Leave Capitol Hill to Congress and Detroit to Detroit

by Brian Johnson on August 20, 2009

ChryslerOne of the ways that Chrysler and GM have set about to recover is by taking the opportunity afforded to them by their bankruptcies to shrink the number of car dealerships to a managable level.  Before the bankruptcy, this reduction in dealerships could only have been managed on a dealer-by-dealer basis through painstaking renegotiations of contracts and would have proven a very expensive undertaking.  In response, the House of Representatives passed a bill that would make it illegal for these bailed out giants to sever those ties.  Should the bill become law, the auto companies will be forced to re-up contracts which they can no longer afford to maintain.  Essentially, Congress is telling the automotive industry how to conduct its business with an eye to keeping voters happy and without acknowledging the very real threat of this legislation: that it could force Chrysler and GM  into bankruptcy again.

Like others, I believe that the people responsible for running America’s automotive industry are also responsible for their companies’ bankruptcies.  Furthermore, I am not overly confident that they can do what it takes to turn the industry around now. However, I have no doubt than they know more about their particular business than Congress does. 

An Innovative Healthcare Plan

by Odysseas Papadimitriou on August 17, 2009

medicalI’ve been criticizing the Obama administration’s healthcare plan recently without really offering an alternative solution.  Rather than continuing to point out the faults within the plan currently being offered up, I’d like to lay out my vision of what a comprehensive, national healthcare plan should look like.  This is a plan that I think will work, particularly because it is driven by the fundamentals that shape any successful free market economy.

The healthcare system I am proposing is designed to fix the elements of our current system that don’t work, and leave the elements that do work with relative effectiveness as they are.  One rarely hears complaints about the quality of U.S. healthcare; rather the complaints are centered around coverage and cost.  And so, I feel that if a healthcare system is to work, it should strive to maintain the level of quality we currently enjoy, while at the same time driving down costs and increasing coverage. 

From Newspaper to Blog

by Brian Johnson on August 13, 2009

newspapersThe end of an industry is always the beginning of its replacement. When the typewriter went out, it was replaced by the personal computer which could do everything the typewriter could do, and more.  The replacement is supposed to improve on the original. 

We are now losing the industry of print journalism to its replacements: the online newspaper, the talk show, the entertainment news industry, and the blogs.  Whereas, print journalism held itself to a high standard of objectivity, investigation, and fact checking, the vast majority of internet writers self-publish their opinion (and sometimes their solicited opinion).  Their views are not expert, nor are they generally supported by interviews with experts.  Instead, what passes for news is either the author’s views unmediated by an editorial staff or even a publishing company, or a biased entertainment news industry whose main concerns are spectacle and the money that spectacle brings. The collapse of print journalism has started a race to the bottom for news reportage.

Buy Treasury Inflation-Protected Securities (TIPS)

by Brian Johnson on August 4, 2009

wb_chartGiven the recent economic upheavals, as well as the unprecedented manner by which the government is handling these dilemmas, a lot of people are worried about what inflation will do to our savings and investments.  One option that investors have to safeguard against inflation is to put money into Treasure Inflation-Protected Securities or TIPS.

Basically, the principal investment for TIPS is adjusted by the Consumer Price Index (measures inflation) + A Fixed Yield that is unique for each TIPS (recently it has been around 2%).  This means that your investment primarily rises or falls along with inflation.   To use a simplified example, if you put in $100 in a TIPS that has a 2% ‘Fixed Yield’ and the nation goes through 5% of inflation in a year, then the value of the TIPS will raise from $100 to $105 over that year (as a result of the 5% inflation)+ 2% of $105 to a total value of  $107.1. 

'Cash for Clunkers' Gets $2B Vote from House

by Lynn B. Johnson on August 1, 2009

gas-guzzlerThe U.S. House of Representatives voted 316-109 Friday to augment the Car Allowance Rebate System (CARS) program by $2 billion. The additional funding will be transfered from energy stimulus funds.

Fears that the “Cash-for-Clunkers” program would die within days of its initial approval spurred the House to call a vote, an action that came within hours of Transportation Secretary Ray LaHood’s report that the program would soon run out of funding.

No More Economic Bubbles - Let's Focus on Fundamentals

by Odysseas Papadimitriou on July 23, 2009

economic-bubbleOur country’s economy has been operating from bubble to bubble.  From 1996 until 2000, we were in a tech bubble.  Our faith in the financial potential of the dot com industry was boundless, though it ultimately proved ill placed.  From 2000 until 2006, we were in a housing bubble which, when it burst, laid the foundations for the current recession.  During these periods, the country placed its economic hopes on new, seemingly plentiful, frontiers that promised new means by which to make money.  Older values were made to seem, by comparison, out of touch and out of date.  As a result, we, as a nation, allowed ourselves to slip further and further away from the fundamentals necessary for a healthy economy.

Now, we stand on a precipice.  We could create another of these economic bubbles to put our financial hopes into – an option as illusory as ever – or we could find some way to return to the fundamentals that have, historically, made our nation’s economy strong.  Over the last decade, we allowed our exports to slip and made our economy deeply reliant on imports from the rest of the world.  We have let the trade deficit grow too wide without finding new products or new technologies to export, and as a result have found ourselves without a significant industry to insure future success in the global economy.

California Tells Government to Fix its Budget...America Should Follow that Lead

by Brian Johnson on July 23, 2009

cut-wasteful-spendingHere’s what happened recently in California.  First, some basics:  in order for taxes to be increased in California the citizens of the state have to vote.  Without support, the government cannot simply raise taxes.

Recently, five propositions came up for raising taxes in California to help cover the costs of that state’s ridiculous budget problems.  All five were shot down with something close to a two-to-one margin.  The state government wanted more money, and the people refused to give it to them.  Their answer?  Cut spending, balance the budget, and trim waste.  For Californians, the reasoning was obvious:  why should they foot the bill for a government that refuses to spend within its means?

Social Security Parties on Tax Payers Dime

by Brian Johnson on July 22, 2009

social-security-partyThe Social Security Administration (SSA), in an effort to deal with the stress of their jobs, held a conference a couple of weeks ago in Phoenix Arizona during which 700 SSA directors relaxed to the bill of $700,000 worth of tax payers’ money.  They had dance troops.  They stayed at a nice hotel.  They even had an excursion to a local casino.

Three things:

Lenders Need to Become Proactive Instead of Reactive

by Odysseas Papadimitriou on July 21, 2009

home-foreclosureAccording to realtytrac.com, 300,000 homes went into foreclosure last month.  Bloomberg reports that the U.S. delinquency rate rose to 9.4% and foreclosures rose to 1.37%.  According to Moody’s Investor Service, 42 percent of outstanding 2006-vintage subprime loans are at least 60 days delinquent, in foreclosure, or held for sale.  As we all know, the housing crisis and rising unemployment rates have served to make it difficult for many Americans to pay their mortgages on time, and the result is that many of the nation’s home owners are in dire straights.  The problem is bad, and banks need to change the way they modify mortgages if they hope to provide adequate assistance.  They are now concentrating on fixing disasters as they arise rather than preventing them in the first place.

With so many people in financial trouble, mortgage lenders like Bank of America, Wells Fargo, Wachovia, Chase, and Citigroup are finding themselves too understaffed to deal with these excessive defaults.  Given that a bank only has so many resources to extend to their borrowers, the dilemma becomes who to work with first.  Basically, the bank has to perform a kind of triage, like in a hospital, to determine which of their clients demands immediate attention, and which clients can wait.  The lender faces different kinds of repayment problems.  Specifically, they have people who cannot repay and who are defaulting right now, and people who have done everything in their power to repay (tapped into savings, changed their lifestyle, etc.) but who cannot sustain their payments any longer; they have not defaulted yet but soon they will.  According to a survey by ProPublica, it seems that most major lenders have been focusing on borrowers who are most delinquent at the expense of borrowers that are current but will quickly become delinquent unless they get help.

AIG Acts as Conduit. Taxpayers Get Nothing.

by Odysseas Papadimitriou on July 17, 2009

AIG BankruptMy point, in the past, has been that if America had allowed AIG to go into prepackaged bankruptcy, as we are doing with Chrysler and GM, we would have been in a better position to deal with the money AIG owes through Credit Default Swaps (CDS) because we could have negotiated payback for those positioned to collect on AIG’s obligations.  AIG owed money, we bailed them out to save the economy, and the result is that AIG paid off a lot of its obligations, and we, as taxpayers, now own billions of dollars of nearly worthless AIG stock. 

For the ones that are still not convinced, let us look at Goldman Sachs and its position concerning AIG.  AIG  paid out $13 billion bailout money to cover its CDS obligations to Goldman Sachs.  Actually, taxpayers paid Goldman Sachs, AIG just acted as a conduit.  The $13 billion was incredibly good for Goldman Sachs whose stock has since risen, but not nearly as good for AIG whose stock is perpetually on the verge of tanking.  However, the major problem here is that taxpayers paid AIG to pay off Goldman Sachs.  The result is that taxpayers own AIG stock (on the verge of collapse), and own no stock in Goldman Sachs (which is on the road to recovery).  Moreover, because CDSs are still unregulated, Goldman Sachs stands to make about $30 billion if AIG does, eventually, go bankrupt because of the CDSs they’ve taken out on that eventuality.  It is possible that other companies have similar CDSs bought against AIG, but since, remarkably, there still is no system of market regulation set up for CDSs, we can’t know for sure.

Abolishing the American Rule Needs To Be Part Of Healthcare Reform

by Odysseas Papadimitriou on July 9, 2009

American RuleAs the nation’s lawmakers make decisions about healthcare reform, we ought to keep in mind the danger of fixing a system without understanding how it  became broken in the first place.  Among nations with comparable average lifespans, Americans pay more for healthcare than does anyone else in the world.   The system is grossly overpriced, because it has structural problems which need to be acknowledged before they can be fixed.  One such problem is the American Rule in lawsuits.

The American Rule  requires that, even if someone wins a lawsuit, they remain responsible for their legal fees.  This means that if someone brings a lawsuit against you, though you may have done nothing wrong, you still have to pay for your defense.  In general, the American Rule encourages a kind of legalized bullying since the system does not provide incentive to avoid starting a lawsuit, and actually encourages frivolous legal action.

Allow Patients not Government to Reign in Healthcare Costs

by Odysseas Papadimitriou on July 7, 2009

Healthcare CostsThere has been a lot of talk about healthcare in the news recently, especially in regards to its reform.  For the most part, these discussions center around coverage: who pays for it, who will get it and what that means for those who do?  What seems to be missing from the discussion is an acknowledgment that a system that doesn’t hold the recipient at least partially responsible for the financial burden of their medical expenses is likely to fail. 

The problem with America’s current system is evident with one look at its global performance.  Though life expectancy is about the same in France, Sweden, the United Kingdom and the United States, the price of healthcare (as a percentage of Gross Domestic Products) varies greatly.   According to the World Health Organization’s 2009 report, the U.S. pays over 15%, whereas France pays 11.2%, Sweden 9.2% and the United Kingdom 8.2%.  We are paying more for what is essentially the same level of healthcare because our system encourages inflated costs.

Companies That are Too Big To Fail Should Not Exist

by Odysseas Papadimitriou on July 1, 2009

too-big-to-failThis recession has been characterized by the presence of companies that are so vast and influential that their failure actually endangers the American economy.  The names of these companies, GM, Chrysler, AIG, Citibank, Bank of America, and so on, are all too familiar to us from their prominent place in news stories about economic disaster.  In order to prevent systemic economic collapse, America has resorted to bailouts and political bankruptcy,  essentially changing the “rules of the game” in order not to have these failing companies take our economy down with them.  What is clear is that the benefits reaped by the economy in allowing the existence of these financial giants is nothing as compared to the damage caused by their collapse.  Companies that are too big to fail should simply not be allowed to exist.

We should remember that capitalism is based on free market principles in which companies compete with each other.  If one fails, other and presumably better companies take its place.  Thus, the market evolves so as to better meet consumer demands.  Companies fail in a free market economy because they are unable to compete with stronger business models.  Moreover, they should be allowed to fail in these circumstances so that better business models can take their market share.

Cash for Clunkers Will Soon Take Effect

by Lynn B. Johnson on June 22, 2009

gas-guzzlerThe Senate’s “Cash for Clunkers” bill passed Thursday, as an addenda to the war-spending bill. It was approved by the House last week. The bill allows for trade-in vouchers of up to $4,500 for owners of gas guzzlers who want to buy or lease a new, more fuel-efficient vehicle.   If signed into law by President Obama, the program is likely to go into effect in August.

Called “Handouts for Hummers” by critics, the program is less green than advocates had hoped, and will not do an extraordinary amount to limit the United States’ dependence on foreign oil. Car owners could get a $3,500 voucher for trading in an under-18 m.p.g car for one that gets at least 22 m.p.g., or $4,500 if the new car gets 10 m.p.g. higher than their existing vehicle. Truck, minivan, and SUV owners will receive a $3,500 voucher for buying a similar new vehicle that gets at least 2 m.p.g. higher; that voucher will increase to $4,500 if the new truck/van/SUV gets at least 5 m.p.g. higher than their existing vehicle.

A Drop in Unemployment Payments is NOT Good News

by Odysseas Papadimitriou on June 19, 2009

UnemploymentWe, at Wallet Blog, are as anxious for good news about the economy as is everyone else.  We’d love to concentrate on giving money management advice for the vast fortunes the nation reaps in boom years, rather than discussing the pros and cons of economic rescue plans and the need to overhaul the financial industry.  However, there’s a fine line between finding a ray of hope in this recession and simply misreading statistics.

A recent Associated Press headline read: Jobless benefit rolls drop sharply to nearly 6.7M.  Good news right?  Less people are receiving unemployment benefits.  That can only mean one thing:  all the people who’ve lost their jobs have found new employment.   How could a drop in unemployment payouts be anything but evidence that the nation is finally on the upswing?  After all, the AP article recounts the various highlights of this statistical evidence and calls them encouraging signs… 

Obama Wrong About the Need for Yet Another Regulatory Agency

by Odysseas Papadimitriou on June 18, 2009

ObamaPresident Obama has come out strongly in favor of overhauling the financial regulatory system by introducing another watchdog agency known as the Consumer Financial Protection Agency.  This agency will be set up to monitor the marketing of mortgages, credit cards and other loan products.  President Obama’s proposal is obviously a response to the dangerous and deceptive practices recently brought to light in these industries.

To be clear, we agree that there were deceptive practices in the lending industry.  The mortgage industry was allowed to operate rife with fraud. Mortgage agents would misrepresent borrowers on applications to get loans for which they otherwise would not have been approved.  The excesses of the credit card industry have been blatant enough to require the federal government to step in and protect consumers.  We acknowledge that the industries have been allowed to ride roughshod over consumer rights without anyone stepping up for the little guy.

Ken Lewis is Fully Responsible for the Merrill Lynch Acquisition

by Brian Johnson on June 14, 2009

ken-lewisRecently, lawmakers have been questioning Bank of America’s motives for its acquisition of Merrill lynch last September.  Some are calling the merger a shotgun wedding directed by Fed chairman Ben Bernanke.  Investigations are now underway to determine whether the federal government threatened Bank of America Chief Executive Kenneth Lewis into acquiring Merrill Lynch under the duress that if he didn’t, Bank of America management would be removed from their positions.

We would like to suggest two possible scenarios related to this investigation and regarding Lewis’s responsibility in the purchase of Merrill Lynch.  Either Lewis truly believed that the Merill Lynch acquisition was a smart move for Bank of America, or Lewis, having his job threatened, abandoned all responsibility he had to his shareholders in order to maintain his position.  In the first case, we have to question Lewis’s judgment.  If his company is in financial trouble, the worst thing he could do would be to acquire another financial institution that was even worse off. Knowing what he knew about his company’s financial health, it was a ridiculous idea to put Bank of America further in danger of financial collapse by buying a company that was already collapsing.

Credit Cards: Another Greenspan Failure

by Odysseas Papadimitriou on June 11, 2009

Greenspan FailureA lot has already been written citing Alan Greenspan, ex-head of the Federal Reserve, as one of the people most accountable for the country’s current economic problems.  Reportage on the tech bubble, the housing bubble, the systemic risk of unregulated Credit Default Swaps (CDS), and the extremely relaxed underwriting standards to mortgages habitually mention Greenspan’s policies as a primary contributor to these problems.  The fact that the U.S. government has had to step in to fix the credit card industry suggests that regulators under Greenspan were asleep at the wheel.  As head regulator, the Federal Reserve was in a position to regulate the excesses of the credit card industry for years.  Now that disaster has struck, the Federal Reserve finally came up with a new set of rules in December 2008 which would take effect in July 2010, but obviously, their regulation has come too late, as the United States Congress and President have already had to step in and do their jobs for them.

For fifteen years, credit card regulators have had it in their power to prohibit the excesses of the credit card industry.  At any time, they could have put rules in place that would have prevented arbitrary interest hikes or the creation of additional fees without rhyme or reason.  Now, law will force credit card companies to change their practices, but the government wouldn’t have had to take this kind of action if credit card regulators had been doing their job over the last decade and a half.  America is now, in essence, forced to make laws to regulate the credit card industry because our regulators completely failed to do so.

Dow Jones Accurately Priced? Don't Count on That

by Odysseas Papadimitriou on June 10, 2009

dow-jonesAccording to CNNMoney, all of the news surrounding the stock market in the past few months, “has been good news, or at least neutral news,” but nothing bad.  The rationale for all of these happy feelings is that the market has the ability to prognosticate for the worst of times, and did so in March when we saw the Dow dip to around 6,500.  Additionally, it’s believed that 6,500 represented a worst-case scenario that never actually happened, and that therefore we’ve seen the lowest of the low. 

While this perspective fueled the three-month surge, it lacks fundamentals that can be found on page one of Investing for Dummies.  Before we fall for the hype, let’s face the facts.  We are in uncharted economic conditions, and face headwinds that we’ve never seen before and that cannot yet be fully understood. 

In Public Companies, If You Don't Vote it Still Counts

by Odysseas Papadimitriou on June 4, 2009

Vote does not countThe thing about corporate democracy, as it has been allowed to flourish, is that it isn’t very much like a “real democracy”.  Basically, in a “real democracy” that you and I would recognize, people either vote for or against something.  If there are more votes for yes then yes wins the day, otherwise, no.  What we don’t think about as much is the number of people who don’t really vote yes or no, but who don’t vote at all.  In a “real democracy”, these people don’t really count.

On the other hand, in a corporate democracy when it comes to counting the votes from shareholders in publicly traded companies, those votes that aren’t cast, still count.   Officially, the votes not voted are given over to the brokers.  The brokers in charge of these votes are likely to defer their position to the suggestions made by the board of directors.  Thus, whatever the directors put up to a vote, they can be assured of having it go their way because they are supported by a silent majority.

Who will pay for healthcare reform?

by Brian Johnson on June 3, 2009

TaxesJanine Sahadi did a great job over at CNNMoney.com describing the current ideas being looked into by lawmakers to help the government pay for health care reform. From her synopsis, it looks as though the government is hoping to tax revenues that have, up until now,  gone untaxed. So far, lawmakers have suggested taxing, among other things, employer contributions to health care, Medicare benefits for state and local government employees, and drinks with high fructose content.

We are fundamentally aligned with the belief that everyone ought to get health care regardless of their condition as we see this as a basic human right.  However, we find it a little disturbing that all of the ideas being bandied about by lawmakers involve either raising existing taxes or creating new taxes. We are willing to do our part, of course, but shouldn’t the government be just as willing?

AIG - Still a Danger after $180+ Billion

by Odysseas Papadimitriou on May 26, 2009

AIG BankruptAt the beginning of its trouble, AIG held $2.7 Trillion dollars worth of exposure on the derivative market.  Now that the United States Government has given the company $180 Billion dollars of bailout money, they still have $1.5 Trillion in exposure.  To make matters worse, AIG’s fourth quarter loss of $61.7 Billion was the worst corporate loss in U.S. history.  

We believe that AIG needs to go into prepackaged bankruptcy for three reasons: 

We are still vulnerable to the CDS Scandal

by Brian Johnson on May 26, 2009

ScandalThe most infamous offshoot of the derivative market, the Credit Default Swap (CDS), is continuing to operate in an unregulated manner.  This despite the various collapses that this $60 Trillion unregulated market has caused, and the resulting government bailouts that have forced all of us to become financially responsible for lumbering economic giants such as AIG – a company which was deemed too big for the government to allow its collapse. 

Surely, given the damage caused by this unregulated market, the first order of business for lawmakers should be, and should have been, to put laws into place which would end derivative trading in its current form.  In short, we would expect that the current recession would inspire lawmakers to make laws that would prevent another recession of this kind in the future…but they haven’t.  They’re now trying, and that’s admirable, but those laws haven’t been passed as of yet. As recently as May 13th, Treasury Secretary Timothy Geithner sent a two-page letter to congressional leaders urging them into action.

Piggybacking Stalls Much Needed Credit Card Reform

by Brian Johnson on May 16, 2009

PiggybackingRight now, as the country demands tougher restrictions on the credit card industry, and as the House has passed a much needed bill to that effect, the Senate has stalled the bill so as to piggyback amendments onto it.  Now, we understand that that grouping together related laws saves time and allows for the deal making that is part and parcel to cooperation across the aisles.  However, when the laws are totally unrelated, we are at odds to figure out just how this congressional procedure aids anyone.

The success of the credit card reform bill has prompted senators to attach their own pet projects to it.  In one case, the senate is attempting to piggyback an amendment that allows people to carry firearms into national parks – sponsored by Tom Coburn (R-OK).  Thus, this much needed credit card bill is being stalled because of something completely unrelated to it.  Why is the Senate wasting time on irrelevant amendments when we are in the middle of an economic crisis which demands immediate legislative action? 

The New Credit Card Bill & Your Wallet

by Odysseas Papadimitriou on May 15, 2009

LegislationCurrently, a credit card reform bill is making its way through Capital Hill as law makers attempt to stem the tide of consumer complaints against credit card companies.  Having already passed through the House of Representatives (gaining 357 votes for the bill with only 70 votes against it), the popular bill entered the Senate floor nearly assured of success there.

As so often befalls popular bills, unrelated amendments have stalled the proposed bill which reached the floor of the Senate on Wednesday May 13th.  Some of the credit card proposals within the original bill would:

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