How Does Europe Solve its Debt Crisis?

by Odysseas Papadimitriou on November 29, 2011

Whether you are well-versed in international economics or not, you’re probably aware that Europe is having substantial problems. You’re also likely familiar with the resulting worldwide ripple effects: uncertainty amongst investors, fears of a global double-dip recession, and widespread political upheaval, just to name a few. Of course, there are a number of prominent theories for how to solve Europe’s debt crisis, but given the depth and complexity of the problem, none is perfect and each requires tough choices to be made. People – not just in Europe, but around the world – need hope, however. We need a plan, a sense that these economic issues are finite and not permanently debilitating. So, with that being said, what say we take a quick look at four different courses of action that Eurozone governments can take, the pros and cons of each, and which will provide the most long-term benefit without causing short-term chaos.

Option 1: Economically sound European countries pay down southern debt
This plan would involve countries like Germany, the Netherlands, and Finland using savings, tax revenue, and export surpluses to help pay down the debts of southern neighbors like Greece, Portugal and Italy until they are at manageable levels. Such an approach is logical in the sense that the economies of European Union (EU) nations are interconnected, and the default of one or more countries would have negative repercussions for others.

What’s the Connection Between Unions and Your Wallet?

by Odysseas Papadimitriou on November 9, 2011

labor union workersUnions are inextricably tied to the U.S. economy. Since the industrial revolution, they have served an important purpose, ensuring that there is a balance of power between management and labor. But what if things have gone too far? Could unions actually be costing Americans jobs by forcing companies to outsource? And, if so, what’s the solution?

To understand the role of labor unions today and how they could be jeopardizing your wallet, we must circle back to their origins. When most of the U.S. labor force was concentrated in mills and factories in small towns and growing industrial epicenters, connected only by a limited railway network, unions played the dual role of watchdog and agent. They ensured that management could not subject workers to inhumane conditions or force them to accept unfair compensation by giving workers bargaining power borne from unity, organization and educated leadership. For many of us, the noble role unions played during this time, righting wrongs like those explored in Upton Sinclair’s famous novel about the U.S. meatpacking industry, The Jungle, created a romanticized image that unfortunately does not match up with current realities.

Switzerland Supports Criminals & Hurts Your Wallet

by Odysseas Papadimitriou on November 2, 2011

wb_swiss_criminalsWhen you think of Switzerland, the first few things that likely come to mind are bank accounts, chocolate, and neutrality, and there’s a reason for that. The Swiss love to portray themselves as mild mannered people who eschew crime, make delicious candy and run perhaps the most unique banking industry in the world. But hidden behind this façade are layers of hypocrisy and implicit criminal involvement, which allow illicit operations to flourish around the world and provide safe haven for tax evaders. Lost in the aura and tradition of Swiss banking isolationism is the negative effect the Swiss system often has on citizens of other countries. The bottom line is that economies around the world are now more interconnected than ever, and if we want the world to become a safer place or all U.S. citizens to be held accountable for the same tax laws, then Switzerland will need to adjust or risk expulsion from the Western financial network.

Swiss Banking’s Murky Past
Swiss banking secrecy officially took effect in 1934 with the passage of the Swiss Banking Act—which effectively made it illegal to share bank account information with third-parties, including Swiss authorities and foreign governments—and even the circumstances of these origins are enough to raise eyebrows. Switzerland has long justified its banking secrecy laws by harping on the merits of personal privacy, and while this is likely a large part of the equation, scholars seem to agree that the aforementioned 1934 law was passed in reaction to a French scandal, which involved France’s Prime Minister accusing distinguished French citizens from various walks of life of stashing money away in Swiss banks and thereby funding the Nazi regime.

Down with Default Rates!

by Odysseas Papadimitriou on October 5, 2011

penalty aprIn a previous article, I made the case that usury laws are counter-productive. Usury laws, which cap interest rates for lenders, completely fail to serve their intended purpose of forcing banks to deliver affordable loans and instead result in the declining availability of loans for anyone whose credit history merits an interest rate above an arbitrary cap. While this is still true for regular interest rates, I would like to suggest one particular feature of our contemporary lending industry that could actually benefit from usury laws: Penalty rates.

Why? Because penalty (or default) rates on loans and credit cards currently dictate the order in which consumers repay their debt obligations during times of crisis and invite banks to engage in reverse competition over who can charge the highest interest rates.

Usury Laws, Anyone?

by Odysseas Papadimitriou on September 28, 2011

usury interest ratesEvery so often, talk of curbing excessive lending practices by instituting usury laws at a federal level resurfaces, and speeches are made, hearings are held and editorials are written, but nothing ever comes of it. This begs a couple of questions: For starters, what are usury laws exactly, and—perhaps more importantly—do we need them?

Usury laws are those that prevent high interest rates, and as a result typically garner popular support, especially in times such as these when the economy is fledgling and anger toward financial institutions is running high. However, you cannot truly evaluate the merit of these laws, which at their basis are a means of forcing lenders to serve the greater public good, without understanding their practical effect.

Shareholders Don’t Want Board Members, Who Cares?

by Odysseas Papadimitriou on July 29, 2011

Board RoomImagine for a second a U.S. president loses an election, decides he’s just not ready to give up his power yet, and concludes that he’ll remain president for another four years, whether the American people want him or not. How do you think that would go over with the voters? Not so well, I would guess. In fact, he might have to board up the White House’s doors and windows to deal with the resulting revolt.

Well, if you think about it, that’s essentially what’s going on right now with the board of directors system in this country. According to Business Week, more than 200 board members at public U.S. companies over the past three years have received less than 50% of the shareholder vote at elections, yet all but a few retained their seats. Two-thirds of the S&P 1,500 doesn’t even require that board members garner the approval of a majority of shareholders in order to keep their positions. But how could that possibly be?

Is it the Beginning of the End for Magnetic Stripe Credit Cards?

by John Kiernan on July 12, 2011

magnetic-stripe-death“A what?” This just might be a common refrain from children a few years down the road in response to their parents discussing the good old days of magnetic stripe credit cards as if they were single-digit movie theater prices or some other relic of yesteryear. Indeed, the magnetic stripe credit card, common in the United States since the 1960s, might be on its way out. But this isn’t the first time the death knell has tolled for magstripe cards, so why should we believe it this time around?

Notable Replacement Efforts

Bank of America’s Membership Fees Break Law’s Intent, Follow Treacherous Industry Trend

by Odysseas Papadimitriou on March 4, 2011

no-repricingBack in 2009, Wallet Blog broke the story that Chase had reneged on a promise it made to certain customers not to increase the interest rates on balances transferred to the company’s credit cards. While Chase did not increase interest rates per se, the company did begin assessing $10 monthly fees that increased the cost of consumer debt nonetheless. Working together with the New York Times, Wallet Blog made the story national news, causing then-New York Attorney General Andrew Cuomo to threaten legal intervention against the financial giant. As a result, Chase repealed the monthly fees and even provided refunds to the customers it had already charged.

Such actions were taken because, from a regulatory standpoint, there is no practical difference between interest rates and fees. Both are considered finance charges. In its Federal Truth in Lending Act (Regulation Z), the Federal Deposit Insurance Corporation defines finance charges as:

Fed Rules Promote Accurate Underwriting, Not Gender Inequity

by Odysseas Papadimitriou on March 2, 2011

HouseholdThere has recently been a great deal of talk about rules proposed by the Federal Reserve that seek to require credit card companies to consider the merits of applicants based on individual rather than household income. These rules, critics contend, stand to significantly affect stay-at-home mothers by preventing them from establishing credit history in their own names, which would be extremely important to garnering a loan, renting or buying a property, and/or landing a job in the case of divorce or the death of a spouse.

Given that 2010 Census figures show men to be the sole breadwinners in 28.2% of couples with children under the age of 18 and women to be the only earners in about 4% of such families, roughly 7.3 million women and 963,000 men would face a difficult time garnering access to credit if the claims made by the rules’ detractors prove to have merit.

Credit CARD Act Creates Loophole in Payment Allocation

by Odysseas Papadimitriou on June 9, 2010

LegislationAs we all know, the Credit CARD Act that came into effect earlier this year was meant to protect consumers from egregious practices by the credit card companies. By and large, the new rules do a good job in accomplishing this goal. However, there was one revision in the final draft of the bill around payment allocation that does not have the consumer’s best interest at heart.

The new payment allocation rules state that any payment above the minimum must be applied to the balance with the highest APR first. While this is an improvement from the previous payment allocation rules, it still offers no benefit to people who can only afford to pay the minimum payment each month – that’s 29 percent of Americans according to a FINRA National Survey.

Cash For Caulkers

by Brian Johnson on March 13, 2010

cash-for-caulkersThere has been some talk about a ‘Cash for Caulkers’ program that would refund homeowners 50% of their costs to renovate their properties in order to make them more energy efficient.  The program,officially called Home Star,  is unofficially being dubbed ‘Cash for Caulkers,’ and represents another effort in getting us out of the recession.

The program is obviously trying to emulate the Cash for Clunkers program, which helped stimulate the auto industry.  While I agree that Cash for Clunkers was a great idea, it was not without its faults.  Most notably, though it put people into new cars, it did nothing at all to make America more competitive on the global market.  What Cash for Clunkers did, essentially, was to tell the American people, “don’t worry about the recession; buy a new car!”  The day after buying their new car, however, Americans saw more unemployment, more banks failing, and more homes going into foreclosure.  It didn’t solve the real problem.  The money set aside for the Cash for Caulkers program will likely have the same effect:  it will make Americans spend money, but it won’t do anything to really end the recession we’re in.

Citibank continues experiments with derivatives

by Brian Johnson on March 1, 2010

cdsIn a recent Market Watch article, David Weidner commented that Citibank is attempting to create a new product, the CLX, which acts as insurance against financial collapse.  The product sounds, as Weidner deftly points out, a lot like the Credit Default Swaps that helped cause our current recession.  It involves the same risks and is being endorsed using the same shaky justifications.

The problem with financial products like the CDS or the CLX is, first and foremost, that it is unclear who covers the ‘bet.’ If financial collapse does happen, and Citibank is to make good on their CLXs, what guarantee is there that Citibank will be in a position, post-collapse, to honor its obligations?  And if it isn’t in a position to honor those obligations, who does?  What’s clear after the fallout of the CDS scandal is that the responsibility of paying off the debts of ‘too big to fail’ financial institutions inevitably falls on the American tax payer.

No New Jobs from the Job Bill

by Odysseas Papadimitriou on February 24, 2010

no-jobsThe current Job Bill being debated on Capitol Hill, in its most recent form, holds at its core an incentive to hire people who have gone more than sixty days without a job.  Businesses that hire these workers are allowed to forgo paying their social security taxes throughout 2010.  The extent of this benefit depends both on the employee’s rate of pay and on the length of their employment.  The hope is that this will provide employers incentives to create new jobs.

Whether the bill passes or not, it’s unlikely to do much by way of solving the unemployment problem in this country because it’s built upon a faulty premise: that the reason employers aren’t hiring is because they can’t afford to pay social security taxes—which only amounts to about 6.2% of the employees paycheck.  The truth is that employers hire people because they need the help.  If there is no demand for their products, then they certainly don’t need more people to help them manage their dwindling operations.  To put it plainly, an incentive of 6.2% simply doesn’t address the problem of dried up demand.

Bonuses: Not all Banks are the Same

by Odysseas Papadimitriou on February 3, 2010

BonusesIt is frustrating that American banks, post bailout, are paying out record bonuses given that many of those banks would not be in business if they hadn’t received a handout at the tax payers’ expense.  In response, President Obama is now threatening to heavily tax these bonuses to send the banking industry the message that the American people will not stand for such behavior.  The depiction of these banks in the media and by the government, however, is far too simplified.  Not all banks are the same.  Some banks simply didn’t need the bailout and other banks received aid indirectly when the government bailed out their debtors.

For a company like AIG, the issue is quite clear.  They would have failed had we not bailed them out.  As a result, we now own most of their company.  AIG clearly shouldn’t give their executives a bonus.  Moreover, as shareholders, we have every right to demand that those executives don’t get a bonus.  On the other hand, some banks didn’t need a bailout.  Capital One, for instance, was forced to take the government’s money so as to help stabilize the economic disaster.  Their cooperation helped conceal the real problem areas (i.e. Citibank and Bank of America), thus preventing investors from cutting and running on companies that desperately required the bailout to stay afloat.  Those banks which didn’t need the bailout repaid that money almost immediately and they shouldn’t be penalized.  If anything, they should be rewarded for helping the American economy stay afloat and for having a sustainable business model when, all around them, other giants of their industry were toppling.

We Are All Doing More With Less - Except for our Goverment

by Odysseas Papadimitriou on January 23, 2010

wasteful-spendingMore and more American families these days are learning to live within their means.  They’re making trade offs about what they want, what they need, and what they can afford.  They’re trying, during these hard times, to make their dollar stretch as far as possible.  You’ll notice that what they aren’t doing, or at least not in great multitudes, is borrowing against their future so as to maintain their lifestyles.  Sure, the draw to live as one has become accustomed is strong, and likewise, the ability to buy on credit is still a possibility.  Were there no repercussions, were it simply a case of someone saying, “here take this, no strings attached,” we wouldn’t need to make sacrifices so that we can live within our means.  However, when we know that there will be repercussions for our spending, that the credit card bill will come or that the bank will want their money back, we also know that we are going to have to do more with less.

Note, this is not a post about family budgets, but a post about national budgets.  America, like America’s households, needs to learn to get more done on less money.  Just as with those households, it is easy for the country to buy on credit, on the assumption that we can repay at some later date… far too easy in fact.  Very little will stand in the way of our nation going deeper into debt, but just as with a normal household, someone has to eventually pay the bill.  That money is not given to us—it comes with repercussions.  Our President seems to be operating in the same mode as his predecessor:  putting our nation into deeper and deeper debt so as to pay for all the projects that he wants to start or maintain.  Congress raised the federal deficit cap in February of 09, they raised it again this month, and are poised to raise it again next month as part of a larger economic bill, currently before the Senate.  Simply raising the amount of debt the federal government allows itself to accrue is easy enough to do.

Business As Usual For Congress

by Brian Johnson on January 20, 2010

CongressOn January 14th, Congress voted to increase the federal deficit cap to $12.4 trillion having  raised it from $12.1 trillion February of last year.  The bill was a concession by Democrats who had planned an attempt to increase the federal deficit cap by $2 trillion in order to prevent having to call another vote before next year’s midterm elections.  Already, Democrats are pushing to increase the deficit cap again by mid-February to prevent the U.S. government from spending more than it is allowed and therefore default on certain obligations.  Because the government tax revenues simply cannot cover the rate of government spending, both the national debt and the interest on that debt continue to grow.  For most Americans, this is cause for concern.

Not for Congress though.  The increase to the deficit cap follows on the heels of  last year’s huge omnibus spending bill signed into law on December 16, 2009 which earmarked $446.8 billion for special projects and increased federal spending by 10 to 12%.  Its the kind of thing that can only make it into legislation in December when lawmakers are in rush to make it to the holiday recess and haven’t had the time to give proper vetting to the measures on the table.  It was a holiday surprise for the average tax-payer and a gift to the numerous special interest groups that, sadly, have influence on our lawmakers.  We may recall that it was just such an omnibus spending bill that legalized Credit Default Swaps.  In 2009, despite the fact that the federal government had reached the limit of money that it could borrow, the omnibus spending bill wrapped together 6 different lesser spending bills and had provisions for over 6,000 back home projects for the lawmakers who sponsored it.

The Mortgage Relief Plan is a Failure

by Brian Johnson on January 12, 2010

failureOur government suffers from a naivete with some of its plans to resuscitate the economy which consumers simply cannot afford.  To be more specific, the current administration needs to come to terms with the fact that business practices are dictated by laws and potential for profit.  Businesses cannot, and should not, be counted on to change their policies out of the goodness of their hearts.

Last March, the Obama administration put into place its Mortgage Relief Plan to help homeowners stay out of foreclosure by urging banks to institute loan modifications for borrowers.  Renegotiation of their loans would allow borrowers to make payments on a more affordable rate, allowing them, in theory, to keep homes that would otherwise go into foreclosure.  Since its launch last March, the plan has provided permanent loan modifications to only 4% of those who have attempted to sign up.  Lenders like Bank of America have helped only .06% of the people who’ve requested a modification.

Wallet Blog's Top 10

by Odysseas Papadimitriou on December 28, 2009

wallet-blog-top-10We’re coming up on the close of the year, so we thought we ought to take stock of some of the ideas we’ve put forward that we think are central to our commentary on the world of finance. Since starting Wallet Blog, we’ve found that our mission to provide information on the nation’s economy, consumer advocacy and commentary on the financial news of the day has become deeply linked to the recession.  Because of this, we’ve written many articles on what we think our country’s leaders should do in order to fix the economy, as well as what we think about what they’re actually doing.  During that process, we’ve noticed that a number of major factors keep coming up to describe the problems with the state of our economy and our recovery.  We wanted, then, to take a moment to summarize the ten things we see as endemic to the economic problems we are facing and the steps we see as necessary to achieving their solutions.

10.  Level the Playing Field for American Workers:  We shouldn’t be penalizing U.S. companies for hiring from inside the country rather than outsourcing.  The payroll taxes that our government requires employers to pay for their American workers encourages companies to hire from outside of the United States.

Did Washington Learn Anything About Bad Loans?

by Odysseas Papadimitriou on December 17, 2009

bad-loansOn December 14, 2009, President Obama met with CEOs of the largest banks to urge them to approve more loans, to lower interest rates, and to curb fees.  The meeting was obviously in response to Federal lawmakers’ feeling that, having bailed out the banks, the nation has a right to expect concessions from its financial institutions.  This feeling is fueled by the belief that America’s banks, having received federal funds, have since failed to adequately return to the business of loaning money.

To put this in perspective, we should remember that one of the large contributors to the current recession was the practice of giving out home loans to people whose incomes and credit histories did not justify those loans.  The assumption was, of course, that any loan was essentially a good investment since the value of the house was expected to appreciate astronomically.

Pay for Health Care NOT with Taxes but by Engendering Competition

by Odysseas Papadimitriou on December 4, 2009

TaxesThe latest version of the health care reform bill, sponsored by congressional Democrats, offers a mixture of both productive and counterproductive methods of gaining the necessary revenue to make affordable national health care a possibility. However, by-in-large, the bill ignores the fact that we operate in a free market capitalist society, in which competition exists in order to keep costs down. Instead, the bill proposes a funding solution that will cause a trickle-down effect, with the costs of reform being passed back to the consumer at the end of the day.

The bill does have a few provisions that would encourage competition and thereby drive down costs. For instance, it includes a provision that would allow the government to negotiate prescription drug prices for beneficiaries. However, in large part it targets the medical industry as a funding source for the suggested overhaul, by levying fees and taxes on medical device manufacturers and drug companies, among others.

"Same Old, Same Old" is Getting Just Plain Old

by Brian Johnson on December 1, 2009

old-ideasAs Americans, you and I are part of a country with a great history of overcoming obstacles.  However, that history has always been rooted in the basic understanding that during extraordinary times, we are called to extraordinary courses of actions.  In order to overcome the problems we have faced, we have had to reinvent ourselves and the manner by which we handled our problems.  When our economy crashed in the late 1920s, we pulled ourselves up by our bootstraps, organized work projects and made our nation strong enough to engage in combat against the threat of world-wide fascism.  After decades of isolation following World War I, when America was called into action by the attack on Pearl Harbor, we rose to the occasion waging a new kind of war in Europe and the Pacific.  When it became clear that the fascist forces of Nazi Germany and Imperial Japan posed new kinds of threats to the peace and stability of the world, we met that threat by creating the atomic bomb.  When our country was faced by civil unrest, when the edifices of our nation’s governance proved unequal to its nation’s citizenry, we changed the manner of our laws and even our society to work towards civil rights and equal opportunities for all people.  We are a nation composed of people able to make drastic changes to meet our extraordinary circumstances.

It is, therefore, disheartening to hear the Thanksgiving affirmations of our nation’s leaders.  President Obama promises to extend unemployment benefits and secure national health care.  Meanwhile, we borrow money in record amounts and 1 out of every 10 Americans is unemployed.  Speaking on behalf of the GOP, Representative Mike Pence (R-Ind), offers that the answer to our economic issues is to cut taxes. Neither side provided any original answers.

Politicians Focus on Greed Instead of Competition

by Odysseas Papadimitriou on November 23, 2009

greedLawmakers and the media seem to have dubbed greed as the primary evil responsible for the downfall of the American economy.  Insurance companies are routinely accused of greed, as are credit card companies and networks, investment banks, CEOs and so on.  In these times of economic hardship, when the nation’s economy is in desperate need of examination and revision, our federal policy makers are eager to put checks on greed in order to help fix the economy.   However, the truth is that in a capitalist economy, profits aren’t a sign of greed, they are a sign that a given company’s business tactics are successful within the competitive system in which that company operates.  If lawmakers think that specific companies are making too much money, then the problem isn’t corporate greed, it’s that there simply isn’t enough competition to keep those players from making excessive profits.  The President and Congress are determined to use their legislative powers to bail out the U.S. economy, but they ought to be concentrating their efforts not on greed, but instead on the lack of competition in the marketplace.

Instead, lawmakers have been continuously critiquing the profits of large companies, like those in the health insurance and credit card industries, attributing their successes to greed and greed alone.  The business practices of these companies are then regulated by numerous redundant agencies, creating enormous and costly bureaucracies that bog down the system and drive up prices.  In addition, they also create a system in which small companies cannot afford to compete with larger companies, and where companies operating within a single state are hampered by the regulatory costs and procedures that are associated with going national.

Congress Should Address Medicare Fraud Before Spending More of Our Money on Health Care Reform

by Brian Johnson on November 20, 2009

If you tuned in to “60 Minutes” on October 25th, you saw a segment detailing the extent of fraud committed against Medicare and taxpayers.  If you missed it, here it is:

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Geithner lacks the judgement to do bailouts

by Odysseas Papadimitriou on November 18, 2009

GeithnerIf Treasury Secretary Timothy Geithner doesn’t know how to get appropriately compensated for the loans / bailouts that he keeps approving on behalf of the United States Government then he shouldn’t be giving out these loans at all.  His mismanagement of these negotiations is wasting our money.

For instance last year, when Geithner, then operating through the New York Fed, decided to bailout AIG, the ailing insurance giant was already in negotiations with banks that would have retired their Credit Default Swaps with AIG paying 40 cents on the dollar.  Once Geithner took over the negotiations, he instructed AIG to pay 100 cents on the dollar.  The flubbed negotiations cost American taxpayers at least $19 billion (i.e. 60% of the $32.5 billion that AIG paid to retire the swaps).

Bank of America Tries but Fails to Defend New Annual Fees

by Odysseas Papadimitriou on November 10, 2009

no-repricingLast week, we posted a blog entry that called out Bank of America for its plans to begin testing the introduction of annual fees on active credit card accounts. Relative to the October 6th media frenzy that occurred after BofA wrote letters to both Sen. Chris Dodd (D-CT) and Rep. Barney Frank (D-MA), pledging that it would stop re-pricing its existing credit card customer base, these new annual fees are unethical and contradictory to the promise the bank made to both lawmakers and to its customers. Additionally, it is our belief that if Bank of America moves forward with its plans to raise membership fees on existing customers into 2010, it will be breaking the laws mandated under the CARD Act, which is slated to take effect in February of next year.

We knew our blog post might spark some controversy, and that it would likely circulate quite a bit. Nonetheless, we were still surprised when we were contacted by Bank of America’s corporate communications department. The spokesperson who contacted us insisted by phone that Bank of America’s letter to Sen. Dodd and Rep. Frank referred to interest rates and interest rates only, and that it made no mention of annual fees. We found the letter. Here’s what it said:

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