Recently in Economics Category

Remember when retirement meant 65?

I just got my annual social security statement.

Full retirement now means 67.

To get the highest monthly payment, the statement suggests waiting to 70.

Similarly retiring at 62 yields the lowest payment.

That 70 number looks attractive... I sure hope you love your job.

And more importantly, I sure hope it loves you. I find it hard to imagine doing the job I do now at 70, given the competition from college hires and the developing world as well as the rate of change.

Im sure there are a lot of folks who plan to work until 70. I just wonder if there will be jobs around for them to work.

This year Ive been working on an idea, a big idea that I have been having trouble expressing. But here goes...

Animals have a life-cycle. Can a system like capitalism have a life-cycle too? Can it be young and naive in one nation but old and past its prime in another?

Think about MTV. I remember when it came out it. It was pretty rough. They played that horrible Buggle's video 24/7. Over time the music video matured and got more sophisticated. Then MTV realized that music videos just didnt keep one's attention so they completely changed their format to the present one, 24/7 reality shows.
MTV today is barely recognizable from its start in the 1980's which is true for just about any topic since WW2.
Think about a product or process. It starts off simple, gets increasingly sophisticated, often it changes so much it is unrecognizable today from 50 years ago or it is completely gone.

We call this progress and the guiding force behind this progress are the basic rules of capitalism. Make more money.

Cars, car manufacturing, steel, mining, banking, computers as well as systems like trade or banking. The Cold War with the Russians came and went in the last 50 years as did entire thought systems, the big ideas of communism and socialism.

The nature of human beings may not change much over the centuries but a human being does. We start out very simple, grow stronger, come into our prime and then start a long decline. What does an 80 year old think when looking back to when they were 30? Can you recognize an 80 year old from their photo at 10, 20 or 30? Are the changes welcome? Are they desirable?

The idea I have been struggling with is that our system of capitlaism is reaching 80 (in the USA) and the affects are not pleasant now and getting worse. Capitalism itself may not be sustainable in a way that is agreeable for Americans.

Put another way, for the past 50 years our system has been giving the business to other countries and we have been living better and better. Our system now is no longer naive and simple but rather sophisticated and mature. It is looking like the next 50 years will have the rest of the world giving us the business, particularly China. China is our child in this way. 50 years younger than us, looking to us for guidance but indepenent and ready to forge a new way whether or not we like it. (Ungrateful kids!)

For the past 20 years, our natural progression has been away from the manufacturing industries that built our wealth and onto the next step, banking. Banking and investing have been our only source of economic growth since the Clinton administration -- and it just blew up.

Can we rebuild and maintain our finance empire? Can this financial empire stage actually support us? All of us? Sure Buffett and Madoff made a lot of money but most people havent seen a raise in years and now unemployment (and underemployment) are at the highest levels since the great depression.

The capitalist system we have created and fostered (much like children) doesnt owe us anything and we dont control it. With the globalism we pushed to make ourselves wealthier, it is now a force by itself well beyond our control or even the control of national governments. Everone everywhere recognized the desire to make a buck and financial systems are changing much faster than government systems.

So now what?

The stock market is ballooning again less than a year after our "crash" but why? I think the stock market (the industry of money) is greatly separated from the realm of jobs and families, ie real people.

I question whether the jobs will ever come back to the USA. It is more likely that there will never be as many jobs as before. In part that is because of technology which lets fewer people do more with less. (For a perfect example, look at farmers.) There are too many people, and not enough jobs that need to be done. (There are also jobs that lack trained people.)

We will continue to have the highly paid high-tech and banking jobs but all other jobs will go away or not pay enough to support a family.

Think about your experiences at retail and fast food and support on the telephone. Are you getting knowledgable, helpful, happy people because I am sure not. I get indifferent, often miserable folks - they dont love their job, they know they dont make enough now and they know that they never will in that job. The hope of a brighter future is missing and sometimes so is the English as even these jobs have been moved out of our country.

Not quite the Road but not a very cheerful outlook for my daughter.

I dont see any curbs on capitalism and as a result I see a very different future for our country. When I was a kid in Michigan, the morons who dropped out of high school could get a job making cars for Detroit and make enough money to afford a summer house with a boat on the Great Lakes. Not anymore.

Im expecting more people, fewer jobs, and less prosperity overall in the US. The retirement of the baby boomers is going to be painful. Crushingly painful as they find out what it means to not have saved for retirement (but to still have a mortgage for a McMansion).

All that whether or not we have significant climate change.

I dont know if you have heard but the economy is not doing well.

Salaries have been flat for years, the stock market took a fall last year, whole industries are on government-paid life support, and the un-employment rate (including the under-employment rate of people who want to work more but cannot) is higher than the great depression.

As I drive to work, I see all those BMW's and Lexus'.

As I look for a house to live in, I see all those incredible prices, so much higher than average incomes.

And I think to myself: Just how are all these people able to afford so much??

Then I see articles like this and I say: I thought so. A lot of people cannot afford that stuff - and its going to end badly for them.

This was a good article that is a reminder that things are often not what they seem. And if you have been unemployed before, it is also a reminder of just how bad that feels.

Life on Severance: Comfort, Then Crisis

By MARY PILON

Wall Street Journal

NOVEMBER 10, 2009

SILVER SPRING, Md. -- Paul Joegriner hasn't worked since March 2008, when he was laid off from his $200,000-a-year job as chief executive officer of a small bank. But you wouldn't know it by appearances.

His wife, Marzena, shuttles their two young children to private school every morning. The family recently vacationed in Virginia Beach, Va., and likes to dine on Porterhouse steaks. Since losing his job, Mr. Joegriner, 44 years old, has had several offers. He's turned each down in hopes of landing a position comparable to what he held before.

The family's lifestyle over the past year and a half has been propped up by a $200,000 severance package and another $100,000 in savings -- funds the family has burned through rapidly. By Mr. Joegriner's own calculations, the family will be out of money in six months if he doesn't find work.

"It will be D-Day," he says. "But on the outside, no one has any idea that we're in trouble."

Mr. Joegriner is a member of what might be called the severance economy -- unemployed Americans who use severance pay and savings to maintain their lifestyles. Many lost their jobs in 2007 and 2008, and thought they'd soon find work. Now, they're getting desperate.

The stock market has made a big recovery from lows of a few months ago. The general tone of the media seems to be that the worst has passed. It seems like people are just tired of hearing about economic collapse so we have stopped talking about it that way and consumer confidence numbers are rising.

But was that really the bottom?

My sense is that we have some really big structural problems and those wont go away in a few months. Simply put, we are used to spending more than we can afford to.

While bank stocks are recovering and GM slides peacefully into bankruptcy, the FDIC released some data on the health of our banks.

I am as eager as anyone to see stability return but it seems like that wont be for a while yet.

FDIC Paints Dark Picture of U.S. Banking

First-Period Profit of $7.6 Billion Was Nice, but Problem Loans and 'Problem Banks' Are Rising

Wall Street Journal

MAY 28, 2009

There also were plenty of negative signs in data released Wednesday by the FDIC. The number of banks on the FDIC's "problem" list climbed to 305 as of March 31, up from 252 three months earlier and the highest level since 1994. Banking regulators don't disclose the names of these problem banks.

Meanwhile, the number of loans more than 90 days past due climbed across all major loan categories. "The first-quarter results are telling us that the banking industry still faces tremendous challenges," FDIC Chairman Sheila Bair said. "And that going forward, asset quality remains a major concern."

Banks continued to aggressively add to their reserves during the quarter. The FDIC said nearly two out of every three banks increased their loss provisions during the quarter and that the industry set aside $60.9 billion in loan-loss provisions.

Despite those actions, banks were increasingly unable to build their reserves fast enough to keep up with noncurrent loans. The ratio of reserves to noncurrent loans fell to 66.5% in the first quarter from 74.8% in the fourth quarter. It was the lowest level in 17 years.

The FDIC said that banks responded to the rising amount of troubled loans by charging off $37.8 billion during the first three months of 2009, led by loans to commercial and industrial borrowers, credit cards and real-estate construction loans.

The agency said the high-level of charge-offs did little to slow the rise in loans at least 90 days past due, which increased $59.2 billion during the quarter, as the percentage of loans and leases considered non-current hit the highest level since the second quarter of 1991.

The problems were spread across all major categories, though the FDIC said that real-estate loans accounted for 84% of the overall increase.

FDIC Chief Economist Richard Brown told reporters said regulators are seeing increasing woes in the commercial real-estate market. "That probably hasn't hit full-force yet," Mr. Brown said.

The 21 bank failures during the first quarter were the most in any quarter since the last three months of 1992. The failures reduced the fund that protects consumers' deposits to $13 billion from $17.3 billion at the end of 2008.

Another pattern that supports my theory that we are in an inflection point of global capitalism, forging new ground with little understanding of where we head.

We thought information technology was allowing us to see into the supply chain and control it better. While that is surely true on some level, the side affect is that we can make abrupt changes faster than ever too. And we may not understand the system as well as we actually thought.

This article makes me think of the "beer game". A business exercise we thought we had mastered.

Clarity Is Missing Link in Supply Chain

By PHRED DVORAK

Wall Street Journal

MAY 18, 2009

The reason is now starting to become clear. The world's complex "just in time" manufacturing supply chains are making it increasingly tough for Zoran, and any other single link in the chain, to know what's going on just a few links away. Sometimes, Zoran itself doesn't even know how its own chips are used: One batch it thought was destined for DVD players instead turned up in digital picture frames.

The recession has exposed a harsh side effect of the supply-chain system. Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive.

Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain -- from retailers all the way back to makers of factory machinery -- shows that, at almost every stage, companies were flying blind as they cut.

"We're still not sure what happened," says Angelo Grestoni, owner of a California machine shop that mills aluminum parts for chip-making machines. He is many steps away from Zoran on the chain, but his clients, too, evaporated around the same time. Today Mr. Grestoni employs 150 people, down from 600 just 18 months ago.

The cumulative result: The tech pullback may have been overdone. In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers' deep cuts made it tough to keep shelves stocked. Suppliers "all decided to build a lot less," says Best Buy merchandizing chief Michael Vitelli.

This morning I heard a thought-provoking review of the new movie, Welcome.

We dont talk about it but the truth is that there is a war going on. A war against the poor.

On one side you have us, people with something. On the other side, you have the poor, people with nothing except the drive to fight for something.

In the USA, the poor are Latin's from Mexico and Central America. In Europe, the poor are Africans largely from Morocco. Almost every country has an ethnic minority living in poverty, doing the crappy jobs, and being vilified by the populace.

Walls, laws, dogs, police, brutality, propaganda. It's not a shooting war yet but it is a war which is made all the worse because we dont acknowledge it. We tell ourselves we are just following the law.

But are the laws just? Should I get an all-you-can-eat meal at Olive Garden while the people that built the restaurant and work in the restaurant illegally are told to go hungry? While their family back home is told to starve?

Maybe it seems like a stretch now but the naked truth is going to get more and more obvious. At some point we will have a shooting war. There are too many peopel competing for the save basic resources: food and water and comfort.

All the while, we in the US piddle around about abortion. Abortion, abortion, its so terrible!! Clearly what America needs is more poor children with bad or no parents! Give me a break. This is not an easy question. This is a tough decision between two evils.

We live in a tiny bubble of prosperity surrounded by a sea of poverty and despair. A few hundred million people in Western prosperity surrounded by a sea of billions of the unwashed, unfed, uneducated. If you care so much about the un-born, please adopt someone who is born, one of the millions of orphans living in poverty right now. How much of your money, of your comfort, are you ready to give to the un-born?

Some argue that we need more babies to maintain our standard of living but what they mean is that we need more tax-paying babies with good jobs. The sad irony is that technology allows us to do more with less. We may need more tax payers but we have fewer jobs and the jobs we have require more and more technical education. The un-born, unwanted are not going to help this problem; they are going to add to the problem.

There will always be a need for some manual, unskilled workers but we need fewer every year and the standard of living they can earn shrinks every year. Work hard, for peanuts - something that only sounds appealing to most ambitious of the very poor. The very people we are trying to keep out.

I hate to be an annoying moralist here but the sad truth is that we, you and I, have a hand in this. Just like global warming, you can think that this is someone else's problem but our comfort comes at a cost to other human beings. People we either ignore or think of as less than human. It is not a new pattern but it has never been such a global one.

I have heard the term "inflection point" several times in the past week. I cant say that others are using it to refer to the same thing as I am but I too sense an inflection point building.

In the past month, I have done some retail shopping for several items. It has not been a good experience.

All of the items I have purchased, clothes, underwear, shoes, toys, electronics, have the same label on them prominently displayed: made in China.

There are a lot of choices to choose from but they are almost all identical. The only obvious difference is the brand. You can buy underwear from Jockey or Calvin Klein but its basically the same thing and ... made in China.

The quality of the items seems noticeably lower than the same item a year or two earlier. The material is thinner, less sturdy, and usually synthetic instead of natural. Good luck finding a pair of thick cotton gym socks. Now you get super thin, cheapo cotton sock blends or 100% synthetic Nike socks for $15 a pop. All of them are again made in China.

Taken alone, none of these things are totally new or a sudden change. I have been seeing this pattern for years and would argue that they are the natural result of capitalism.

Our capitalistic system is focused on increasing profits through system optimization. Lower labor costs, lower material costs, decrease meaningful product variations, simplify the supply chain. Thousands of people are working on these issues and the results are obvious.

At first it meant quick improvements to the bottom line and allowed more choices. Now I think the trends have matured enough that they are noticeably reducing choices.

These trends are also the steady state trends, things that were happening before the financial melt-down last year.

With the financial crisis we see that people dont have as much money as they thought so there is less demand for the products we used to make. Manufacturing overcapacity and shrinking revenue is leading to bad debts and bankrupt companies. Not only are the fewer choices in Men's underwear but pretty soon there will be fewer brands of mens underwear and fewer retailers to buy them in.

Cars are a case in point. Where we once had three strong American car companies, now we have 1. At least we would if it weren't for extreme government intervention. Now we will have 2 1/2, much smaller companies struggling to survive. Banks and insurance are another area where companies have put themselves out of business if it were for extreme government action.

I see this inflection point leading to two things:

One, the mega corp. For years sci-fi writers have predicted a future of giant corporations that sell everything. As companies continue to go bankrupt and get bought up, it is starting to feel like the future will have a lot fewer companies to choose from.

Two, a lower quality of life. For the past 60 years, capitalism has lead to expanding choices and variety for consumers. Moving forward it seems like there will be less and less meaningful choice as we all have the same thing in different colors.

On the plane trip to Miami, I had a nice long block of time with which to finish this book by Paul Krugman. Highly recommended. If you are short on time, skip to the end and read the final 2 chapters.

Unlike my economics classes in business school, this book is very easy to understand and follow. No mathematical models. No IS-LM curves.

From the book I got a real sense that there is an inherent problem with trade between countries and currencies which is at the heart of all these "crises". Such trade is also at the heart of globalism.

Another thing I get from this book, the current crises and other sources is that the "economy" is just too complex to comprehend -- and it is always basically out of control. We build our models and make our arguments but we dont really know what is going to happen or why. Dont take it too seriously when anyone tells you things are "under control".

One of the critical issues that I had never heard of elsewhere was this idea of a "shadow" banking system - sources of money outside of the regulated banking system. Fascinating and significant. Krugman estimates that 40% of the total banking system is now this shadowy, unregulated, unmeasured segment.

The funny is that as you read this book, you feel like you understand what is happening in the story. You think you are following along and things are happening in a logical, common-sense way.

But when it was over, I still dont feel like I understand what is going on in the economy today. I still dont really know what I think should be done or what I should do as an investor. I have moments when I think I understand followed by complete confusion. It's getting old.

As I write this, the stock market has zoomed up from 8,000 to 8,400 over the past two weeks. I was convinced that the market was going to go in the opposite direction when it was at 8,000. So reading the book has not helped me understand stock market dynamics, at least in the short term, but it has given me some insight into the problems we face.

This interview is outstanding.

I could not have said it better myself and I have tried :) I particularly liked the line where he pointed out that 60% of American buying power is with people 50 years or older and those people could live the rest of their lives by only buying food, socks and underwear.

Prepare yourself for a major adjustment to our consumption habits and the resulting economy.

Shopping Shift

Paul Solman talks to author Paco Underhill about changing shopping habits amid the economic slump.

Listen to the recording

Hey buddy, remember that $100 you loaned me? Well I can pay back $22. Does that work for you?

That is basically what GM is telling its lenders this week. Chrysler is offering even less to its lenders and the stock of both companies is probably worth nothing in a bankruptcy.

Wow!! Think about that statement for a moment.

Lending is the backbone of business and here we have some of America's oldest, largest corporations not even close to paying back their loans. And car companies are not alone. There are 10,000 publicly traded companies on our stock markets. I hear the overall bond market is expecting higher rates of interest and default rates of 40% to 50% over the next few years. That default rate is astonishing.

As I write this, the stock market is up today and the S&P500 has been hovering around 8,000. The stock market indicates stability and a possible bottom for recovery; the bond market indicates financial disaster. That is a major disconnect that is not being reported in any significant way.

This is a very strange time. One week we hear about "depression" and "deflation" and the next week we hear about "profits" and "recovery" and the "bottom". How is a regular guy supposed to make sense of it?

Do you remember J. Wellington Wimpy? This kind of bankruptcy talk makes me think of him. Always hanging around, asking for a loan, when you know he wont pay it back.

What are American's thinking when they see major companies like GM walking away from their debt? When families see that corporate behavior, how will they feel about paying their own mortgage and credit cards and car loans when they run into trouble?

Corporations have always have financial advantages over households but this current economy really highlights those differences. The tax tea parties were a side-show. Will there be bankruptcy tea-parties? Should there be?

Yes, it is a very confusing time.

Wells Fargo posts a profit? Huh?

Last month the economy was in "collapse" and we needed to spend tax dollars to "save the banking system."

This month the banking system is posting profits? I guess I ought to be happy that the banks are doing better but this change comes so soon, it just doesnt feel right.

This week the other big banks will announce their results. If they post profits, watch out.

The anger felt by the public towards AIG will surge onto banks and there will be some 'splaining to do. What's more, the general sense that we dont know who we can trust will only get worse. Our system depends so much on the "greater fool' theory, but right now the public is starting to worry that they are the fool.

Are we really ready for recovery so soon?

Even though the stock market bounces up and down, I dont think so. There is a lot of news, good and bad, and one has to take as much as you can into account and guess.

My concern is debt. If you have ever gotten yourself into credit card debt, you know that it is much easier to charge the card up than it is to pay it back down. There may be a "glimmer of hope" but we have a lot of bad debt to pay back down and like any diet, it is not pleasant and it takes a lot longer than we think it will.

This interview on Friday with the News Hour was a good summary of some of the problems still out there.

Obama Optimistic, Yet Cautious on Economic Recovery Outlook

The president said Friday he saw "glimmers of hope" in increased lending to small businesses, but the economy was still under "under severe stress." Analysts discuss the signs of economic recovery and the road ahead.

Credit card debt is continuing to go bad and so is commercial real estate. Add that to the existing housing debt and I see a lot of pain for lenders and bond investors. Banks may post a profit; stock markets may go up, but losses are still coming.

Another issue is that FASB has conceded to political pressure and modified the rules for mark to market accounting for debts. The belief is that this change will let banks hide their bad debts for longer. Instead of going bankrupt now, they will trickle out the losses over time, probably years -- just like Japan did.

On the one hand that might be a good thing, lots of little pains instead of a heart attack, on the other hand some of us wanted to rip off the band aid and get it over with. Its clear that wont happen and the Obama administration wants to stall.

It is April 2009 and the S&P500 is about 8,000. I am with the folks that think this is a bear rally and we will soon be "testing new lows".

Not that I am a fan of GM, but I do agree that they are held to a different standard than other companies right now. Why is so much attention is paid to their losses while other large losses are ignored? AIG and housing represent equally terrible corporate management.

General Motors Corp. had a net loss of $9.6 billion in the fourth quarter and a full-year 2008 loss of $30.9 billion including special items.

GM reported Thursday that fourth-quarter revenue was $30.8 billion, down from $46.8 billion, a year earlier. Total revenue in 2008 was $149 billion, compared with $180 billion in 2007. GM’s core automotive business generated revenue of $148 billion in 2008, down from $178 billion in 2007.

GM losses are front page news but in the middle of the paper, one finds announcements about Fannie and Freddie.

Fannie late Thursday reported a $25.2 billion loss for the fourth quarter, and Freddie is expected to report a huge loss for the latest quarter when it posts earnings, probably in early March. Homeowner defaults have continued to increase even as the government has redirected the two companies to focus their attention on preventing foreclosures and propping up the housing market. Gone are worries about pleasing shareholders, whose stock has crashed to about 50 cents a share at both firms.

Fannie's loss was caused by mortgage defaults and drops in the value of derivative contracts used to hedge against interest-rate risks. For the full year, Fannie had a loss of $58.7 billion, compared with a year-earlier loss of $2.1 billion. The loss for 2008 exceeds net income for the preceding 17 years.

AIG's losses were at least more public as they brought the entire stock market down after posting the biggest lose in history. Setting records is a good reason to pay performance bonus'! What a mess.

The crisis-stricken insurance company AIG has crashed $61.7bn into the red with the biggest corporate loss in US history after being crippled by policies protecting troubled banks against default on loans and derivatives.

In a renewed effort to prevent AIG from collapsing, the US government yesterday provided it with access to $30bn of emergency aid. This takes the amount of taxpayers' funds advanced to AIG to more than $150bn.

At least GM was trying to produce a tangible product with real-world value. AIG and the Mae's basically produce paper... Apparently only paper with red ink.

A week before Obama spoke to Congress last month, there was this little article about BYD.

Obama urged us to become a technology leader in green automobiles, hybrid cars, and batteries. Obama said America can lead the way.

As I heard him say that, I was thinking about BYD. I've never heard of this company before I read this article.

Check out this portrait of the CEO. It is so staid and serious and old fashion but Mr Wang Chuanfu struck me more as a visionary.

BYD makes lithium ion batteries. The ones we rely on in all our gadgets. The same battery technology required for electric and hybrid cars. A few years ago Chuanfu's battery company bought a car company because he saw something.

He recognized that trying to beat established companies at making cars was foolish. It was too hard to catch up. As he put it, "who can beat the Swiss at making a Swiss watch?"

No, what he saw was a wide open playing field for electric cars because the giants left the door open for decades. As we dragged our heals resisting the future, the future has become more and more obvious. And that future represents a huge opportunity for new companies like BYD.

I have say, I see a lot of merit in his analysis. While we futz around trying to urge our auto companies to lead, someone else can just do it. And I suspect they will.

Maybe a few years down the road, we will all have heard of BYD.

As I have said before, I hate doing my yearly tax form because it is so complicated. Consequently I have been in favor of a much simpler tax system, ie one without all the loop holes and deductions and credits. I dont see why the federal tax is not as simple as sales tax.

Having said that, I never expected to see it change so I was surprised to see Obama even mentioning the largest tax deduction: home mortgage.

I think the mortgage tax deduction is a bad idea but I never expected anyone to be able to touch it. By saying we need the money and the rich can afford it anyway, he is able to touch it. Nice.

Think about it. Who does the mortgage deduction really help? It helps banks. It tricks you into thinking you can afford a bigger house while at the same time raising house prices. Do you really need an incentive to buy a house? This interest deduction has gotten twisted up in our debt-society brains.

Reading the comments about the article though, I am reminded of my fellow Americans and their confused thinking. People that think it is communist to cut a tax deduction and fail to recognize that they are asking the government to help them buy a house. And all the people that worry about millionaires and who clearly arent.

Ironically, if this crisis is bad enough, it could allow us to restructure the government significantly. Simplify tax laws, remove sacred cows like the farm subsidies and actually get the "small government" Republicans are so fond of saying they want. We could even revitalize American business by removing the burden of health care from companies.

There is so much potential here and common ground yet you would never know that based on the public rhetoric. As a country, we have decided we are two teams in a football game and we have to fight any change on principle, often without even thinking about it. It is silly.

What's going on? I thought the "world government" was totally toothless and ineffective? I thought the rich lived by their own rules?

Well there is still time for both to be true but I was surprised to read that this Swiss tax issue continues to escalate. Suddenly the G20 is considering blacklisting Switzerland as a tax haven... and the Swiss are "reconsidering" their privacy laws, in particular the line between tax evasion and tax fraud.

Hmmm.

Swiss to Review Banking Secrecy Laws

By DAVID CRAWFORD

MARCH 7, 2009

Wall Street Journal

Switzerland's government on Friday gave a panel two weeks to advise on whether the country should loosen its banking laws to allow the release of information on tax evaders to foreign governments.

On Sunday, French president Nicolas Sarkozy said the G-20 could put Switzerland on a planned blacklist of tax-haven nations.

Swiss officials say their government has not been invited to the summit, which will broadly discuss how to reform the international financial system, despite its role as an international financial center and regulator of some of the world's biggest banks. The G-20 represents a selection of industrialized and developing countries from all continents, plus the European Union. Switzerland is not a member.

Mr. Merz said his country had three choices: to keep its bank secrecy laws as they are; to abolish them; or to adapt them as the situation requires. The cabinet chose the third option, he said.

The panel is likely to look at whether Switzerland's banks should change their rules on client confidentiality. Swiss law defines tax evasion as a civil, rather than a criminal offense. That protects depositors from scrutiny, because the country's banking rules say that bank data can be provided to foreign governments only in criminal cases.

It's this distinction between tax evasion and tax fraud that the expert commission set up Friday is tasked to review. Any decisions prompted by the panel, whose deliverations will be confidential, would be taken made by the Swiss cabinet.

The new investment advice is bonds. Bonds are supposed to provide stock-market returns over the next few years.

But watch out. Corporate defaults are rising faster than global temperatures. And that is if you still believe anything Moody's says.

Bonds may indeed have better returns than stocks but its still likely to be a bumpy ride.

Wave of Bad Debt Swamps Companies

By JEFFREY MCCRACKEN and VISHESH KUMAR

FEBRUARY 13, 2009

Wall Street Journal

The U.S. is entering a period likely to feature the most corporate-debt defaults, by dollar amount, in history. By various estimates, U.S. companies are poised to default on $450 billion to $500 billion of corporate bonds and bank loans over the next two years.

In percentage terms, the projections from the three main credit-rating agencies for defaults on high-yield bonds approach levels last seen in 1933, according to an 87-year default-rate history compiled by Moody's Investors Service. The agencies expect default rates on these non-investment-grade bonds to triple to about 14% or higher this year, from around 4.5% last year.

The coming default wave is another source of trouble for the global financial system, which already is grappling with hundreds of billions of dollars in defaulted mortgages, credit-card debt, student loans and other consumer debt. Corporate defaults threaten to hurt banks, pension funds and private-equity funds, which in recent years gobbled up high-yield corporate debt and pieces of bank loans.

Corporate defaults -- in which companies cannot meet interest or principal payments on borrowed money -- don't always result in Chapter 11 filings. Often borrowers can restructure their debts by working out new payment terms with lenders. Sometimes they agree to give lenders ownership stakes in exchange for reducing or eliminating debt. Such workouts can dilute or wipe out existing shareholders.

S&P estimates high-yield-bond default rates will hit 13.9% this year, but could go as high as 18.5% if the downturn is worse than expected. Moody's predicts a default rate around 16.4% this year. The default rates in recent downturns were 11.9% in 1991 and 10.4% in 2002, according to S&P. Such rates peaked at around 15% in 1930, according to Moody's. In 2007, when credit flowed freely, the default rate dipped below 1%, an all-time low.

This year, as of Feb. 6, 21 U.S. companies have defaulted on $43.1 billion of high-yield bond and bank debt, according to S&P. That is greater than the dollar value of defaults in 2006 and 2007 combined, and it's more than 25% of the $157 billion of high-yield-loan and bond defaults in all of last year.

Is this "new math" or something?

Considering how much we hang on economic indicators, it is pretty shocking how imprecise they seem.

The Federal government produces numbers like the unemployment rate with computer systems that predate the Internet. Economists have complained about how inflexible the system is but no administration has been willing to fund improvements.

Over the past few years I began to believe that a crappy system suits presidents just fine. They can release incorrect numbers on time and then quietly revise them a month or two later. Being accurate is not nearly as important as being on message.

Which is pretty much what we saw Friday with the GDP numbers. Originally stated by the Bush administration as a 3.8% drop but now we hear the number is actually 6.2%. A nice hefty mistake but par for the course. For years, the Bush administration revised their own numbers downward with metamucil regularity.

And then we have this wonderful graph. More importantly we have the new President saying that he wants to include all government spending in the budget. What?

I dont know the details (and they probably wont change this graph much) but it appears that the Bush Administration was able to pull a little legal trick and hide the Iraq war. By funding the war as a "supplemental" budget and not "the" budget, it does not show up as part of the Federal budget.

I still cant get my common-sense head around how that could happen. How dumb are we?

Government spending should be government spending now matter how many bills or earmarks there are but I guess I dont know much about Washington politics. If nothing else, you have to give the Bush administration credit for being masters of our political system and using every trick in the book.

I very clearly remember Bush telling us the war would be free (paid for by Iraqi oil) and I remember when they fired the guy who said it would cost $100B. I cannot wait to see the new numbers which nonpartisan estimates put at $1T to $2T when you include healthcare. Maybe that is why the Bush administration kept VA funding so disgracefully low...

Anyway, like our crumbling road infrastructure, it is time we invested some money in our economic infrastructure. New computers for measuring economic measures and the power of websites to shine some light on Federal spending. You would think those would have been goals of "small government" Republicans but maybe that Obama guy will actually do something about it.

I wrote about this case a few months ago but it continues to make headlines.

It appears that UBS helped thousands of Americans hide their money from the US government in Swiss bank accounts. The previous investigation turned up a UBS document that said thousands of accounts were involved, far more than we knew about.

Now our fine government has decided to try to find these fine patriots and ask them to pay the taxes they owe. Appparently this is such a shock and violation of international law, it is turning into a major international legal incident. Go figure.

Where is the line between tax evasion (the Swiss say that's ok) and tax fraud (the Swiss agree thats a problem)?

If I make a mistake on my taxes, the IRS will eat my lunch but if I am rich enough to afford lawyers to keep me from paying taxes, well that is ok? I just love these stories of how the rich get different rules from the rest of us.

U.S. Wants More Client Names From UBS

FEBRUARY 20, 2009

By CARRICK MOLLENKAMP, GLENN R. SIMPSON and DAVID GAUTHIER-VILLARS

Wall Street Journal

The Justice Department sued UBS AG to obtain access to 52,000 accounts belonging to U.S. clients -- some 30,000 more than previously known -- a day after reaching an agreement to settle a criminal investigation that called for the Swiss bank to turn over 250 accounts in a wide-ranging tax-evasion probe.

"The Department of Justice is committed to do all that it can to aid the [Internal Revenue Service] in locating those who would seek to hide behind secret accounts and in holding them accountable under the federal tax laws," Mr. DiCicco said.

A new IRS document also details secret transaction codes used by one UBS manager to shroud client information -- for example, using the word "swan" to denote a $1 million transaction.

UBS now faces the difficult task of convincing clients it can keep their account information confidential, even as it now tries to fight an effort to turn over the 52,000 accounts. UBS client bankers used a range of ways to hide U.S. accounts and transactions, according to court documents. In a new disclosure, an IRS official said in a court document that one UBS money manager used an elaborate code: The color orange referred to euros while green stood for dollars. A $250,000 transaction was referred to as a "nut."

On Wednesday, as part of the Justice Department's settlement with UBS, the government said UBS had in the range of 20,000 U.S. "clients" with assets of about $20 billion. But Thursday, an IRS investigator said in a sworn court declaration that he had discovered an internal document from 2004 stating that the bank had some 52,000 secret American account holders with assets of around $15 billion.

On Wednesday and Thursday, Swiss bank representatives took pains to explain that the 250 names were a special case because suspected tax fraud was involved. Swiss authorities, seeking to calm nervous Swiss bank clients, draw a narrow distinction between tax fraud -- which allows the lifting of bank secrecy rules -- and cases of tax evasion, which don't.

As a kid, my parents told me that life is not fair. I never accepted that lesson.

I often think about Aesop’s fables such as the ‘Ant and the Grasshopper’. What that fable tells me is that humans have struggled with the idea of people getting what they deserve for as long as there have been humans.

Sure, nature isn’t fair. Storms and earthquakes are something we have to accept and endure. But, if “life” is not fair, that simply means that people are not fair. We decide whether life is fair and just or not.

So it is my childish and unwavering sense of fairness and justice that has me so freaking mad about the last 8 years and especially about the economic crisis we find ourselves in.

Two things: punishment and acceptance

We ought to punish those that can clearly be assigned blame, and possibly a few on the border.

Heavy, overbearing punishment was a favorite theme of the Bush administration. I see no reason to end it now. In fact, I might even be fine with 24-style Jack Baer torture as long as it confines itself to the right wealthy, Caucasian victims…

The people that created this crisis directly should be punished.

As we take over banks and investment companies, the first thing we should do is fire the top immediately. The executives, the board of directors, and any managers that were clearly involved. Escort them to the door and let them know criminal charges are pending. Appoint a board of trustees to hire new management and throw the bums we know out. Keeping them on is like hiring the town arsonist to run the fire department.

People accused of massive financial fraud should be treated the same way we treat inner city kids for drug possession and gang crimes. Hint: hold their ass in jail and not “house arrest” in their own mansions. If being accused caries the presumption of guilt for the poor, I see no reason why it should not extend to the members of the 38% tax bracket.

If I saw clear evidence that the guilty were getting punished, that they were suffering, it would make it easier for the second part of all this, acceptance.

The truth is, we are all in it together. What burns the hottest is that people who consciously stayed out of trouble have to suffer along with those that actively courted trouble. That is true for global warming, war, or economic problems.

At some level, we do need to accept that people are not fair and move on. If we don’t, we will end up like Israel and Palestine, in a perpetual cycle of blame and grief.

But I am not there yet. I am not ready to accept the people who brought this mess upon us as our saviors. And I don’t think I am alone.

Combine payments, insurance, maintenance and gasoline and you will find that most Americans spend a LOT of their annual income on cars. On top of that, most Americans dont even purchase their cars anymore. To afford the car they want, they lease it, trading a monthly payment that never ends for a lower one.

It is not surprise that car purchases would drop in a downturn. If you have a car, chances are it runs fine and is more than you actually need. You wont need to purchase a new one for a long time.

Nor it is a surprise that such a drop would have a big impact on our country. Cars and car-related services represent a significant part of our GDP.

Here are some photos of unsold car inventory. Something to think about as we ponder a tax-payer bailout of GM and Chrysler. (Don't ponder too much; its a bad idea.)

The supply chain for all manner of manufactured goods is backing up like a train wreck. As customers halt purchases, inventory is pilling up at all levels all the way back to raw materials. Its not pretty.

I have become an economics junkie. I used to spend my free-time looking for information on video games. Now I read the paper and listen to economists.

If you want to learn about economic philosophies, this is a good time for it. There is ton of information out there as everyone tries to figure out what happened to us and what will come next.

Listening to the news last week, something started to nag at me.

We spend a lot of time discussing the numbers and economic measures we have used for years. Unemployment, consumer confidence, GDP, car sales, shipping and manufacturing indexes, oil and commodity prices, home construction and sales, default rates, etc.

We spend a lot of time on the numbers that we know but are they really meaningful for this crisis? If these numbers were so meaningful, why didnt they let us see the crisis before it became a crisis?

If you only watched mainstream news, you might believe that this crisis was caused by a few naughty poor people who bought homes they could not pay for. Im sorry but there arent enough poor people in America to have created a crisis on this scale.

No, the problems are because of paper assets not real ones. This crisis is because of the investment banks who took real assets like houses and turned them into a stream of paper assets - mortgage backed securities, credit default swaps and the like. Who took a $1 asset and turned it into a $10 loan.

Government regulators like Alan Greenspan sat by while Wall Street created tens of trillions of dollars worth of these things. Most of them are unregulated and unmeasured. We dont know who has them, what they are, how much there is or what they are worth. (Greenspan refused to regulate them because he didnt want to slow economic creativity with inefficient government regulation -- I hope you are enjoying your slice of that creativity. He will be dead soon so you can have his piece too.)

What started to bug me is that the things we know are the tip of the iceberg. We are spending so much effort focusing on the visible tip of the iceberg that is floating above the water and you have to look hard to see any discussion about the much larger danger lurking beneath the waves.

It seems like we are spending too much time focusing on the things we know, the economics of the past, when our problems are due to the things we dont know, the stuff we created after Bush became president.

I am encouraged that the Obama administration seems to be looking below the iceberg's tip. When he talks about Japan's lost decade, I feel better. Maybe he will have the courage to force the banks to fess up so we can have an honest discussion of how bad things are.

But I worry that Obama is making a mistake by not spreading awareness of these financial instruments and where they came from. People dont know what a CDS is. If Obama suddenly says Citigroup is insolvent (like AIG was) because of the CDS's and we need to take action, it will be a hard sell unless people understand it better. Instead of focusing the blame, he runs the risk of taking it on himself.

Then again, maybe Jack Nicholson is right and we can't handle the truth. But I prefer to think we should put the blame where the blame belongs and not scape-goat the poor, the ethnic, the ignorant or the Messenger.

It has been weeks since I watched the Sunday morning news shows.

As I listened to the crew complain about Obama, the economy and Nancy Pelosi, it just struck me. What a bunch of wealthy, Baby Boomer dreamers. George Will and Sam Donaldson? What planet do they live on?

I am sorry but the problem with the economy is not that Obama needs to be more positive and give us all hope and confidence.

The problem with the economy is that for the past 8 years, the President and the Republicans dug a titanic financial hole in the ground. As they were living it up and reveling in their own short-sighted greed, they either sat idly by or actively contributed to creating the largest financial mess in history. Before we can move forward, someone is going to have to fill that hole back up again.

Instead we are borrowing more and more. $2T for 2009 alone. We are going to be setting debt to GDP records as we match the bad 1980's and then WW2 levels.

And here we are with the professional news media on TV telling Americans that all we need is a little confidence and to start spending again. It is so shallow and brazen you almost have to laugh. There is a lot of good information out there on what has been happening but you have to seek it out because the main streamers dont seem to know much of it.

People cant start spending again because they have been spending money they dont have for the last 15 years. Before we can really start spending again, we have get past the big debts we have already accumulated.

And its not just us. We exported our debt binge to every country around the planet. The stock market and the talk show hosts dont seem to read the paper. All I see is bad news, everywhere. Russia, China, Venezuela, Mexico, Brazil, Hungary, Iceland, Cambodia, Australia...

Life goes on but there is no guarantee it will be the life we knew or the life we want. (If I was a betting man, I would say it wont be either.)

I don't know what the future will bring but it is deeply disconcerting. When lots of people are unemployed and worried, it makes people stressed, angry and ultimately irrational and violent. When countries struggle with mass unemployment and fear, extremist politicians tend to get elected and they tend to start wars.

And the worst part of all this is that we did it to ourselves. Happy Sunday to you.

It is tax season again. I hate tax season.

Whenever I sit down to do our taxes, I am reminded of the totally corrupt and ridiculously complex rules of the tax code. Rules so convoluted that an entire industry exists just to fill out the forms. Oh the tyranny!!

While a standard 1040 is ok, I have been struggling with one particular part the past few years: capital gains taxes on investments. I dread the schedule D...

I totally struggle with managing our investments. It seems like it should be easy and it just is not. Even Quicken, my champion of household expenses, totally sucks with our investments.

While I am still looking for a solution that doesn't suck the life out of me, I saw this brief article hidden in the paper. Figuring our investments should be totally easy for my broker, Schwab. It seems that it took a law for them to actually do so however.

If it works out, that may be my favorite law ever.

Investors to Get Reports on Cost Basis of Stocks

By ARDEN DALE

FEBRUARY 4, 2009

Wall Street Journal

A law passed last year requires brokerages and others to show on Forms 1099-B the cost basis of stocks, starting with those stocks that customers buy on or after Jan. 1, 2011.

Cost basis, used to calculate capital gains, is figured differently depending on how an investment was acquired. For a stock purchased by the owner, it is usually the price paid, along with commissions and other costs. Right now, it's up to the taxpayer to figure it.

Life is expected to get a lot easier for taxpayers and their tax advisers after the new reporting begins. Figuring cost basis can be tricky when a security has a history that includes corporate spinoffs or other events that complicate its lineage.

The change was intended in part to "simplify the tax work for investors by having brokers do the math," said Stevie D. Conlon, tax director of GainsKeeper, a division of Wolters Kluwer Financial Services that provides automated tax accounting and basis tracking.

Let's be clear: We can't expect relief from the tired old theories that, in eight short years, doubled the national debt, threw our economy into a tailspin, and led us into this mess in the first place. We can't rely on a losing formula that offers only tax cuts as the answer to all our problems while ignoring our fundamental economic challenges – the crushing cost of health care or the inadequate state of so many schools; our addiction to foreign oil or our crumbling roads, bridges, and levees.

Oh wait... Did say that?

No the President of the United States said it!! Dang.

That quote was from a speech he gave over the weekend. Today I listened to a very long press conference he held. It's a bit weird.

First off, I can barely remember a press conference the previous President gave let alone one in the first month.

Most importantly, Obama sounds fucking smart. He sounded like he personally knew what the hell he was talking about and he was talking about good common sense. I honestly dont remember any President talking like that (except recent interviews with Jimmy Carter). No wishy-washy political BS. Simply amazing.

I am still quite doubtful about the TARP, the bailout and the new stimulus plan but so far I am very impressed with the President himself. I just hope he knows what he is doing...

I have been marveling at how resilient housing prices have been here in Seattle.

Looking at incomes, housing prices are way outside of their historical averages due to the bubble-economics so I expect them to fall. But all I see are empty properties -- a LOT of empty properties -- for sale at bubble prices.

I know this is human nature. People wont drop the price unless they are forced to. So what will force people to take a loss and when will it happen?

Although we have been looking at single-family homes, I have noticed the huge supply of condos, specifically new, luxury condos. No one is going to purchase those condos and they are too expensive to rent. Why are they still being built? What will happen to them?

Here is the first article I have seen that provides some explanation - interest reserve provisions.

Simply astonishing. As the facts come out about the roots of our financial bubble and the resulting crash, I just shake my head.

So many people, professionals no less, abdicated their personal responsibilities in order to make a few extra bucks -- AND the government regulators we entrusted to protect the system sat idly by while they did it.

You can rail about the ignorance of poor people, ie subprime borrowers, but there is a higher standard for risk-management professionals. Like AIG.

Remember how America was gonna do so great in the Information Economy?
Remember how good our schools are and how innovative we are?

Maybe its just the auto industry but I've noticed an odd thing recently. All the new cars, the ones that are going to save the Big Three, are actually from other countries.

Chrysler is trying to get "small car know-how" from Italy.

Ford is delivering a full-electic car, starting with a van from Turkey. Turkey?

I dont remember any specifics from GM but its something to think about. We know that manufacturing has been fleeing our country for decades, but innovation?

Maybe innovation is just going global and the issue is more nuanced. I hope so.

Now its real.

Signs of economic deterioration have been with us for a while. First housing prices started to drop. Then we had a "subprime" crisis for banks, followed by the collapse of the investment banks and the emergency TARP bill. For Thanksgiving the topic du jour was the retail sector and then we started to marvel at the amazingly high unemployment numbers.

By January 2009, the daily paper was a list of articles on companies with shrinking revenue, rising losses and layoffs. The news has been impossible to ignore but as things often are here in Seattle, they seemed far off.

Until yesterday.

On Thursday January 22, 2009, Microsoft did its first every "mass" layoffs. The rumors had been going strong since December but now it is official.

For people living elsewhere, you probably think, "what's the big deal? Companies do layoffs all the time." But not here.

As a transplant, whenever I complained about the unsustainably high price of housing in this area, I was told time and again that prices were high because Microsoft jobs pay so well and they never do layoffs.

So much for that twisted logic. Yesterday Seattle rejoined the nation. Following the bankruptcy of WAMU, the Microsoft announcement makes the sinking economy undeniable even here in the forest.

Even though I was expecting the announcement (since last week), yesterday was a hard day. I did not lose my job but it was very emotional for me nonetheless. I've been laid off before and I guess I still have a lot of strong feelings about the experience, which was probably the lowest point in my life.

Its one thing to read about layoffs, another thing to work at a company doing layoffs and another level altogether to get laid off yourself.

Although I did not lose my job, people I know and like did. Their absence will have a very real affect on my job moving forward. They will be missed and the rest of us will be changed.

I hear that Microsoft was originally going to cut much more than the 5% it actually did but 5% is bad enough. The emotional impact is going to be much larger than the actual numbers.

The word "never" is gone for good and Balmer clearly said that layoffs would continue for 18 months so now even the survivors know they arent safe. The company also froze raises for the year so the topic is sure to linger for months. Ugh.

It is pretty clear that the global economy is going to struggle for the foreseeable future too. Job problems and money fears are going to grow and linger for everyone. 2009 is going to be a hard year. For a lot of people, it may be their first hard year ever.

This may be the the first people of job losses for some people, but job losses arent the only story. While the news will continue to focus on the losses (and the occasional plane crash), companies will continue to hire some people. That will give some people hope even as it will strange for others.

On the day we got email about the job losses we also got an email from a college grad showing up for his first week of work. Wha? Microsoft is firing people out one door and hiring new ones through another. There is a logical argument for this but the emotional experience is a difficult one.

But difficult or not, that is just the way it is going to be. We are adults and we have to face realities. Businesses exist to make money. They are influenced by politics and circumstance. Our task is to make our way as best we can in that system.

My heart goes out to all those people facing hard times, especially those that did not bring it on themselves with poor decisions. Let's all pray for better days.

Well crap.

For the past week, I've been refreshing iTunes to get the next 1upShow podcast. Today I finally pointed my browser to the google and found out why.

The website (and thus podcast) had been bought and half the staff fired. Now what am I going to listen to? Listening to TWIT mangle the truth is no substitute.

2009 is going to a tough year.

There are days when I read the newspaper and feel like I am living in a disaster movie. Specifically, the first 30 minutes of a disaster movie where we see people going on with their normal lives oblivious to what we, the audience, know is coming.

December sure hasnt been a slow news month.

This week President Bush lost his economic religion. Free markets are fine when times are good but Detroit's auto companies are too big to fail so his leadership is going to throw tax payer dollars (something Republicans are fond of calling "your dollars") at the problem.

Congress couldnt agree on what to do so Bush is going to give $15B to GM and Chrysler so they can limp along another few months until the next guy gets stuck with the problem. Now that's what I call leadership.

Auto sales were 16M vehicles in 2007. The industry has lowered that expected number to 12M.

GM, Ford and Chrysler are now expected to become profitable in a few months in a market that is 25% smaller than 1/4 it used to be.

The skeptical might think it improbable that Detroit can turn itself around and pay these tax payer loans back but dont worry. The CEO's promised to become profitable. They promised!! Its like a Tom Cruise movie. They werent trying before but now they promised so good things will happen. Oh brother.

I've said before that one or two of the Big Three should be killed so the remaining one has a chance to survive. The industry as a whole has been at 80% capacity and that was before the market shrank 25%. We just dont need as many cars as we can make. There will be fewer jobs.

It is curious that GM and Chrysler imploded so quickly. I was expecting a bailout but not until Democrats took over in January. It is surprising to see Bush, patron saint of defense and oil not manufacturing, lead the bailout.

Ive been reading a lot of different opinions about this issue in the past few months. It is interesting to ask why banks get bailouts but car companies are forced to beg and cut and concede. Why executives get a pass and blue collar workers get blamed.

While I think Detroit needs drastic changes, far bigger changes than they are being forced to do by the government, I do agree that the Administration has had a double standard and they they treat Wall Street with kid gloves.

So sit back and enjoy the show. The problems on Wall Street and Detroit arent going to end anytime soon.

Why is it that the more you have, you less you want to share what you have?

One would kind of think that the more you have, the less any of it means. $10 is a lot more important if you only have $100 than if you have $1M. Or a few $B.

These folks went out of their way to pay expensive bankers so that they would not have to pay their country and UBS stuck with the business because these folks were willing to pay so much to avoid taxes.

Top Banker Cited In Tax-Dodge Case

By EVAN PEREZ and CARRICK MOLLENKAMP

Wall Street Journal

November 14, 2008

WASHINGTON -- U.S. prosecutors charged one of the world's top private bankers, a senior executive of UBS AG, with helping rich clients evade federal income taxes, the latest U.S. move aimed at pressuring Swiss banking officials to reveal the names of their American account holders.

Raoul Weil, a member of the Swiss banking giant's executive board, is accused of organizing a phalanx of private bankers to help hide from U.S. tax authorities about $20 billion in assets belonging to about 20,000 clients, according to an indictment filed in U.S. District Court in Fort Lauderdale, Fla. The alleged offenses occurred between 2002 and 2007, when Mr. Weil was the bank's top international wealth management executive.

Mr. Weil, according to federal prosecutors, referred to the offshore business as "toxic waste" because of the risks it posed to the bank, but oversaw the expansion of the accounts because they were so profitable. If convicted on the felony charge of conspiring to defraud the U.S. government, Mr. Weil could serve a maximum of five years in jail.

I guess it doesnt shock me that the Americans with the most want to keep it for themselves. What does shock me that there were so many of them. 20,000 cases with UBS alone! Wowza.

UBS Clients Seek Amnesty on U.S. Taxes

By CARRICK MOLLENKAMP in Zurich and EVAN PEREZ in Washington, D.C.

Wall Street Journal

November 24, 2008

Wealthy clients of Swiss bank UBS AG are coming forward to make amends with tax authorities, a sign U.S. efforts to battle offshore tax evasion and dent Switzerland's bank secrecy are having the desired effect.

Moved to take action after a former UBS private banker was indicted and spilled valuable secrets, the UBS clients are hiring tax lawyers and pursuing amnesty through an Internal Revenue Service voluntary disclosure program. The program allows U.S. citizens to avoid criminal prosecution if they acknowledge evasion and agree to pay taxes and penalties.

The clients' actions are a boon for the IRS, which lacks the staff to go after about 20,000 U.S. citizens who U.S. authorities say worked with UBS private bankers to avoid taxes.

I have been thinking about a number of things recently but haven't had the time to write. 2008 has turned into a historic year on many levels.

Needs and Wants

One topic that has been on my mind again is the difference between needs and wants.

This issue is almost a constant in our household. Based on the economic news, I am thinking it will be a big topic for others too.

The number of things you can spend your money on is almost infinite. Even when you pick an object, like a watch, the amount you can spend varies greatly. You could buy a $5 digital watch, or a $50 running watch or perhaps the very simple-looking $5,000 Swiss watch I picked out last week - before I knew the price.

Our culture is obsessed with stuff and being a product of our culture, I regularly struggle with decisions about stuff. What do I want? What can I afford? These two questions invariably lead to the real question: What do I need?

A new era of frugality

My sense is that for years, many fellow citizens have started with the first question and skipped the other two. We have been consuming far beyond our ability to pay and we have filled our lives with things we really dont need anyway.

Now that period may actually be coming to an end. For a long time if not forever.

Of course I have been banging this drum for years but current events indicate that on a national scale, we may finally be facing the fact that borrowed money cannot take us any further. Eventually the capacity to afford things impacts our purchase decisions and we focus on what we truly need.

I dont think many Americans have suddenly bought Quicken and done an actual analysis of their spending but companies are doing it for them. Credit is drying up. Banks are failing. Everyone, consumers and businesses alike, are looking at their spending and their "wealth" and feeling poorer. It looks like the macro economy is forcing us to face the prospect of a painful financial diet.

we already have what we need

I was surprised to realize that both of my personal computers are now two years old. As a gamer and a professional computer user, that is the longest period I have ever gone without an upgrade.

My desire to upgrade was dormant but kicked into high gear recently. So I have been shopping and researching. Turns out a LOT of stuff has changed in the past 2 years and there are an abundance of neat new computer toys available.

But every time I put items in my shopping cart and look at our budget, I reluctantly face reality: my 2 year old computers are still just fine. They do just about everything I need them to do even if they arent as flashy as a new PC would be. In other words, my needs are already met even if my wants are falling short. So I click cancel instead of purchase and try to think about other things.

Resisting a purchase is good for our household finances even if it is bad for the national economy. I suspect there are a lot of folks out there like me who are going to forgo an upgrade because they really dont need it.

I have already written that the power of computers has surpassed the needs of consumers. Now I am looking at Apple, and Dell and Intel and wondering if we are going to see that have any impact in this new economic environment. There are billions of people that do not have a computer but the ones that do have one are the most likely to upgrade to a new one. Unfortunately, they are also the most likely to already have what they need.

The exact same situation exists for cars. I bought my car in 1996. It is not flashy or luxurious but it is totally reliable and will probably drive just fine for another 100k miles. Anyone that bought a car in the past 5 years is in the same boat. Detroit is in bad shape but we just dont need those new cars very much.

I suspect the same thing can be said for just about any consumer good. We have been buying new stuff and throwing out our perfectly good stuff for some time. We have been buying for fashion and style not for needs.

2009

I think the stock market is down about 40% from its peak, today the Federal government announced another bank intervention with Citigroup and Christmas is just around the corner. I am not expecting a big rally for corporate profits because our needs dont justify it and our wants cant afford it.

Now that we helped the banks and given them tax dollars to use for buying other banks and making themselves bigger.

Now that we have helped AIG stabilize the mess that CEO Hank Greenberg created.

Now that we have helped the investment banks stay alive.

Now that we have helped all those huge companies that should have known better, Congress is getting around to helping the lowly home buyer. Again.

Once of the most problematic consequences of all this financial mess is that millions of people paid too much for a home, many of whom cannot or will not pay the mortgage they agreed to.

There seem to be numbers on the scope of the problem but there is still little agreement on how to help. Lots of people are talking about helping homeowners but what do they actually mean?

Who do we help? How do you pick the victims from the chaff that should have known better or worse, that did know better?

Once we identify who to help, how do we help them? What kind of help do they get and how would we implement it?

Unfortunately, the process that allowed these troubled loans to get made in the first place makes it hard to fix. The housing bubble was Humpty Dumpty and putting those pieces together again is a bitch.

You, nice home buyer, buy a house and get a mortgage from a lender to pay for it. The lender, without any input from you, then goes and resells that loan to someone else. The lender you talked to may still service the loan, ie you send them the checks, but they no longer own it.

Worse, 1/5 of the mortgages were sold to Wall Street who then split the mortgage up into $1,000 bonds and split those bonds up into traunches which were sold to investors around the world. If your mortgage was securitized like that, who the heck is your lender? Who do you call to negotiate?

Oh yeah, don't forget that all of these mortgages are legal contracts. How is the government going to wave a wand and renegotiate the terms of millions of contracts? How do you spell "see you in the Supreme Court"?

So far Congress has passed two bills to help homeowners in addition to the $700B bailout bill. They have also passed a lot of hot air talking about helping homeowners. Has it helped?

Apparently not much. The FDIC took over IndyMac bank earlier this year and have been trying to rework 60,000+ mortgages. 10% of IndyMac's loans are delinquent but IndyMac only owns 1/3 of the mortgages they service so if you call them for help, you have a 1 in 3 chance of getting any. After several months, the FDIC says they have reworked less than 5,000 mortgages.

FDIC Plan Tests Limits of Leniency

By MICHAEL M. PHILLIPS and RUTH SIMON

Wall Street Journal

NOVEMBER 1, 2008

In total, IndyMac services about 653,000 mortgage loans on behalf of itself and other investors. About 65,100 are "seriously delinquent," generally meaning at least 60 days late. Of those, the FDIC says roughly 47,000 might meet its criteria for a new loan.

The FDIC has already completed loan modifications for 3,500 borrowers. Several thousand more have accepted the FDIC's offer, though their modifications are still being processed. On average, those who have renegotiated have seen monthly house payments cut by more than $380, or about 23%, the FDIC says.

But those are good numbers when you compare them to the latest Congressional bill. What percentage is 42 divided by 400,000?

Hope for Homeowners was expected to help as many as 400,000 people, but in its first two weeks it helped just 42 homeowners, according to agency records. The U.S. Department of Housing and Urban Development estimated earlier this month the plan could help 19,600 people by the end of 2009. An agency spokesman said it was too early to judge the program because it takes time for loans to be processed.

As others have pointed out, these numbers are insignificant when compared with millions of foreclosures. What I havent seen anyone ask is whether this is a problem that actually needs a "fix" or that can be fixed. What if the right answer is just waiting a few years for prices to stabilize at a new level that matches supply and demand? Painful yes but maybe the answer is also that simple. Maybe it is time to stop talking about poor old Humpty and put our energy into a new egg. Given how effective Congress has been at intervening in markets, Im starting to wonder.

U.S. Steps Up Help for Homeowners

By DAMIAN PALETTA, JESSICA HOLZER and RUTH SIMON

Wall Street Journal

NOVEMBER 12, 2008

The potential reach of the program is constrained by the large number of mortgages, especially subprime, which have been bundled into packages of securities and sold to investors around the world. The practical and contractual complexities surrounding these securities renders the mortgages hard to change.

The House Financial Services Committee is holding a hearing Wednesday, and the Senate Banking Committee is holding a hearing Thursday to examine why the government's efforts so far have not slowed delinquencies.

House Financial Services Committee Chairman Barney Frank (D., Mass.) said he wants to rewrite rules that servicers say make it hard for them to modify loans. Rep. Mel Watt (D., N.C.) said Democrats planned to push for a 90-day moratorium on foreclosures. President-elect Barack Obama has suggested that any bank receiving money from the government as part of the rescue package should temporarily halt foreclosures.

Congress passed a housing-rescue package in July and its central plank, a program known as Hope for Homeowners, went into effect Oct. 1. It allows banks to move borrowers into government-insured loans if lenders agree to write down a portion of the principal. The program was supposed to improve upon an earlier effort, called Hope Now.

Several weeks ago, Ms. Bair began privately floating a proposal that would use roughly $40 billion from Treasury's $700 billion program to help roughly three million homeowners move into more affordable loans. The White House has been cool to the idea. Bush administration officials have said the FDIC's proposal could offer perverse incentives that might push more people into foreclosure, such as encouraging people whose mortgages were underwater to stop making monthly payments in order to qualify for aid.

Of the $11.3 trillion in mortgage loans outstanding, $2.03 trillion were packaged into mortgage-backed securities sold to investors by Wall Street, according to Inside Mortgage Finance. Another $4.5 trillion are owned or guaranteed by Fannie Mae or Freddie Mac.

Election is over. Let the corporate welfare continue!!

It didnt' take long before the Democratic leaders decided to follow the Republican lead by extending the financial bailout to Detroit. I expected it but I am still disgusted by it.

Why is Detroit hurting? Because they are fat, dumb and lazy. Because the only vehicles they make money on, gas guzzling trucks and SUVs, are bad for the country and the planet. Because they dont make cars people want and they dont have battery or hybrid technology for the future. Because the world changed and they didnt. The Big Three are not victims; they are getting what they deserve.

The Big Three deserve to die. We need to send in Dr. Kevorkian not Pelosi, Reid and Obama. Corporate welfare at this point is just life support which will only delay the inevitable.

We need a 21st Century car company not three relics of a bygone age. A company that has alternative fuels, high mileage, electric motors, carbon fibers. A car company for the future not the past.

Based on the last 20 years of failure from Detroit, the only way to get there is to let the current companies die and let someone build a new company from the ashes. Especially if we are going to use tax dollars to do it. If the federal government is going to get involved in cars and nationalize the auto industry, then cars must be in our national interest and we should expect returns that reward the country not just the corporations.

Pelosi, Reid Press for TARP Aid for Auto Industry

By GREG HITT

Wall Street Journal

October 9, 2008

WASHINGTON -- House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid sent a letter to Treasury Secretary Henry Paulson urging him to assist the Big Three auto makers by considering broadening the $700 billion Troubled Asset Relief Program to help the troubled industry.

The two top Democratic leaders in Congress are likely to make the request in a letter to the White House, which could be forwarded as soon as Saturday afternoon, said individuals familiar with the matter. President-elect Barack Obama is generally supportive of the appeal, but at the moment is moving on his own track to assist the industry, these individuals said.

Mr. Obama is scheduled to meet with President George W. Bush at the White House Monday.

The White House has been reluctant to broaden use of the $700 billion program, which was created by Congress just ahead of the election to deal improve credit flows and calm turmoil in financial markets incited by the downturn in the housing economy.

"It was not set up for anything else," said Bush spokesman Tony Fratto, noting the only assistance authorized by Congress for the auto industry is a $25 billion loan package meant to help the industry retool to meet higher fuel economy standards.

It is hard to feel sorry for hedge funds so I got a chuckle out of this article.

Earlier in the year I got convinced that I could make more money by trading in options like the big boys. I got an options account and then I stopped. I realized I was getting in way over my head and the most likely outcome was losing all my money.

Its reassuring to see the pros get in over their heads and lose money.

VW's 348% Two-Day Gain Is Pain for Hedge Funds

By GREGORY ZUCKERMAN, JENNY STRASBURG and MIKE ESTERL

Wall Street Journal

OCTOBER 29, 2008

Hedge funds around the world absorbed a punishing blow Tuesday, as soaring shares in Germany's Volkswagen AG created one of the biggest losses from a single bet in recent memory.

The funds are expected to face billions of dollars in losses, according to prime brokers familiar with the positions, because they were wagering that VW shares would fall. Instead, shares of the big German auto maker soared 82% Tuesday to €945 ($1,185) in trading in Frankfurt after fellow German car maker Porsche Automobil Holding SE said it had boosted its VW stake.

VW shares are up 348% over the past two days and 267% in the past month -- as short sellers rushed to pay ever-higher prices for shares they need to exit from positions.

Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside Capital, according to people familiar with the funds.

Last week Alan Greenspan was back in D.C. testifying before Congress. I was most pleased to hear that the tone of the testimony had changed. The cowards who sucked up to him in the past were a little less friendly this time.

models versus reality

David Brooks had an interesting analysis on Friday (paraphrasing):

• Greenspan was a numbers guy. He took historical data and used his big brain to build a complex mathematical model of reality. And he had faith in the model to predict the future.
• Greenspan’s critics were students of human behavior. Instead of math, they looked at how people actually behave and they predicted problems long ago.

I think there is a lot to Brook's summary. A lot of people on Wall Street were math wizes. Enron-type geniuses that build mathematical models that could literally create wealth. Hmmm.

I would put it a simpler way: There are a lot of really smart (often arrogant) people who have no common sense.

Common sense tells us:

• There is a point at which the difference between home prices and incomes is so great, people cannot afford homes.
• Lending money to people who cannot pay it back is not a good idea even if you can sell the loan to a greater fool.
• Putting trillions of dollars into derivatives that are completely unmeasured will lead to problems.
• You cannot borrow forever.

Obvious signs were there for years. It doesn’t take a spreadsheet to realize there was trouble ahead. Making money is not a sign that everything is fine. Ignoring the signs because you are making money is simply a sign of greed.

The discussion of predicting the future from data brings up an interesting cultural issue.

Imagine a graph with three dots. Each dot goes higher as you move left to right.

An American looks at the graph and says the 4th dot will be higher and to the right. We predict linear trends that continue forever. Sort of like saying "Home prices never go down".

A Chinese looks at the graph and says 3 good years means a bad year soon. They predict cyclical trends that more closely resemble nature.

So common sense and nature agree -- good things dont last forever. Who knew this would be so shocking to Wall Street.

Greenspan: I was partially right!

Greenspan went on to say that there are always people who warn of danger and that these markets are just too complex to predict. Apparently after the dot-com crash, he also told Congress that these markets were just too complex to predict.

I call bullshit on that in two ways.

One, if markets are too complex to predict and there is nothing you could do to protect us from disaster… well then why did we PAY you? If the Federal Reserve bank and the SEC are powerless, why didn’t you shut them down and save the government some money?

Two, all it took was a little common sense to see this coming. When there was a push to regulate derivatives, you should have at least required companies to register them. If credit default swaps were registered we could at least have seen the storm brewing BEFORE it got up to $56T! That is hardly overbearing government regulation; it is just a little common sense.

Instead we paid the fox to build the henhouse. We gave the fox the key and then we kept replacing the missing hens with new ones. The “fundamentals were good” – until we were shocked to find that the hens were all gone.

There were a lot of people involved in this creating this crisis but Greenspan was one of the most powerful and definitely the most public. He deserves a HEAP of blame yet he still is not contrite.

Did he make a mistake? Greenspan says: “I was partially wrong”. The keyword is partially.

With all the obvious damage and more to come, I haven’t seen anyone in public that a) looks sorry, b) admits wrong, c) acts repentant. There aren’t any suicides. There doesn’t seem to be any guilt. There is a whole lot of “it wasn’t my fault” and “you just cannot understand how complex it all is”.

American values

I dont know if it is a cause or symptom, but there is another angle to this crisis that revolves around values and principles.

In the past 8 years there have been a lot of people in power who just have different values from the rest of us. I am not sure they are unethical or immoral so much as they just have different beliefs than average people about right and wrong.

The neocons thought we could free Iraq literally for free. Oops.

The Bush administration have made a concerted effort to combine Church and state. They have cut funding to programs on religious grounds and changed hiring in the justice department to put religious beliefs ahead of legal competence.

We created a private prison system outside of US jurisdiction -- a clear attack on the Constitution and the idea of inalienable human rights.

We have pursued "fiscal responsibility" by cutting taxes while greatly increasing spending to create huge deficits. Worse, instead of asking people to pitch in and share the burden of a needed war, we urged them to go out and shop! Support the war by buying yourself a plasma TV...

And we have pursued a so-called "free market" ideology that coddled some industries like defense and finance and encouraged government regulators to stop enforcing existing laws.

The list goes on and on as Im sure the number of books in the years to come will as we slowly learn about all the things that happened which we dont know about yet. There is no question that what we know is only scratching the surface.

But Bush was re-elected not impeached. There is a larger picture here about changes to our fundamental American values. There is probably also a story about how we make decisions that contradict our professed beliefs. These are messed up times.

For now the CEO's and leaders continue to testify as if they did nothing wrong. They clearly see the world in a different way from the rest of us and unless that changes, I fear for our future.

There are a lot of white male senior citizens out there who are powerful, arrogant and corrupt. I think we will be seeing more and more of them do the walk of shame to jail or disgrace.

First we had Ken Lay.

Then Randall Cunningham in San Diego.

Last week we got to see Alan Greenspan admit that he was "partially wrong".

And then we got to see Alaska Senator Ted Stevens.

Alaskan's seem to love "Uncle Ted" but the rest of us know him as the clueless 80 year old who described the Internet as a "series of tubes" and was one of the most powerful men in the Senate.

More than once I asked why the Senator from Alaska was so powerful? I can only assume the answer is seniority because it is not population or economy. After all Steven's first became a senator sometime after the Pony Express and before the telegraph. But power through seniority smacks of union rules or corruption - neither of which I want to see in Congress.

What I find most interesting about Steven's case is something I see in these other leaders (except for Cunningham who showed genuine remorse). They are true believers in their own cause. While others see them as a fraud, a phoney or a crook, they see themselves as victims. They arent sorry or full of regret or honest. They arent wracked with guilt or losing sleep. They are so far gone they cannot even see where they started from.

Steven's was a true believer. He asked for an early trial so he could run for election. He took the stand himself. He testified in a court of law how he didnt receive illegal gifts because he didnt' ask for the gifts and because he didnt want the gifts. The fact that he took the gifts and used the gifts doesnt seem odd to his internal logic. He clearly sees himself as innocent. He even accused the Bush justice department (the most feeble and corrupt justice department in decades) of injustice. Its so messed up you just have to laugh.

Except its not a laughing matter. These leaders of government and industry have done so much damage to our country and yet they see themselves as innocent victims who should be helped or even compensated.

The banks need a bailout. Wall Street needs a bailout. GM needs a bailout. Everyone needs a fucking bailout from taxpayers and yet we cannot find a dime of tax dollars to pay for teacher salaries or national healthcare. The irony is so thick you need hip waders and people are still out there running commercials about cutting taxes and tax-and-spend democrats or socialists. If bailing out wall street or GM isnt socialism I dont know what is. If it isnt a transfer of wealth from the poor to the rich, I dont know what is.

Im not a supporter of the blanket idea that we "throw the bums out" and change; there is a need for experience in government. But the past few months have me deeply suspicious of anyone who has been in Congress for more than 10 years. Stevens and McCain arent much different from Dodd and Franks from this perspective. As a simple tax payer, I dont know who to trust anymore.

Reality seems to be on hold these days and true believers abound. Over the next year I expect to see a steady stream of rich white old men going to court or testifying before congress or heading off to jail. I guess I always knew there were innocent men in prison.

For the past month or two I have been riveted by the stock market. Then I got to thinking about what a big change that is.

In the 1920, hardly anyone invested in the stock market. Retirement meant savings, family or poverty. There was so much poverty we created the social security administration.

Over the years it has gotten easier and easier to invest in the stock and bond markets. Since 1990, it seems like EVERYONE has a broker and a portfolio and an IRA account. For decades, most people got a pension from their employer and a little extra for social security. Now it seems that everyone is on their own and "investing in the market" is something everyone is expected to do.

Take a moment and think about what a huge change that is over a generation.

With every asset class falling at the same time around the world, take a moment to think about whether it is a good idea for everyone's retirement to depend on the stock market.

I thought I had a good grasp of investing before this crash but I have learned a ton in the past month. I cant imagine what the average person knows or thinks about the stock market. Very few people I talk with have any idea what they are doing.

By pushing millions of people into the market, we have created a huge supply of "greater fools". Is it realistic to think that the "market" can sustain the retirement needs of everyone?

By expecting people to take care of their own retirement by investing in the market, we may well be recreating the crisis of senior poverty that social security tried to eliminate nearly a century ago.

Today I read in the WSJ that since Bush took office in 2000, the auto industry has lost almost 500,000 jobs. That kind of dramatic and steady job loss is indicative of manufacturing in America. The number of jobs that you can get without a college degree is shrinking. The amount of money paid by labor jobs is shrinking. Despite the empty promises of politicians, the middle class is vanishing because the jobs that created the middle class are vanishing.

economic transition number two

The post-WW2 American way of life that we are used to is going away because of two trends:

• technology allows fewer people to do more work
• fewer people have the skills for technology jobs

In the great depression, the US was largely an agricultural economy. By WW2, our economy gradually moved to a manufacturing one. The jobs lost in farming were replaced with jobs in factories and the machines that factories built allowed fewer farmers to grow more food than before. Farm labor went down even as yields went up such that today farming is about 2% of the workforce.

Not for the first time, I find myself asking if the Information Economy can support our country. Are we are seeing that same painful transition all over again except this time the labor force is not able to make the transition? Are we doing more work with less people and we dont need the people?

In the last transition, unskilled farm laborers could find jobs in factories. There was unskilled labor to do in factories and people could learn the new skills on the job. But that is not true today.

A 40 year old factory worker from a Chrysler factory is not able to step into a job producing biotech drugs or designing a new microchip. Many of them cannot even operate the new robotics that are used to make cars in the very factories they used to work in.

We dont need those cars from Detroit but those people do need jobs to feed themselves and their families. I fear that the advance of technology is creating structural unemployment on a massive scale and we as a country are not facing the issue.

raising the minimum bar

Recently I was thinking about a similar but different aspect of this issue. A young man came to our door selling magazines. He was in a program to turn his life around. He was 19, had a 2 year old daughter, and no skills or education. I immediately liked him. He asked me what I did to get where I am today so that he could learn from me...

Well I studied hard in high school and got a scholarship to a top private school. Then I got into a top university. Then I picked a very hard degree of study which I knew would pay well and have some job security. Then I got jobs that payed well, I worked hard, and I moved with changes in the industry. Then I got a masters degree from another top university. All of which before I took on the challenges of parenting.

What could I tell that young man? Did he have any hope in hell of following my path given that he was already 19 and a parent? I found this personal experience to be both profoundly moving and sad.

The bar today is so high and getting higher.

My grandparents immigrated to this country in the 1950s with no education, no money and two children. Through physical labor and two jobs each, they were able to make a life for themselves. Significantly, they were also able to get their children a good education in public schools. Neither of my grandparents finished high school themselves but they knew that education is what set people apart. They had enormous respect for education and there was never any doubt that their children (or grandchildren) would get good degrees as a way to secure their financial future.

Today you pretty much need a college degree from a top university and in an applied degree of study. Most leaders I work with have masters degrees or phd's.

But everyone isnt able to get a law degree. Everyone isnt suited to configure email servers or work in a clean room. Someone still has to cook the food, mow the lawn and build the cars. What do we do with all those people? What kind of life will they have in America?

moving fast with no directions

The pace of change in the information economy is amazing. Computers barely existed 30 years ago and today Microsoft employs 90,000 people and is one of the most profitable companies in history. If you got in early, you probably feel like a king, like you and your stock option money are smarter than everyone else.

But how does the rest of America feel? My guess is that there are a lot of people who feel lost, confused, abandoned and afraid. They see the changes of technology but they dont understand it. Maybe they can operate an iPod but they have no idea how to make one. the changes threaten their jobs and they see people half their age making twice the money and then eliminating their job altogether.

When people are afraid, they react in two ways: a) they admit they are afraid and ask for help; b) they deny they are afraid and spurn help.

It strikes me that there are millions of (b) people out there and they may be the reason why our country feels so divided and irrational. I see this fierce idea that "Im as good as everyone else no matter how I talk or where Im from" in the 2000 election of Bush and the current nomination of Palin. Part of the 2000 election was that Bush was a "regular guy" not an educated guy. He talked like a moron, chopped wood, you can trust him. Why were Americans so drawn to the idea of Bubba running the country? Governor Palin's story is almost identical. Soccer Mom from the Boonies gets tapped by Washington to run the country. Brings tears to your eyes. It could happen to you!

There is a twisted logic at work here that creates a movement of the left-behind (and the literal Left Behind books) that seem to gravitate to the new Republican party. It is an emotional and irrational movement that Abe Lincoln would barely recognize. Listening to what Colin Powell says and comparing it to what other Republicans say, its hard to believe they are in the same universe let alone the same party.

the same coin

"Dont worry about me, I will be rich some day. Go ahead and cut those taxes. Its my money and I dont need no stinking socialism handout from the government." etc.

For years now, I have found the twisted logic of the Republican party to be baffling. I have friends that voice these opinions and when I talk to them, it is clear that they dont see the circular logic they espouse. It doesnt take long before they react harshly: I'm an elitist, Im attacking them, etc.

Why would the poorest people fight so hard for policies that hurt them and made the richest people richer? Why do we spend so much energy on the issue of abortion when our bridges are crumbling, are government is broke, and we are all worried about our jobs?

After struggling with trying to understand people, I now think we are just seeing two reactions to the same fear. Republicans reject the changes and want to restore the past through tax cuts and military spending. The Democrats have an equal pipe dream of restoring the middle class through government intervention.

Both reactions are two sides of the same coin. Both sides are reacting to the same fears about the future they are just doing so in opposite ways.

forecast calls for more of the same

Sadly, I dont think the transition we are experiencing is fixable.

As technology becomes more complex, it will take more and more training to contribute. The people that fall off the learning path or were never on it to start with will never find technology jobs. They will be left competing for minimum wage work or unemployed.

The best we can do is discuss the situation honestly and decide how we want to treat people. We could improve education. We could give more people a chance but it will cost money. Or we could continue down the path of every man for himself, but that too will cost money, largely in crime and quality of life. Money that we have less of every day as we lose jobs and make it up with debt.

Whatever happens, I think we are at an inflection point in history. This period may last a lifetime but life moving forward will be forever changed from life before. First we will face economic changes; soon we will face environmental ones.

Remember $4 gasoline? Or record high prices for gold, platinum, corn, you name it?

Only a few months ago we were experiencing a commodities bubble. Experts all said prices would go up and stay up because of "increased demand from China" and things like that. I believed it. I bought gold at $940/oz... and then the market imploded. Now oil is almost down to $70/brl again, most commodities are off 40% and the experts are talking about recession not about commodity demand. Whippee! Im ready to celebrate cheap gasoline with a new HMMR.

I had been thinking about this rapid reversal of fortune in commodities when I heard an interview with Antonia Juhasz on the radio. The title of her book (The Tyranny of Oil: The World's Most Powerful Industry — and What We Must Do to Stop It.") was rather inflammatory but her comments were enlightening. Put another way, they were another example of “Is that REALLY true? Geez, what else DON’T I know?” or in simpler terms an example of the Bush43 administration.

I long suspected that the commodity price run-up was not due to normal supply and demand. Even professional traders in oil were saying as much. Everyone suspected that “speculators” not “consumers” were at the root of price rises but no one in government seemed able (or interested) in proving it.

Then the government quietly enacted some laws that prohibited certain firms from buying commodities. Almost immediately prices started to fall. Hmm.

In the case of oil, Juhasz tells us that the oil market actually was Enron/California all over again. Meryl Lynch and Morgan Stanley helped the oil companies create a second (unregulated) commodities market just for trading oil. More significantly, that private exchange got even larger than the public exchange. Whaaa? How was this never in the newspaper?

Not only does the author make a strong argument that the price of oil was directly manipulated by this shadow exchange but she argues that the reason Meryl and Morgan are still alive is because of the collateral they had from these oil investments. They had the same CDS and MBS losses as other wall street firms but unlike Bear Stearns et al., they had the oil collateral to stay solvent long enough to get bought. Wow.

The more you know, the more you don’t know.

I just cant take it anymore. If I have to hear McCain or Rossi or any other Republican whine about taxes, Im going to shoot myself. For decades I have had to endure this idea that taxes are evil and everything would be better if no one paid taxes.

Well what happened to "country first"? What happened to personal responsibility? What the fuck to do people think taxes are?

Do you like roads? Do you like running water in your house or trash collection? Do you like electricity? Do you feel safer with 911 calls or should we fire the police and firemen?

Why dont any politicians get in front of this issue and reframe the argument? Everyone wants more money but would you rather have $100 or all those services? Do you even know how much you actually PAY on taxes?

For that matter, what pays the salaries and health care for Republican politicians? fairy dust? No. Tax dollars pay for their benefits and I dont see our "tax cut" politicians lining up to work for free.

Taxes pay for everything that makes our a pleasant country to live in. Taxes are another way American's put country first. Taxes are an example of how American's are in this together. Paying taxes should be a badge of honor instead we have tacitly agreed that taxes are always to be avoided. We have created a culture of personal greed. Me before We.

These tired Republican arguments that taxes are evil, wink wink, prevent any real dialog or discussion about what we do spend our money on. That is what we should be talking about.

You want a penny to give a crippled person health care or feed a child in school? Well you have to fight a bloody jihad to get money for fellow citizens in need.

You want $100 to give to Wall Street or to buy a useless stealth bomber or give a rich farmer a rebate on corn? No problem, here take $200.

I am sorely disappointed in how our leadership handles this issue of taxes but I hope that things will get bad enough that we start to discuss our real priorities again. I am still waiting for my peace dividend from the end of the Cold War. I'd rather make butter not guns because that is putting country first.

The other aspect of taxes and "country first" is deficit spending. I think there has been 1 single year in the past 25 where the federal government did not spend more than it earned. Every year our nation has dinner and then runs out on the check. We charged up the credit card and then transfered it to our children to pay back.

What kind of traditional family value is that? What kind of fiscal conservative urges you to stop paying taxes and just borrow the money?

Our behavior is outrageous. It is criminal. And it never seems to end!

No we cant cut taxes because we have to pay our fucking bills! Look at this Federal bill we got in the mail -- 30 years of borrowing, mostly for military spending. If you dont like paying taxes, then you should have asked why we were spending so much money all those years.

We have already borrowed $10T and the next administration is going to borrow wheelbarrows more. The only source of income the government has to pay back that spending is taxes.

So wake your brain up and let's start having an adult conversation about taxes and where we should spend money. Its high time we really put "country first."

For many years the auto industry has had more manufacturing capacity than it needs to meet demand and that situation has only increased as other countries (Germany, Japan, Korea, India, China) create their own domestic industries. With overcapacity, the industry has pushed sales through advertising, fashion and creative financing. That “must have” SUV for safety kind of thing.

With this financial crisis, things are changed.

Car manufacturers can no longer afford to finance the system we were used to, in particular car leases. The end of car leases is huge. It’s a bombshell. Car financing was just about the only thing in the industry that was profitable and now its gone too.

Demand for cars is going to plumet. If American’s are forced to actually purchase cars, there will be fewer new car sales and more used car sales. There will also be fewer sales overall as people realize that the car they already have is good enough.

Car dealers are already going poof so when will we see the first American car manufacturer declare bankruptcy and which one will it be? Chrysler? Ford? GM?

Frankly, the world can live without any of them. Our lives would be fine if all cars came from Toyota, Honda, VW or BMW. All those companies can make small cars profitably and most of them have hybrid technologies. Moreover there just isn’t enough food to go around; we are all better off with fewer healthy companies than more sickly ones.

But this is an election year and Democrats are about to control the White House and the Congress. The only things Democrats like more than Fannie Mae is the UAW and labor unions.

The Big Three are begging for money. First they needed billions to invest in cleaner car technology. Now they need billions to stay alive.

We threw hundreds of billions of tax dollars at the banking industry. Will we throw another hundred or two at the auto industry? To save American jobs? To save our pride?

Will we throw a Socialist lifeline to our once proud symbol of American Industry or will we ask what they did with 50 years of huge profits and why they didn’t prepare for this obvious outcome? My guess is they will get the lifeline.

For a long time now we have known that American citizens have been living beyond their means, living on debt.

The signs of shrinking household wealth are easy to see. People have been using credit cards and home equity to buy toys and pay their bills. Our savings rate has been zero for a while and household debt has been rising while home equity has been falling. People that dont like to hear we aren't savers anymore (unlike Japan) always point out the value of our investments - homes and stocks. Not sure what their argument will be after this month.

The changes are even more apparent when you look at the WW2 generation's cash society and compare it with our current "ownership" society. A majority of people lease cars instead of buying them. Recent home mortgages have gone from 15 year to 30 year to 40 year and we have had interest-only loans. Ownership has become a euphemism as people dont "own" things anymore so much as they rent items in their possession.

Again, none of that is a surprise. The data has been public for some time.

What did catch me by surprise was finding out that businesses are in the same boat.

While the media and the experts focused on the "housing crisis", the stories about the corporate paper market were both sudden and surprising. Like finding out someone has been living in your basement keeping the water running and the heat working. All of a sudden corporate paper not housing was the real crisis. We are told that if corporate credit dries up, companies wont be able to make payroll. Wow.

I didn't know much about the corporate paper market before this meltdown and I find myself wondering how long it has existed and when it became the "lifeblood of our economy".

I can understand selling bonds to fund an expansion but I don't understand borrowing money to make this month's payroll. To me that indicates an irresponsible level of cash reserves. It also suggests that there are a lot of companies out there that are barely alive and will not survive without easy credit. Both bad things.

Now Paulson has his bailout bill but the cycle of fear as spread around the world and things have gotten worse not better. The billion dollar question is whether this will be a short but acute problem or whether we are seeing the collapse of a system and the creation of a new one.

Will there simply be less credit next year than there was last year? Will banks shrink the number of home loans? Will car leases disappear? Will credit card limits drop? Will company revenues (and jobs) drop as people have less to spend?

How will people and businesses adjust to a world with less credit? And will it last?

In the 1980's it was all about the Soviet Union. Nuclear war, the commies, death was near.

In the 1990's it was all about the money we spent in the 1980's. Our federal debt was a concern and the taxes needed to pay the interest on the debt was a topic of debate. The Concord Coalition was formed. A Democratic president and a Republican congress got together and they balanced the yearly deficit and started paying off the accumulated debt.

The 2000's replaced the commies with terrorists and we went on a spending spree again. Although our debt has ballooned to $10T, few people are talking about the payments on that debt the way we focused on it in 1992.

Im hoping a focus on debt financing will return and tax payers will again decide it is important to pay off those loans and not waste tax dollars on interest payments to other countries (since we dont really buy much of our own debt).

But none of the presidential candidates are talking about it. I expect the Democrats instead to focus on spending even more money to help people, including people that dont need help like farmers and auto companies.

The next president is going to have to face some unprecedented economic issues. We have dug a big hole for ourselves.

The Spending Explosion

September 10, 2008

Wall Street Journal

Here's a prediction: The media will report today that the federal budget deficit is big and getting bigger. What most of them won't report, alas, is that the cause of these deficits is an explosion in federal spending. The era of big government is back, bigger than ever.

The real news in yesterday's Congressional Budget Office semiannual report is that federal expenditures on everything from roads to homeland security to health care will on present trends reach 21.5% of GDP next year. That's a larger share of national output than at anytime since 1992. If the cost of the federal takeover of Fannie Mae and Freddie Mac prove to be large and are taken into account, next year federal outlays could be higher as a share of the economy than at anytime since World War II. In this decade alone, federal spending has increased by almost $1.2 trillion, or 57%.

The federal deficit is expected to hit $407 billion for fiscal 2008 (which ends at the end of this month) and $438 billion next year. Still, the deficit is expected to be only 3% of GDP, which is in line with the average of the last 30 years. We hope Congress and the Presidential candidates don't obsess over the deficit per se, because the real fiscal drag from government comes from how much it spends, not how much it borrows.

The real runaway train is what CBO calls a "substantial increase in spending" that is "on an unsustainable path." That's for sure. The nearby chart shows how much some federal accounts have expanded since 2001, and in inflation-adjusted dollars. This year alone, federal agencies have lifted their spending by 8.1%, with another 7% raise expected for 2009. There's certainly no recession in Washington. The CBO says that, merely in the two years that Democrats have run Congress, federal expenditures are up $429 billion -- to $3.158 trillion.

The fiscal blowouts have included a record farm bill, notwithstanding record farm income; an aid bill for distressed homeowners, extended unemployment benefits, and more generous veterans benefits. Next up: votes on $50 billion for Detroit auto firms, an $80 billion energy bill, as much as $50 billion for spending masked as a "second stimulus," plus $100 billion or more for the Fannie and Freddie rescue. Rather than sort through priorities, Congress is spending more on just about everything.

Maybe it is just me but I have this lingering feeling that we American's are about to experience a very long period of feeling poorer. WSJ journal articles from the past month tell the tale:

Despite the foreclosure wave, home prices in cities across the country are still at a historic levels of unafforability when looking at income versus home prices.

Banks have been slammed by real estate investments. Banks are failing and there is still a huge amount of uncertainty about how many bad investments (and losses) are still out there.

States are experiencing a major shortfall in revenues which is leading to cuts in services and jobs. High gas prices, fewer home sales, higher costs for education and healthcare are putting a hurt on local governments who will have to raise fees and taxes.

The federal governments plan to help homeowners is expected to at almost $1T to the federal deficit (assuming they did not under-estimated).

Energy and food prices are higher and rising. Oil prices are 2x what they were a year ago and gasoline is over $4. (Diesel has been around $5!)

The US$ is low, low, low and there are grumblings about moving vast oil investments from the Middle East into Euros.

While current investments are looking bad, a huge wave of baby boomers are getting ever closer to retiring yet many have little savings to live on.

People are dipping into their 401k at record levels to get money for living expenses.

On a personal level, Ive been shopping for a new computer monitor and for the first time I can ever remember, prices have been going up not down over the past few months.

This is more than a few data points and none of them are positive.

After Japan's stock and housing bubbles, they experienced 10 years of deflation and a stagnant economy as prices slowly corrected. Is that what we have to look forward to?

Everywhere I look, I see signs that the goods and services we are accustomed to are going to be more expensive and I see signs that people are going to have less disposable income than they used to. Taken together, the prognosis looks painful and long-term.

More records for the Bush Administration to be proud of.

Iraq will be the longest and most expensive war in American history, the national debt has never been higher, and now Bush can crow about his economic achievements.

Crisis Deepens as Big Bank Fails

IndyMac Seized In Largest Bust In Two Decades

By DAMIAN PALETTA and DAVID ENRICH

July 12, 2008

Wall Street Journal

IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history.

IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year -- and it likely won't be the last. Banking regulators are bracing for a slew of failures over the next year as analysts say housing prices have yet to bottom out.

The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.

Here is my quote for the day:

Critic of the Firms Sadly Says 'Told You'

By JOHN D. MCKINNON

July 12, 2008

Wall Street Journal

So how does he feel to be proved correct about the possible risks of a huge government bailout? "Terrible," he said. "I would have preferred that Congress had listened when something could have been done."

The quote is from an article about a guy who has criticized the structure and corruption of Fannie Mae and Freddie Mac for 25 years, since he served in the Treasury department for Ronald Reagan.

While the housing problems are bad and a clear result of greed and corruption, the quote makes me think mostly about global warming. Money is important but global warming is life and death.

Another article in today's paper details the Bush Administrations battles to prevent the EPA from doing anything about global warming. Sure, the White House now publicly agrees that global warming is real (a reversal of their original position) but apparently it is not real enough to actually do something about. Why? Because change will be expensive.

Maybe someone in 2050 can fix the problem with "scientific advances". Maybe more people need to watch Al Gore's movie and think about that scale with the world on one side and gold on the other...

Will Congress be able to do anything better with a new President?

Administration Releases EPA Report, Then Repudiates It

Blueprint to Reduce Greenhouse Gases Called Too Costly

By STEPHEN POWER and IAN TALLEY

July 12, 2008

Wall Street Journal

WASHINGTON -- The Bush administration published a government blueprint to reduce the U.S. output of global-warming gases, but at the same time rejected the document out of hand -- saying it relied on "untested legal theories" and would impose "crippling costs" on the U.S. economy.

Essentially, the White House presented critics of the report with a prepackaged rebuttal brief, in what is expected to be the Bush administration's last major effort to frame the national discussion on responding to global warming before a new president inherits the issue. The White House argues the Environmental Protection Agency must not be allowed to regulate greenhouse gas emissions, for fear it would be able to block development across the country.

The EPA document was written to respond to a Supreme Court order: The court instructed the agency to decide whether greenhouse gases are a danger to public health or welfare. Instead, the final document took no position on the court's question -- yet escalated the extraordinary battle between the agency and the White House.

The White House rejected an earlier draft that did find a danger to welfare, which would trigger application of the strict rules of the Clean Air Act to regulating greenhouse gases. This time, the agency stopped short of the endangerment finding, but still drew up a road map for using the Clean Air Act. That led the White House to warn of a government "command-and-control" regime that would regulate virtually every aspect of American life from cars to factories, hotels and lawnmowers.

Despite the presence of fairy-tale villains like Dick Cheney, one hopes that individuals grow both wise and generous as they grow old and wealthy.

Warren Buffett appears to be one of those individuals and his willingness to donate the bulk of his fortune after his death is a reason why. Perhaps T. Boone Pickens is another.

This week I saw Pickens speak on the Nightly Business Report and I read his op-ed in the WSJ. He is a wealthy oil man. He has a plan for change. He is willing to spend his own money to make people hear it. One hopes he is sincere.

I like his plan. Most of all, I like that someone in the industry has a plan other than "drill more oil to make me richer". Our unwillingness to face global warming is sickening. Our willingness to leave such terrible problems for our children is unconscionable.

My Plan to Escape the Grip of Foreign Oil

By T. BOONE PICKENS

July 9, 2008

Wall Street Journal

One of the benefits of being around a long time is that you get to know a lot about certain things. I'm 80 years old and I've been an oilman for almost 60 years. I've drilled more dry holes and also found more oil than just about anyone in the industry. With all my experience, I've never been as worried about our energy security as I am now. Like many of us, I ignored what was happening. Now our country faces what I believe is the most serious situation since World War II.

The problem, of course, is our growing dependence on foreign oil – it's extreme, it's dangerous, and it threatens the future of our nation.

Let me share a few facts: Each year we import more and more oil. In 1973, the year of the infamous oil embargo, the United States imported about 24% of our oil. In 1990, at the start of the first Gulf War, this had climbed to 42%. Today, we import almost 70% of our oil.

This is a staggering number, particularly for a country that consumes oil the way we do. The U.S. uses nearly a quarter of the world's oil, with just 4% of the population and 3% of the world's reserves. This year, we will spend almost $700 billion on imported oil, which is more than four times the annual cost of our current war in Iraq.

In fact, if we don't do anything about this problem, over the next 10 years we will spend around $10 trillion importing foreign oil. That is $10 trillion leaving the U.S. and going to foreign nations, making it what I certainly believe will be the single largest transfer of wealth in human history.

Why do I believe that our dependence on foreign oil is such a danger to our country? Put simply, our economic engine is now 70% dependent on the energy resources of other countries, their good judgment, and most importantly, their good will toward us. Foreign oil is at the intersection of America's three most important issues: the economy, the environment and our national security. We need an energy plan that maps out how we're going to work our way out of this mess. I think I have such a plan.

Pickens' plan is basically a short-term stop-gap to address our energy (and financial) problems in the immediate term while we build a better long-term solution.

He would replace gasoline with compressed natural gas as the fuel for individual transportation. I would add making lighter, smaller cars which are better suited to our actual use. People buy vehicles that are much larger than they really need because they imagine they need a 3rd row of seats for 7 people or they need to haul a piano or they need 4WD so they can scale a mesa. The reality is that most cars do one thing: drive a single person to work and back or on errands. In addition to smaller vehicles, we need more electric-hybrids like the Prius.

He would invest immediately in wind power generation built in the center of our country across our wide-open prairies. I believe that in order to make that work, we will also need to spend a massive amount of money on electricity transportation as in transmission-line infrastructure.

He would put a lot of money into alternative energy research. I would add nuclear power to the list.

Lastly I think the government will need to institute a large national tax on gasoline. The only reason we are seeing any attention on this issue now is because of $4 gasoline. If the price of gasoline drops back to $2, American's will lose interest in change. To prevent this, the government should institute a tax that gets larger as the price of gasoline gets lower. Keep the retail price of gasoline high and use any tax revenue to invest in transportation.

With this presidential election, change is in the air but the election will not be enough. We need substantial change on energy and environmental policy and we need it immediately. We need real leadership.

What is up with oil, diesel, and gasoline? One would think there is a strong correlation between the price of a barrel of oil and the price of a gallon of gasoline but rising gas prices seem to have come out of nowhere. In less than a year, the cost of diesel has doubled!

Suddenly our economic system built on a foundation of cheap transportation is reeling. Last week there was an article in the WSJ about manufacturing moving back to the US because the cost of transportation from China suddenly made it cost-efficient to build things here again.

Is expensive gasoline here to stay or a momentary bubble? Expensive gas is good for the Earth. People will drive less. Eventually someone will provide lighter cars that get 50 MPG and those stupid Dodge Durangos will disappear. But the transition will not be pleasant.

And the cause of expensive gas is not to my liking. Instead of raising tons of tax money to spend on our nation's infrastructure, the increased money is going to investors and oil producing countries and companies. Although we built a national oil system in Iraq, any increased drilling in the US will not benefit US citizens but instead oil companies. Higher prices have not lead to wiser policies.

Looking at this chart, I would expect gasoline to become a LOT more expensive soon. In 2002, oil was $22/barrel and gas was $1.31/gallon. If those ratios were to stay the same, oil today is more than $130/brl so gas should be be around $7.80/gal -- almost twice what it is.

Remember all the hype in the 1990's about the information economy?

Repeat after me, class: For thousands of years there was an agricultural economy. Then it was replaced by the Industrial Revolution. Only to be replaced by the information economy.

But is an information economy sufficient to support a nation as large and diverse as the United States?

I have never really heard anyone discuss that question. My gut feeling over the past few years is that the answer is no.

The US is much more than Harvard-trained intellectual elitists who think shopping at wal-mart makes them "middle class". The US is also all those undereducated, high school drop outs, the homeless mentally ill, the middle-aged folks with obsolete skills, and the people born before the PC.

the manufacturing base
I recently learned that every major nation has a division of their national government devoted to supporting manufacturing. I also learned that the USA abandoned our division in the 1990's. After all, why would an information economy need a manufacturing base?

In the last 15 years or so, the vast majority of economic growth in our country has come from financial companies - banks, mortgage companies, hedge funds, investment firms, etc. If you were a bond trader or worked at a hedge fund, you did damn well. Not so much for the rest of America.

And now we are witnessing the results of our transition to that financial empire - two historic asset bubbles followed by historic meltdowns. The current housing/debt bubble dwarfing the dot-com madness.

There has been a lot of talk about how our information economy is built on fast and cheap communication. The Internets let US companies harness cheap, educated labor in India and China.

This is certainly true but it fails to recognize a second critical issue: cheap transportation (and its dependence an cheap energy).

We can shift jobs to the information economy and away from a manufacturing one because it is so cheap and easy to manufacture goods a world away and ship them to consumers here. Even the information economy goods, like computers, are built somewhere else.

If there is ever a shock to the energy that cheap transportation relies on, how will you feed yourself or buy those computers needed for an information economy?

The upside of an information economy are high-paying jobs that are cleaner and safer than manufacturing ones. The downside means a greater (perhaps total) dependence on other nations for our basic needs.

Oil is now a $120/barrel and some argue that it will all be gone in 2 decades anyway. What will we do then? And what about global warming? If we are the root cause of global destruction, wont we have to quickly abandon the cheap oil-buringin transportation we rely on? Keeping our suburbs alive by replacing gas-guzzlers with electric hybrids is great but how will we get the hybrids in the first place?

Big hairy questions. Questions that are made all the more relevant by Kevin Phillip's new book about our information cum financial economy.

March 2008. What a month! If you had written a movie about the Bush White House -- no one would have believed it yet here we are.

strike one

After years of obvious and unsustainable behavior, we finally witnessing a complete meltdown of our financial system and housing. The canary in the coal mine is Bear Stearns. Teh poison gas is cheap money and the morgage-backed security.

At the end of last year, we had a "credit crunch" because of the process of turning mortgages into bonds. Bear was a leader in this financial wizardry and they profited handsomely from it. Then in Q4 2007, the world woke up and admitted it wasnt such a good investment after all.

The shares of Bear fell and the experts assured us the worst was over. I even considered buying shares of Bear in Dec/Jan. (How dumb was that.) Fast forward to March and from Friday to Monday, Bear shares fell from $150 to $2 and a buyout was announced by JP Morgan. What?? Out of the blue, a total meltdown.

How could this happen so quickly? So suddenly? Most of all, how could this happen with the FED orchestrating it? Why on earth would the federal government reward unscrupulous speculators?

Suddenly the small-government-dont-tax-me-free-market evangelists like Bear are getting a bailout from the federal government. It appears to be the ultimate fast one, the ultimate financial joke on Americans.

Tax payers pay for all the risk when things go bad and the bankers get all the profit. Even the purchase of Bear's assets by JP Morgan while the Fed assumes all of Bear's liabilities stinks to high heaven. That is 100% NOT how the free market is supposed to work. In fact, things are so upside down and confused its like an alternate reality sci-fi mini series...

And the revelations keep coming. The truth is we still dont know much about the details nor is it clear why the middle class should foot the bill for the wealthiest 1% when they screw up. Every day, I find myself aghast. Again.

strike two

If financial market debacles arent enough for you, we also have the Iraq occupation. Go on YouTube and watch interviews of Donald Rumsfeld telling us that the "war" would cost $50B. A few government analysts predicted $300B -- and got fired for the trouble. Oh it seems so quaint and jocular now.

A few years later, economists say well actually, it will be more like $1,000B or $1T. A year after that and we have more estimates - $2T to $3T!!! $3,000B of your tax dollars. An inconceivable amount of money and it went to pay for... what exactly?

We didnt get any free oil. We didnt create freedom or democracy. We didnt make friends or even keep our old friends... We also didnt rebuilt New Orleans, repair our own crumbling public schools or worn our bridges or put fiber optic networks into every home for the "information economy"...

strike three

A third major Bush Administration contribution to the world is also shaping up in March -- global warming. A giant ice sheet in Antarctica has now crumbled away. Glaciers are melting everywhere and our government still has a policy that says global warming is not real enough to actually do something about... gosh no, that might be expensive. Better wait until someone else is president.

you're out!!

Wow.

Bush wanted to go down in history. It seems pretty clear that he will.

And yet there are no riots in the street. No calls for impeachment. No nothing. We as a country are lining up and happily bending over. It is just bizarre. Think about the protests in the 1970's and compare that with the business as usual experience today. The people who do complain are "left-wing nuts". There isn't even a national consensus on whether or not we have problems let alone any unified moral outrage. (It's not just tax dollars after all. We have killed hundreds of thousands of people in Iraq - an we NEVER talk about it.)

vote with your wallet

Who do you think is going to pay for all these things?

Do you think cutting taxes is going to pay for the $1T in losses when the housing bubble finally resolves itself? Or Iraq?

We seem so removed from our own condition these days. Oh sure, you are broke, you borrowed all the home equity you could and spent it on a vacation, a new TV and a BMW... but dont worry, you will get our economy going again with more shopping...

And dont get me started on "accountability" or "individual responsibility". Republicans have preached for years about "responsibility". We shouldn't have welfare!! People should be responsible...

Well I dont see anyone lining up to pay the check for any of these crisis. I dont see anyone lining up to pay MORE taxes so we dont have to borrow so much. I dont even see any Republicans talking about how to fix these things with the next president. Apparently when it comes to your mistakes, accountability is synonymous with total denial.

Perhaps our voting system would garner a lot more attention and responsibility if we paid for our choices. After years of Bush Tax Cuts, I would like to see Congress enact the Bush Tax. If you voted for the president in 2004, you should be personally responsible for any debts he acquired since then. Just send the money in with your tax bill. If you didnt vote for him, why should you have to pay for him?

Maybe we can apply market forces to our political process and attempt to get the people who spend the money to pay the money. Then again, we would probably put Bear Stearn's in charge of the plan and screw it up.

I have not heard much talk about this topic but I believe that we are in the middle of a tremendous financial change in our country that has taken place over the past two generations. While this has been a fairly slow transition, its implications for our society and our nation are hard to over state.

cash to credit

The WW2 generation lived on a cash economy. Their habits were forged in the Great Depression and World Wars. Borrowing money was expensive and debt was socially unacceptable. People who could get a mortgage to buy a house, paid it off. Often as soon as they could. There were no credit cards and people were good for their word and a handshake.

Those times and those standards are gone and their children, the boomers, started that change. Rejecting their parents conservatism, they helped create the stock market booms, bank reforms and credit card economy. A cash economy is hard to grow and lending was good business and good for business. Making money and borrowing money became more socially acceptable. People got bigger homes, fancier cars, more stuff.

GenX and GenY are almost completely different from their grandparents. People today buy almost everything on credit, either a credit card or a loan. Things have changed so much that few people ever pay anything off. Leasing has has become the norm. Christmas presents go on credit cards, savings has all but disappeared, and much of people's income goes to services that did not even exist 30 years ago.

There are several forces causing this change and several symptoms of it.

education and money taboo

One of the main causes of problems is that American's are uncomfortable talking about money and few households know the first thing about finance or economics.

Even though we live in a capitalist nation, money is still a taboo for most people. Schools do very little to teach citizens about how to handle money. We just dont talk about money or investing or fiscal responsibility. It's not "polite." Money is a secret or a competition, even more so within families.

Instead we talk about what we can buy, what we did buy and what we want to buy. The only time most people talk about money is when they are arguing about it. Money problems are one of the main causes for divorce. I would even argue that money is one of the main things that divides people in our country although we usually blame race and culture instead.

Few people can explain simple concepts like the difference between an asset and an expense. Is your car an asset? Is buying a luxury car a better investment than buying an economy car?

The lack of financial education has many important and mostly negative effects. It also allows a small set of professionals to "manage" our economy in ways that help the riches of the rich while the rest of the nation pays the bills.

the rental economy

One of the largest symptoms of this transition is the creation of a rental society. American's just don't buy things anymore; they rent them.

Even when people think they are buying something, they are usually just renting it from a lender like a bank. The bank owns your house until you pay it off. It is their money and their asset. People that buy a house, refinance every 5 years or purchase a larger house dont think much about the fact that their mortgage never goes away. These home "owners" are really renters -- renting from the bank.

The other big ticket item in people's lives are cars. Many luxury cars today cost as much as a home did a few decades ago. Most cars today are not purchased, they are leased. Cars have always been an expense not an investment but leases have changed cars from a purchase into a service.

buying your budget

Another aspect of these changes is that most people today have no idea what money they have or how to manage it. Instead, they buy their paycheck. If they have money in the bank, the feel ok spending it. If they have credit available, they spend it.

This weekend I saw a commercial for a credit card company. their new feature is that you can text them for an immediate reply of how much available credit is on your card. The mentality that thinks this is a beneficial feature is the problem.

Digital cash also means that many people have lost touch with what they are spending. Unless they spent time with personal finance software are often shocked with what they find. Even if you barely noticed them, all those Starbuck's latte's add up quickly.

the service economy

The cash economy bought things and owned them until they wore out. The service economy pays for use and never stops paying, ever. Think about all the monthly bills for services you have that your parents did not.

Car lease, cell phone, cable tv, internet access, video games, HBO, even coffee... These fees never end and they now represent a large portion of one's monthly income.

asset price inflation

When there is more money around, things cost more money. One consequence of easy and cheap borrowing is the inflation of costs. If it was hard to get a loan, houses would cost less. With easy lending, housing and cars cost more. (Cars today can cost more than a house did 25 years ago.)

This is especially obvious when looking at housing prices over the past 5 years and comparing them to prices over the previous 50 years. Easy money has create asset inflation all around us.

At the same time costs for big assets have gone up, our focus has changed towards attainable stuff we think of as assets. Replacing your $400 TV with a $2,000 HDTV is a normal occurrence now. Our culture seems obsessed with stuff and we increasingly spend our financial reserves on small items that provide status but dont last long; new sneakers, TVs, stereos, iPods, cell phones, etc.

debt

We have become so accustomed to debt that people hardly notice it anymore. Debt is big business and we are actively trying to export it.

A few years ago I hear a story that brought this point home for me. A Korean man committed suicide because of the shame of the credit card debt his family had accumulated. When you contemplate the thought that someone would rather die than face the shame of debt, you start to realize how much things have changed for us.

In bygone days, people took out a mortgage for a house and paid it off. These days people just took out larger mortgages to keep up their spending.

Credit cards hardly existed a few decades ago and now personal credit card debt has exploded. Many people finance their lives on revolving credit. They ALWAYS have a debt with credit cards.

Today's announcement by Wachovia is telling of the change in attitude towards debt. It would seem that banks are "shocked" that borrowers who could afford to pay their bills are walking away from their mortgages rather than suck it up. Choosing foreclosure is a clear sign of this transition. Our relationship to money, debt and bankruptcy continues to change.

One could say that individuals are starting to look at debt the same way businesses have for a long time. There is no shame for a business to try hard and then give up in bankruptcy; why should the same not be true for families? Even though credit card companies have tried hard to outlaw personal bankruptcy, this kind of attitude change is happening and it has huge impacts on lending and our financial systems. We are going to see this more and over the next few years.

closing

These financial change represents a fundamental shift in household economics and the way families handle money. What are the ramifications for retirement, social security and health care? What are the ramifications for our national economy and the fiscal health of our nation?

A cash economy wasnt perfect but people need some personal responsibility and fiscal education. Somewhere along the way we may have thrown the baby out with the bathwater.

Or is the question how fast will it get bad?

Signs of economic trouble are everywhere at the moment.

BofA agreed to acquire CountryWide for $4B - a fraction of what CW was worth a year ago. Sounds like a deal but was it $4B too much? As CountryWide fights with regulators and investigators, it may turn out that the nation's largest mortgage broker is broke, insolvent. WSJ says that could be OK because BofA is large enough to take the loss.

But as banks take losses, it hurts lending, it hurts bonds.

SallieMae is having trouble selling its bonds and it needs cash. SLM holds most of the nation's student loans for education but even at 10% return, there are no takers. 10%? wow. Analysts predict they will need to offer 12%-15% but if they do, they are likely to lose money on the bonds which makes the company less attractive to invest in... Either folks think they are a bad borrower or they arent buying bonds in general.

The companies that insure bonds, like MBIA and AMBAC are also struggling.

This month we also get to see Q4 results from last year - and its not going to be pretty. Citi is rumored to be announcing a $20B loss?!

And then there are credit cards, the lender of choice for most households. AMEX just announced a "sudden and sharp" increase in delinquencies in Dec07 -- and they represent the most affluent borrowers. Similarly, the portion of the industry that catered to high net worth individuals with fancy cards are also reporting sudden rise in payment problems.

Some argue not to worry. The DJ is in good shape because the P/E ratios are at historically low levels. What they dont point out is that this is an artificial ratio created by unprecedented high profits. With all these losses and loan problems, profits are clearly coming down which makes those P/E numbers go back up.

The big question is how fast and how deep this recession will be.

In a way, I am surprised that this is considered news. It seems totally obvious to me but then again there were a lot of people who tried to argue that the "subprime" problem was teeny tiny, only affecting a few sorry poor people.

Well, it turns out that was not the case. No money down, teaser interest rates and huge interest hikes "someday" proved too hard to pass up for a big cross section of borrowers.

You cannot see it in the stock market at the moment but I am expecting a whole lot of American households who have been living beyond their means to run out of rope in 2008. The poorest folks are an obvious target but I expect to see a lot of families with their kids in private schools who have been living on credit cards and home equity.

Short-term thinking seems to know no bounds in our culture today.

Subprime Debacle Traps Even Very Credit-Worthy

As Housing Boomed, Industry Pushed Loans To a Broader Market

By RICK BROOKS and RUTH SIMON

December 3, 2007

Wall Street Journal

One common assumption about the subprime mortgage crisis is that it revolves around borrowers with sketchy credit who couldn't have bought a home without paying punitively high interest rates. But it turns out that plenty of people with seemingly good credit are also caught in the subprime trap.

An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.

In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.

The numbers could have dramatic implications for how banks and U.S. regulators address the meltdown in subprime loans. Major banks, mortgage companies and investment firms have been rocked by billions of dollars in losses as shaky subprime loans -- which typically carry much higher, or rising, rates and other potentially onerous costs -- have increasingly gone into default. Many analysts expect hundreds of thousands more loans could go bad over the next several years. The Bush administration and major financial institutions are working on a plan to freeze interest rates of certain subprime loans in hopes of avoiding an even bigger meltdown.

The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy -- including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans -- perhaps foolishly -- with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.

One key factor in determining what kind of loan a borrower gets is his credit score. Credit scores can run from 300 to 850, and many involved in the business view a credit score of 620 as a historic rough dividing line between borrowers who are unlikely to qualify for a conventional, or prime loan, and those who may be able to. Above that score, borrowers may qualify for a conventional loan if other considerations are in their favor. Above 720, most borrowers would expect to usually qualify for conventional loans, unless they are seeking to spend more than they can afford, or don't want to have to document their income or assets -- or are steered to a subprime product.

But rising home prices, and the growth of an industry of lenders specializing in subprime loans, led to an increase in all kinds of reasons for borrowers with good credit scores to sign up for subprime loans.

"Every single day ... I saw prime borrowers coming through my desk with 660, 680 [and] 720 credit scores," says Thomas Rudden, a former senior account executive at Mercantile Mortgage Co., a now-defunct subprime lender. Some were taking out loans as speculators, he believes, while in other cases he thinks brokers put borrowers into these loans because they thought it was easier.

Many borrowers figured they would refinance in a few years before the rate on their loan moved higher -- but falling home prices and tighter credit standards in the past year have suddenly made that unrealistic in many cases. "Brokers and agents were telling" borrowers with high credit scores for the past several years "that it was OK" to get subprime loans, "and borrowers were wanting to take on more debt," says Mark Carrington, director, analytical sales and support at First American LoanPerformance.

I have been reading a really interesting book this past week, "The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the Imf". (Thanks Ben :) One of the fascinating things about history is that the more history you know, the more you see how it repeats.

The book is about the Asian financial crisis that hit in the 1990's. The "crisis" was the result of years of lax lending practices which created an unstable Jenga tower of finances in many Asian countries. This tower of sticks was upended by the combined actions of governments, central banks, the IMF, World Bank, and currency traders - many of whom were trying desperately to keep the tower standing.

The really fascinating part of the story is how many parallels there are to the US economy today.

Although our banking system is much more mature than the Asian economies, we have a huge bubble of housing and corporate loans that has been created by years of lax lending practices. We also have a huge current account deficit and a gigantic federal debt ($9T) due to excessing government spending since Bush took office. Add in the actions of hedge funds and currency traders and we have a steadily declining national currency (the US$). And of course we also have plenty of greedy insiders, people in denial and a totally clueless population who will probably suffer.

The book is a bit repetitive but the story is compelling. Even when people know the apple is rotten, it still takes a lot to topple the tower until eventually it finally does fall -- hard. Runs on banks, fear and doubt by everyone about the stability of the system and the value of assets. Although things were great here in USA, life was hard for hundreds of millions of people for years after that crash.

For the IMF and World Bank there was a huge debate about the "moral hazard" of bailing out people that made bad decisions or who should have known better. How do you help the truly needy without helping the deadbeats, who are often the countries most wealthy, most educated, and most elite individuals?

Why that is the same question people are asking now about the sub-prime loan mess with the same results: inaction while people disagree about who to help.

Rising Rates to Worsen Subprime Mess

Interest Payments Set To Grow on $362 Billion In Mortgages in 2008

By RUTH SIMON

November 24, 2007

Wall Street Journal

Next year, interest rates are set to rise -- or "reset" -- on $362 billion worth of adjustable-rate subprime mortgages, according to data calculated by Bank of America Corp.

While many accounts portray resetting rates as the big factor behind the surge in home-loan defaults and foreclosures this year, that isn't quite the case. Many of the subprime mortgages that have driven up the default rate went bad in their first year or so, well before their interest rate had a chance to go higher. Some of these mortgages went to speculators who planned to flip their houses, others to borrowers who had stretched too far to make their payments, and still others had some element of fraud.

Now the real crest of the reset wave is coming, and that promises more pain for borrowers, lenders and Wall Street. Already, many subprime lenders, who focused on people with poor credit, have gone bust. Big banks and investors who made subprime loans or bought securities backed by them are reporting billions of dollars in losses.

Besides the $362 billion of subprime ARMs that are scheduled to reset during 2008, $152 billion of other loans with adjustable rates are set to reset, according to Banc of America Securities. The other resetting loans include "jumbo" mortgages of more than $417,000 and Alt-A loans, a category between prime and subprime. The latter category is the riskier, in part because it includes borrowers who provided little or no documentation of their income or assets.

Ms. Bair has proposed that mortgage companies freeze the interest rates on some two million mortgages at the rate before the reset to help borrowers avoid trouble. "Keep it at the starter rate," Ms. Bair said at conference last month. "Convert it into a fixed rate. Make it permanent. And get on with it."

The mortgage industry opposes a blanket move to modify loans that are resetting, says Doug Duncan, chief economist of the Mortgage Bankers Association. While modification may make sense in some cases, he says, it may also simply postpone the inevitable or reward borrowers who didn't manage their finances wisely. Mr. Duncan says the industry is working with government officials and consumer groups to develop principles that could be used to determine quickly who qualifies for a modified loan.

The political efforts are aimed at keeping the U.S. economy out of a housing-triggered recession. The Mortgage Bankers Association estimates that 1.35 million homes will enter the foreclosure process this year and another 1.44 million in 2008, up from 705,000 in 2005.

The projected supply of foreclosed homes is equal to about 45% of existing home sales and could add four months to the supply of existing homes, says Dale Westhoff, a senior managing director at Bear Stearns. This is a "fundamental shift" in the housing supply, says Mr. Westhoff, who believes that home prices will drop further as lenders "mark to market" repossessed homes.

Another fascinating aspect of the current situation is what will happen to the dollar.

We Americans enjoy amazing benefits from the fact that the US$ is the main currency of international trade. If we were anybody else, we would probably be in a massive recession/bailout situation already.

Just like in the Asian crisis, we have a massive current account deficit and have been devaluing the US$. Just as the IMF demaded Asian countries back then, lowering the value of the dollar lowers the costs of our exports while raising the costs of imports. This is designed to lower the amount of money we have to borrow each month because our imports are bigger than our exports.

While the mighty dollar keeps us afloat, there are increasing signs that other countries want to float their currencies because the US$ is dragging them down too. 12% inflation? Will the dollar lose its luster in our lifetime?

Wealthy Nations In Gulf Rethink Peg to Dollar

By JOANNA SLATER and CHIP CUMMINS

November 20, 2007

Wall Street Journal

For many years, oil-rich Persian Gulf states have pegged their currencies to the dollar. Now that link is stoking a bad bout of inflation in their red-hot economies and putting policy makers in a dilemma: Break the dollar peg and risk undermining the U.S. currency, or keep it and face growing local discontent.

The dollar peg has "served the economy...very well in the past," said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates' central bank, last week. "However, we have reached a crossroads."

Because countries such as the UAE, Saudi Arabia and Qatar sit on large reserves of U.S. dollars, their decisions will have repercussions beyond their borders. If they move away from their strict dollar pegs -- perhaps following Kuwait, which earlier this year switched to a basket of currencies -- it could undermine demand for dollars and encourage others to diversify their holdings. Many nations have already created sovereign wealth funds to invest their holdings in a broader array of assets.

The UAE and Qatar have suffered some of the worst inflation, as the oil gusher has triggered a building boom. In Qatar, inflation hit 11.8% last year, and the International Monetary Fund estimates it will average 12% this year. This week, officials in Doha, the capital, raised taxi fares by a third.

Structured Investment Vehicle. SIV rhymes with HIV except this virus is financial not biological.

You have probably never heard about SIV's before this year but you can expect to hear a lot more about them since they are now at the heart of the question: who will get stuck paying for all the bad mortgages that were collateralized into CDO's.

The first time I had ever heard about off balance sheet investments was when experts tried to explain why Enron imploded. Now we have our largest banks using SIV's and the Department of the Treasury is trying to help them with a super-SIV fund.

Call me old fashion but if my bank has invested millions if not billions of dollars in something in order to make a profit, that thing ought to be on their accounting books. There ought to be a formal record of that investment. The concept of an "off balance sheet" investment should be anathema to a bank.

Then you have the whole mortgage-to-security process that involved SIV's and enabled the cheap money for the housing boom. Seeing the bond rating agencies now restate "AAA" CDO's as, oops!, junk bonds only re-enforces the obvious - the whole process involved a lot of risk. The kind of risk banks should not have been party to.

David Wessel had a nice summary of the banking/investing situation today.

American households, much like the American government, have been spending more than they earn for a long time. It shouldn't be a surprise that living beyond our means could not go on forever but there seem to be a lot of Peter Pan's out there, especially on Wall Street (and the White House).

I am still expecting to see the stock market drop as the housing market continues its slow meltdown throughout all of 2008. But how much money have our banks really lost investing in SIV's and mortgage-backed securities?

Central Banks Map a Middle Course

By DAVID WESSEL

October 18, 2007

Wall Street Journal

The story so far: The merry-go-round of rising housing prices stopped early in 2006. Builders were thrown off first, then subprime borrowers. Because these homeowners could no longer tap rising home values to refinance mortgages they couldn't afford, defaults and foreclosures spread more rapidly than investors in mortgage-backed securities had anticipated.

Then in August, the problem in the U.S. housing sector became a global financial problem, and that's when things got complicated.

A lot of subprime mortgages had been turned into securities that were sold to outfits that relied on short-term borrowing. With the value of those securities in doubt, these outfits could no longer borrow and turned to the banks that had created the securities or which had promised to lend to them in a pinch.

Since no bank was sure who was or would be stuck with this toxic waste, banks grew wary about lending to one another, a classic case of distrust that called for central banks to provide credit, which they did.

The Fed, and its counterparts abroad, have made their objectives clear: (1) Do what's necessary to keep financial markets functioning and prevent a financial crisis from provoking an unwelcome recession; (2) Encourage the return of more prudent, realistic attitudes among investors, lenders and borrowers.

Are we headed into a recession? Will there be an unwinding of the past few years? Has household debt and home prices gotten too high to be sustained?

Recent WSJ articles points out (a) a panel of economists now put recession odds a 1 in 3, (b) history shows that we dont recognize a recession until many months after it has started.

September is almost over now but at the start of the month, I predicted this would be the month. If its gonna happen, it will start now.

Apparently September has a history as a down month but that is trader lore. The important thing is that September marks the end of the quarter.

So much of the market hysterics the past two months has been about mortgages and uncertainty. Once accounting periods end, companies will be forced to disclose their loses and their liabilities - that will end some of the uncertainty. (I say "some", because if things look bad, companies will do whatever they can to cover it up.) We have already seen some fallout in the US, Britain, and Japan.

This week the Fed will decide whether to cut the Fed rate and several wall street firms will announce their quarter results. Wall Street is begging for a rate cut. Will the Fed bail them out?

Of longer-term significance, this month the government started to get into the act. SEC investigations of the bond rating agencies could lead to more unpleasant disclosures about banking collusion and a need for reform. Senators are also talking about how to help families that were taken advantage of while not helping investors and businesses that took huge risks. With tens of thousands of job losses in the mortgage industry already, we could see a return to mortgage practices of the past.

And to top things off, Greenspan released a book and did an interview on 60 Minutes - where he lambasted the Bush administration and their financial policies. *ouch*

Will we ever face our health care crisis?

Health-Care Premiums Climbing Faster Than Inflation, Studies Say

By VANESSA FUHRMANS

September 12, 2007

Health-care premiums of employers and their workers have climbed more than twice as fast as inflation in 2007 -- to about double their cost in 2000 -- and look to rise at a similar or slightly faster clip next year, a pair of nationwide surveys show.

The average family premium has risen 6.1% in 2007, according to an annual study by the Kaiser Family Foundation and the Health Research and Educational Trust. A widely watched barometer of employer health-care costs, the joint survey of 1,997 employers contained a modicum of good news: This is the fourth straight year premiums have decelerated since soaring nearly 14% in 2003.

But after a decade of inflation-topping increases, the annual cost for family coverage through an employer plan is now more than $12,000, well over what a minimum-wage worker earns in a year. Workers now pay on average $3,281 a year to cover their share of that family policy, double what they did in 2000, the survey found.

I suppose it is natural to take things for granted. We all do it to some degree but there is a point where ignorance becomes cruel, becomes indefensible and monstrous.

I woke up to this story on the radio this morning. The music reminded me of my grandfather and the polish music he used to listen to. My grandparents were penniless immigrants like we hear about today in the immigration debate. They came to this country legally but with little more than hope. They worked harder than anyone I have every known and all they wanted was a chance to make an honest wage and make a better life for their children.

Which they did. I can sit here today and write a blog because of their sacrifice. when I think about them and the millions of poor families in this country today trying to do the same thing, it makes me cry. While CEO's complain about their 200+ Million dollar golden parachutes, the backbone of any economy are hard working families trying to make a better life for their kids.

Which is why these corrido songs and our current immigration debate is so offensive.

So many of the things we take for granted in America, like our "low low prices", are based on slavery.

First it was the outright slavery of Africans that supported our agricultural economy. When slavery was outlawed after the civil war, it was replaced with an economic slavery that was just about the same thing. Sure you could move on, but if you died on the job or lost an arm, well fuck you.

The industrial revolution replaced African slavery with the veritable slavery of immigrants (and blacks) in the factories that supported our industrial economy. Today we see the slavery of illegal Latino immigrant workers who support almost all of our trade labor, from factories to farms to building houses to fast food industry. The problem today is probably bigger than it ever was but since the victims dont speak English, few of us notice or care.

Another reason these songs resonated with me is because this past week I watched the movie Fast Food Nation. Not a great movie (read the book) but I was surprised to see that one of the main points in the movie had little to do with fast food or health - it was about the critical role illegal workers plays in our food supply.

We may preach about how we dont want Latino's sneaking over the border to steal our jobs but the fact is our economy is completely dependent on them doing so. And the thing that really scares many businesses is that we would make these workers legal so that the businesses would have to pay them a fair wage and give them legal rights.

What is wrong with us? Slavery is not an American value. We ought to be ashamed. It really boggles the mind the mind that while we take advantage of the lives of all these people so that we can enjoy our standard of living, we criticize these same people as "illegals" and "criminals".

Ignorance, selfishness, and fear make a nice combination.

It is fashionable these days to say that freedom is not free. Well neither is that hamburger, or that 99-cent t-shirt you are wearing. It is time we looked in the mirror and asked ourselves who we really are when we continue to take advantage of other human beings this way.

1. So you make a bunch of loans, homeless people in the park will do.
2. Then you take those loans and you sell them to another company.
3. That company takes those loans, puts them all in a pile with other loans, and resells pieces of them as bonds to investors.
4. They also make sure the bond-rating agencies rate the bonds highly by threatening to withhold their business.
5. Investors, largely hedge funds and off-balance sheet entities tied to banks, borrow money from Japan at a low interest rate, snap up the bonds and make a big, risk-free profit on the difference between the bonds high return and the low cost of borrowing the money.

Its all a beautiful, cant-lose situations where everyone gets rich on fees and buys a new yacht. Until someone realizes that the homeless guy has never made a payment...

Last week we saw a correction in stock markets around the world and a reaction by the Federal banks of many nations because of the so-called "sub-prime mortgage" problem. The Dow dropped 1,000 points -- is it time to jump back in the market and snap up the cheaper stocks? Or is it best to wait? That's a tough call.

This whole mess is bigger and more complicated than a lot of people want to let on. What makes things worse is the lack of transparency and the slow-motion nature of the problem.

The guys at step #1 and maybe #3 knew the risks of those borrowers but those risks got lost by steps #4 and #5. (The greater fool theory hard at work.) Not only do investors who own these mortgage-backed bonds not know what their true risk is many of these investors do not even have to disclose how many of these bonds they own. The accounting rules for hedge funds and other investing companies are very different from banks or public corporations.

The worst may be over already, making this a good time to buy.

Or not.

The mortgagees themselves, the 2/28 and 3/27 loans, are a slow motion problem. People may be able to make their payments for months or even years before problems. Similarly, the investors who own these bonds are likely to keep them hidden as long as they can and hope for the best.

One can expect more "surprise" announcements over time as the mortgage defaults grow and at the end of accounting periods, like Q3 and Q4, when companies are forced to declare returns to their investors and the government. Right now its hard to know anything for sure and that creates the fear and doubt that hurts markets and creates volatility.

Why have sub-prime mortgages had such an impact on investments around the world when they are such a small part of the total mortgage market? Clearly there is more to this story than home loans. (And less to the people arguing that subprimes are too small to worry about.)

Going with the theme that things are all connected (by money), comes this article on "conduits". "Off-balance sheet affiliates"? That sounds a lot like Enron to me... Borrowing money to purchase investments that are now worthless? That sounds a lot like the 1920's stock market to me...

Debt Puts German Banks in a Bind

Financial Rescue Given State-Owned Sachsen LB Reflects Conduit Problem

By CARRICK MOLLENKAMP, EDWARD TAYLOR and IAN MCDONALD

Wall Street Journal

August 20, 2007

Investors around the world are snubbing many types of short-term debt as credit worries spread. That is posing particular problems for German banks, which issue a lot of such debt, known as commercial paper.

Many used the borrowed money to buy securities, some of which were backed by U.S. mortgages to people with weak credit, a market that is crumbling. Adding to investor concern is a lack of transparency. Many banks hold their loans in off-balance-sheet affiliates called "conduits" in industry parlance.

Mainly because of conduits, issuance of asset-backed commercial paper has exploded. As of March 31, there was $983 billion in such paper outstanding globally, up about fivefold from a decade earlier, according to Standard & Poor's Corp. Conduits issue commercial paper, borrowing money for terms of less than a year, and use that cash to buy longer-term bonds paying higher interest rates. The bank behind the conduit typically collects asset-management fees and investment profits.

The conduit business model breaks down if investors get nervous about the value of the securities the conduit has bought and stop lending the conduit money. In recent weeks, conduits have struggled to find buyers for their paper, and, when they have sold it, buyers have wanted sharply higher interest rates.

This is a good article that represents the thousands of families now facing mortgage problems. Expect to see a lot more of these sad stories about regular families now facing terrible financial problems that stem from their home purchase.

One Family's Journey Into a Subprime Trap

Monteses May Lose House as Rate Resets, Credit Options Dry Up

By JAMES R. HAGERTY and KEN GEPFERT

Wall Street Journal

August 16, 2007

FULLERTON, Calif. -- Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.

The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. "We agreed we wanted to be homeowners again," says Mr. Montes, "even if it meant the end of vacations and not eating out as often."

Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then "reset" to a much higher level. Mr. and Mrs. Montes say their mortgage broker assured them they would be able to refinance in a couple of years to keep their payments affordable.

The really hard part of this "sub-prime mortgage" situation is deciding who is to blame and how it should be fixed.

Even if the government agreed to float families like this a fixed rate mortgage (because banks wont accept that risk), the family still could not make the mortgage and tax payments.

They may not have liked renting; a lot of people may have told them buying a home is the smartest investment; they may have felt that they deserved a home -- but the math doesnt lie. The fundamental problem we now face is that many families tried to purchase homes they could not afford to pay for. (One lesson? Do not depend on your bookie for betting advice.)

The amazing home prices we have seen are just not justified by the markets ability to pay those prices. It follows that something big will have to happen to balance the equation. That correction could be losing the home, it could be lower home prices, it could be big raises for the higher cost of living. (Well probably not the last one.)

Personally, I feel the real culprit in all of this is are the lenders. If those loans were not available in the first place, home prices would not have risen so much and we would not be in this problem now. The lenders (and the mortgage brokers they employed) got greedy, got risky, and screwed us all - and they are now the first in line for a bailout from the federal government.

Lenders in turn may say the problem was those slick guys from Wall Street. Those well dressed hedge fund geniuses who could talk an eskimo into buying snow. There is probably truth to that too.

If lenders had not been able to sell all those mortgages to someone else, who created mortgage-backed securities with them, none of this would have happened either. The banks would have been stuck with the loans they made which means they would not have taken so many risks for so long. By allowing someone else to suffer the consequences of the lending actions, we created a monster. A lot of people made a lot of money but the results are not sustainable and a lot of people are about to lose a lot of money.

There are now a growing number or articles and blogs about who is to blame and who should pay. Im pleased to see that most people dont blame the borrowers as much as the lenders.

Andrew Sammwick writes about market risks

Calculated Risk chimes in

And both refer to this post by Dean Baker

One issue none of these articles talk about is retirement.

A few of the articles talk about guidelines for how much of one's income should be devoted to housing, ie how much of a home one can afford. After all, a home is only one aspect of financial needs. Retirement is a much bigger problem. If a family couldnt afford the mortgage, how much are they saving for retirement? If there are two million homes in foreclosure, does that mean two million household bankruptcies? Two million families with no retirement except social security?

I fear that another big downside of the recent housing boom is that it is going to end up ruining the finances of millions of households. And those households are going to create a huge wave of senior citizens in poverty. Not a pleasant prospect.

Wow, every single day brings a new front-page news article about mortgage financing. For the past few years, they were articles about rising home values and sales. Now the articles are about the rapidly dissolving mortgage market and hedge funds and the totally erratic prices of stocks. The tone and the topics have come full-circle.

increasing complexity of markets makes them more volatile

It is often hard to know what to make of these articles but one of the main take-aways is that the mortgage market is now very complex. The structure of the market has changed a lot since your parents bought their house decades ago and there is a lot of money changing hands along the way. All that capital sloshes from home buyers to banks to wall street to investors in other countries and back again.

the long-lost risk premium

Last weeks big news was that the market had suddenly re-discovered the idea of a risk premium. Banks were raising rates, asking for more information on potential borrowers, and the general money supply for loans started to get "tight".

the Fed's hot-beef injection

And instead of an orderly walk to the exits, someone screamed "Fire!" and it became a stampeed. On Thursday and Friday Federal Banks around the world "injected liquidity" into the markets. (Dont you wish people would say what they actually did instead of using jargon?)

It is hard to find an explanation for "injecting liquidity". I have heard two explanations. One: it means that government banks bought mortgages from commercial banks, thus giving the banks cash and removing some of their liabilities. (Isn't that a tax-payer funded bailout?) Two: it means that the Fed wanted to keep short-term interest rates at 5% so it was willing to loan money at that rate to anyone who asked. (Doesn't that defeat the purpose of charging a risk-premium for lending if you give riskier borrowers the same rate?)

Whatever the definition, an interesting fact was that the US injected about $50B but European banks injected about $200B. Isn't that the opposite of what you would expect since the cause of all this was supposedly home loans in the USA?

Moving forward we can hope that banks will go back to making loans the right way - expecting borrowers to actually show some evidence they can pay the money back. We can also hope that the hedge funds and "smartest guys in the room" will lose their shirts if not jobs, as they should, for creating this mess.

home(less) alone 4

We can also expect pressure on home prices as the cost of money (ie bank loans) increases and the supply of buyers shrinks.

What will happen when home prices flatten, even if they dont fall? How many people will find that they borrowed more money for a home than they can comfortably afford? There is a lot of talk about sub-prime borrowers but how many prime borrowers used ARM's and no-money-down loans to refinance their own house or to purchase investment property "risk free"? We may find out over the next two years.

Estimates are now roughly 2 million homes will go through foreclosure even though banks are already making extraordinary measures to help borrowers refinance (and continue to pay something). The "subprime" assumption is that these homes are all in the ghetto but how many of those mortgage defaults will be for wealthy neighborhoods?

I predict that poor minority "subprime" families wont be the only ones in trouble. There will be a lot of pain for wealthier families that took risks they did not understand because the "you cant loose!" media hype was so strong. (And the financial training in our education system is so weak.)

Expect a repeat of the dot-com and the Enron-pension stories.

mumbo-jumbo loans get more jumbo

One thing for those of us on the Left Coast to watch is jumbo loans. Fannie Mae and Freddie Mac buy about 1/2 of all mortgages from banks (which allows banks to make more loans). But they are restricted by law from buying any loans above $417k. Any loan above that amount is a jumbo loan and it is handled by private institutions.

Given that the median home price in Seattle is now about $420k, this is potentially a big deal. Just this past week Fannie/Freddie asked to be allowed to buy jumbo loans -- Congress said no. And the rates lenders are charging for jumbo loans went up more than the rates for regular loans. (As it probably should.)

So expect higher rates for loans over $400k, which again, will put more pressure on those $800k, $900k home prices that I see for very average-looking properties all over our area. Expect the drop to start in the SF Bay area, then LA, then San Diego and finally Seattle. (Which is also the order homes appreciated in.)

unwinding the unmeasurable

Another thing to watch for is being called the "great unwinding". Along with the mortgage boom there has been an options/derivatives boom. Warren Buffett has been warning about this boom, saying that it makes the risk of the great 1920's start market crash look mild in comparison. One of the problems with options is that they are almost impossible to measure but a recent WSJ article stated the total value of traded options at over $390 TRILLION.

The "unwinding" refers to all the hedge funds and other investors that bet heavily on options and what happens if those options fail to work as designed or companies bet wrong. We have already seen two funds from Bear Stearns that went belly-up for betting wrong. There are now articles from "quants", the big-giant-heads who write the statistical models that allow computerized option trading, that are saying the markets are behaving in ways the models do not predict -- ie they are losing money. (Ooops - garbage in-garbage out.)

up-down-down-up-up-down-

So expect more volatility. Expect more doom & gloom on home prices and mortgages. Expect more hedge fund loses, especially from banks and pension funds. And expect the politicians to stick their noses in and muddle everything up (or worse, expect them to bail out the big fish and let the little fish "learn a lesson").

As that Chinese proverb says: We live in exciting times.

When regular people lose their retirement money, it is sad.

When wall street insiders lose money from speculating, its ARMAGEDDON!! OMG!! I SEE THE HORSEMEN! GAAAHHH!!!

I dont know if we are seeing the great Unwinding but this video is rather hilarious.

Greenspan and the piles of cheap money he helped create after the dotcom crash is a big reason we are in these problems today. When insiders are making gob of money, they want the government to stay out of things; When insiders' excess has created major instability in the markets and things start to topple, suddenly they look for someone in government who "gets it".

I sure hope Bernanke is different. If a few people lose their summer homes and their Ferrari money, it would be a good thing. Let the market clear itself and unwind a bit.

This article today is a great read for a recap of the "unintended consequences" of super-cheap capital.

How Credit Got So Easy And Why It's Tightening

By GREG IP and JON E. HILSENRATH

Wall Street Journal

August 7, 2007

An extraordinary credit boom that created many first-time homeowners and financed a wave of corporate takeovers seems to be waning. Home buyers with poor credit are having trouble borrowing. Institutional investors from Milwaukee to Düsseldorf to Sydney are reporting losses. Banks are stuck with corporate debt that investors won't buy. Stocks are on a roller coaster, with financial powerhouses like Bear Stearns Cos. and Blackstone Group coming under intense pressure.

The origins of the boom and this unfolding reversal predate last year's mistakes. They trace to changes in the banking system provoked by the collapse of the savings-and-loan industry in the 1980s, the reaction of governments to the Asian financial crisis of the late 1990s, and the Federal Reserve's response to the 2000-01 bursting of the tech-stock bubble.

When the Fed cut interest rates to the lowest level in a generation to avoid a severe downturn, then-Chairman Alan Greenspan anticipated that making short-term credit so cheap would have unintended consequences. "I don't know what it is, but we're doing some damage because this is not the way credit markets should operate," he and a colleague recall him saying at the time.

Now the consequences of moves the Fed and others made are becoming clearer.

You have heard of bridge loans for buying a home. They are also big money when it comes to buying a company in a leveraged buyout.

You gotta love charts like this - and you gotta wonder how the trend could continue.

Burning Bridges? Top 3 Banks May Soon Show

By ROBIN SIDEL

Wall Street Journal

July 18, 2007

As the country's three biggest banks start reporting second-quarter earnings, investors should be asking their CEOs some tough questions about the industry's $33 billion game of hot potato.

That's how much money banks extended in leveraged-buyout-related bridge loans in the first half of 2007, according to data compiled from Reuters LPC.

Bridge loans are short-term financing given to fund leveraged buyouts until long-term loans can be arranged. When times are good, banks sell the loans to pension funds, hedge funds and others, getting rid of the risk. When times are bad, the banks sit on the loans -- and the associated risk -- because nobody else wants them.

In all of last year, banks extended just $12.9 billion of bridge loans. So the jump has been huge, but the total amount is still below the $48 billion of such loans Reuters calculates from the buyout heyday of 1988.

Some of today's deals are running into trouble as a flood of new issues come to the market and debt investors get choosier about what they're willing to buy. So which banks could be left holding the potato?

The bank earnings parade this week starts with J.P. Morgan Chase & Co., a major player in the LBO bridge bonanza and the big daddy of leveraged loans to companies. It's followed by Bank of America and Citigroup.

The stock market has been a real puzzle to me. I keep hearing how great the economy is and how low inflation is but that rosy view just doesnt seem to match the things I see around me.

Home prices have risen into unaffordable realms. People have been charging up mortgage debt like there is no retirement to continue their personal buying sprees for plasma TV's and toys. Gas is consistently over $3/gallon. Health care costs are higher (and more confusing) than ever. Even milk and food have gone up.

A recent poll indicates that many Americans share my concerns.

America's Economic Mood: Gloomy

Broad Public Pessimism Spurs Democratic Candidates To Target Business Interests

By JOHN HARWOOD

Wall Street Journal

August 2, 2007

WASHINGTON -- Americans are feeling decidedly sour about the economy and those in charge of it, fueling Democratic efforts to target business interests in the 2008 election campaign.

More than two-thirds of Americans believe the U.S. economy is either in recession now or will be in the next year, a new Wall Street Journal/NBC News poll shows. That assessment comes despite the fact the economy has experienced sustained growth with low inflation and unemployment and generally rising stock values ever since the recession that ended early in President Bush's tenure.

In addition, the poll shows a lack of confidence in economic leaders. That includes not just Mr. Bush and Congress, both of whom have the approval of fewer than one-third of all Americans, but the financial industry, large corporations in general and energy, drug and insurance companies in particular.

So I ask myself, who is experiencing this great economy?

Despite numerous financial concerns about consumer spending, the stock market has continued to rise. Corporate profits are still high. And the LBO craze has continued its insane pace.

Because of the cheap loans available, the top investors have been buying everything that isn't nailed down, for ever increasingly prices. Everything from high rise office towers to companies have been going up and up in price and changing hands faster than ever.

This is a great article about what these LBO's mean to regular people - the people who dont invest in hedge funs. The people who depend on paycheck, not capital gains, to pay the mortgage.

This article is more evidence of the increasing divide between the super-rich and the rest of us. A friend of mine who travels often to Latin American countries recently commented to me that the US appears more and more like Mexico every day. That is not a positive comparison in my mind.

How a Blackstone Deal Shook Up a Work Force

Layoffs at Travelport, Dividend for Investors; 'On Pins and Needles'

By IANTHE JEANNE DUGAN

Wall Street Journal

July 27, 2007

CENTENNIAL, Colo. -- Not long after the Blackstone Group bought Travelport Ltd. last August, workers at the company's office campus here began feeling the squeeze.

Two months after the deal closed, scores of employees were lugging boxes of personal belongings to their cars, having lost their jobs. Under Blackstone's ownership, the travel-reservations conglomerate has laid off 841 people, about 10% of its work force. Blackstone, a private-equity firm, has already recouped all of the money it invested in Travelport.

Similar scenes have been unfolding at companies around the nation, a human toll of the corporate-buyout boom. Private-equity firms, which say they bring sorely needed financial discipline to poorly run companies, have been slashing costs and extracting profits at warp speed. As the cycle of buying and selling companies has intensified, life in the trenches can be unstable and traumatic.

...

To complete their $4.3 billion Travelport purchase, Blackstone and Technology Crossover Ventures, a Palo Alto, Calif., venture-capital firm that now owns 11%, invested $1 billion and borrowed the rest. That debt landed on Travelport's balance sheet. In March, Travelport borrowed an additional $1.1 billion and paid it out as a dividend to the two firms, returning all their money in just seven months.

"This is likely one of the quickest returns of invested capital for a private-equity deal of its size," Travelport's new chief financial officer, Michael Rescoe, said in a May conference call with analysts.

The buyout boom has been lucrative for Blackstone partners and investors, which include large institutions such as pension funds. Last year, Blackstone managed assets valued at about $88 billion and earned $2.27 billion, according to a prospectus for its own initial public offering in June. Its chief executive, Stephen Schwarzman, who resides in a 35-room Manhattan apartment, made more than $650 million on the offering and retained a 24% stake now worth more than $5 billion.

Over the past five years, private-equity firms have bought more than 10,000 companies. This year, through June, 1,399 deals worth $582 billion have been announced, according to data provider Dealogic.

I am simply amazed at the stock market and its ability to keep rising. But I predict things will be very different by the end of this year.

It doesn't get much attention, but companies have been buying back their own stocks at a record pace these past few years. The rules of supply and demand tell us that this company-generated demand has kept stock prices higher than they would have been. But it is looking like that hoard of corporate cash is drying up.

Cash Flows May Be Drying Up

Firms' Earning Pace Might Not Back Surge In Share Buybacks

By MICHAEL ANEIRO

April 14, 2007

Wall Street Journal

But the underlying assumption that companies remain awash in cash may be eroding, and without many investors realizing it. The most recent flow-of-funds data released by the Federal Reserve shows that free cash flow in the nonfinancial corporate sector plummeted late last year, according to Dominic Konstam, head of rates research at Credit Suisse. As credit spreads show signs of inching upward, a ramping up of corporate leverage at a time when cash is flowing to share buybacks could send bond spreads surging higher.

Free cash flow, calculated as internal funds less capital spending and buybacks, typically runs slightly negative and at most reaches about 2% of gross domestic product, according to Mr. Konstam. In the most recent flow of funds report, however, that figure plummeted to minus 5% of GDP, about as low as Mr. Konstam said he has ever seen it.

"I think it's alarming, and I think a lot of people are unaware," Mr. Konstam said.

Inflation also appears to be a factor. As a head of household, I never understood why food and energy are excluded from the inflation index. After all, I spend money to buy both of those necessities. My home heating bill doubles this past year due to the cost of natural gas. Similarly, my gasoline bill went way up. And we still need to eat - food prices are higher too. Only incomes have stayed fairly flat and that means less money to go around for households.

Higher Prices Weigh on Consumers

By CONOR DOUGHERTY

April 14, 2007

Wall Street Journal

Economic reports released Friday supported the widely held view that the U.S. economy is sputtering while inflation is picking up, an unpleasant combination that is weighing on consumer sentiment.

And the third leg of the stool is the housing sector. If house market flattens, and those ARM's kick in, the magic house ATM machine is going to stop printing money. This will be a painful correction for people as they have to face the real limits of what they can afford.

Subprime Pullback May Crimp Consumer Spending

By CONOR DOUGHERTY, MIKE SPECTOR and ANA CAMPOY

April 2, 2007

Wall Street Journal

With subprime mortgage lenders pulling back, some working-class Americans are already finding it harder to buy a new home or refinance the one they already own. The big question now for the nation's economy: Will it also get harder for these consumers to buy cars, shop at the mall and dine out?

All three of these factors together tells me that corporate profits are going to slow because consumer spending is going to slow. Other analysts have written that businesses have been buying back stock instead of investing in their own infrastructure. On one hand, this means business spending will not pick up the slack from falling consumer spending. On the other hand, I wonder if this lack of investment is because businesses too foresee a slowdown and dont want to invest in new factories that will sit idle.

Business-Investment Drop Stirs Worries

By CONOR DOUGHERTY

March 29, 2007

Wall Street Journal

A key measure of business investment declined in February for the second consecutive month, igniting fears that businesses are becoming more pessimistic about the economy and have pared back their plans to expand and modernize.

"Businesses are worried [about] where the economy is heading, and they're being very cautious about buying equipment," says Patrick Newport, a U.S. economist at consulting firm Global Insight.

"It's looking like capital expenditures aren't going to be able to offset housing and autos with respect to investment," says Joseph Brusuelas, chief U.S. economist for IDEAglobal, an economic-consulting firm in New York.

And dont forget President Bush's record setting pace of borrowing and the increased payment on his federal deficits as well as the costs of Social Security and health care as the boomers age. These factors imply a future of higher income taxes.

Times have been good thanks to Alan Greenspan's policy of cheap cash but like all good parties, the hangover that next day is a bitch. I hope he lives long enough to share it with the rest of us.

Recently I have been thinking about home prices, household spending and debt. My larger concern is that American's are wildly living beyond their means and that this issue is a real long-term problem for all of us. To understand this issue better, I have been looking for symptoms and root causes that might explain our behavior.

While there are several threads in this story, one of them is the number of new expenses that increase our monthly budgets. Things that did not exist before but we find "essential" today, such as cable TV, cell phones and internet access.

After looking at my own household expenses, it strikes me that household budgets have changed a great deal in the last 20 years and those changes are a contributing factor to household debt.

To examine this point, I made a typical budget for a small household in the Seattle, WA area. It is worth noting that some people pay a LOT more for cable TV and cell phones and that these numbers are only for monthly fees, not purchases of new phones, etc. There are also a lot more monthly fees out there, such as a newspaper or website subscriptions, video game subscriptions, and the like.

Remember when Republicans wanted to curb government spending? Remember when there was bi-partisan support for eliminating the deficit and lowering the national debt? It would seem that few of our leaders remember since government spending (and debt) has exploded since 2000.

As our federal debt gets close to our $11 Trillion Dollar GDP, it seems like our government officials have completely forgotten about saving some money for real problems in the future but I hope that issue comes back in the next election.

Clinton Brings Debt Worries to the Fore

By DEBORAH SOLOMON and JOHN HARWOOD

March 5, 2007

Wall Street Journal

WASHINGTON -- Sen. Hillary Clinton, sounding a theme likely to recur among 2008 presidential hopefuls, is warning about the "economic vulnerabilities" posed by foreign interests owning large amounts of U.S. debt.

In remarks on the Senate floor and a letter to Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, Mrs. Clinton said President Bush's economic policies have contributed to an "erosion of U.S. economic sovereignty." She also said it is "undeniable that the exponential growth of foreign debt in the last six years has undermined our economic standing."

Currently, the U.S. imports more goods than it exports from places like China, resulting in a trade deficit, and it borrows heavily from abroad to finance its domestic investment. Foreign interests own about $2.2 trillion of U.S. Treasury securities -- or about 52% of the public debt not held by the U.S. government, compared with about 20% in the early 1990s, during the Clinton administration. The U.S. has come to rely on foreign capital because Americans don't save enough to finance the nation's domestic investment.

2006 was a funky year for investing as a lot of "rules" no longer seemed to apply.

One such rule has been the relationship between bond prices/rates and risk. As more and more money has been flying around the markets, the premium investors demanded for riskier bonds has all but disappeared.

I am not sure that change is a good thing for anyone (except risky companies that need to borrow cash) but this article indicates how large of a problem this has become.

Although this article is focused on the Democratic party, the information is presents on the economy and the distribution of wealth in our society is worth a read. Taken together with a slew of articles on changes in China, we truly are living in historic times in economic terms. Simply amazing changes from a macroscopic perspective.

The graph in this article is also astonishing. I knew that there were a lot of millionaires out there but I was not aware that the gap between the rich and poor is back to levels not seen since the 1930's!

I have not been blogging much about investing or the economy lately but 2006 continues to confuse me.

With widespread expectations that corporate profits would be down in 2007, I have been expecting the stock market to drop. It has risen.

What has been falling is the value of the US$. Something I haven't been thinking about (and no one has been talking about) for over a year. Our ballooning Federal deficit and the falling US$ seem to be unpopular topics in the face of a rising stock market and Iraq.

Trying to lower trade deficits by weakening the US$ has questionable value over the long term. I have doubts that getting China to raise the Yuan will help our failing manufacturing industries very much.

As the world's second largest economy and home of the longest running period of deflation, Japan is always worth keeping an eye on and things seem to be improving. Two recent US exports to Japan: buyouts and credit cards.

Oil prices went sky high and then dropped - after reaping the highest corporate profits in history for large oil companies. Is the market price really based on "fundamental supply and demand" or is there something else at work?

Another article investigates the influence of hedge funds in the energy markets.

Times have been good in the US economy. Home prices have been going up and we just cant seem to buy enough stuff, from new video games to imported cars to HDTV's.

But we consume more than we produce, more so every year. How long can that deficit continue? Our credit streak has gone on for years because we are the only international economy in the game - but can it last indefinitely? Are we pushing our luck too far?

Everywhere you look, markets are setting new records and going to new places.

US GDP is about $10 trillon a year or about one half of the global GDP so we have a big lead over everyone else but China is changing things very quickly indeed. Just look at that chart since Bush took office!

Every time I see this chart, it blows me away. I know that you need to do comparisons as ratios but but the growth in absolute terms is just extraordinary to me.

Look at the big crashes: the 1920s and 1987. They seem quaint by the scale of the market today. (Although in ratio terms, it isn't. 1987 looks like about 30% drop which is larger than the drop from 1999 to the low point in the 2000's.)

Most periods of extreme growth are followed by decades of relative flatness. At least that was true before the 1980's.

There has been a lot of talk about how the "Creative class" is leaving big cities for life in out-doorsy places like Utah or Seattle. While there may be some truth to that (and this article tries to prove the point), this summary of patents is rather astonishing.

If you look at the number of patents from the top 20 US cities, Silicon Valley accounts for 63%! 11 of the top 20 cities are located in the SF-Bay area. (Seattle makes the list; right behind Portland. Ouch :(

Patents arent everything but I guess there really is something different when it comes to California.

When things are looking grim, people always bring up the argument that it "never happened before." What they fail to say is that the world isnt like it was "before" and that the system involved today is very different than it was in the past. This is as true for global warming as it is for housing prices.

When in doubt, follow the money. The lending industry has changed dramatically in the past decade so there is some real question about the rewards, risks, and motivations of the current system. Does our current system really protect itself from bad loans? If not, who is going to pay for those loans when people cant pay them anymore?

This is the first article I have seen that asked this critical question. Although the numbers are small now, this is a big issue and it may take years to find the answer.

I vividly recall a heated discussion I had a year ago with a Pacific Northwesterner about China and pollution.

Her augment was that the environment is so important, China should be go far beyond what the USA is willing to do to protect it. China was being a terrible global citizen by polluting like they do.

My counter-argument was something about the fact that China has 1.3 Billion people and their social stability depends on finding jobs for people so that they can literally survive. I agreed that the environment is important but it seemed a bit hypocritical to expect China, a much poorer country, to do more than we in the USA are willing to do. I think it is hard for us, with our Patagonia's and Subaru wagons to grasp how hard life is for most Chinese.

This is a very interesting article on what they are willing, or at least, trying to do. I certainly hope that I am wrong and China is able to do more than we seem willing to do.

Suddenly there is a raft of articles about failing hedge funds... Since normal folks like myself were generally excluded from hedge fund riches, Im not too put out by the news.

The real story for me is who is actually losing money here. The media focuses on the big money winners in the stock market but there are a lot of big money losers out there. Where are these losses going to show up? In the dot-com crash, it was a lot of pension and retirement money that got lost. Not so here.

As someone who has personally run into problems with being honest at the office, I find this to be an interesting story on more than one level.

One one level, we talk about honesty as a virtue but there is always a lot of controversy about being honest in the workplace. Honesty is a virtue, just dont tell the truth. This is doubly true in democracies around the globe that dont have much in the way of a "free" press.

On another level, I read this story and wonder how much of our economic "foundation" is based on lies and misinformation. Is there really a solid foundation down there somewhere or is the whole game a quicksand confidence game?

When a lot of money tries to buy a liimted number of assets, prices go up.

What happens to those prices when the money supply dries up? Well we may be about to find out.

In recent months I have come to a new appreciation of how much oil supports the systems that define life as we know it. Despite its importance, the price of oil (and gasoline) continues to be a mystery.

It strikes me that investors, not consumers, are probably at the root of the increase in oil prices so naturally I enjoy articles that raise that very question. Considering the way investors have speculated on the price of housing, I dont see why the same thing couldn't have happened in other asset categories, even though it hasnt happened in the past.

It is still hard to find any articles discussing the economic impact of global warming, but if you keep your ears open, the "recession" word is starting to show up again. Which is interesting because most of the news lately has me thinking about dot coms stocks in 1999.

"It will never go down!"
"It's a new economy!"
"If you dont get in now, you will only miss out on the easy money!"

Ever since the income tax was started, there have been steady changes in who pays the bulk of the taxes the government needs for spending. This year it looks like the rich and corporations are paying more taxes because they are the only ones making more money.

Of course our deficits are still insanely high, the federal government is spending more than ever before in history, and I find it highly questionable that the "rich" are making more money because they are "working harder."

A few articles on bank loans for housing and businesses. Are banks wisely handling their funds or is there a lot of risk out there?

Speaking of risky collateralized-loans, I just refinanced my student loan debt... Watch out!

A few articles on bank loans for housing and businesses. Are banks wisely handling their funds or is there a lot of risk out there?

Speaking of risky collateralized-loans, I just refinanced my student loan debt... Watch out!

I have heard surprising little about this massive buyout offer by GM. I think this is a big deal because the main issue at stake is the cost of pensions and healthcare for retirees. I believe I heard that GM has 100,000 employees but benefits to over 300,000 retirees! Ouch.

With these people off the company balance sheet, they will join the Federal and State balance sheets. Will this finally precipitate some attention on healthcare? Maybe not since a $10B loss for a company demands change but $10B of our tax dollars is only 1 month of our occupation of Iraq... But it might be a start.

And this is sure to have an impact on the economies of the Midwest states.

If voters actually fall for this foolishness about taxes (which they do), I think there is little hope of any progress being made on global warming, a real issue.

This weekend I saw the movie Syriana, which is one of the best movies I have seen in years. The depth and complexity of its plot showed how simplistic hollywood movies are. More importantly, it also gave one the sense of how important oil is to our economy and our economic and government systems.

Would we invade Iraq just for oil? You bet we would, although the average person wouldn't know that.

And we can expect to see more turmoil due to our complete dependence on oil for our lifestyle and our economic systems combined with the complete lack of federal leadership on energy.

This article provides a lot of detail on our changing relationship with oil.

I found it interesting to note how much more oil we use than other counties like China. Considering how much flak we give China for using up all the oil and for pollution, I was surprised to see that we use 3x as much oil as they do.

Of course none of these supply and demand questions take global warming into account. At least not yet.

We call it "pre-fab" housing in the US and generally look on the results with disdain. But if you have ever spent time building a house, you know that a whole lot of mistakes are made in the field. The site-buillt house is more of a marketing image than a reality. It is much easier to control the quality in a factory than it is outside with a crew.

It seems to me that eventually pre-fab housing will really take off and once again, Toyota seems to be involved ahead of the curve. Read it yourself.

Here are two articles from a few months ago that talk about growing market volatility due to hedge funds and housing. Given the global crash of equity markets this past week, it is something to think about.

How risky have things gotten? How much are people leveraged? Is the global system at risk of sudden, dramatic shifts?

With all the talk of outsourcing in this country, it is easy to forget that the developing countries taking our jobs have their own problems.

Going with my belief that the biggest lessons in life are usually painful, even if they lead to better things later, this is an interesting article on job loss in Denmark.

It is interesting to note that while we Americans abhor paying taxes or spending that money on social benefits (spending it on Iraq is ok because we are at war), other countries use their tax money to invest in their citizens.

Could it be that the US is not the perfect society and one can improve on the market system?

In the perfect world otherwise known as the classroom, competition causes prices to fall until there is no economic surplus, ie profits, left. In the real world, monopolies and government intervention (or lack thereof) usually prevent this from happening.

Im doubtful the real estate business will change much without government intervention but it is nice to see come pressure from competition.

Attention has shifted back to our bungling in Iraq, but not long ago the topic du jour was the price of oil.

I listened to several lame discussions of the price of oil in the media and none of them mentioned hedge funds and the impact of speculators. Maybe this kind of answer is too complex for the adoring public; much easier to blame foreigners.

We really do live in an "oil economy". Oil is involved in almost everying we purchase, from plastics to transportation.

Which is why I have been mystified by inflation this year. How can oil triple in price without raising the prices of everything else? Even gasoline has risen in price less than oil itself. What gives?

This year gold made a run to re-reach its highest price ever. Experts say this is due to voracious demand from industry and banking not speculation so the price is unlikely to drop anytime soon.

Here is an interesting article on the "gold chain".

I read the newspaper and magazines every week, mostly on Sundays, and I cut out the interesting articles. If an article really pushes my buttons, I blog about it immediately. The rest of the articles go into a pile, which shall we say, piles up. Eventually the pile gets so big, I cannot find my desk so I go through it and blog about the things that are still interesting to me weeks or months later.

Today I have been re-reading the financial articles of the past few months. Two months ago stocks were hitting an all time historic high. Today? Down in the tank :(

Interesting times, indeed.

How much are you willing to pay to stop illegal immigrants?

Forget walls and border patrols and national guardsmen. The solution to stopping illegal immigrants is to remove the jobs they come here to get. Period.

These poor people dont risk their lives to come here for our unaffordable health care or our non-existant retirement benefits - they come here for the American dream: work hard and earn a buck to help your family live a better life.

If the IRS and the social security administration got together and really checked the payrolls of American companies (and wealthy individuals who cant seem to stay away from those illegal servants and nanny's), they could prevent companies from hiring illegal workers. If the government built an enforceable system of worker identification and fined businesses heavily for hiring illegals, illegal immigration would end within a year.

And prices would rise.

You are what you eat. Literally. Our bodies are collections of chemicals so we truly are the result of what we eat.

Which is to say that food is important. It may be the most important decision we make every day, yet people seem to spend very little time educating themselves about this decision. A decision that is getting more complex every day.

Today I heard a terrific interview by author Michael Pollan. His book, "The Omnivore's Dilemma : A Natural History of Four Meals", sounds great - informative and disturbing at the same time.

Toyota was in the paper no less than three times today.

Hybrid sales are down? Hmmm, could this be because of the way the car companies chose to build and market hybrids?

"V8 power with V6 gas mileage!"

Umm, who the fuck wants that? Oil is $70/barrel and gas is $3/gallon. The polar ice caps are melting and car exhaust is a huge contributor. Do you want V8 power with V6 mpg or do you want to do something responsible for change?

The sale of real hybrids like the Prius are still going strong and I expect to see good signs with the Camry hybrid as well. The people who care enough to buy a hybrid in the first place dont want an SUV and those folks that need room for a gun rack and the seven adult friends they dont actually have are going to keep buying Denali's and Yukons until the law says they cant.

This "hybrid math" will help the people who are on the fence or who will do the right thing if it doesn't cost them anything. Sadly, the math doesn't add up so its no surprise to me that sales have been slow. Then again, Im still waiting for a luxurious small call.

The Federal Reserve meets periodically to set the rate that banks borrow money in the short-term. This rate has an impact on a lot things, such as mortgage rates and treasury bonds, so its worth watching. Raising rates increases the cost of borrowing and acts as a brake, slowing things like the housing market down. (At least in theory.) Whether that is good or not depends on your investment bets.

After a long time without any increases, the trend this year is (finally) up.

I suppose it shouldn't be a surprise but it appears that a lot of home owners do not understand the terms of their mortgages or what could happen to them. It is sad but I think this means that there are a number of people who are going to get into trouble when rates go up again.

It is also understandable since there isnt anyone out there to educate consumers; everyone you are likely to interact with when buying a house makes money from your purchase. There is not much money to be made in restraint.

This data is from 2001 and the number of people with ARMs is almost 3x higher than it was then.

Three articles about Japan, who finally seem to be recovering from their own financial hang-over after how many decades?

In the 1908's investors pushed Japan's real estate prices through the roof and the banks had so many bad debts, they could not collect on them for fear of bringing down the whole banking system. Hmmm, why does that sound so familiar?

As the World's second largest economy, this trend in Japan is one to watch if you are interested in investing there.

Deficits continue to climb as the Fed bleats about raising taxes to pay for it.

It's nice to see US businesses are investing their funds wisely - in other countries! If this trend continues, what jobs will be left in our country? Stock brokers and fast food clerks.

Here are 2 articles from February about our mounting deficit problems. US Treasury bonds are the definition of risk free investments. I wonder if that will still be true when I retire in 30 years.

The totals and the trends (big increases) should give all us reason to pause. I believe in global trade but it wont float all boats. Numbers like these mean you need to make sacrifices and wise decisions now to provide for your family in the future. There wont be any federal money to take care of you.

Im a big fan of investing in other countries. Ive been looking for hard numbers but it appears that the US is roughly half of the world market. So if you money is only in the USA, you are only participating in half the market.

But the decision where to invest is complicated. Here are two articles about overseas investing. One warns about international bonds and the other warns about staying out of the world markets.

If your parents go broke, its a personal tragedy. If everyone's parents go broke, its a national crisis. Then again, there is safety in numbers as long as you arent first or last.

Looking at the numbers it is clear that people either dont know what they are doing and/or they arent thinking ahead. What was that parable about the grasshopper and the ant?

I keep waiting for the shoe to drop on health care. Waiting, and waiting and waiting.

And be sure to take the 5% test - odds are you wont like what you find...

One of the most alarming things about the recent investment market is the apparent disappearance of risk premiums. One is supposed to pay a premium for safer investments but these days safe and risky are priced the same.

One of the biggest contributing factors to the housing bubble is the willingness of banks to lend money to anyone with a pulse. This article on bonds shows that its not just the housing market that is being impacted by current thinking and the same cause - the people who make the loans dont hold them and the people who buy the loans dont know who pays them.

Will it take another great depression to wake people up? I sure hope not.

It's no secret that I think the cost of housing has risen too high and will have to come back down.

One of the biggest factors that I look at is the number of people who have purchased property they cannot afford, either as their own home or as an investment property. Borrowing has been so cheap and lending practices have been so lax, it seems like a given that there are a lot of bad loans out there. As the cost of borrowing rises, I expect to see a lot of people who cannot make their payments and who will need to make changes.

I could be wrong and the process has been much slower than I expected. But we are starting to see the signs... One household in eight? *ouch* This is a scary article.

Net worth is rising (due to housing not savings). Long-term bonds are rising (which raises the cost of borrowing). Job growth is strong (although no numbers here on salaries which I think are still flat).

Money is still cheap but the number that I would look at is the rise of consumer debt.

We all know that home prices have been rising but is that price rise causing any changes to the underlying housing market?

When you look at family housing, we see a cycle. Entry level couples and individuals buy 'starter homes'. After they're income rises and they build equity, they are able to sell their existing home and buy a larger home. Home owners thus need new buyers so that they can sell their own homes and move up. If something stops this cycle, everyone suffers.

As home prices have risen, the first question to ask is whether first time buyers are still able to afford those starter homes and begin the process? The second question is where these $200k homes are? :)

Previously I wrote about my theory that there is a big pile of cash flowing around the world looking for investments and pushing up prices to levels seen in California or New York.

Based on this article from February, others see the same thing.

I have recently been doing some investment planning for my grandmother. The general rule for retirement is that you have a pile of money saved up and you can spend 5% of it every year.

So you take your yearly expenses for your lifestyle and subtract your social security payment (or assume it will be zero) and your pension (if you have one). This amount is the 5% of your savings needed which lets you figure out how much you have to save. For example, if you have $100,000 saved then you get to spend $5,000 a year which is less than $420/month.

The Employee Benefit Research Institute just released their annual survey on retirement savings which makes for some interesting reading. It sort of makes one wonder what will happen to the economic-treadmill when millions of Boomers suddenly have to stop buying because they are totally broke.

I've been listening to the recent debate on "fair trade", the minimum wage and illegal workers.

As an investor, you look at a company and you demand revenue growth and profit growth - every year if not every quarter. As a company, you can grow in two ways:

• you can get more customers or
• you can get existing customers to consume more.

If you raise the minimum wage, you will raise costs which will raise prices. People who argue against raising the minimum wage or against a "living wage" point out that increasing prices will decrease consumption and hurt everyone.

So be it.

Economists look at how pieces of the economy are connected to (and influence) each other, such as the idea of supply and demand. If the demand for labor goes up and the supply goes down, then wages for labor will increase. If wages increase then the cost of goods increase (to cover the wages) which means higher prices. Higher prices is another term for inflation.

The general rule is that if an economy is growing too quickly, we get inflation. The cure for inflation is to slow the economy down which the government tries to do by raising interest rates. By making money more expense (by increasing the cost of borrowing money), businesses slow down and the economy slows down and prices fall again.

At least that is the theory. Rules of thumb like this example build up over time. Economists study the great depression and the stock market crash of the 1920's for decades and eventually rules of thumb about how the economic system works appear. Economies are so complex, you cannot really see all the interactions and understand it so you need rules of thumb that explain things well enough but are simple enough to use.

I just wonder if the game is changing so fast and much that our rules of thumb based on the past century of national economies are no longer appropriate.

the new rules

This morning, I heard a news story about inflation which is what got me thinking about all this. The truth is, I am rather puzzled by inflation. The person being interviewed pointed out that the national inflation rate has stayed around 2% for years, but I dont get it.

How is it that prices for goods never seem to go up much? We pay $3 for a gallon of gas (diesel actually) in Seattle. Our heating bill went up by 4x this winter and housing prices have gone through the roof everywhere. The cost of gold and platinum is at an all time high. In fact, everywhere I look (except for computers), prices are way up so how is the national inflation index only 2%...?

Thinking about inflation, I got to thinking about closed-systems. Economies used to be largely closed systems. Raw materials would be brought into the system from other countries, but the bulk of the value was manufactured in our country. Thus the Fed and businesses only had to worry about the factors within the nation. All those supply and demand rules about wages and inflation were refined in the past century, so they are based on the idea of a closed national system.

But we dont have a closed national system anymore.

the global economy

The economy today has expanded beyond national into a global system which turns rules of thumb, like supply and demand, on their heads. Wages in our nation arent as important to inflation anymore because the jobs can just move to a cheaper country. If manufacturing costs get too high in our nation, prices dont go up but rather those jobs move to China.

Another rule of thumb economists use to judge the economy is the unemployment rate. If too many people are employed (a low unemployment rate), there will be competition for jobs and wages will rise, ie overheating the economy. This is why investors (inexplicably to many workers) like to see a healthy (ie high) unemployment rate but this rule of thumb is being changed by the massive influx of cheap labor coming into this country (like 10 million illegal workers). This supply of cheap labor prevents prices (and incomes) from rising because there is always someone willing to work for less money. And since they are illegal, you can forget about Unions or other groups pressuring for a living wage.

Of course, economists do take these inflows into account in their models but I have begun to wonder if the magnitude these inflows are now so large that they change the rules of the game. Not only has inflation stayed low because of importing cheap labor and exporting jobs but we have been importing amazing amounts of foreign capital. China, Japan and Korea continue to buy huge amounts of our Treasury Bonds, which keeps the US Dollar and our government out of bankruptcy despite the fact that we borrow more money every year (the national debt is now over $8 trillion dollars!).

So why has the inflation rate in our nation stayed so low? The answer is that globalization has changed the rules of the game and for the moment, the rules are in our favor. We continue to talk about inflation in the old terms, using our old rules of thumb, but globalism has made the picture a lot more complex.

I imagine this is clear to economists but I suspect it is completely UN-clear to citizens. We continue to make decisions on a personal level about household spending and on a macro level about education and infrastructure as if we are the only game in town. People still seem to see things as a closed-national system and that is a dangerous thing for the welfare of our children.

I have gotten a few questions about this article so I wanted to write a bit more.

According to the graph, it is only fair to point out that government spending started to rise and tax revenue started to drop in 2000, which is before president Cheney took office.

The article is not focused on tax revenues. Supply-siders argue that cutting taxes may still raise revenues, they just need a few more years. Or something.

The focus of the article is actually government spending. Republicans have campaigned for many years on the idea of a smaller federal government, less federal spending, and "fiscal responsibility." The article points out that almost every area of federal spending has increased during President Cheney's reign of error. (Which is what "irks" conservatives in the title.)

I was particularly impressed with the "earmarks", which have grown to 14,000 since the Republicans took over Congress in 1995. Earmarks are anonymous spending items that are added to bills AFTER the bill has been approved, often at night after voting and before printing the bill. Earmarks are pure pork with no federal oversight and they have become a hallmark of Republican leadership, although they dispute that the amount of money involved is not worth worrying about. So much for "it's YOUR money!".

What does the federal budget include?

Mandatory spending for entitlement programs with benefits set by law accounts for more than half the total budget. Last year, Medicare, Medicaid and Social Security cost more than $1 trillion; additional programs benefit farms, veterans, civil servants and others.

...mandatory spending grew to 10.8% of GDP this year, from 10% at the start of the Bush administration. Medicare has been growing twice as fast as Social Security amid rising health costs -- and that is before the tab for Mr. Bush's new prescription-drug benefit. Entitlement spending is projected to explode as baby boomers retire.

How much are we spending on defense?

Discretionary spending for defense and domestic programs is what the president and Congress haggle over in yearly appropriations bills, and the type of spending many Americans associate with the budget. But at $894 billion in spending authority for 2006, it is less than a third of the entire pie.

Defense and homeland-security funding since the Sept. 11, 2001, terrorist attacks has grown to 4.2% of GDP in 2006 -- or 4.6%, counting expected additional war funding -- from 3.4% in 2001. [All discretionary programs add up to 7.7% of GDP so "defense" is over half.]

The President started a war and invaded two countries. War is pretty expensive yet he did not raise taxes to pay for it. How much is it costing us to borrow that money?

Also off-limits is interest on U.S. debt. After declining from 1998 through 2003, payments to creditors here and abroad jumped a near-record 14.2% in 2005, CBO reported. They are now 8% of all spending -- roughly half the size of all domestic discretionary spending, or more than the entire budgets of the departments of Agriculture, Education, Energy, Homeland Security, Health and Human Services, Interior, Justice and Labor combined.

For fiscal 2007, Mr. Bush is expected to again omit Iraq funds from his budget request. The additional $50 billion he is expected to seek for 2006 would bring this year's total to $100 billion in emergency funds. Separately, he is expected to seek about $20 billion more in emergency funds for post-Hurricane Katrina relief.

The President has cut programs like Head Start and student loans. Can he cut enough to make a difference?

With debt payments, defense, homeland security and entitlements off the chopping block, Mr. Bush and Congress are left whittling at the one-sixth of the budget that goes to domestic discretionary spending. Only this funding has fallen as a share of the economy -- to less than 3.1% in the current year -- from 3.4% before Mr. Bush arrived, the center found.

Our financial problems are not going away anytime soon. Expect the next President to get stuck with the bill.

Remember when Republicans believed in balanced budgets and smaller government? Ahhh, those were the decades...

As the state of the union approaches, it is time to ask ourselves how our president has been doing. Today's topic is how he has been doing with our national finances.

This article is a good overview of the Republicans "ballooning" federal budget. I particularly enjoyed the chart which clearly shows the impact of the tax cuts starting in 2000.

Expanding Bush Budgets Irk Conservatives

With Next Blueprint Looming, a Look At How Defense, Entitlements Fuel Increases

By JACKIE CALMES Staff Reporter of THE WALL STREET JOURNAL

January 24, 2006

WASHINGTON -- When President Bush reveals his budget request in two weeks, he likely will repeat a boast from recent speeches: "We've now cut the rate of growth in nonsecurity discretionary spending each year since I've been in office."

But such spending -- for everything from air-traffic control to education and prisons -- amounts to one-sixth of a $2.5 trillion budget. And it is the only piece that isn't ballooning.

Conservatives are fuming because this is occurring when Republicans control both the White House and Congress. "The White House always says it's [due to] defense and homeland security...but even without defense and homeland security it's record spending," says Brian Riedl, budget analyst at the conservative Heritage Foundation. "The brakes are off everywhere."

The big picture: The budget request for fiscal 2007 is expected to total about $2.7 trillion -- up from nearly $1.8 trillion when he took office. According to the Congressional Budget Office, or CBO, total spending rose from 2001 through 2005 by an average 7% annually, double the pace of the previous five years -- and nearly triple the average inflation rate.

The increase in fiscal 2005, which ended in September, was 8%. The year's deficit came in lower for the first time under Mr. Bush because tax revenue was up nearly twice as much as spending, due to an improved economy. The gap was $319 billion, or 2.6% of gross domestic product, the measure of the total economy -- down from 2004's high of $413 billion, or 3.6% of GDP. The administration has projected that this year's deficit will swing back above $400 billion.

China finds oil in Saudi Arabia while gas prices rise (again), Ford shrinks and Iran tells us to stick it. Quite a Monday.

Ford Posts 19% Profit Rise, Unveils Restructuring Plan

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP

January 23, 2006

Ford Motor Co., the No. 2 U.S. auto maker, said Monday that it will cut 25,000 to 30,000 jobs and idle 14 facilities by 2012 as part of a restructuring designed to reverse a $1.6 billion loss last year in its North American operations.

The cuts represent 20% to 25% of Ford's North American work force of 122,000 people. Ford has approximately 87,000 hourly workers and 35,000 salaried workers in the region.

The plant closings, which affect seven assembly plants, will eliminate capacity of 1.2 million vehicles. Ford currently can build 4.5 million vehicles a year in North America using 43 parts, stamping and assembly plants.

China Will Strike An Energy Deal With the Saudis

By SHAI OSTER Staff Reporter of THE WALL STREET JOURNAL

January 23, 2006

BEIJING -- China and Saudi Arabia are expected to sign a wide-ranging agreement today on energy cooperation amid Beijing's quest to secure more energy resources vital to fuel its fast-growing economy.

China, the world's second-biggest consumer of oil, has been seeking to tighten economic and political partnerships with its major oil suppliers across Central Asia, Africa and Latin America. Its quest has taken on added urgency since 2004, when the country's oil demand surged about 15%, helping underpin the biggest rise in international oil prices in a generation.

China's oil imports from Saudi Arabia have roughly doubled in recent years, from 12.5 million tons in 2002 to 22 million tons for the first 11 months of 2005.

West Talks Tough With Iran, Treads Lightly

U.S., Europe Seek a Security Council Role, But Too Much Pressure Could Backfire

By CARLA ANNE ROBBINS Staff Reporter of THE WALL STREET JOURNAL

January 23, 2006

WASHINGTON -- As U.S. and European officials press to have Iran brought before the United Nations Security Council, they are also promising that Tehran won't face serious punishment there -- for quite a while.

Iran has few friends left after deciding to resume efforts to enrich uranium, a process that could advance it a big step closer to being able to build a nuclear weapon. But there are reasons the move toward international penalties might not be swift. As the Organization of Petroleum Exporting Countries' second-largest producer, Iran has considerable economic leverage. It also may benefit from the "Iraq effect." There is widespread anxiety that any U.N. action -- unless carefully constrained -- could open the door for another U.S.-led war.

There's Little Margin for Error

Fuel Pressures Keep Prospects For Economic Growth in Limbo As Investors Begin to Seek Cover

By E.S. BROWNING Staff Reporter of THE WALL STREET JOURNAL

January 23, 2006

Now, with oil back near $70 a barrel, Mr. Herrmann is beginning to hunker down again. So are a lot of other investors. That helps explain why the Dow Jones Industrial Average fell 213.32 points Friday for its biggest one-day percentage decline since 2003. With the current bull market now more than three years old, the question is whether the economy can improve enough to get people like Mr. Herrmann to feel good enough to start buying stocks again.

"We don't have much margin for error," Mr. Herrmann says. "We can't afford to lose two million barrels a day being exported out of Iran."

What worries him is that the problems weighing on the economy "won't go away real soon." It isn't just that expensive oil serves as a tax on consumers and businesses alike. Interest rates have been rising as well, and the two together are damping growth. "I don't think $70 oil translates into a huge economic problem," he says. "But who says it can't go to $80? Who says it can't go to $90?"

First music, then movies, then books. The genie is out of the bottle with digital technolgy. IF you can make a copy to use it, there doesnt seem to be any way to keep people from making illegal copies.

Digital media is a thorny problem where someone will have to think out of the box to create a system that balances freedom and ownership.

Repro Man

Meet the 21-year-old Norwegian who defied Hollywood to help the world copy DVDs -- and beat the studios in court. Now, he's liberating your iPod.

By STEVE STECKLOW Staff Reporter of THE WALL STREET JOURNAL

October 15, 2005

Jon Lech Johansen dropped out of high school after just one year. He lives alone most of the time, except when he stays with his parents in his native Norway. The 21-year-old doesn't drive, rarely goes to parties and says he has no close friends, except his father. He spends about nine hours a day in front of his computer screen.

Yet this reclusive young Norwegian is the man who may be the entertainment industry's worst nightmare. Mr. Johansen, Hollywood executives claim, has done more than almost anyone in the world to ignite the explosion of movie piracy on the Internet, costing them billions of dollars in lost sales. He scoffs at that.

Jon Lech Johansen says people should be able to use legally bought digital entertainment however they like.

At the age of 15, Mr. Johansen wrote a computer program that allowed users to copy DVDs. Then he posted it on the Internet. A Norwegian private school awarded him a prize for making an outstanding contribution to society. The Norwegian government indicted him.

Mr. Johansen may not be a household name in America. But he is lionized by people who, like him, believe that when they legally buy digital entertainment they should be free to use it as they please; fans have downloaded more than a million copies of his free software programs.

Piracy of copyrighted entertainment isn't new. For years, people copied record albums onto cassette tapes and traded them, a violation of copyright law that was generally overlooked because the quality of the copies wasn't great. But with the advent of digital entertainment on compact discs and more powerful personal computers, perfect copies could be made easily. The music industry initially took no technological steps to prevent copying from CDs. When DVDs were introduced in 1997, the film industry encrypted their content to try to avoid the piracy then already beginning to plague the music business.

It is called "consumer surplus" and its foolish for companies to give it away. Companies wanting to maximize profits should set prices to match demand. They should NOT cut prices until demand falls because that means giving away potential profits. It has also been noted that trying to compete on price only drives the prices (and profits) down.

Even though this behavior is bad for companies, they seem to be dong it. Is this stupidity or does it reflect a change, ie compression, of the business cycle where technology products cut prices so fast its hard to recoup the investment?

On the good side, I hope that the existence of more flat-panel TV's puts market pressure on TV broadcasters to improve the HDTV offerings.

First it was an issue of whether the yield-curves would invert. Now its a question of how much they invert. Is this the end of the era of cheap money?

Regardless, here is a good article that explains the issues involved with bonds in plain english. Worth a read.

Yields on Bonds Invert, Reflecting
Unease About Economy's Future

By MARK WHITEHOUSE Staff Reporter of THE WALL STREET JOURNAL

December 28, 2005

The nation's bond market interrupted the holiday season with a downbeat message yesterday: Many investors expect the economy to hit tougher times within the next year or so.

That pronouncement came in the form of long-term interest rates dropping below short-term rates, a trend that often -- but not always -- precedes an economic downturn. The development is known as an inversion, because it flips the traditionally upward-sloping shape of bond yields plotted on a graph. The yield curve typically rises because longer-term debt usually pays higher interest rates to compensate investors for the greater risk they incur waiting for repayment.

Inversions can squeeze or even eliminate profit margins for banks, hedge funds and any other financial business that borrows money at short-term rates and lends it at long-term rates. "This is a warning signal...that we are on recession watch now," says Paul Kasriel, chief economist at Northern Trust Co. in Chicago. The inversion, however, so far is minor, he says. And some economists believe an inversion isn't as reliable a predictor as it once was.

Bonds make fixed interest and principal payments to investors, but their yield depends on what the market is willing to pay for the bonds on any given day. In deciding what yield -- or return -- to demand on bonds, investors consider various factors, including their expectations for future short-term interest rates and the bond's duration.

Investors, for example, usually demand more yield from governments and companies to tie up their money in longer-term bonds. When they are willing to accept a lower yield, that means they are persuaded that the Fed, which most expect to raise short-term rates to 4.5% or higher early next year, will soon have to bring those rates back down to mitigate, or ward off, a recession. Yield-curve inversions have preceded all of the last six recessions, but have also sounded two false alarms, the most recent in 1998.

The housing market is the most likely trigger for an economic slowdown and Fed reversal. As the Fed raises rates, monthly payments on adjustable-rate home loans go up, cooling demand for houses and leaving homeowners with less money to spend on all the other things companies want to sell them. Second, as house prices stall, homeowners aren't able to borrow as much against the value of their homes -- a source of cash that has added hundreds of billions of dollars to consumers' spending power in recent years.

"What the Fed is going to do is shut down the ATM machine known as the housing market," says Tad Rivelle, chief investment officer at Metropolitan West Asset Management in Los Angeles.

In the computer age, finding out what people are watching on TV is shockingly archaic. I know this isnt a technical problem so I suspect that they dont want to fix it because they dont want to show how god-awfully inaccurate they have been all these years. 3 cheers for monopolies...

New TV Ratings
Will Produce
Ad-Price Fight

By BROOKS BARNES Staff Reporter of THE WALL STREET JOURNAL

December 22, 2005

For nearly two decades, Nielsen Media Research measured national television ratings one way: It estimated how many people sat in front of their TVs when the networks broadcast a show. Now, as more viewers record programs, Nielsen on Monday plans to start tracking them, as well -- setting up a fight between advertisers and networks over the price of commercials.

Until recently, the daily Nielsen reports gave the TV industry a relatively clear picture of who was watching what the night before, and the industry based advertising rates accordingly.

But the widespread adoption of digital video recorders, or DVRs, and video-on-demand services -- along with the delivery of shows via computer, cellphone or iPod -- is rendering Nielsen's tracking method obsolete.

Now the company, the sole provider of national TV ratings data in the U.S., is rolling out the technology to keep up: It will measure DVR viewing daily.

A 30% raise? Check out the graph... While this is happening, American 'workers' are getting a 3% raise if they are lucky. Is this disparity a problem or just an annoyance?

Another Boost for the Boss Compensation Rises Again

As CEOs Get Lavish Packages For Coming, Going or Staying

By JOANN S. LUBLIN Staff Reporter of THE WALL STREET JOURNAL

December 12, 2005

Criticism of lavish executive pay -- from shareholders, regulators and elected officials -- is on the rise again. But so too are pay deals. These days, it seems, corporate leaders are getting paid unusual sums for coming, going or even staying put. In addition to the millions it offered Mr. Zafirovski, for example, Nortel is also paying his predecessor, William Owens, more than $5 million in severance.

"Salaries are frothy again. Retention packages are compelling. And buying newcomers out of noncompetes is de rigueur," says Hal Reiter, chairman and CEO of New York recruiters Herbert Mines Associates Inc.

Total compensation for CEOs at 1,522 big U.S. companies rose a median of 30% last year to $2.4 million, double the 15% increase for 2003, according to researchers The Corporate Library in Portland, Maine. The figure includes salary, bonus, restricted stock grants, gains from exercising options and payouts from long-term incentive plans.

Compensation keeps rising despite ongoing complaints that executives are paid too much. Securities and Exchange Commission Chairman Christopher Cox wants improved disclosure of pay deals in corporate proxy statements. Democrats in Congress are pushing a similar measure. At a packed Senate hearing on high gas prices last month, California Democrat Barbara Boxer displayed a chart comparing last year's multimillion-dollar bonuses for three oil-industry CEOs to the annual pay -- $10,712 -- a minimum-wage worker makes in the U.S.

The rules of the game do change so who knows what will happen next. Is it reassuring that even the 'experts' dont agree?

Scary Season

By JUSTIN LAHART




December 12, 2005

Fear and greed are supposed to be what drive the stock market, but as the year finishes up, it often seems like fear and more fear.

In addition to investors' usual fear that the market will fall, there's the competing fear that they'll miss out on a year-end rally that sets them behind their peers. Among the many professional investors who are judged on their calendar-year performance, these concerns are particularly acute. Fall behind in the final month of the year, and that fat year-end bonus you expected can go on a crash diet.

Because the past couple of years have seen big year-end rallies, a lot of investors became conditioned to worry more about getting left out of the fun than getting left holding the bag. One factor behind stocks' gains last month may have been that many investors stubbornly clung to their positions for fear of missing out on a big year-end move.

The problem: With so many investors anticipating that stocks will rally through the end of the year, it's hard to figure out who will be the buyers behind the move -- which may be why the market has petered out this month. At the same time, with so much uncertainty about the housing market and the Fed, investors are having a hard time figuring out how they want to position themselves for next year.

Meantime, the year-end game may be happening away from stocks. To wit: Gold is surging like a momentum stock, tacking on $23.70 an ounce last week alone to set a batch of 20-plus-year highs.

Did you know that we didnt even have a department of defense until after WW2? Until then we had a department of war. Someone wisely understood that it would be hard to defend the "war" budget during peacetime but it would be hard to cut the "defense" budget... ever.

We spend more money on our "defense" budget than all other nations in the world combined and yet critics say that our troops are poorly trained and supplied. Where is all that money going? Even before Iraq we spent $300B+ every year on the military and that money didnt even cover any of the expenses of actually fighting; we needed $250B (and counting) more money for Iraq and Afghanistan.

When we talk about cutting things, like taxes and social programs, have you noticed that no one ever talks about cutting defense? I've heard some say that we cant cut these budgets because of the job loses but that sounds a lot like social welfare for the military industry. Im happy to see that some people are thinking about cutting those defense payments even if it doesnt make the news.

On the other hand, McCcain and others have been talking about increasing the size of the military in order to maintain our occupation of Iraq and the 9/11 Commission is saying that we arent spending on things that would actually protect us from terrorism.

I support McCain's comments but would use money from the big weapon system budgets to pay for it. Even so, how much "defense" can we afford to pay for and are we spending those funds on things that really defend us?

It has already come down again but the Dow got very close to the 11,000 mark. The Nikkei is at a 5 year high. Gold hit $500 and ounce while platinum hit $1000/oz! Lots of big psychological barriers going on.

Is investing all math or is it also impacted by psychology?

Go Figure: Zeroing In on Market Milestones

The Round-Numbers Approach To Making Decisions Can Have A Real Impact on Trading

By AARON LUCCHETTI Staff Reporter of THE WALL STREET JOURNAL

December 5, 2005

Wall Street traders and bankers love zeros this time of year -- at the end of their bonus checks. When it comes to big, round numbers, investors are more ambivalent.

Take 11000. The Dow Jones Industrial Average has been peering at that lofty milestone for more than four years and has been within striking distance of it for days, but investors can't seem to push it over the top. The same had been true of gold until it broke the $500-an-ounce mark last week for the first time since 1987 and Japan's Nikkei 225 Stock Average until it settled above 15000 points Thursday for the first time in nearly five years.

Many analysts dismiss the focus on such milestones as numerology that doesn't carry much weight in stock picking or gauging the economy's health. But the approach of round numbers has real impact on trading because many investors base real decisions on them. If the industrial average hits 11000, some figure, many will sell to solidify profits, so maybe it is better to sell now -- a mind-set that knocks down prices. Others figure momentum is building and rush to buy, boosting prices.

"It's 100% psychological," says Michael Cook, head of Cook Mayer Taylor, an asset-management firm in Memphis, Tenn. "These are emotional figures, but they're real because" individual investors pay attention to them, and "the market is made up of a host of individuals."

Precious Metal Tops $500 Mark,
And DJIA Adds 106.70 Points
To Close In on Key 11000 Level

By E.S. BROWNING Staff Reporter of THE WALL STREET JOURNAL

December 2, 2005

In a day of active trading across the financial markets, gold surpassed $500 an ounce, the Nasdaq Composite Index jumped to a 4½-year high and the Dow Jones Industrial Average surged 106.70 points.

The stock rally began with Tokyo's Nikkei index surpassing 15000 for the first time in five years. U.S. stock futures rallied before regular hours as the European Central Bank raised its benchmark interest rate to 2¼%. Higher rates could create headwinds for European companies. With the Federal Reserve expected to stop raising U.S. rates next year, analysts recommended a shift toward U.S. stocks.

Nikkei, Gold Hit Milestones; Dow Nears One

Japan's Strengthening Economy And Market Overhauls Propel Stock Index to Close Above 15000

By YUKA HAYASHI and CRAIG KARMIN Staff Reporters of THE WALL STREET JOURNAL

December 2, 2005

The growing strength in Japan's economy sent the Nikkei Stock Average to a five-year high, zooming past the 15000 mark. Sustaining those gains will depend in part on whether Japan can keep moving toward U.S.-style practices for how companies and markets are run.

The Nikkei hadn't closed above 15000 since December 2000. Yesterday, the 225-stock Nikkei rose 258.35 points, or 1.7%, to 15130.50, leaving it up 32% for the year.

I guess I am in school but it hasnt felt like a "record profit" year to me. Perhaps there is a disconnect between citizen prosperity and corporate prosperity?

Dividends, Buybacks Set New Benchmark for Largess

As Corporate Coffers Swell, Holders Reap the Rewards; The $1,700-a-Head Bracket

By IAN MCDONALD Staff Reporter of THE WALL STREET JOURNAL

November 28, 2005

Cash-rich American companies are showering a record windfall on their shareholders -- and in the process stirring some concern about future growth of the U.S. economy.

This year, the companies in the Standard & Poor's 500-stock index are on track to pay out more than $500 billion to shareholders in the form of dividends and share repurchases, or buybacks, according to S&P. That's up more than 30% from last year's record -- and equivalent to nearly $1,700 for every person in the U.S.

The flood of dividends and share buybacks is a direct result of record U.S. corporate profits and is welcome news for shareholders, particularly because dividends are taxed at lower rates and share prices have been flat; since the beginning of the year, the Dow Jones Industrial Average has risen a paltry 1.4%.

Economic wealth is the great equalizer. Russia this year. China on the horizon.

The Russians Are Coming -- And They're Paying Top Dollar

By AVERY JOHNSON Staff Reporter of THE WALL STREET JOURNAL

December 2, 2005

The hospitality industry calls them "the next Japanese." They're Russians, and now that they can afford it, they're traveling overseas often and in style.

Wonder if this will actually happen. There is a sudden flurry of talk about changing the way our favorite government-supported monopoly, cable TV, is bought by consumers. I dont put much stock in the idea of the FCC doing anything pro-consumer, but perhaps market forces, ie competition from phone companies, will shake things up.

The Clinton's were too early in 1992 for the big health care debate. But pressures have kept building this past decade. How much longer can we go before we really HAVE to discuss the value of health care to a society and how much we can afford. I hope its not much longer.

State, Local Officials Face
Looming Health-Care Tab

Rule Requiring Disclosure Of Obligations to Retirees Could Force Painful Choices

By DEBORAH SOLOMON Staff Reporter of THE WALL STREET JOURNAL

November 23, 2005

A looming accounting change is forcing state and local governments to fess up to something that's been lurking on their books for years: Many have made costly retirement health-care promises without planning how to pay for them.

Under a new accounting rule, governments soon must start recognizing their long-term obligations to pay for retirees' health benefits -- and, for the first time, publicly disclose what it would cost each year to fund that liability.

For many governments, the promised amount is likely to be sizeable enough to prompt big changes such as cutting retiree benefits, borrowing money and diverting tax dollars from other spending priorities -- or risk a credit-rating downgrade that could significantly boost borrowing costs. Estimates of obligations for some states range from $500 million to as much as $40 billion.

"This is going to be a big jolt to many state budgets, and this problem is one that is not immediately resolved," said Cecilia Januszkiewicz, secretary of Maryland's department of budget and management.

But the dilemma for governments may be even thornier. Most states are legally required to provide some form of employee and retiree benefits for government workers, and changing or doing away with those benefits usually requires legislative action. While some local municipalities have more flexibility to change benefits, others must work through their state legislatures. In contrast, most public companies can easily trim benefits, especially those with weak or no union representation.

A few articles on the prices of precious metals. I was a bit surprised to learn that the demand driving up the price of platinum is diesel auto makers and not my wife's demand for jewelry. *phew*

Where will these prices go now?

Not housing directly but it does show the link between our current prosperity and home prices. Greenspan has talked a little about this issue. If spending money comes from assets/loans and not from salaries/cash, it's a big deal if those assets take a hit. It's a big deal...

Real-Estate Boom Soon May Sputter
As an Engine of Retail Sales

By RAFAEL GERENA-MORALES Staff Reporter of THE WALL STREET JOURNAL

November 28, 2005

Leading the worrywarts are economists at Goldman Sachs Group Inc. For several years, they have been closely watching what the firm dubs MEW, which stands for mortgage-equity withdrawal. It is the cash people extract from their homes by drawing on home-equity loans, "cash out" mortgage refinancing, or capital-gains earnings from real-estate sales.

Federal Reserve Chairman Alan Greenspan co-wrote a study in September that estimated Americans withdrew $600 billion in equity from their homes in 2004, or 7% of their disposable income. While economists at Goldman and the Fed came to similar conclusions in their studies, there were a few differences. Goldman estimates that consumers spend about 68% of the cash they extract through home-equity loans and refinancing and use most of the rest to pay down credit-card debt or invest. The Fed's 2003 report estimated that consumers spend about 51% of the cash they extract.

In other words, Goldman believes that consumer spending is even more closely tied to home equity than does the Fed. If Goldman is correct, that means the housing slowdown will have a bigger negative impact on spending and the economy than commonly thought.

Jan Hatzius, a Goldman Sachs economist, estimates Americans will withdraw $834 billion from residential real estate this year. That will fall next year, he says, to $758 billion and to $645 billion in 2007. "As households' cash flow goes down," Mr. Hatzius says, "spending weakens." That, in turn, will reduce economic growth.

A few weeks ago, I talked about the slow death of GM and the people who depend on US manufacturing. This week we have similar news from Ford.

While I am very pleased to see the decline of the SUV, I am less happy to see the further decline of our auto industry. I grew up in Michigan and it's already a much bleaker place than it was in my childhood with little hope of improvement. (Although i was intrigued by the idea of Toyota, a thriving car company, opening its next plant in Michigan.)

Ford Looks to Close Plants, 
Shed Jobs in Overhaul

Moves Seen as One Element Of Broader Strategy Review Amid Losses, Falling Sales

By JEFFREY MCCRACKEN Staff Reporter of THE WALL STREET JOURNAL

December 2, 2005

Weeks after rival General Motors Corp. announced plans to eliminate 30,000 jobs next year, some details are starting to emerge about job cuts and plant closings at the U.S.'s other big auto maker, Ford Motor Co.

Though Ford's plan, dubbed the "Way Forward," is still being formulated and is subject to change, the nation's second-largest auto maker is likely to shutter assembly plants in St. Louis, Atlanta and St. Paul, Minn., according to two people familiar with its product plans. Also slated for closure are an engine-parts plant in Windsor, Ontario, and a truck-assembly plant in Cuautitlan, Mexico, said these people.

Together, the plants employ about 7,500 workers, roughly 6% of the company's total North American work force. A Ford spokesman declined to comment on the plan, which is expected to be unveiled in January.

...

Yesterday, the company said U.S. sales fell 15% last month -- the worst of any auto maker -- and cut production targets for both the fourth and first quarters. (See related article1.) Especially hard hit were sales of trucks and SUVs. Ford Explorer sales have collapsed this year, falling nearly 52% in November from a year earlier despite an extensive redesign of the vehicle.

Ford once sold as many as 400,000 Explorers a year and ran two Explorer plants on overtime. This year, it will do well to sell more than 240,000 -- a single plant's worth.

"Gone are the days when we are going to sell 400,000 Explorers [a year] without incentives," said Ford sales analyst George Pipas, commenting on November's results. "It's sayonara."

Putting concern for citizens aside and thinking in economic terms however, we have an major oversupply of cars. I recently read someone's comment: "If GM stopped making cars, would anyone not have a car?" And of course the answer is no, they would just buy someone else's car.

If Ford and GM cannot make money and we have an oversupply of cars, would the industry be better off without one of them? (This is the same question the airlines are facing.) We talk a lot about our "free market" but we keep a lot of dying companies around on life support because its too hard to let go but that isn't necessarily the best thing to do.

I like David Wessel but wasnt too impressed with this WSJ followup on a previous article about job shortages.

Behind the Labor Shortage-Layoff Paradox: Lack of Skilled Workers




December 1, 2005

One story in The Wall Street Journal last week reported1: "Difficulty in finding enough skilled workers is hampering the ability of many U.S. manufacturers to serve their customers." On a facing page, another story2 said, "General Motors Corp. ... raised its job-cut target by about 5,000 to a total of 30,000, and said it will close operations at nine North American factories."

...

Two answers: One, manufacturers aren't investing enough in training. The National Association of Manufacturers survey found only 50% are spending more on training than they did three years ago. Two, manufacturing has earned a bad reputation, as it responds to globalization, competition and stockholders. Mention factory jobs to an American high-school student and he or she thinks about layoffs, benefit cuts and bare-knuckle union bargaining. No wonder so few want to grow up to be machinists.

While I agree that the skill-gap (and lack of training) is part of the problem, I think globablism is also playing a big part.

After all, if workers were really scarce, manufacturing wages would be rising rapidly -- and they're not.

This is a classic economics argument which I no longer think holds true. Wages dont rise from a shortage anymore because the economy is no longer a national game.

While there may be a national shortage of workers but there is no global shortage. If the costs of an end product cannot rise because of low-cost foreign competition, then the costs for making the product have be kept low. If domestic wages wont allow this, the company has to go to a global solution and by moving the work to less expensive countries.

In other words, in order to enjoy the cheap products we like, companies have to move our jobs to cheaper nations. While this trend has been going on for decades in the manufacturing realm, I think we have been seeing just the tip of this "global economy" iceberg. I fear a tipping point is getting near.

At times it can be fun to ponder how different things might be. As we get ready to tap ANWR and shove more oil money into the pockets of some perky oil corporation(s), it is worth giving a thought to what things might be like if our nation's oil went to our nation's citizens. (Imagine what our retirement benefits would look like if ALL our national resources went to benefit our national citizens? *phew*)

This idea was such a provocative affront to God, it caused Christian leader Pat Robertson to suggest assassinating (in a holy way, I am sure) the President of Venezuela, Hugo Chavez. In the meantime, quiet, unassuming Norway has been using its oil money to benefit its 4.6M people for years. As our country runs up its credit card bills as fast as the registers will allow, imagine sharing a $190B with 4.6M people...

It was nice to boost to my patriotic pride to see American companies head the "blood money" list at the end of the article.

I predicted that the dollar would fall this year and I was wrong about that. But I just cant see how the dollar can ever never fall enough to solve our trade imbalance.

Strong Dollar Scares a Few Bears

Recent Rally Has Some Analysts Thinking the Gains May Extend Into the Beginning of Next Year

By CRAIG KARMIN Staff Reporter of THE WALL STREET JOURNAL

November 14, 2005

Most everyone on Wall Street predicted the dollar's three-year bear market would get even worse this year. And, despite its impressive rally in recent months, most are again calling for dollar declines in 2006.

With the U.S. currency climbing to a fresh two-year high against the euro Friday and hovering around a 26-month best against the yen, there are nascent signs the bearish consensus may be splintering. A few analysts are even arguing that the dollar could strengthen further next year.

...

As Mr. Thayer's camp sees it, the driving factors behind this year's dollar rally should remain intact for much of next year. U.S. interest rates will stay well above those of its major trading partners, like Europe and Japan, and this will continue to attract foreign capital to higher-yielding U.S. assets. These foreign flows will support the dollar, keeping longer-term concerns about the ballooning U.S. trade deficit in the background.

Many analysts and economists can't shake their concerns about the U.S. structural imbalances. They suggest that the interest-rate story will run its course by the first half of 2006, when the Federal Reserve is expected to stop tightening, slowing the flow of overseas money. Then the market's focus will return to the trade deficit, where a weaker dollar is considered vital to correcting this imbalance because it would make U.S. exports cheaper and imports more expensive.

By next year, most U.S. companies will be finished repatriating their overseas profits to take advantage of a limited discounted tax rate. Analysts estimate that about $100 billion of these earnings had to be converted from euros or other currencies to dollars, and that these transactions are playing a role in the dollar's recent gains.

I despise these credit scores even as they grow in importance.

I dislike the lack of transparency, the lack of standards, the bizarre rules/algorithms which dont reflect good money management behavior, and most of all, the disregard of actual consumers. Businesses, not you and I, are the customers of this industry, a lesson one learns if and when they ever have a problem with their credit rating.

But since you cant beat them, one might as well understand them as best they can.

How to Boost Your Credit Score

Increasingly, Employers, Others Check Your Ranking; Do You Really Need That Store Card?

By CHRISTOPHER CONKEY Staff Reporter of THE WALL STREET JOURNAL

November 19, 2005

It might be the most important number you don't understand.

Credit scores -- the arcane calculations pored over by everyone from mortgage lenders to auto dealers to decide how much they're willing to trust you to pay them back -- are growing in importance as their use spreads beyond traditional lenders to wireless-service providers, insurance companies, and even employers.

Pressures have been building for a long time and big changes seem close at hand in the auto industry, a bell-weather indicator of US manufacturing.

Once upon a time, I was in college and totally panicked about choosing a career. Everyone told me "computers." Get a degree in computers and you would never be out of work... So i did.

Well it took me less than 10 years to prove them wrong.

There is no safety anymore and I think professionals are finally starting to feel that, even if they dont verbalize it. Companies just dont want to pay to train people today and the global marketplace of skills puts new pressure on wages. Guru's tell us to picture ourselves as "knowledge contractors" for "virtual corporations", in other words, protect yourself because no one else will.

While i think this is good advice, it is not the warm and fuzzy world of the 1950's we tend to hear about at election time.

Behind 'Shortage' of Engineers:
Employers Grow More Choosy

Job Hunters Face Long Lists Of Requirements as Web Brings Flood of Résumés

Two Hires From 158 Applicants

By SHARON BEGLEY Staff Reporter of THE WALL STREET JOURNAL

November 16, 2005

Many companies say they're facing an increasingly severe shortage of engineers. It's so bad, some executives say, that Congress must act to boost funding for engineering education.

Yet unemployed engineers say there's actually a big surplus. "No one I know who has looked at the data with an open mind has been able to find any sign of a current shortage," says demographer Michael Teitelbaum of the Alfred P. Sloan Foundation.

But for candidates facing 200-to-1 odds of getting the job, the struggle seems all on their side. "Companies are looking for a five-pound butterfly. Not finding them doesn't mean there's a shortage of butterflies," says Richard Tax, president of the American Engineering Association, which campaigns to prevent losses of engineering jobs.

Four perky articles on bonds and the trade deficit: "Natural corrections", "headaches for homeowners", "shun housing stocks", and falling interest in buying US Treasury bonds. On the positive side, they say than an "inverted yield curve" (when short term rates are higher than long term rates) doesnt ALWAYS presage a recession...

Three articles this week on the housing bubble. The first article talks about one of the contributing factors to the bubble; the other two articles talk about changes stemming from higher interest rates.

I'll say one thing about the President: He thinks big and likes to set records. If he can break $617B this year, I say we go for a trillion next year!

Seriously though, at what point does this trade deficit become a real problem? Every year of the Bush presidency, the gap between the things we sell to other nations and the things we import from other nations grows larger. So far this issue just seems like more meaningless numbers to the American public.

I say meaningless because, like our embarrassingly low savings rate, trade numbers dont cause anyone to change their behavior. But one cannot borrow forever. At some point the bills come due and those bills to finance our debts are paid with tax money.

No one is going to want to raise taxes to pay our interest payments but we seem to make fewer goods in this country every year so what will ever happen to reverse the trade deficit? Monthly exports are about $100B and imports are roughly 70% higher at $170B. That's quite a gap.

Three articles today on global trade: Taxes, farm subsidies and the debate about whether trade improves the lives of average people.

It's funny. Every time i read articles like these, I think about the people who chant "free trade." Given all the rules and restrictions that exist, i wonder how anyone can get away with calling any of our systems "free".

There are big changes afoot in the investing world. The WSJ has a new series that examines the effects of cheap money, low interest rates, and the lengths (and risks) huge funds of investment money will take to find a return.

One lesson to remember is that investors never remember lessons. Expect more bubbles and more busts because the system clearly favor risks over wisdom and the speed of capital flows has never been greater.

Whew! What an insane amount of news this week. Miers resigns, Libby indicted;Rove not indicted, Alitto nominated, bird flu preparations and in the middle of all that, an announcement on tax reform.

Since it sounds unlikely to pass, it may not be worthwhile paying attention to the proposed reforms but for those who are interested, this is a good summary/overview article. I particularly liked the summary table although i question that these proposals are class-neutral. They definitely look like they will lower my deductions and raise my taxes although I am pleased to see the home mortgage deduction curtailed.

Yesterday i had the opportunity to hear a very interesting speech: "Flying Blind: Strategy and Competitiveness in a World of Global Over-Supply" by Prabhu Guptara.

Mr Guptara's premise is that the world (governments, businesses, and people) are flying blind -- we are having to make decisions about a future that no one ever predicted and phenomenon that have never happened before. Not only do we not know what is coming next and have no historical precedents to work with but most people are simply ignoring the issues and avoiding decisions as long as possible.

Some of the global trends that he mentioned include:

• Economics is based on a model of scarcity. The Western economies however are suffering from oversupply and shrinking costs. Not only do we have more and more products to choose from every year but their costs keep dropping. Instead of scarcity, our problem is what to do with all the stuff especially when it is thrown out as trash, ie last years model cell phone and all the packaging for everything.
• Economics explains bubbles and busts as a symptom of poor information. Traditional economic theory predicts that markets should be more stable than ever because today's economies have more transparency and available information than at any time in history but the reality is the opposite, more instability than at any time in history.
• There is a huge amount of capital flying around the world looking for something to buy. This kind of capital flow is unprecedented. This pool of global capital is pushing up prices and creating bubbles in all asset categories even as it ignores traditional values of risk. Ignoring risks combined with the speed at which this capital can move creates fiscal crisis like the Asian Flu. (Ironically, the WSJ started a series of articles called "Awash in Cash" on this very topic on Wednesday 11-3-05.)
• Traditional systems (governments and business) are struggling to cope with changes in the emerging global system. Prabhu argues that none of them are really dealing with strategic issues that will emerge over the next 50 years and that these organizations are suffering from strategy paralysis. They have strategy groups but they dont actually think strategically.
• Globalism is changing the natural pace of economic development for nations and for individuals. The rules of capitalism dictate that if two people do the same job and one will do it for less money, the business should choose the cheaper supplier. This fact is causing large scale migration of jobs from developed nations to developing nations, creating unemployment in one and massive growth in the the other. This migration has been going on in manual/unskilled labor for decades but suddenly engineering, medicine and other highly skilled jobs are also following this trend. Prabhu also pointed out that the increasing sophistication of robots being built in Japan will lead to massive unemployment as machines replace humans for service jobs.
• As businesses go global, mega-corporations are forming. The largest few corporations in any sector generally take 50% of the profits so they have the motivation and the funds to keep growing. Moreover as companies try to compete globally, they are incented to purchase large corps in new countries if not new industries. Most people are actually employed by mid-size companies not the large or small ones and it is these mid-size companies that are under attack. Small companies will always have some room to operate on the fringes but mid-size companies are being bought or put out of business by the mega-corporations.
• In general, Guptara questioned whether the status quo is desirable and whether these trends are unavoidable. Does business really need unending growth or is there another viable model? Are national government systems capable of wise global decisions or are they mired in local issues? Should NGO's, governments, business and citizens be fighting each other and will that conflict lead to the best decisions?

Should companies bear the healthcare costs for citizens? Does making companies pay for healthcare put an unfair burden on small companies (who dont have enough workers to amortize the costs) and on old companies (who have too many retired workers to pay for)? Does shifting the burden of health care costs onto employers make them even less competitive in the global marketplace?

Would it be better for healthcare to be a citizen's right, provided to every citizen and paid for every citizen by the federal government? Should health care be a matter of social welfare like the freeway system or national defense?

I was surprised by the bankruptcy of Delphi but the fate of those US workers and retirees looms in my mind as a matter of great significance. The financial status of GM and the other US auto manufacturers could be the tipping point on the health care debate in our country. The competitiveness of Detroit has been on a slow simmer for years but it feels like it is finally starting to boil.

As GM continues to lose billions of dollars a year, their main complaint about why they cannot compete is the cost of healthcare, largely for retirees who no longer even work for the company. What will it take before politicians do something the people can support about healthcare in this country?

Step into the WayBack machine for a moment. Clinton was in the White House and the Treasury concluded that we would not need 30 year bonds anymore because the government was running a budget surplus for the foreseeable future.

A few years with that Harvard MBA at the helm and the 30 year bond is back with a vengeance.

This article just made me think of the recently passed "energy bill" chock full of tax breaks. It's nice to see our tax dollars well spent by Republicans who constantly harp about spending our tax dollars well. After all its MY money, right?

So much for my sleepy ole' tax liens.

This is actually rather funny :)