companies, his crew usually works from 2 a.m. to 5 a.m.
"That way, most people are in bed and don't see us coming," Albertson said.
Many of the car owners Albertson deals with are families with two or more vehicles who are prioritizing bills and let the extra car slide, although he recently repo'd the cars of a husband/wife Realtor team in Shakopee who lost their Cadillac and Jaguar. Albertson said he's repossessing more SUVs and trucks than before, which he attributes to the escalating cost of filling up the tanks.
Across the board, nearly all the auto lenders Albertson works with have boosted orders recently, he said. But he's seen particular growth with First 1 Financial Corp., a subprime auto financer out of Massachusetts. First 1 Financial didn't return phone calls.
Missy McMurray, owner of an American Lenders Service Co. franchise in St. Paul and Hudson, Wis., said her Minnesota vehicle repo accounts nearly doubled in the first quarter from a year ago. There's been a notable increase in semi-truck repos, said McMurray, who also attributes it to rising fuel costs. McMurray declined to name the lenders she works with.
"I just think more people are falling behind," she said.
Some auto lenders have responded accordingly.
Bobbie Britting, senior analyst in consumer lending at Needham, Mass.-based researcher TowerGroup, said auto lenders are "not waiting as long as they used to" on delinquencies. That varies by the type of portfolio, she said, such as whether it's prime or subprime loans to borrowers with poorer credit.
Detroit-based GMAC Financial Services, the nation's largest auto lender, told analysts in a February conference call that it has added 400 collections associates and has accelerated contact with borrowers. Spokesman Mike Stoller said in an interview that most auto finance companies contact consumers with a letter or call after a borrower is 30 to 45 days late on a payment. If payment is still due after 90 days, lenders turn to more aggressive tactics.
"While repossession isn't likely to happen on day 91, that kind of activity comes into play," Stoller said.
Banks are in "clean-up mode," Mike Jackson, chief executive of Fort Lauderdale, Fla.-based AutoNation, told analysts two weeks ago. Lenders are "accelerating repossessions on any vehicle that they see out there that has a question mark over it. They are proactively trying to deal with it now rather than later," said Jackson, whose company is the country's largest auto dealer.
Along with the uptick go disputes. At least one Twin Cities attorney reports more wrongful repo calls coming in. Tom Lyons Jr., president of the Consumer Justice Center, a Vadnais Heights law firm, said he's preparing to file two such cases. In one, a Hugo woman alleges she climbed into her car in her attached garage to go to work early one recent morning, and after she opened the garage door, a repo crew raced in and dragged her out of the car.
"I think the banks are getting more aggressive on their willingness to wait for consumers to catch u," Lyons said.
Not everyone is rolling in new orders. "The business is either chicken one day or feathers the next," said Dale Hedtke, owner of Midwest Recovery Bureau Inc in Maple Grove.
National Asset Recovery Group in Wayzata, which specializes in repo'ing heavy equipment, aircraft, RVs and large boats, said business is up, but the repo trends are different for larger vehicles.
President Dan Paselk said his boat business is up at least 15 percent from last year. He attributes most of the surge, at the moment, not to eager lenders but to the fact boat owners recently hauled their big toys out of storage, where repo crews cannot easily get to them and have them parked on the water.
Lenders are less aggressive about repossessing such large equipment because they're much harder to liquidate in a slow economy than cars and trucks, Paselk said. Some lenders are rewriting loans on these big-ticket items, doing what they can to accommodate strapped borrowers, he said, because they don't want the equipment back.
"if they get back a Caterpillar and they have a $50,000 loan on it, they're better off rewriting the loan than running it through the auction," said Paselk. "These big-ticket items aren't selling."
Consumer lenders are going after rising delinquencies harder. Rozanne Andersen of ACA Internation, an Edina-based debt collectors association, said she sees a growing number of department store and smaller retailers both locally and nationally cracking down on delinquent accounts by starting the collections and recovery process much sooner. Most companies opting to accelerate the start of the debt collection process are cutting down the time they're willing to wait for payment by one-third, Andersen said.
"Businesses are in need of cash," she said. "They have determined they cannot afford to wait as long as they may have in the past before sending a debt to collection."
Albertson, at American Towing, said he feels the pinch of high fuel costs as his trucks rumble about picking up vehicles.
"I used to drive a Lexus SUV, and I sold it, and I went out and bought an older Honda Civic," he said. "It's a huge step down, but you have to."
Late on a car payment? Beware. Delinquencies are rising, and impatient lenders aren't waiting long to call out the tow trucks.
By Jennifer Bjorhus and Nicole Garrison-Sprenger
Pioneer Press
It's 3 a.m. - do you know where your car is? If you're late on payments, your local towing company probably does.
High and rising auto-loan delinquencies, now above 2001 recession levels by one measure, are speeding u action in the repossession lane. Some Twin Cities car and truck towing companies are reporting a significant uptick in orders from lenders, which they attribute to mounting economic ressures on stretched borrowers.
But accelerating debt collection by lenders appears to be another factor in the rise of repossessions. The country's top auto lender, for instance, said it is cracking down on delinquencies and "moving up the timeline" on recovering unpaid debt.
It's not just the auto industry that's getting more aggressive. Some department stores and retailers are accelerating action on delinquent accounts, according to a Twin Cities debt collectors association, because they too need the cash to pay bills.
All Corey Albertson knows is business is hot after a slow winter.
"Probably in the last four weeks our fax machine started kind of getting bombarded with more repossessions," said Albertson, president of American Towing and Recovery in Hastings.
Auto lenders pay Albertson $300 to $500 to tow away cars and trucks, typically after borrowers are 90 days late on payments. Like other companies, his crew usually works from 2 a.m. to 5 a.m.
"That way, most people are in bed and don't see us coming," Albertson said.
Many of the car owners Albertson deals with are families with two or more vehicles who are prioritizing bills and let the extra car slide, although he recently repo'd the cars of a husband/wife Realtor team in Shakopee who lost their Cadillac and Jaguar. Albertson said he's repossessing more SUVs and trucks than before, which he attributes to the escalating cost of filling up the tanks.
Across the board, nearly all the auto lenders Albertson works with have boosted orders recently, he said. But he's seen particular growth with First 1 Financial Corp., a subprime auto financer out of Massachusetts. First 1 Financial didn't return phone calls.
Missy McMurray, owner of an American Lenders Service Co. franchise in St. Paul and Hudson, Wis., said her Minnesota vehicle repo accounts nearly doubled in the first quarter from a year ago. There's been a notable increase in semi-truck repos, said McMurray, who also attributes it to rising fuel costs. McMurray declined to name the lenders she works with.
"I just think more people are falling behind," she said.
Some auto lenders have responded accordingly.
Bobbie Britting, senior analyst in consumer lending at Needham, Mass.-based researcher TowerGroup, said auto lenders are "not waiting as long as they used to" on delinquencies. That varies by the type of portfolio, she said, such as whether it's prime or subprime loans to borrowers with poorer credit.
Detroit-based GMAC Financial Services, the nation's largest auto lender, told analysts in a February conference call that it has added 400 collections associates and has accelerated contact with borrowers. Spokesman Mike Stoller said in an interview that most auto finance companies contact consumers with a letter or call after a borrower is 30 to 45 days late on a payment. If payment is still due after 90 days, lenders turn to more aggressive tactics.
"While repossession isn't likely to happen on day 91, that kind of activity comes into play," Stoller said.
Banks are in "clean-up mode," Mike Jackson, chief executive of Fort Lauderdale, Fla.-based AutoNation, told analysts two weeks ago. Lenders are "accelerating repossessions on any vehicle that they see out there that has a question mark over it. They are proactively trying to deal with it now rather than later," said Jackson, whose company is the country's largest auto dealer.
Along with the uptick go disputes. At least one Twin Cities attorney reports more wrongful repo calls coming in. Tom Lyons Jr., president of the Consumer Justice Center, a Vadnais Heights law firm, said he's preparing to file two such cases. In one, a Hugo woman alleges she climbed into her car in her attached garage to go to work early one recent morning, and after she opened the garage door, a repo crew raced in and dragged her out of the car.
"I think the banks are getting more aggressive on their willingness to wait for consumers to catch u," Lyons said.
Not everyone is rolling in new orders. "The business is either chicken one day or feathers the next," said Dale Hedtke, owner of Midwest Recovery Bureau Inc in Maple Grove.
National Asset Recovery Group in Wayzata, which specializes in repo'ing heavy equipment, aircraft, RVs and large boats, said business is up, but the repo trends are different for larger vehicles.
President Dan Paselk said his boat business is up at least 15 percent from last year. He attributes most of the surge, at the moment, not to eager lenders but to the fact boat owners recently hauled their big toys out of storage, where repo crews cannot easily get to them and have them parked on the water.
Lenders are less aggressive about repossessing such large equipment because they're much harder to liquidate in a slow economy than cars and trucks, Paselk said. Some lenders are rewriting loans on these big-ticket items, doing what they can to accommodate strapped borrowers, he said, because they don't want the equipment back.
"if they get back a Caterpillar and they have a $50,000 loan on it, they're better off rewriting the loan than running it through the auction," said Paselk. "These big-ticket items aren't selling."
Consumer lenders are going after rising delinquencies harder. Rozanne Andersen of ACA Internation, an Edina-based debt collectors association, said she sees a growing number of department store and smaller retailers both locally and nationally cracking down on delinquent accounts by starting the collections and recovery process much sooner. Most companies opting to accelerate the start of the debt collection process are cutting down the time they're willing to wait for payment by one-third, Andersen said.
"Businesses are in need of cash," she said. "They have determined they cannot afford to wait as long as they may have in the past before sending a debt to collection."
Albertson, at American Towing, said he feels the pinch of high fuel costs as his trucks rumble about picking up vehicles.
"I used to drive a Lexus SUV, and I sold it, and I went out and bought an older Honda Civic," he said. "It's a huge step down, but you have to."
Friday, May 16, 2008
Foreclosure filings rise 65% in April
The following appeared on page 2C of the Thursday May 15, 2008 issue of the St. Paul Pioneer Press.
More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday. Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.
Nevada, Arizona, California and Florida were among the hardest hit states, with metropolitan areas in California and Florida accounting for nine of the top 10 areas with the higest rate of foreclosure, the company said. Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions.
One in every 519 U.S. households received a foreclosure filing in April. Foreclosure filings increased from a year earlier in all but eight states.
More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday. Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.
Nevada, Arizona, California and Florida were among the hardest hit states, with metropolitan areas in California and Florida accounting for nine of the top 10 areas with the higest rate of foreclosure, the company said. Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions.
One in every 519 U.S. households received a foreclosure filing in April. Foreclosure filings increased from a year earlier in all but eight states.
Default swaps carry uncertain risks
The following Edward Lotterman "Real World Economics" column was published on page 1C of the Thursday May 15, 2008 issue of the St. Paul Pioneer Press.
It is dangerous when anyone plunges into business deals they don't fully understand. Over the past 25 years, the securities industry has developed myriad new financial instruments intended to better manage risk. But it's becoming clear that not everyone dealing in these securities really knows the risks relative to the rewards.
Most people have never heard of a "credit default swap," but they're making news as the risks posed by such once-obscure financial instruments gain visibility.
A credit default swap is insurance against loss from default on another financial instrument. Suppose you own a corporate bond. It is highly likely the corporation will make all promised principal and interest payments. But you want to be sure, so you make periodic payments to a third party who agrees to make good your loss in the unlikely event that the bond goes bad.
This is little different from insurance on houses. I don't expect my house to burn down or blow away, but I am willing to pay several hundred dollars a year for the right to be reimbursed if that does happen.
At this basic level, a credit default swap is straight-forward and useful. One party wants to reduce their risk and is willing to pay a premium to do so. Someone else is willing to assume risk for a fee. Both can be better off in the long run.
But such swaps do differ from insurance in important ways. Insurance companies won't write policies unless the buyer has an "insurable interest." I can buy a policy on my own house, but I cannot go out and buy a policy on Joe Blow's house three blocks down the street. I can insure my own life, but I cannot buy policies that will pay me if Tom Hanks or Tiger Woods dies.
One can, however, either buy or sell protection against a bond defaulting even when neither you nor your counter-party actually owns the bond.
Moreover, default swaps fail a classic test for separating "investors" or "hedgers" from "speculators." Is a given party always on the same side of the transaction or not? Homeowners always are insurance buyers. Insurance companies always are sellers. Grain elevators contract to sell wheat in the future. Flour millers usually contract to buy.
But a financial institution may sell default protection on a bond one week and buy it for the same bond a week later, depending on its assessment of which side is more profitable.
The number of houses in a country limits the volume of mortgage lending. The borrowing needs of governments and corporations limits the number of bonds issued. The number and size of corporations limits the total value of shares of stock. A country's total stock of buildings puts an upper limit on how much property insurance can be sold.
But there is no limit to the volume of credit default swaps that can exist at any time. And their growth has been enormous.
In 1994, there were some $45 billion in such swaps. By 1998, that had quadrupled to $180 billion. Over the next six years the volume increased 44 times to $8 trillion. It is now estimated at $45 trillion, three times the U.S. Gross Domestic Product.
So what, you may ask. Why should the fact that large financial institutions have made large bets on unlikely events affect the average family?
There need not be any effect if all of the players in the credit default swaps market have correctly estimated the underlying risks, and if the prices paid for swaps fully reflect that risk. As long as everyone involved holds up their end of the bargain, come what may, these swaps need not affect the real economy.
However, the ongoing collateralized mortgage debacle demonstrates that financial institutions can be way off base in pricing new, poorly understood securities. Moreover, it is clear that many of the institutions that have jumped on the credit swap bandwagon, including obscure banks in Africa and Asia, don't have the financial wherewithal to pay up if some insured default actually occurs.
When financial institutions lose trust that other parties in deals are willing and able to carry through on commitments, fear comes to dominate markets and they seize up.
That is what happened to commercial paper last August and September. Fear that Bear Sterns no longer was a reliable counterparty is what brought that firm from apparent strength to near bankruptcy in days in March.
As with many other financial sector innovations, the horse is long out the door. There isn't much government can do right now to reduce the threat default swaps pose for the broader economy. We can hope that participants can unwind their positions smoothly in coming months, allowing firms' exposure to drop, without anyone going broke in the process. But don't count on it.
It is dangerous when anyone plunges into business deals they don't fully understand. Over the past 25 years, the securities industry has developed myriad new financial instruments intended to better manage risk. But it's becoming clear that not everyone dealing in these securities really knows the risks relative to the rewards.
Most people have never heard of a "credit default swap," but they're making news as the risks posed by such once-obscure financial instruments gain visibility.
A credit default swap is insurance against loss from default on another financial instrument. Suppose you own a corporate bond. It is highly likely the corporation will make all promised principal and interest payments. But you want to be sure, so you make periodic payments to a third party who agrees to make good your loss in the unlikely event that the bond goes bad.
This is little different from insurance on houses. I don't expect my house to burn down or blow away, but I am willing to pay several hundred dollars a year for the right to be reimbursed if that does happen.
At this basic level, a credit default swap is straight-forward and useful. One party wants to reduce their risk and is willing to pay a premium to do so. Someone else is willing to assume risk for a fee. Both can be better off in the long run.
But such swaps do differ from insurance in important ways. Insurance companies won't write policies unless the buyer has an "insurable interest." I can buy a policy on my own house, but I cannot go out and buy a policy on Joe Blow's house three blocks down the street. I can insure my own life, but I cannot buy policies that will pay me if Tom Hanks or Tiger Woods dies.
One can, however, either buy or sell protection against a bond defaulting even when neither you nor your counter-party actually owns the bond.
Moreover, default swaps fail a classic test for separating "investors" or "hedgers" from "speculators." Is a given party always on the same side of the transaction or not? Homeowners always are insurance buyers. Insurance companies always are sellers. Grain elevators contract to sell wheat in the future. Flour millers usually contract to buy.
But a financial institution may sell default protection on a bond one week and buy it for the same bond a week later, depending on its assessment of which side is more profitable.
The number of houses in a country limits the volume of mortgage lending. The borrowing needs of governments and corporations limits the number of bonds issued. The number and size of corporations limits the total value of shares of stock. A country's total stock of buildings puts an upper limit on how much property insurance can be sold.
But there is no limit to the volume of credit default swaps that can exist at any time. And their growth has been enormous.
In 1994, there were some $45 billion in such swaps. By 1998, that had quadrupled to $180 billion. Over the next six years the volume increased 44 times to $8 trillion. It is now estimated at $45 trillion, three times the U.S. Gross Domestic Product.
So what, you may ask. Why should the fact that large financial institutions have made large bets on unlikely events affect the average family?
There need not be any effect if all of the players in the credit default swaps market have correctly estimated the underlying risks, and if the prices paid for swaps fully reflect that risk. As long as everyone involved holds up their end of the bargain, come what may, these swaps need not affect the real economy.
However, the ongoing collateralized mortgage debacle demonstrates that financial institutions can be way off base in pricing new, poorly understood securities. Moreover, it is clear that many of the institutions that have jumped on the credit swap bandwagon, including obscure banks in Africa and Asia, don't have the financial wherewithal to pay up if some insured default actually occurs.
When financial institutions lose trust that other parties in deals are willing and able to carry through on commitments, fear comes to dominate markets and they seize up.
That is what happened to commercial paper last August and September. Fear that Bear Sterns no longer was a reliable counterparty is what brought that firm from apparent strength to near bankruptcy in days in March.
As with many other financial sector innovations, the horse is long out the door. There isn't much government can do right now to reduce the threat default swaps pose for the broader economy. We can hope that participants can unwind their positions smoothly in coming months, allowing firms' exposure to drop, without anyone going broke in the process. But don't count on it.
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