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. 

Misleading Stock Charts

by Odysseas Papadimitriou on March 31, 2009

Misleading ChartsAll the leading providers of online stock quotes (Yahoo Finace, MSN Money, Google Finance) supply a chart that shows the price of a stock over time.  This type of chart is handy for people who already own the stock as it allows them to track their investment as it rises and falls.  People who are hoping to invest, however, need to know the value of the company over time.  The current charts are not useful for this purpose and are actually misleading because they create a false impression of the company’s value over time.

As we all know, the market capitalization of a company is the number of its shares times its stock price.  The current charts used do not show how the value of a company changes when that company issues more equity (i.e., more shares) in order to raise more cash, a common practice in a recession.  These charts simply show the stock price.

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]

Unlimited FDIC Insurance

by Brian Johnson on March 24, 2009

FDIC UnlimitedLet’s face it: one of the things that we’ve learned from the current economic crisis is that the U.S. government isn’t going to allow any significant number of depositors to lose their money when a bank fails (which we completely agree it is the right and smart thing to do).  If this is the practice, then, wouldn’t it be better to make this the official policy?

If the government is already unofficially insuring savings accounts, regardless of size, they would do well to turn this practice into public policy, and let Americans and the rest of the world know that, no matter the size of their savings account, their money will be safe in a U.S. bank. 

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.

Less Rewarding Credit Card Rewards

by Brian Johnson on March 10, 2009

wb_rewardsRewards programs have been used to lure in customers, but with the credit card crisis, the value of those rewards is being altered.  According to a letter that Citibank sent out to its customers, as of March 1, 2009, “ThankYou Network may be revised in a manner that may affect your ability to use the ThankYou Points you have already accumulated.” More specifically, “20,000 Thank You points used to get you a $250 gift card and now they only get you a $200 gift card” says Heather Stockburger, a Citibank credit card customer. This backpedaling and manipulation of the value of reward reinforces what Card Hub (owned by the same company as this blog) has been saying for some time:  cards with cash-back programs are better than mileage or points rewards cards because they give you what you earn as you go and do not store up your earnings in points systems that can be changed by the card issuer.

Citibank is not alone in altering their points system.  Reports from multiple sources now suggest that the rewards point systems are changing on cards issued by Chase, Discover, and American Express.  With these companies altering their points and miles rewards, membership is becoming significantly less rewarding. 

Recession: Give Credit Where Credit Is Due

by Odysseas Papadimitriou on March 6, 2009

Recession: Give Credit Where Credit Is DueResponsible citizens are getting higher interest rates on their credit cards and loans.  Their retirement funds and investment portfolios are evaporating.  In the midst of their attempt to deal with this financial upheaval, they are losing their jobs.  Future generations will inherit an untold surplus of debt because of our mistakes and yet no clear accounting has been made of all the problems we must fix so as to not repeat those mistakes going forward.

We must learn from our errors. Stimulus packages, tax cuts, interest rate cuts, etc., may help to stave off the immediate crisis, but what we desperately need is a thorough assessment of what went wrong so that, long term, the processes that led us to this economic disaster can be repaired or replaced.

The Current Board of Directors System Must Go

by Odysseas Papadimitriou on March 5, 2009

Board RoomThe original reason to put a board of directors system into place was to give representation to the stockholders. The job of the directors is to act in the best interest of the company’s investors, to hire executives so as further those interests, and to make decisions so as to keep the company healthy.  The board system has failed at these tasks because it inclines members to work towards other interests even when those interests run contrary to those of the investors.  The system, simply put, requires a complete overhaul.

Such failure at the top is a problem because it sets the tone for the rest of the company.  If the board makes bad decisions, they ripple down across the entire management chain.  An incompetent board will hire incompetent executives who will surround themselves with incompetent subordinates. The system promotes a spread of bad decisions.  Moreover, if an incompetent board of directors allows executives to keep their jobs despite poor performance, it creates a corporate environment in which there are no repercussions for bad decisions.

What you need to know about the New FICO

by Odysseas Papadimitriou on February 10, 2009

What you need to know about the New FICOThere has been a lot of press surrounding the release of Fair Isaac’s new credit scoring system, FICO 08, and in my opinion the new FICO has been overhyped.   Nevertheless, both consumers and creditors should be glad to have it since it is a marginal improvement in the critical area of credit risk analysis.

The benefit of an improvement in this area must be understood in light of the credit industry’s reliance on the shared responsibility of all borrowers. In such a system, even the most responsible borrower suffers due to flagrantly irresponsible behavior by others.  Wide spread credit problems, then, have a disastrous effect for all borrowers—those who pay their bills on time as well as those who don’t.  Right now, the general condition of credit throughout America is hurt by the awarding of loans to individuals who can’t pay them back.  Any improvement in this area will better separate people who are good credit risks from bad so that banks can do better in distinguishing who should get a loan.  Ultimately, this leads to fewer losses for the banks and allows them to pass savings on to borrowers who are reliable. 

Troubling: Some of Chase's Recent Change in Terms

by Odysseas Papadimitriou on December 12, 2008

terms-conditionsRecently a customer of Chase wrote to me with concerns about what is happening on his credit card.  He had transferred a balance to a Chase credit card with a rate that was fixed for the life of the loan.  Recently, however, Chase started charging him a mandatory monthly “Account Services” fee.

After reading this letter, I am disturbed by the fact that people are now being assessed an additional monthly fee by Chase even though they were originally promised an unchanging rate contingent upon their behavior as a responsible borrower.

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