Facing the Economic Aftermath

by Odysseas Papadimitriou on May 12, 2009

AftermathObama has four major issues on the agenda for his presidency:  three he wants to deal with and one he inherited.   Those issues are: the current economic recession, education, health care, and energy.  All of these issues are pressing.  Massive government spending needs to happen to keep this recession from spiralling into a full blown depression.  We must maintain high standards in education so as to make sure that the next generation of American worker will be as competitive in the world stage as the previous one.  We must refigure health care for moral reasons as it is unacceptable that one of the richest nations in the world should leave millions of its citizens without health care.  Energy innovation is an issue of  both national security and economic prosperity in that it keeps America’s money at home instead of sending it abroad.

All of these projects will significantly drain the nation’s finances in the short term.  We agree that these plans are necessary but the money to pay for them must come from somewhere.  As we see it, of the four agenda items, the development of a more efficient energy source is the most likely to produce the money needed to fuel the other initiatives. 

Senate Voted Wisely on Cram Down Bill

by Brian Johnson on May 8, 2009

StimulusOn April 30th, the Senate defeated the “cram down” bill that would have allowed bankruptcy judges to adjust mortgages so as to allow those people going through bankruptcy to keep their homes.  The defeat came as some democrats sided with the bill’s opposition, mirroring a general weariness from within the banking community towards this piece of legislation.

The media balked at this defeat with claims that echoed the bill’s sponsor Richard Durbin (D-Illinois) that the banks essentially controlled congress and that senators needed to vote along with the needs of the American people rather than according to the desires of the banking and mortgage lobbies.  The accusation from Durbin, and from the media following the defeat, was that these senators (particularly the 12 democrats who voted against the bill) were essentially bought out.  The media portrayed the senate as under bank control.

Credit Card Rate Hikes NOT Halted

by Odysseas Papadimitriou on May 7, 2009

Rate ChartBy July 2010, credit card companies will have to play by a new set of rules.  This new set of Fed regulations will curb abusive credit card practices and will fuel transparency within the credit card industry, thereby making it easier for consumers to understand the real costs of a credit card. Specifically, one of the new rules that will take effect in July will prohibit credit card companies from raising the interest rates on existing balances for consumers that pay on time.

On May 4th, the Federal Reserve rejected a request by Senators Schumer and Dodd that would force credit card companies to immediately halt interest rate increases on existing balances.  “We believe that issuers must be afforded sufficient time for implementation to allow for an orderly transition process that avoids unintended consequences, compliance difficulties and potential liabilities,” Fed Chairman Ben Bernanke wrote in a May 4 letter.

Congratulations on the Chrysler Bankruptcy

by Odysseas Papadimitriou on May 1, 2009

ChryslerChrysler has been in deep financial trouble for months and the President has been trying to save it.  In order to keep the iconic American company afloat, President Obama had asked that various groups make concessions.  First through the government bailout, he asked tax payers to make concessions.  We were willing.  Second he asked the banks to whom Chrysler owes money to make concessions; they would have to forgive the majority of the loans awarded.  They were willing.  Then he asked the auto workers themselves to make concessions; for Chrysler to stay afloat they would have to accept pay cuts and a restructuring of employee benefits.  They were willing.  The hope was that all of these concessions would make the company attractive to Fiat who would then swoop in and save Chrysler from economic oblivion.  It was this plan that had ultimately guided the government’s attempt to rescue Chrysler.

Unfortunately, Chrysler also owed money to hedge funds who were also asked to make concessions; they were not willing.  Because of these hedge funds, Chrysler is now going into what is called either surgical or pre-packaged bankruptcy:  bankruptcy in which the government steps in after the debts have been sorted out and provides funding to allow the company to emerge in shape to continue doing business.  By going into pre-packaged bankruptcy, Chrysler and the U.S. government are basically forcing the hand of the hedge fund investors who would not play ball.  They will have to get in line with Chrysler’s other creditors.

A Government of Zero Accountability

by Odysseas Papadimitriou on April 30, 2009

ZeroThe barbarians, so the saying goes, are no longer at the gates.  They’ve stormed through.  In many cases, they were practically let in by negligence of the regulators whose job it was to protect us from greedy swindlers, inventive accountants, and fraudulent lenders.  The gatekeepers themselves, the various federal regulators, have not been punished for failing in their duty to protect America.  They remain, even now, at their posts as the country reels from the damage it has taken from the various scandals and crimes committed against its economy and its taxpayers.  Those whose job it was to police against these crimes have failed us and we wonder why they have not been made accountable.

Why, for instance, didn’t Christopher Cox, the head of the SEC, not resign after the Madoff scandal?  Surely the crime was glaring enough to call his competency into question.  Shouldn’t he have taken some responsibility as the scheme was carried out on his watch?  Cox offered no public apology and was never taken to task for the calamity that resulted from his oversight.  He just stayed in, despite the very real complaints of his critics, until he was replaced by the next administration.

Citigroup Provides Further Proof that the Board of Directors System is Broken

by Brian Johnson on April 23, 2009

Board RoomAP Business Writer Madelein Reid, in a recent article summarized the conflict between Citigroup Inc. and its shareholders at the company’s annual meeting.  The shareholders were rightfully outraged.  The Board seems unwilling to change most of its procedures or to give up any of its power to decide the future of the company.  It alone decides executive compensation packages—not the shareholders just as it alone decides that the company will fund a new stadium.  The shareholders, simply put, have no say.

Reid points out that the chairman of the board of directors amiably listened to the shareholders’ many complaints while keeping in good spirits and remaining polite and unflappable.  And of course, offering no indication that the shareholders’ opinions would have any affect on the business of the board or in the method by which the board would be run.  If the shareholders don’t want to support a new stadium, too bad for them.  As unhappy as the shareholders of Citigroup Inc. are with the company’s performance, all returning directors and the four new recommendations were voted in without much difficulty.  The board had not recommended anybody to run against the contenders for these positions…

Obama's Cost Cutting: A drop in the ocean

by Brian Johnson on April 21, 2009

Drop in the oceanPresident Obama has asked his cabinet to cut 100 million dollars of government spending by finding ways to make government more efficient.  His hope is that by finding 100 million dollars worth of waste, he will help to restore taxpayer faith in their government’s attempts to keep the economy healthy.

The subject of government spending is a hot topic here at Wallet Blog.  We are in agreement with the President’s basic philosophy that the government needs to spend money to get us out of this recession—it’s about the only thing that helped the United States get out of the Great Depression.  The system needs money and that money has to come from somewhere.  If regular citizens are unable to stimulate the economy, then the government must intervene.  To this end, we support, generally, President Obama’s decisions to inject cash into the system so as to support fiscal growth and to create job opportunities in a period of rampant unemployment.

Immigration: Foreign Technical Expertise and its Solution

by Odysseas Papadimitriou on April 16, 2009

Immigration VisaOne problem with the American workforce is that it lacks an abundance of highly skilled technical labor and so these jobs are going elsewhere.  All things being equal, American employers would prefer to hire native born American employees.  The reason for this preference is three-fold.  First, on average, American born employees have better communication skills than their foreign born counterparts.  Second, the bureaucracy that surrounds hiring immigrants, such as work visas, complicates the process of employing immigrants.  Third, there is always the danger that the immigrant will return to their homeland, and thus, the American employee is seen as a more stable choice for the position.  All things being equal, American companies should be hiring Americans.

We can only assume then, that for skilled technical and scientific labor, all things are not equal.  American companies routinely ask congress for more visas so that they can bring in scientific researchers and engineers from foreign countries, sparking debate about whether such visas are good for the American economy and the nation’s workforce.  The American labor pool for these skill sets is, however, simply not large enough to keep up with employers’ demand.  When American companies don’t get these visas, the jobs do not automatically go to Americans by default.  Instead, the companies staff these jobs in foreign offices.  The government’s position on these visas provides yet another example, like the payroll tax, where U.S. policies are effectively encouraging American companies to outsource jobs.

Who is responsible for the CDS Scandal?

by Brian Johnson on April 15, 2009

ScandalHere at Wallet Blog, we have been reporting on the fallout of the CDS scandal by looking not only at the issue as it is affecting us now, but also at who is responsible for allowing unregulated trading of Credit Default Swaps (CDS) to occur in the first place.  We have pointed out that the laws that made Credit Default Swaps illegal, which had been in place for over 90 years, were repealed by congress in its passing of the Commodity Futures Modernization Act in December of 2000.  The repeal of these laws has cost hundreds of billions of dollars in tax payer money, including the $180 billion that taxpayers are paying for the collapse of AIG alone.

Since our reportage, some of our readers have asked us for an explanation as to why there has been no significant mention of congress’s role in the production of the CDS scandal within mainstream media.  Here at Wallet Blog, we too are troubled that the media has, in general, avoided taking lawmakers to task for their votes.  We are equally troubled by the overwhelming number of congressmen and women who voted this bill into law and who are, therefore, responsible for the legislation that is currently devastating the American economy.  In the House of Representatives, the bill passed 291 with only 60 representatives voting no.  In the senate, the bill passed unanimously without a single voice of objection.

Regulation that Fosters Innovation and Competition

by Odysseas Papadimitriou on April 13, 2009

RegulationIt’s interesting that we never debate the need for a police force to regulate civic behavior.  We can all imagine that if, tomorrow, there simply were no more police officers, anarchy and chaos would be the likely result.  Yet, when it comes to our economy, we are able to entertain debate about the need for regulation without ever acknowledging that an economic market without regulation is just as volatile as a city without law enforcement.

We need regulation, this should never have been up for debate, and it is certainly obvious how much we need regulation given the various economic scandals that are the root causes of the current recession.  If there is to be debate, let it concern, instead, how to create regulation that levels the playing field between companies.  By regulating businesses and their products in such a way so as to make comparison possible, we would foster the competition and innovation that are key elements for a successful free market.

Companies that still don't get the role of bonuses

by Odysseas Papadimitriou on April 10, 2009

BonusesFannie Mae and Freddie Mac are planning on paying out $210 million dollars in bonuses despite the fact that both these companies had to be seized by federal regulators so as to prevent dire repercussions across the economy.  Their failure has been one of the central low points to the economic devastation of this past year

James Lockhart, federal regulator for Fannie Mae and Freddie Mac, defended these bonuses for two reasons.  First, he suggests that the bonuses are needed because of the destruction wrought upon the company employees’ savings by the crash of their stock.  The scene for such workers is, of course, tragic, but we wonder if bonuses should go out to those who lost money in the stock market, then don’t we all deserve some of that cash?  The plight of the employees at Fannie Mae and Freddie Mac is hardly unique—it is the plight of every American hurt in this recession.  But of course, the average American doesn’t get government bailouts for the money that they’ve lost in the various markets—we pay for them.  When all is said and done, investment is a gamble.  In other words, the people at Fannie Mae and Freddie Mac gambled their life savings, like so many of us, and lost.  We don’t get a safety net, why should they?

We're All In This Together…Except For Bondholders

by Odysseas Papadimitriou on April 8, 2009

Boat WavingAs more and more big name companies become insolvent, taxpayers and shareholders in these companies are losing money.  Bondholders, on the other hand, are not feeling the hit and are actually making money out of bailed out companies.  Given the size of America’s economic problems and the ways in which these problems seem to affect all of us, it makes no sense that bondholders aren’t feeling the effect as well.

A bondholder is essentially someone who has loaned money to a company.  When a company needs cash, it either issues stock to shareholders or takes out loans.  Thus far, if the stock goes down, investors take the hit.  If the company requires government bailout, taxpayers must pay for the company.  However, even when a company is on the brink of total collapse, and must be brought under federal regulation to keep it from failing, that company is still expected to pay off its debt at the rate set at the time of the loan.  So long as the company has not gone bankrupt, it must still repay its creditors, including its bondholders.

The American Rule Encourages Bullying & Inefficiency

by Brian Johnson on April 6, 2009

Money and JusticeRight now, if someone were to sue you, the bottom line is that it would cost you money.  It wouldn’t matter if you were innocent – the case could be groundless or even ridiculous – it would still cost you money.  On the other hand, it cost nothing for the average person to threaten a lawsuit or for a lawyer to pursue a lawsuit if they have extra time on their hands.  Because of what is called the American Rule upon which our legal system is based, those engaged in lawsuits pay their own expenses.  In other words, even if you win, you still have to pay the lawyer.

Because it costs nothing to threaten a lawsuit, this results in a kind of legalized extortion.  An example might help to illustrate the point: imagine some person A who threatens to file a lawsuit against person B unless he gets $1,000 from person B. Person B is faced with a choice:  will their lawyer charge them more than a $1,000 to defend them.  If they choose to go to court and lose, they are out of pocket $1,000 plus their lawyer fees, but even if they win, they still have to pay the lawyer’s fees which are likely to amount to much more than $1,000.  The choice is really no choice at all.  It is in B’s best interest to pay the $1,000, and it is in person A’s best interest to keep bringing threats and lawsuits against other people given that each one earns him some cash.

We Need a New Manhattan Project

by Odysseas Papadimitriou on April 2, 2009

Manhattan ProjectAs we discussed, in our previous post “Stimulus Plan Misses A Golden Opportunity“, the Obama administration spending bill concentrates on mending America, whereas it should be concentrating on getting America set to make a strong return to the world market after the recession.  In this post we’re building off of that idea and making some suggestions about how the government spending should be used to support America as a global economic leader.

President Obama is now in a position with his spending bill to invigorate the economy, just as Presidents have done in the past.  What we should remember is that when the American government has, historically, spent money to revive the economy, its most notable successes were not related to improvement or repair, but to innovation.  A concentration on the development of new technologies has always signaled eras of prosperity for America.

Stimulus Plan Misses a Golden Opportunity

by Brian Johnson on April 1, 2009

Golden OpportunityThe Obama administration’s stimulus plan is commendable for its size, its urgency, and its impact.  At Wallet Blog, we believe that it will be a powerful force in getting us out of the recession.  We do not, however, agree with the areas and projects to which the money is being funneled because the concentration is not on innovation.  The competitiveness of our country comes down to how much the world wants to buy from us, rather than how much we want to buy from the rest of the world, and the stimulus plan does not concentrate on the development of new products.

Instead, the areas of spending are aimed at areas like increasing the quality of America’s roads and bridges, providing incentives for the weatherizing of homes, and providing tax cuts. All of these improvements are good in the plan’s short term goal of ending the recession, but they do nothing towards making the rest of the world want to buy things from us.  Part of the reason we are in a recession is America’s inability to sell new products in the international marketplace. 

Money, TV Shows, & Entertainment

by Brian Johnson on March 30, 2009

CassandraMoney shows should not treat finance as entertainment by turning the buying of stocks into a joke or by turning a discussion of serious economic situations into an occasion for groundless argument.  These shows discuss issues directly involved in the managing of people’s money, pensions, savings, and 401ks. The networks that produce these shows, then, have a moral responsibility to treat the subject matter with the seriousness that it requires. 

To fulfill this obligation, the networks should do two things.  First, the network should only invite experts to discuss financial topics.  Participation should be limited to those who have actually worked in the field that they will be discussing.  All too often, financial reporters who have little or no work experience in a particular field are invited to comment on very serious economic issues and their presence drowns out the founded insights of real experts who should be listened to.  Second, the networks should see themselves as obliged to foster a healthy debate founded on factual evidence and cogent argument, and not gut feeling.  The moral obligation of these networks should be a constant pursuit of the truth.

American Workers Need A Leveled Playing Field

by Odysseas Papadimitriou on March 30, 2009

Leveled Playing FieldAny government’s job in a free market economy is to level the playing field for workers and employers.  This is true nationally, and it is certainly true internationally.  However, the government’s current demands through payroll taxes are contributing in the creation of an uneven playing field in that American employers are required to pay taxes over and above their American employee’s salaries. 

When an American company hires an American, they are expected to pay 6.2% to social security, 1.45% to Medicare, and .8% to state and federal unemployment insurance.  Thus an American worker making $5,000 is costing his or her employer $5,422.  That same employer could employ a Chinese or Indian worker for $5,000 without any extra taxes.  Payroll taxing punishes employers who hire Americans and encourages employee outsourcing.

To AIG Executive: Who is your boss?

by Brian Johnson on March 29, 2009

BossHaving read in the NY Times the open letter of resignation sent by Jake DeSantis, Vice President of AIG’s financial products unit, we would like first to extend our sympathy to Mr. DeSantis for having borne some of the brunt from his company’s hardships. We would also like to acknowledge and recognize Mr. DeSantis for essentially not taking a salary as he worked towards putting this company back together.

That said, we couldn’t help but notice that Mr. DeSantis addressed his letter to the wrong person. Clearly, as it is a letter of resignation it should be officially addressed to AIG CEO Mr. Liddy. However, Mr. DeSantis does not seem to be aware that his letter ought to at least extend an explanation to the owners of the company particularly since it was the owners who demanded that his bonus, and the bonuses of his coworkers, be returned. As taxpayers, you and I own 80% of AIG. As taxpayers, you and I demanded that Mr. DeSantis return the money.

Analysis: Obama's Plan for a Financial Overhaul

by Odysseas Papadimitriou on March 28, 2009

OverhaulAccording to the Associated Press the Obama administration has released its new proposal for dealing with the economy.  In response, we would first like to recognize the effort made by Treasury Secretary Timothy Geithner for realizing the need for an overhaul.   We feel that 50% of solving a problem is recognizing its scope.  Here at Wallet Blog, we’d like to throw our own advice into the mix, point-by-point, as outlined by Martin Crutsinger in his article.  The administrations proposals are:

  • “Imposing tougher standards on financial institutions that are judged to be so big that their failure would threaten the entire system.” AND “Creating a regulator to monitor the biggest institutions. Geithner did not say which agency should wield such authority, but the administration is expected to favor the Federal Reserve.”

We agree to the principal of tougher standards for larger institutions, but we should be weary of allowing any financial institution to grow to such a size that they would threaten the entire system by their failure.  Institutions of this size are unmanageable (Citibank and Bank of America are great examples in proving the point).  They are unmanageable for the executives and definetely unmanageable for the regulators. Their value to the market place is questionable given how difficult they are to run and is disproportionate to the damage they can cause through failure, as we all learned recently. So what are the market benefits of allowing an institution to become so big that if the regulators do not do their job it can bring down the entire economy?

Analysis: Financial Experts on TV

by Brian Johnson on March 25, 2009

Just because they’re on television doesn’t mean that they’re experts. Watching this video from Fox News Cavuto On Business, August 18th, 2007, we have five experts talking about the economy: Ben Stein, Tracy Burns, Charles Payne, Stuart Varney, and Peter Schiff.

[video http://www.europac.net/media/Schiff-Fox-8-18-07_lg.wmv nolink]

HYPOCRISY times a thousand

by Odysseas Papadimitriou on March 23, 2009

HypocrisyEveryday the headlines are filled with news of public and political outrage at AIG, their shady business practices, the various scandals in which their executives seem to be involved.  The latest of these scandals is, of course, the $165 million in bonuses that AIG paid out using taxpayer money through the government bailout.  Don’t get us wrong, here at Wallet Blog, we too are appalled that AIG turned around and used taxpayer money to essentially pay out staff who helped run their company, and as a result, the American economy, into the ground.

However, we need to keep in mind that 165 million dollars, while a lot of money, is more than 1000 times smaller than the amount of money that the government has given AIG in bailouts thus far…and that’s just AIG.  Why is the American financial news community concentrating on 165 million of mismanaged funds, when there’s the subject of 180+ billion dollars that have been handed over to AIG as a direct result of the CDS SCANDAL, which Congress and President Clinton passed into law, in December of 2000, after being illegal for 91 years?

AIG Needs to Go into Prepackaged Bankruptcy

by Odysseas Papadimitriou on March 22, 2009

AIG BankruptAs an insolvent company of this size, the government really has only two options for dealing with AIG.  They can either keep pumping money in, allowing AIG to fulfill all of its obligations (i.e. what the government is currently doing), or take AIG through a prepackaged bankruptcy to remove AIG’s Credit Default Swap (CDS) obligations. AIG has huge CDS obligations as a result of their greed in exploring the regulatory loophole that was created from CDS scandal.

By AIG not paying off its CDS obligations, there will be ripple effects throughout the banking/insurance industry.  However, we believe that dealing with these individual crises on a case-by-case basis, will be a much more efficient use of tax payer’s money. The President needs to work towards the best solution for taxpayers’ money. Clean house Mr. President! 

Unemployed Get Forced to Pay Debit Card Fees

by Brian Johnson on March 21, 2009

feesAccording to a recent CNN story, state unemployment agencies are making benefits available either immediately through a debit card or after a ten day waiting period through check. These agencies have loaded their debit cards with numerous little fees designed to nickel and dime anyone getting unemployment payments through this method.

If state unemployment agencies offered an immediate turnaround for providing the unemployment benefits regardless of whether the recipient chose the debit card option or the check option, there would be no problem.  Given that these benefits are going out to people who are unemployed, in many of these cases, the choice of waiting 10 days to get a check is really no choice at all.  Bills need to be paid, and food must be bought.  Having already waited for unemployment, once they get their benefits, they need them immediately.

Piggybacking Must Come to an End

by Odysseas Papadimitriou on March 17, 2009

Piggybacking Must Come to an EndThe current recession has brought to the spotlight the dire consequences of piggybacking by the U.S. Congress. Piggybacking is the term used to describe the process of grouping unpopular legislation together with the popular so that the unpopular legislation passes into law.  The legislation attached to one another needn’t concern the same subject.  Piggybacking is very dangerous because it further impedes the ability of congress to vote in a responsible and well informed manner.

There is no greater example of the danger of piggybacking from the passing of The Commodity Futures Modernization Act which, after 91 years, legalized CDS. This irresponsible piece of legislation is currently costing hundreds of billions of dollars of tax payer’s money thru all the bailouts.

Politicians Keep Quiet About The CDS Scandal

by Odysseas Papadimitriou on March 16, 2009

Politicians Keep Quiet About The CDS ScandalCredit Default Swaps (CDS) are one of the primary reasons for the crash of the American financial system.  Given their impact, one would expect to see a political backlash against the practice through the various media outlets that report on Washington’s finger pointing, but the backlash hasn’t happened.  What reprimands have been handed out have been quietly conducted so that the average taxpayer, now suffering in a broken economy, hasn’t heard about the CDS scandal or its implications.  Politicians don’t want taxpayers thinking about Credit Default Swaps because congress is responsible for making them legal after 91 years of their being a felony offense.  It is not incidental that Warren Buffett famously described CDS and other derivatives that are bought speculatively as “financial weapons of mass destruction.”

Though there are a number of different varieties of Credit Default Swaps, and all are fairly complex, the easiest way to think about them is that they are like betting without any assurance that either party has the money to cover their bet. The impact of a Credit Default Swap (or a bet) can be collectively illustrated by this simple example: imagine some Company A makes a $1 million bet with Company B that “John Smith” will default on his $200,000 mortgage.  When the mortgage is defaulted, Company B owes Company A $1 million.  The financial problem, ignoring for a moment the Credit Default Swap, is that the bank holding John’s mortgage is $200,000 out of pocket. The CDS compounds the problem because, not only is the bank out $200,000 but Company B is also out another $1 million. In the end, the $200K mortgage had a $1.2 million impact. If Company B had money on the side specifically to cover the bet, then this financial crisis would simply be Company B’s to handle, but our elected representatives did not bother to ensure that these companies had the money to cover their bets.

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