Posts Tagged ‘recession’

Credit Cards – Regulation for Regulation’s Sake

April 23, 2009

Today, President Obama is meeting with the CEOs of credit card companies, in an effort to protect consumers from rising rates and high fees.  Both the House and Senate are currently working on versions of such a bill.

I agree that a simple law, stating that credit card companies have to inform you when your rate increases and a chart showing the fees you could incur if you missed a payment or went over your limit, should be welcomed by consumers.  Right now, all you get is a little “average daily rate” table but it doesn’t tell you if your rate went up or down.  

However, the need for the government to enact laws to “protect” us are insane, and another example of the government meddling too much in private affairs.

Really, who’s fault was it that we ran up so much credit card debt?  Part of the blame has to fall on the card companies for giving cards with high limits to just about everyone.  The problem was that they were able to securitize their loans and sell them on Wall Street.  So the card companies were just intermediaries between the consumer and Wall Street.  They bore almost no risk.

A large portion of the blame has to fall on the Federal Reserve as well because their easy money policies allowed the card companies to just keep giving away money.  To stave off a recession after 9/11, the Fed kept rates too low for too long, pumping up a huge spending/debt fueled bubble.

However, to act like consumers were just taken advantage of is absolute nonsense.   Even the most uneducated person knows what credit cards are and how they operate.   The card companies did not take advantage of them and did not force them to spend.  Consumers wanted instant gratification and put items on their credit cards they could not afford, with the intent to pay it off later.  Rather than saving, they took out a loan for all sorts of purchases.

Instead of putting regulations on the credit card companies for the sake of regulation, the government should put simple laws in place to inform consumers, and then back away.  By placing all of these restrictions on the companies, we are not solving the problem, which was too many unqualified people having high limit credit cards.  

Obama needs to let the markets work, and let the companies set limits and interest rates in line with the risk of lending people the money.  Until the government stops propping up the securitized credit card debt and meddling in the credit markets, no one will have a clear picture of who should be able to lend and borrow.  The longer the government distorts the markets and meddles in private business, the longer the recession will last.

Obama’s Double Talk on Economy

March 14, 2009

When President Obama reassured China and the world that their investments in US bonds and the dollar were safe, he made the following quote:

“And that is not just in U.S.-issued treasury notes, but also in the private sector and the commerce and the industry that has made this the most dynamic economy in the world.”

If our economy is so great and dynamic, why did he just go about ripping it when he was pressing for his stimulus package?  Didn’t he say it was unsustainable and that we needed new clean energy jobs to take us into the 21st Century?  The double-talk from Obama is starting to get ridiculous.  With Bush, at least we knew where he stood.  Obama is a much smarter man, but he seems to be trying to please too many people.

Also, just to clarify things, our economy is not in great shape.  When almost 60% of our GDP has been fueled by spending, I don’t see how we’re in great shape.  This year, in order to make up for the lack of consumer spending, almost half of our GDP is predicted to come from government spending.  Also, we’ve had almost zero savings for the last decade, we have no manufacturing base, and we are up to our eyeballs in debt.  To me, that is anything but a dynamic economy.

We can fix the economy, but no one wants to re-route the ship.  Instead, we’re burning through trillions of dollars trying to keep it down the same path to oblivion.  We need savings and investment from the private sector to provide capital, and we need to start producing goods and services in the US.  We have the best and most skilled workers in the world.  We also have some of the best creative minds.  What we need is more competition to lead to better innovation and new products and skills to turn us around.  We need to strip away layers of government interference that burden businesses and hinder their ability to compete in the global market.

Obama really pushed hard for his stimulus package, telling us how bad of shape our economy was in.  Now that his stimulus isn’t really working, he’s pushing hard to tell everyone how great our economy is.  He needs to decide where he stands on all of this and provide a consistent message to the world.  We need a strong dollar, and we need to start producing and stop spending.  It can be done, but our leader has to come to this realization as well, and not believe the words coming out of his own mouth.

More Government Equals More Recession

February 22, 2009

The latest headlines have the government taking a larger stake in Citi, upping it’s share to 40%.  This is just going to stretch out the recession we’re in even longer.  If they are going to take a stake in the failing bank, the Feds need to stop taking baby steps and flat out nationalize already.

Of course, letting the banks fail and letting the free markets work is out of the question now.  The reason is that government intervention has eliminated failure as an option.  It’s a tangled mess that all went back to the original TARP plan, that in hindsight, looks like what we needed.

The entire problem with the system right now is that there is too much bad debt and malinvestment.  The original goal of the TARP was to eliminate this debt.  Instead, though, the Feds realized that if they actually determined the market value for these securities, a lot of banks would fail.  They then modified the TARP to give money directly to the banks, so they could offset their bad assets.  This failed because the assets were basically worthless and no amount of money could offset the malinvestment.

So, here we are, with the banks still in the same predicament, and the taxpayers on the hook for $300-$700 billion.  We don’t the exact number because the government lost count somewhere along the way.  Remember, as protection for the taxpayers, we got shares in the banks.  So if they fail or get nationalized, we lose all our money.  Everyone else gets away for free while the taxpayers are left holding the bag.

Everyone talks about how bad the failures of Bear Stearns, Lehman Brothers, and Washington Mutual were.  Honestly, though, they weren’t that bad compared to the Great Depression II Obama is trying to create.  Shareholders lost everything, the bond holders got 20 cents on the dollar and a lot of people got screwed, but the failure was pretty orderly.  The bankruptcy system and the method of failure works.  Sure, it’s painful, but at least we know what we’re getting and we can move on.

We’re in a situation now where no one wants to let the banks fail, and we will bankrupt the nation and the taxpayers in order to make it work.  We’ve already been screwed over enough, and a couple more months of pain from the failure of a few more banks isn’t going to kill us.  Just get it over with so we can move on.  Don’t keep stringing this charade out.

The more the government gets involved, the bigger the conflict of interest and the bigger the problem gets.  We need the liquidate the bad debt.  Plain and simple.  We need failure and we need the free markets to work.  Why are we going to prop up these banks that made the terrible decisions that got us here?  It’s absolute nonsense.

Bank Bailout a Failure Already

February 8, 2009

New Treasury Secretary, Tim Geithner, is supposed to announce his new and improved Bank Bailout Plan on Tuesday.  Supposedly, the gist of his plan is to have private investors buy the bad assets from banks, with the US Government setting a floor for the minimum return on investment.

So, basically, the banks will be able to unload their assets on investors.  Then, when the assets prove to be worthless, the Federal Government will backstop the deals.  This results in the losses being shouldered by you and me, the American taxpayer.

First, some comments on the plan in general.  Why will someone buy these assets if the government is already setting a floor price?  Why not just buy them for that floor price amount?

Also, this plan seems to allow the Wall Street firms and big banks to get out of this unharmed.  That makes no sense.  Why do they get to unload all their bad investments, but homeowners across the country are stuck with upside down mortgages?  Wouldn’t this money be better served attacking upside down mortgages?  Those are the root of the problem.  Bailing out the banks is just treating a symptom, but not the real problem.

If you step back though, and look at this from the bigger picture, you realize that this plan is going to fail already.  There should be one goal and one goal only right now:  Liquidate the Bad Debt.  Don’t move it around, don’t artificially set a higher price for it.  Just get rid of it.

If the banks had been required to declare bankruptcy before getting government help (like was done in Sweden), we’d be on our road to recovery by now.  The pain might have been a little worse, but it would have been short lived.

Instead, we have spent the last four months throwing almost $2 trillion around, with nothing to show for it.  We might have “staved off a financial collapse,” as the pundits like to say, but who’s to say it’s still not going to happen?  The bad assets are still there, and they are getting worse!  We might have just prolonged it by four months and dug a deeper hole from which we have to get out.

Currently, the actions of the government are making a bad situation worse.  We have attacked this crisis without any sort of plan, and we have changed course too many times.  When will we learn that we are going to have to take our medicine?  Actually, the American public already has.  We are feeling this more than the elite in Washington are!  How bad do you think Geithner is feeling this when he makes enough to owe $34,000 in back taxes?  That’s a lot of people’s yearly salaries!

We have learned to deal with this recession and just want it to be over.  Instead, our leaders are trying to make themselves feel important and are trying to “save us.”  Right now, we don’t need saving.  We need the government to get out of the way and let the banks fail.  After that, the Feds and investors can step in to help rebuild our economy.  Until they let that happen, though, we’re just in for more pain, more recession, and more government failure.

Too Much Stimulus Too Late?

February 8, 2009

There’s been a lot of talk this weekend about Obama’s stimulus plan, which is set to be voted on this week by the US Senate.

While Obama was slow to unveil his plan, and now Congress has delayed the passage, we’ve all gone on with our lives.  We might not be making as many big purchases like cars, plasma TVs or ATVs, but we are still getting by.  The standard of living has been adjusted, but it’s not the end of the world.

The question now is if need such a huge package anymore.

Sure, the jobs picture is bad, but will adding jobs building roads in Montana and filling potholes in the middle of nowhere really “stimulate” the economy?  Will out of work people be willing to move and perform manual labor instead of collecting their unemployment checks?  How can we create jobs when we are still supporting these people on extended unemployment benefits?

What we really need right now is more money in the pockets of individuals and businesses.  All of this stimulus is going to be funded by taxpayer dollars in the first place, so why not put the money back in our pockets?  I’m not talking about the nominal $14 a pay period that has been hyped up either.  Why not cut our taxes in half or more?

This will allow business to invest in employees, new equipment, or shore up their balance sheets.  It will allow consumers to make larger purchases, pay off debts, or spend a little on non-essential items.

Instead, we are going to take the tax dollars of those that are still working, to pay someone minimum wage fixing potholes across the country.  The whole package is a trillion dollar “bridge to nowhere.”

If we want to invest in alternative energy, pull that out and make it it’s own bill.  Don’t co-mingle it with all sorts of ill-advised programs.

We need to start questioning the plans of the flawless new President.  Instead of Hope, Change and Progress, this looks a lot more like Desperation and Socialism.  All of these programs will be funded with our tax dollars, whether we like it or not.  This is taxation without representation, and one of the reasons we rebelled from the British.  As Americans we should be outraged, but instead we are placing faith in the new President because he gives fancy speeches.  Personally, I’d like to have that money in my pocket, not in the hands of bureaucrats building their pet projects.

The Myth of Pent-Up Demand

January 22, 2009

Over the last two days, I’ve been involved in three conversations where the person I was talking to said that people aren’t spending money because they’re scared and because of how the media is portraying this financial crisis.

Is that what everyone thinks?  That if the media was saying “go spend money” they’d go out and do it again?

I think it’s a bigger problem than that.  The economy has been supported by consumer spending for years, and now, the consumers have finally run out of money.  As the bubble grew, their sources of disposable income grew.  First, it was credit cards, allowing people to buy what they wanted and worry about paying for it later.  The last straw was using their homes as ATMs, allowing them to cash out paper gains to buy big ticket items like flat screen televisions, dirt bikes, quads, and toy haulers.

When two-thirds of your economy relies on consumers to spend money, this was inevitable.  Instead of developing sustaining industries, we shipped all our production overseas so people could buy more stuff.  Now we’re paying the price.

I really don’t see any way of this turning around either.  Things are going to have to change dramatically and our need for instant gratification is going to have to be replaced with thrift and savings.  It’s not like all of a sudden, a switch is going to flip and people are going to start using their credit cards again.  They are probably maxed out to begin with.  They won’t be able to fuel their purchases with their home’s equity either.

All of the fixes the government has tried so far have done nothing to help this problem either.  It’s our fault for making bad decisions, but they’re more than willing to throw billions at the banks for even worse decisions.

Our consumer based economy is failing, and we’re going to have to adjust our economy and our standards of living in order to come out of this ahead.  People aren’t spending money because they are already in too much debt, or they don’t want to go further into debt.  The media and this “pent-up demand” have nothing to do with it.

Plunge In Consumer Prices Decoded

December 16, 2008

I’m sure you’ve heard a lot today about the “plunging consumer prices” in the news.  There’s a huge headline at the top of Marketwatch, Yahoo Finance, and Google News.  

The problem is that these numbers are reported linking them to the Great Depression.  This is completely different, but to the lay person, it looks like they should be scared and nervous.  No wonder there is no confidence right now.

Here’s a story from the AP, with my comments:

Inflation plunges by record 1.7 percent in November, housing starts fall more than expected


WASHINGTON (AP) — A record plunge in consumer prices in November puts pressure on the Federal Reserve to act decisively to guard against a debilitating bout of deflation.
BE:  What is so debilitating about this episode of deflation?  Please explain to me, AP, why this is so bad?  Is paying less for gas so horrible?  How will this adversely effect businesses?  Also, why do they report deflation in consumer prices, but inflation in core prices, which exclude food and energy?

The Fed wraps up a two-day meeting Tuesday. Economists expect the central bank to cut the federal funds rate, already at a low of 1 percent, by another half-point in an effort to keep the recession from worsening.

BE:  How about you report on how well the Fed’s easing of the monetary policy has worked so far and then talk about this “effort”?

Consumer prices, an inflation barometer, last month fell by the largest amount on records going back 61 years as energy costs posted nearly double the decline of the previous month, the Labor Department reported Tuesday.

BE:  Oh, now you tell us how the deflation you spoke of earlier is directly tied to falling energy costs.  When gas prices were skyrocketing, you told us inflation was in check because if you excluded food and energy, prices weren’t going up.  Now, you want to show how bad deflation is, and you include these items.  What kind of double standard is this?


Prices fell 1.7 percent, surpassing the previous record decline of 1 percent set in October. It was the largest one-month decline dating to February 1947. Core inflation, excluding food and energy, showed no increase at all in November after a 0.1 percent drop in October.

BE:  Here’s the part about core inflation, and it’s flat!  Well, that sure looks a lot like “deflation” if you ask me!  There is a huge correction going on in the commodities market right now, and that is the whole reason for the flat reading.  With the amount of money we’re printing, we should still be worried about future inflation.

The overall slide in prices reflects the big drop in energy costs in recent months. After hitting a record at $147 per barrel in mid-July, crude oil has fallen by $100 per barrel since then, pushing down the price of gasoline from a record $4.11 per gallon in July to $1.34 in the most recent Energy Department survey.

In other economic news, the Commerce Department reported that construction of new homes fell in November by 18.9 percent, the biggest drop in a quarter-century. The steep decline pushed construction down to a seasonally adjusted annual rate of 625,000 homes, the slowest pace on records dating to 1959.

Only a few months ago, some anticipated that the Fed would start raising interest rates to battle a prolonged surge in energy costs. But since September, the Fed’s focus has switched to trying to prevent the worst financial crisis since the Great Depression from pushing the country into a deeper recession.

BE:  And it has completely failed so far.  Most recessions last 10 months, and we’re a year into this one and probably haven’t hit bottom yet.  Good job, Ben, pat yourself on the back.

Energy prices fell by 17 percent in November, nearly double the 8.6 percent decline in October. Both declines were record drops.

Food costs posted a modest 0.2 percent rise in November, the smallest increase in eight months.

The 1.7 percent decline in consumer prices was larger than the 1.2 percent drop that economists had been expecting. It left inflation rising over the past 12 months by 1.1 percent, the smallest 12-month increase since June 2002. Inflation has not risen at a slower pace since a 1 percent rise in the 12 months ending in February 1965.

BE:  Again, why is this bad?  Why is it bad that the consumer can buy more goods for less money?  I love having to pay $25 to fill up my tank.  A few months ago, I was paying $40 for less than half a tank of gas.  All of our recent inflation/deflation has been energy cost driven.  

Inflation is good for the government because they can fund their ever increasing programs without raising taxes.  However, inflation is a hidden tax that erodes the value of our dollars.

New car costs fell by 0.6 percent in November, underscoring the troubles facing auto companies as demand plunges in the weak economy. General Motors, Chrysler and Ford are appealing for a government lifeline, and the Bush administration has said it is considering what type of support to provide.

BE:  Supposedly, deflation caused by people waiting for a better deal to come along is a detriment to our economy.  However, with auto sales, it’s not that people are waiting for a better deal, it’s just that they don’t want to commit to such a big ticket item when times are tough.  The lower price reflects dealers trying to clear out inventory.

Airline prices fell by 4 percent in November, reflecting the big declines in fuel prices, while clothing costs were up 0.3 percent, a rise that followed a big 1 percent drop in October.

BE:  Airline prices dropped because of lower fuel costs, which means we’re counting the same energy prices twice.  This shows how flawed the inflation/deflation calculations are.  Also, the change in clothing costs shows the month to month volitility that appears in short term measures.  We need to look at inflation over the long term to really see it’s effects.

An Excellent Essay on Inflation and Deflation

November 19, 2008

Today, the big headline was that consumer prices dropped by the largest amount in 61 years.  I’m not sure what measurement they were comparing but that is a pretty significant event.  The funny thing though, is that when we talk inflation, the headlines are always for “core” inflation which subtracts food and energy.  However, these deflation headlines used the CPI number, which includes food and energy.  So it’s definitely selecting the statistic that better suits your argument.

This made me ask myself, “What is so bad about deflation anyway?”  Why is it bad that the price we pay for something goes down?  This lead me to a search on google and I came across this very informative essay entitled “Why So Much Concern About Price Deflation” by Richard E. Wagner, Ph.D, who is Holbert Harris Professor of Economics at George Mason University.  This was written in 2002 during out last economic downturn.

“We recently have been hearing a lot about the threat of deflation, doubtlessly inspired by recent falls in indexes of consumer and producer prices. The Great Depression of the 1930s comes to mind when people speak of deflation. No one wants another Great Depression. Nearly everyone would prefer the double-digit inflation of twenty years ago. This preference is reasonable, but it does not follow that deflation is bad. Whether deflation is bad or good depends on why prices fall.

The Great Depression of the 1930s is the prime example of the bad kind of deflation. The Federal Reserve allowed the supply of money to shrink by thirty-five percent between 1930 and 1933. This gigantic destruction in the supply of money sabotaged markets throughout the land. Consumers could not afford to buy products, businesses could not sell their output, and workers could not find jobs. All of this happened because the Federal Reserve failed in its fundamental task of keeping the stock of money intact. This kind of demand-side deflation is clearly an economic scourge of major proportions.

Deflation can also result for supply-side reasons. This type of deflation is a radically different type of animal, and is a good one to have around. It is the kind of deflation that occurred in our economy after the Civil War and existed pretty much continually until the creation of the Federal Reserve in 1913. As productivity increased, consumer prices fell. Workers did not receive the continual wage increases that they have received during our recent inflationary times. Their well-being increased nonetheless. Steady wages with falling prices is a fine recipe for progress. This is, moreover, a recipe that works to the advantage of retired people on fixed incomes. With moderate deflation, a fixed sum for retirement goes ever farther because deflation allows retirees to share in the gains from rising productivity.

There is all the reason in the world to avoid a demand-side deflation. There is no reason at all, however, to oppose a supply-side deflation. No reason, at least, for ordinary citizens to oppose a supply-side deflation. It may be different for politicians and government officials. They are in a different situation with respect to deflation than are ordinary citizens. Inflation allows for increases in government budgets that would never be possible under deflation. Sustained inflation entered the American economy only with the creation of the Federal Reserve in 1913. Until then, the federal government claimed less than ten percent of the output of the American economy. It was only after steady inflation became a way of life that government’s share in the economy grew and now approaches fifty percent.

There are many reasons why inflation promotes growth in government. One of them is that inflation increases the share of total income that is collected through ordinary taxes. A ten percent increase in income increases collections of income tax on the order of twelve percent. This ability of tax rates to rise with inflation is referred to as “bracket creep.” Inflation pushes people into higher rate brackets, where they pay larger shares of their income in taxes.

Besides bracket creep, inflation is also a type of tax in its own right. The inflation tax is a form of public counterfeiting that goes by the technical name “seigniorage.” Seigniorage is the difference between the value of the money the government creates and the cost of creating that money. It is the government’s profit from creating money, and it is of the same character as the profit that a private counterfeiter makes. It costs almost nothing for the government to print another $100 bill, but this new bill is as valuable as all other $100 bills.

To be sure, the collection of this seigniorage tax works differently in different nations. In some nations, the Treasury and the central bank are joined. In those places, the government can finance its activities directly by creating money. It is different in America because the Treasury and the central bank are distinct. The government can still finance its activities by creating money, only this happens indirectly in two stages. In the first stage the government runs a deficit; in the second stage the Federal Reserve buys government bonds. The end result is indistinguishable from the Treasury directly creating money to finance its activities.

Supply-side deflation would put an end to the government’s ability to finance its activities through monetary expansion as well as through bracket creep. It would also eliminate the need for all of the various forms of indexing that have arisen to deal with inflation. The only losers from deflation would be those who live off the tax revenues that inflation generates.”

From reading this, I think we are experiencing a combination of the two types of deflation.  We have demand side deflation problems with the current credit crisis and the lack of lending.  However, I really do not believe that goods are so unaffordable that it is dragging prices down.  It is more a lack of confidence and uncertainty that is driving the lack of consumer spending.

We currently have more supply side deflation, where people are cutting back and there is an over-abundance of goods and an unwinding in the commodities bubble.  In order to move goods and equalize supply and demand, prices are dropping.

We have just been convinced to think deflation is a bad thing associated with the Great Depression.  However, currently, deflation in consumer prices is great.  We need lower prices for gas, food and our overall living expenses.  As you read above, the main benefactor of inflation is the government, who has us convinced deflation is bad.  They also experience no benefits from deflation.

What Happened to the Bailout?

November 6, 2008

So, after the big uproar over the need for the $700 billion, tax-payer funded bailout, I’m wondering what happened to it.

Didn’t Paulson warn us about falling into the “abyss” if it wasn’t approved?  Didn’t we fall into that abyss anyway?  We approved the bailout and a few weeks later, our stock markets tanked 25 percent!  

Seriously, what the hell is happening?  Have they spent the money? Have they done anything?  Have they even named who’s in charge yet?  

This bailout reeked of an exectutive branch power grab from the beginning, and now that’s all it looks like it was meant to be all along.  If this bailout was so urgent, wouldn’t they have done something by now?  Before the bailout, they were throwing billions of dollars around, taking over Fannie and Freddie, AIG and arranging deals between banks.  Now that they have the bailout?  Nothing!

The real goal of the whole $700 billion bailout was four words:  Office of Financial Stability.

While it might not sound that important, it gives the Exectutive Branch of our government the right to intervene in the financial markets without any sort of Congressional review.  While the Federal Reserve has been intervening in our markets for decades, it was technically still a private bank.  The bailout puts the power directly in the hands of unelected, Presidential appointees.

Look at all of the power we have handed over to the government recently.  After 9/11 they created the Department of Homeland Security and the National Security Agency, who have the power to search your internet records and listen to your phone calls without a warrant.  Also, Congress let the President have the power to go to war without officially declaring war.  Now we are handing the Exectutive Branch the power to intervene in our markets in the name of “stability”.

How much bigger are we going to let our government get?  This country was founded on principles of limited government.  The Colonies were seceding from a monarchy.  The last thing they wanted was a strong central government that governed from thousands of miles away, but that is exactly where we are at and where we are headed.  We can turn this ship around, but we need to get back to basics and start following our Constitution and stop giving the central government more and more power.

A Nation Addicted to Two Things – Greed and Debt

October 7, 2008

As you know, I’ve been reading and writing a lot about the Bailout Plan and all that’s wrong with it.  You can read my other posts for my feelings on the recession we’re in now.

The more I read, though, the more troubling I find the way we do business.  Businesses need access to credit to meet payroll needs and to pay for operation expenses.  Individuals need access to credit to fulfill daily needs and for big purchases like refrigerators, TVs, and cars (ok, cars I can understand, but a $1000 fridge?).

What ever happened to SAVING?

I try and live within my means, avoid using credit cards (I do have a balance, argh), and save a few bucks for rainy days or big purchases.  Even though I am saving a little, I feel that I’m not doing enough.  I don’t want to be in debt, and one day, I’d like to own my home outright and not have a mortgage payment.

I just can’t fathom how others can live by running up more and more debt, saving absolutely nothing.  In the end, you have to repay those debts, and servicing them can cost you hundreds or even thousands of dollars a month.  

Until we get out of this mode of greed and instant gratification, sacrificing savings for more and more debt, the problems we are facing now will continue to persist.  We do need a bailout, not one of Wall Street, but one of the way we look at our finances and how we live our every day lives.  We need to save and not spend more than we make.  That’s why they need to let this recession run it’s course.  It will teach everyone, from Wall Street to you and me, that running on debt is destructive and that savings and self control is needed.