Devolve Regulation To The States

In our book, The Great Recession Conspiracy, we suggest that one of the steps that should be taken to ensure we do not repeat the Great Recession in the future is to remove bank regulation from Washington and transfer it to the state attorney generals.

Here is some very good evidence why this is an important action. Today's Washington Post carries a story headlined, "As Subprime Lending Crisis Unfolded, Watchdog Fed Didn't Bother Barking". One incident from the article is especially pointed. Beginning in 1999 (ten full years ago) a group of Chicago based community groups presented research to the Federal Reserve Bank that the high interest subprime loan originators were focused on black and Hispanic neighborhoods. They held those meetings THREE time a year and their complaints were dismissed out of hand every time.

We really need to get control of our lives away from Washington, a place where cutting self interest deals seems to be the only activity practiced. Read the rest of the article to watch indifference at work for a decade.

You've Gotta Love This!

Henry Blodget runs a site he calls The Business Insider. He has started a clock to count down the time until Treasury Secretary Tim Geithner leaves Treasury for a really good paying job at Goldman Sachs.

His point is that Geithner has been so good to Wall Street (Agreed!!) that he can pick where his next chair will be.

But before you get to worried about Timmy's finances, remember he was paid just under One Million Dollars for his last year at the New York Fed.

Henry also commiserates with Timmy because he can't sell his million dollar house in New York. But he doesn't deserve much sympathy here either. When he couldn't sell it for six months, he RAISED the price. Still couldn't sell it. And this guy is in charge of your money????

Pittsburgh Revisited

Today, the G20 group of countries is convening in Pittsburgh to consider, among other things, the fate of the world's financial system. The location is very appropriate. Business Cycles teach us that contractions aid in transferring resources from old, out dated industries to the new growth industries that drive the economy to expand and create new wealth.

Pittsburgh has understood that fact very, very well. Until the 1980's, Pittsburgh was synonyms with steel. Then other materials began to take the place of steel and plants began to close down. In the 1980's, Pittsburgh lost 100,000 jobs.

But the city government did not spent any time or money trying to save the steel industry. Instead, they invested in, and encouraged, the growth of health care and education in Pittsburgh. Carnegie Mellon University and the University of Pittsburgh, and the University of Pittsburgh Medical Center are highly visible symbols of the city's new direction.

The population has leveled off at about 313,000, and the city has become a center for high tech inovation.

Let's hope that the message of Pittsburgh is not lost on its newly arrived guests.

Numbers To Scare The Hell Out Of You

The Kaiser Family Foundation has just released their 2009 Employer Benefits Survey. Last year, the average cost of health-care insurance for an average family was $13,375, and increase of 138% over the past decade. On that track, the number for 2019 will be $30,083!

Understand clearly, that is the amount that wages are being reduced to cover the health care costs of your employer.

Now here is where Congress comes to play. The main "tool" that the government says it wants to use to "bend the upward curve in cost increases" is called "comparative effectiveness review". Study after study has shown that we pay an incredible amount of money for medical procedures that simply do not work, period. The government wants to collect all that data and make it available to everyone involved in health care.

Here comes Congress! They have inserted a provision in the current health care legislation that prohibits the government from using any of this evidence in deciding what Medicare and Medicad would cover.

We have a government that does not learn from its own mistakes, and now refuses to use facts in developing legislation!!!!

Medical Costs

Today's Los Angeles Times reports on a five year study by the Dartmouth Atlas Project on the costs of the last two years of life. Here are the results for selected California hospitals;

National average: $46,412

Highest Cost (All Los Angeles County Hospitals)

White Memorial $130,992
Alhambra $120,756
Hollywood Presbyterian $115,097
Cedars Sinai $106,951
Brotman $102,909

Lowest Cost

Redwood Memorial (Humboldt County) $35,990
St. Joseph (Humboldt County) $41,020
French (San Luis Obispo County) $41,686
St. Elizabeth (Tehama County) $41,751
Barton Memorial (El Dorado County) $43,326

And these differences are just inside one state, California. The national differences are even wider.

Now you can see what the value of a living will is and what it can accomplish.

A Suprising Finding

The credit reporting company, Experian, wanted to understand the characteristics of the people who walk away from their mortgages. Accordingly, they studied 24 million! credit files they control.

First finding (and a surprise) is that defaults are much, much more widely done than was previously thought. There were 588,000 in 2008, double the 2007 number.

Second finding (no surprise) was that the defaults were concentrated in markets where house prices had risen the most and cratered the most. Hence, California had the most and Florida second most.

Third finding (and a huge surprise!) was completely contrary to conventional wisdom. Most people thought that most of the people walking away from their mortgages were poor people with equally poor credit scores. Not True! Two-thirds of the people who walked away from their mortgages had high incomes and high credit scores. Further, they do it in a precipitous, apparently planned, manner. Lower income folks try very hard to hang onto their homes by making partial payments, making late payments, etc. High score folks simply stop making payments altogether. They seem to understand that their actions will severely affect their credit scores, but figure this is the better course of action now.

The government response to these findings is that lenders should get better at screening such people when they apply for loans.

Geezzzzz...............Is that stupid advice or not? You are the loan officer when this well dressed couple show up to apply for a loan. They have a great credit score (meaning a great credit history) and a significant down payment. Your job is to look deeply into their minds to discover
whether they might walk away from their mortgage at some time in the future depending upon future events that neither of you can foresee or control.

Are you beginning to suspect that the multi-millionaires who run the government in Washington are completely out of touch with how real human beings (you and me) live and behave?

Can The Future Be Built In America?

That is the cover story of this week's Business Week, and it plays on themes in our book, The Great Recession Conspiracy, and several entries in this blog.

First, the story highlights three brand new technologies that are about to disrupt old businesses.
1) Light emitting chips that are as bright as incandescent bulbs will replace the lighting business that exists now.
2) Fuel cells will power electric cars and replace petroleum.
3) Solar panels will replace electric generating plants.

All of that is good since we are shifting resources from old technologies to newer, more efficient technologies. That is one of the good things Business Cycles accomplish. You can read more about it in our book.

The other theme in the article is that U.S. government policies are encouraging manufacturers to move there plants overseas. This is not about low cost labor since all three of these new products will be made on automated production lines. It is about government policies that do not encourage the creation of new high tech jobs in the U.S. Previous entries have discussed how important to the growth of the U.S. economy is creating exactly this kind of jobs. Take a minute and go back to the pieces on JOBS. Then read the article in Business Week.

Uncle Ben Speaks

Uncle Ben, otherwise known as the Fed Chairman, announced today that the recession is officially over. I imagine that will come as a surprise to the 15 million people without jobs, and to the 15 million people working reduce hours, or who have simply given up looking, and to the (maybe) 15 million more worried about losing their jobs (and their health insurance).

And that is why, boys and girls, you should pay no attention to the pronouncements of Washington economists. What you care about is whether the economy is continuing to shrink (and all signs are that it is).

On the other hand, read the post about the Happy Talk Paradox. From that point of view, Uncle Ben is doing the right thing.

One Year Plus One Day

As the anniversary of Lehman Brothers fades into the distance, it is time to consider what purpose Wall Street banks serve. As you know from earlier posts, just three banks now control over 30% of all deposits in the U.S. That is a tremendous amount of power over the economy to be held by just a handful of people.

The financial system's function is to collect the savings in the economy and direct them to productive uses to make the economy grow. The borrowers of the savings pay the owners of the savings for the privilege of using the savings. Banks serve the job of intermediary and get paid a fee for doing the job of collecting savings and parceling them out to worthy borrowers. Simple enough, right? And vital to the growth of the economy, right?

In 1996, the financial firms in the S&P 500 earned $65 Billion for making the financial system function. By 2007, that payment had grown to $232 Billion, that is growth from 19.5% of the total profits of the S&P 500 to 27%.

In 2007, the profits of financial firms accounted for a full 40% of the total profits of all U.S. corporations. They earned those profits without manufacturing a single thing.

It seems to me that it is high time to ask again what is the purpose of the financial system and how should the members be paid.

My Apologies

I meant to say the Federal Reserve Deposit Corporation, not the Federal Reserve Bank. The FDIC is expert in taking over failed banks of any size.

My apologies for trying to do to many things at once.

What Should Have Happened One Year Ago

The smarter way to handle Lehman Bros. would have been to make them into a commercial bank under the jurisdiction of Federal Deposit Reserve Board. Then the Fed could simply have taken them over and sold of the bits. That is what they have been doing for decades and doing it extremely well.

It would have taken less than 24 hours. That is how long it took Goldman Sachs to become a commercial bank so they could tap into the U. S. Treasury.

World economy on the verge of collapse? What a bunch of crap!!

One Year On, Wall Street Reform

Today's Los Angeles Times has this headline, "Crisis has not altered Wall Street". The copy says, "But on the whole, Wall Street has recovered more quickly than expected with little difference in how it does business. And the unapologetic pursuit of money remains as deeply rooted as ever."

And today, the President delivered a speech on Wall Street about Wall Street. He said Wall Street bankers should be ashamed of themselves and they should stop doing the things that led to the recession.

Good luck with that idea Mr. President.

Lehman Brothers Redux

If you go to www.nytimes.com, click on Sunday Business, you will find two articles of interest. They are both nuanced stories about the people who caused the recession, and those who are suffering from it. The stories are:

"Tales from Lehman's Crypt", and "Big Spenders? They Wish."

It will be worth your time.

Nothing Has Changed

Monday marks the one year anniversary of Lehman Brothers demise and the turmoil in financial markets reached its zenith. Now we have invested Billions and Billions of dollars in banks, auto manufacturers and a sundry bunch of other companies, and apparently, the U.S. Government has learned absolutely nothing from the experience.

Virtually nothing on Wall Street, where the recession began, has shown any appreciable change. Investment bankers still focus on risky investments to drive up their bonuses. The eight major U.S. and European banks have 141,000 employees in their investment bank operations and they are on track to pay an average of $543,000 each in bonuses. Would you be willing to take risks with someone else's money if you could get a $543,000 bonus on top of an already healthy salary?

Don't bother to answer!

And all of the financial "innovations" (CDOs, derivatives, etc.) are all still in full use and traded out of sight of the market. In addition, Wall Street banks are adding "Death bonds" to their arsenal of ways to take risks without recourse (see earlier post for details).

Economists have a term for what is happening and there is absolutely no" moral hazard" anymore. The bankers on Wall Street are more direct about the situation, they call it I.B.G. (which means that when the deal goes south "I'll Be Gone").

In short, everything is in place for another financial meltdown. Given how inept the government's response has been the current recession, you should be afraid, very afraid.

It Ain't Over Redux

The administration is proclaiming that the recession is over because they are reporting a tiny increase (maybe?) in GNP for the third quarter. But other facts tell a different story.

In the third quarter, 39,800,000 people were living below the poverty line ($22,025 for a family of four). This is the highest level of poverty in eleven years. These folks cannot be expected to drive up consumer spending which accounts for two-thirds of all the economy.

In 2008, 46,300,000 Americans had no health insurance, up from 31,000,000 in 1987. A substantial number of these people will have no choice but to use hospital emergency rooms for medical care, further driving up health care costs.

And 15 million people remain unemployed and another 15 million, or so, are either underemployed working shorter hours or have simply given up looking. Five of the 15 million will run out of unemployment benefits in the next few months.

End of the recession? Hardly!

It Ain't Over Until It Is Over

Yogi Berra could have been talking about the U.S. economy today. The happy talk clowns in Washington are saying it's over, it's over, etc. etc.

What they don't mention is that there are currently 5 million mortgages in the U. S. that are 60 days, or more, late in payments. In addition, there are an unknown number of Option Arms (see earlier post for explanation) due to be reset. That is a huge time bomb just waiting to go off in our faces, and you should be very, very careful in your spending plans.

And that leads us to a brand new concept in economics which I chose to call the Happy Talk Paradox. If you have read our book, The Great Recession Conspiracy, you are familiar with the well known economic conundrum, the Savings Paradox. The Savings Paradox says that what is good for individuals is bad for the entire economy, e.g., if individuals save instead of spending the economy cannot grow.

You would also know that the Business Cycle is driven by psychology, not finance, and that a Contraction (recession) ends when everyone starts believing everything is going to get better. Therefore, it is good government policy to encourage the idea that everything is getting better, e.g., Happy Talk. However, individuals should be very, very careful about abandoning caution and saving until the next expansion really is underway.

Hence, the Happy Talk Paradox. The best government policy for the entire economy is to encourage optimism, but the best government policy for individuals is to encourage pessimism.
So the Happy Talk Paradox, and you have just witnessed the creation of economic theory.

What is truly interesting today is that Alan Greenspan admitted in an interview on the BBC that the Business Cycle is driven by psychology (see The Great Recession Conspiracy), but then he utterly failed to understand what that means. So sad.

Something Really Important To Watch

There is a case before the Supreme Court that will be decided this week that has the potential to change the U.S. Government forever, and you should be watching it play out.

Here is the thing. We now have a government run by special interests. You can read how Goldman Sachs runs the U.S. Treasury in our book, The Great Recession Conspiracy, but the same thing applies to health care, agriculture, drugs, etc. etc. The entire IRS book of tax laws is simply a collection of rules favoring one special interest or another. The special interests run the government by making huge campaign contributions to members of Congress willing to carry water for the special interest. In short, we now have the best government money can buy.

If you want a different source, try Henry Waxman's new book, The Waxman Report. It details how a 29 year old lawyer goes to Congress and spends the next 30 years there. He even states plainly that money makes the whole process work and we should quit worrying about it. That is really bad advice.

So the case before the Court is Citizens United v. Federal Election Commission. Citizens United made a movie critical of Hillary. Citizens United wants to be excluded from the 2002 McCain-Feingold campaign finance law. If the Court supports Citizens United, it will basically remove all constraints from corporate cash flowing into government and special interests will rule the government openly.

Stay tuned. It is still your country.

They Are At Again!!

Remember CDO's? If not, you can find a very good description in our book, The Great Recession Conspiracy. Well, today's New York Times describes the next big "innovation" in finance on Wall Street.

It goes like this; life insurance will be sold to elderly and very sick people, who will, in turn sell those policies to Wall Street Banks for current cash against the final payout of the insurance, e.g., the Wall Street Bankers will bet you die soon enough for them to make a huge profit.

For example, you might buy a $1 Million policy and sell it to a Wall Street Banker for $400,000 cash right now.

But hang on, it gets worse. Then they will bundle these death bet policies into bundles and sell them off to other investors, and collect huge fees for doing that job.

Does nobody in Washington ever learn anything?? The Wall Street crooks are duplicating the "innovations" that basically caused this recession and nobody seems to care!!

Credit Where Credit Is Due

If you have read our book, The Great Recession Conspiracy, you would know I have great reservations about Tim Geithner because of his ties to Goldman Sachs.

But his recent actions to address the problems that lead directly to this recession are very encouraging. First, he has identified the two big problem areas; 1) Banks that are so large that they might bring down the whole financial system, and 2) Banks and other financial organizations that take huge financial risks which can lead to enormous losses. (Goldman Sachs fits into both categories.) Geithner is proposing that such institutions hold much, much larger reserves than is required today. That is exactly what we proposed in the Great Recession Conspiracy.

We recognize that there is a downside to greater reserves. It will reduce bank profits somewhat and it will reduce the money in the economy that is available to lend. We don't see either of this side effects nearly as dangerous and expensive as the costs of small reserves that led to this crisis.

Stay tuned and watch this one carefully since it is probably the key to how the financial system will function going forward.

Success Revisited

O.K., Joe Biden says the $800 Billion stimulus package saved or created 750,000 jobs. Today's Washington Post says that in August ALONE 280,000 jobs were lost.

Success????

A Definition of Success We Can't Live With

Yesterday, VP Joe Biden said that the government's stimulus program (just short of $800 Billion) was a great success because it has saved or created 750,000 jobs. No evidence or detail was provided.

The facts are that 15,000,000 are currently unemployed and a best guess is that there are another 15,000,000 people are working shorter hours or have given up looking for work.

I wonder how they would define failure???