On the eve of the 2008 market collapse, September 14th, I wrote more posts that Sunday than on any other day. Specifically, I was looking at the elections and the financial institutions that were primed to collapse on Monday. I also wrote about something that was perplexing me. The Federal Deposit Insurance Corporation, which insures our bank deposits, was going broke.
I really wasn't surprised about the financial institutions going under. I had been talking about their problems on my radio program for a year, and was writing about it in real time for my book. But I hadn't been following the FDIC, so if it needed funds I was caught off guard ... Well, I am no longer perplexed by the FDIC's lack of funds.
Via the Boston Globe we're learning that, thanks to Congress, many banks have not been paying their FDIC dues for the past 10 years (which, no doubt, helped their bottom line). Here's the Boston Globe:
The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.
How nice. You know, I think I'll just stop paying my insurance premiums, and ask my insurance company to pick up my tab when I get sick ...
The NY Times has an excellent article on finance in today's paper located, curiously, under it's "science" section. Why science? Because the article discusses how physicists and their hard sciences brethren flocked to Wall Street in the 1980s and 1990s and became the analysts who created the novel financial instruments that helped get us into our current economic mess.
In a few words these "quant geeks" used novel financial instruments to create elegant models that made sense on their computers but, as we know now, had little to do with reality. There's a reason these guys ended up getting it wrong. Like Rumplestiltskin they were, in effect, trying to turn straw into gold.
Rumplestiltskin, as we know, is a child's fairy tale. What many of us don't know is that Rumplestiltskin is an exaggerated caricature of the ancient alchemists, who searched centuries for the Philosopher's Stone, a mysterious substance which the ancients believed had the power to turn base metals, or other materials, into gold. Even Sir Isaac Newton is said to have dabbled (secretly) in alchemy in search of the Philosopher’s Stone.
Sovereigns and alchemists alike believed that if the Philosophers’ Stone could be found, or if the right chemical reactions could be produced, their worries about money and finances would be solved. So it was with Wall Street and their new alchemists from the disciplines of physics and mathematics.
Unfortunately for us, our modern day Rumplestiltskins - the quant geeks and their Wall Street patrons - are now just starting to realize what the ancients learned long ago. Products that are unstable and/or worthless are just that, unstable or worthless.
This week Congress will take up discussion of legislation that will make it easier for workers to unionize. In a few words, the legislation would allow workers to simply sign a card demanding a union. Employers don't like it.
Employers would prefer to have mandated elections because they give employers time to bring in anti-union teams, fire organizers, and generally intimidate the workforce. Passing this legislation would be a first step in helping to address the imablances that have grown between management and labor over the past 29 years; imbalances which have produced stagnant wages for America's middle class, bloated CEO wages, and now - with the economy collapsing - growing tent cities that resemble the Hoovervilles that dotted the American landscape almost 80 years ago.
How badly needed is this legislation? Pay gaps between labor and management have grown so out of hand that wage gaps are as bad as they were when Herbert Hoover left office. Today, as more and more observers are pointing out, labor is now confronting the worst economic situation since the Great Depression.
What follows below is an edited excerpt from Chapter 10 of my forthcoming book, The Myth of the Free Market: The Role of the State in a Capitalist Economy. It explains, in part, how labor has seen its economic position deteriorate over the past 29 years to the point that more and more families are now 1 or 2 paychecks away from being out on the street. FYI, I have 5 charts and graphs in my book - scheduled for release this week - that provide figures for what's presented in this section. If I can get them on a pdf file I will post them later ...
STAGNANT WAGES AND DEBT
Among the forces that fed the market exuberance of the late 1990s and the early 2000s were cheap credit and debt. By feeding consumption, credit and debt fit the goals of both major political parties in America, but for different reasons. Democrats saw the democratization of credit; Republicans saw increased profits. Few thought it was necessary to take a look at collapsed savings rates and soaring debt levels in America . . . rarely was this question asked: What are the factors that cause many ordinary Americans to borrow beyond their means and that lead many into bankruptcy?
We know from Chapter 2 that divorce, job loss, and catastrophic illness cause 90 percent of all bankruptcy filings in America. But we need to shift the issue from uninvited life events to specific, policy-driven areas if we want to understand why Americans have been nudged to take on more and more debt over time. This means looking at wages in America.
In a 2007 speech, Federal Reserve Chairman Ben Bernanke considered incomes and focused on the growing gap between America’s middle class and the financial elite. Bernanke reported that, in spite of rising labor productivity and technological advances—which usually find their way into growing wages—income gaps had increased significantly in America since 1979 . . . perhaps his most significant observation was what he had to say about the impact that organized labor has on wages. According to Bernanke, unions not only reduce wage inequality, but at least 10 to 20 percent of wage inequality in America can be attributed to the decline of unions.
This is important, because organized labor was put on the defensive after Ronald Reagan entered the White House by an alliance of convenience between corporate America and political conservatives. According to Businessweek, things worked out so well for industry that as “[c]orporate America has perfected its ability to fend off labor groups” labor union membership dropped from 20.1 percent of the labor force in 1983 to 12 percent by 2006 . . . Economist, and Nobel laureate, Paul Krugman explains what happened:
It’s often assumed that the U.S. labor movement died a natural death, that it was made obsolete by globalization and technological change. But what really happened is that beginning in the 1970s, corporate America, which had previously had a largely cooperative relationship with unions, in effect declared war on organized labor . . . hardball tactics have been enabled by a political environment that has been deeply hostile to organized labor, both because politicians favored employers’ interests and because conservatives sought to weaken the Democratic Party. “We’re going to crush labor as a political entity,” Grover Norquist, the anti-tax activist, once declared.
The relationship between corporate America and the Republican Party has reaped financial benefits for America’s business elites and political payoffs for Republican political candidates. But it has been financially devastating for America’s working class.
Since the late 1970s, inflation, declining or stagnant wages, weakened unions, lax immigration policies, deregulation, and the challenges of having jobs shipped overseas have left ordinary Americans with an increasingly tough financial line to hoe. The arrangement, however, seems to have worked out well for America’s CEOs, who have seen their salaries rise in relation to the average worker: from a ratio of about 40:1 in 1980 to 262:1 in 2005 (other reports put the figure around 431:1).
Given that the federal government has been increasingly reluctant to intervene on behalf of labor over the past thirty-five years, ordinary working Americans have had to cope with rising costs and stagnating wages in a number of ways.
* Two-Income Households, 1970s: With the women’s movement came the rise of two-income households. Two working parents increased household income significantly.
* Credit and Charge It, 1980s: Americans began racking up serious personal debt in the 1980s when, as former Federal Reserve Chairman Alan Greenspan put it, “innovation and deregulation” worked to “expand credit availability to virtually all income classes.” At the end of 2008 total credit card debt stood at $969.9 billion (Graph 10.1).
* Decline of Leisure, 1990s: Although divorce and personal debt put a dent in disposable income, Americans began working more hours to make ends meet, even surpassing the Japanese in 1995.
* Household ATMS, 2000: To keep the American Dream alive, many Americans went on a borrowing binge, this time using their homes as ATMs.
With more and more households using their homes as ATMs, we can understand why home-owner equity in America was less in 2007 (at the height of the housing boom) than it had been seven years earlier. At the end of 2008 it was poised to drop below 50 percent for the first time since the government had started keeping track of this data.
The end result of stagnant wages, an increasingly hostile environment for labor, and easy credit was a savings rate that effectively stood at zero at the end of 2008. Not surprisingly, when the refinancing boom stalled because of plummeting housing prices and dried up credit markets, more and more Americans found other ways to cope with life’s expenditures—they began using “hardship withdrawals” to tap into retirement funds . . .
It's bad enough that Treasury Secretary Tim Geithner's performances in front of the media and Congress have been reviewed like a Sylvester Stallone movie without Rocky or Rambo in the title. Now Geithner's got the former Prime Minister of Australia, Paul Keating, ripping into his performance during Asia's economic meltdown in the 1990s - the performance that was presented to all of us as Geithner's "Rocky" moment.
How big are these developments? Think about it. Would you have gone to a Sylvester Stallone movie if Rocky and Rambo were somehow erased from your memory (yeah, I didn't go either, even with Rocky, but play along here).
The American Prospect's Robert Kuttner is even suggesting that we may have been sold a bill of goods. Helping to erase Geithner's "Rocky moment" is the fact that people like Kuttner are starting to look at Geithner's mentors, who (with the exception of Paul Volcker) are now in the financial dog house, and the fact that Geithner was head of the Federal Reserve's New York district office when the market meltdown began. In a few words, Geithner is slowly projecting like a bad Sylvester Stallone movie.
This is important because President Obama came into office with a distinct mission: calm the markets and set the stage for stability and growth down the road. Geithner's performances and his mentors are not helping him now. And it's getting worse.
Nakedcapitalism.com is pointing out that the bailout of AIG may simply be a way of funneling money into other market players, here and abroad. If we want to put this in a negative light, AIG is simply a front company - used as a clearing house for shoveling money into financial institutions who bought the toxic garbage (subprimes, ARMs, etc.) produced by Wall Street. Here's a list of companies, compiled by the Wall Street Journal, who have been paid off through AIG:
Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Calyon
Barclays
Rabobank
Danske
HSBC
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Wachovia
Bank of America
Lloyds Banking Group
The fact that this is a "Who's Who" list of global financial players is not as important as this: the bailout of America's financial institutions is slowly being exposed for being little more than a transfer of taxpayer money to the "Big and the Stupid" (sounds like a Stallone movie already) who made bad bets on bad products with money they didn't have. And Geithner was there, watching it happen.
It now appears that we're shoveling money into these global financial firms because, if we don't, the world will blame us for the financial disaster we're confronting because of how we exposed them to our toxic garbage. This is important because it suggests that the world is telling us that if we don't help rectify the situation with their banks they just might quit playing ball with us financially. This, in turn, would force some real ugliness on the American dollar, and cause political panic as the dollar collapses around the world.
In a few words, we're doing this both to save our own skin, and because we want to maintain global political stability (trade partners that become trade competitors is usually a prelude to economic nationalism).
During the Cold War we paid for the defense of the West, and were able to convince the rest of the world to hold dollars. So from a political perspective what we're doing makes sense - even if we don't like bailing out stupidity and greed on Wall Street. There's only one problem here: We're no longer helping the world stave off the Soviet Union and communism (and, No, al Qaeda is not the greatest threat we have ever faced). The cooperation of our allies is now purely commercial and selfish. They want to keep our markets stable. If we blow it there's no telling what could follow.
So, where does this leave us? Here's what I see. President Obama is going to have to make a decision on Secretary Geithner within the next 3 months. If Geithner continues to come across as Sylvester Stallone Obama's going to have to reach for a political Robert De Niro for Treasury (is Paul Volcker open to stepping in?). Here's why. We're eventually going to have to nationalize the failing banks.
A Treasury Department that does little more than prop up the banks with trillions of dollars (there's at least $45 trillion in CDS counter party contracts) that doesn't reach U.S. consumers is simply not sustainable. Few will have much confidence in a partial nationalization game plan (or any Obama plan) if Geithner continues to falter.
What we're facing is too important to continue messing around with weak personalities and a steady drip of shell game AIG bailout stories. We need a Shakespearean performance from the Treasury Department on this one. At this point I'd even settle for the smoke & mirrors of a Rocky movie if it meant buying time for Geithner to grow into his position.
We simply need a better performance from Geithner.
Dead people are the newest frontier in debt collecting, and one of the healthiest parts of the industry . . . Improved database technology is making it easier to discover when estates are opened in the country’s 3,000 probate courts, giving collectors an opportunity to file timely claims. But if there is no formal estate and thus nothing to file against, the human touch comes into play . . .
Specifically, new hires at the company at the forefront of this growing debt collecting approach, DCM Services, are trained for three weeks in what the company calls “empathic active listening.” Their tactics are clear. “You get to be the person who cares,” according to training manager, Autumn Boomgaarden.
But caring is not the only tactic employed by DCM Services. They also prey on the next of kin's sense of spiritual responsibility for their dearly departed. As Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry put it:
"... we want the dead to rest easy, knowing their obligations are taken care of ..."
Where do I begin ...
You know, there was a time when the Catholic Church preyed on the emotional and spiritual weaknesses of the poor to induce payments to save the souls of the dearly departed. The payments were called indulgences. But they were also considered so vile and ghoulish that they helped create the conditions for the Protestant Reformation that brought brutal wars, and changed Europe forever.
- Mark
P.S. In the FYI category: In most states the next of kin are not legally responsible for any of the bills of the deceased.
Stewart deserves a medal for this STFU to market "analysts" Rick Santelli, Jim Cramer, and everyone else tied to Wall Street who missed the meltdown, and STILL act like they know what they're talking about.
For those of you close to someone whose home is under water (or is that upside down?) here’s an excellent Q & A article from the San Jose Mercury (thanks Mike). It answers some basic questions about the new federal legislation designed to stem the tide of looming home foreclosures. For some real life examples of how the program works out here’s a good NY Timesarticle.
In a few words, any chance of getting a home loan renegotiated begins with the stipulation that you must be living in the home that's tied to the mortgage you're renegotiating. There are two type of programs, the Home Affordable Refinance (HAR) program and the Home Affordable Modification (HAM) program. Both involve either reducing interest rates and, in some cases, the principal.
Your chances of getting your home loan refinanced under the HAR are GOOD/EXCELLENT if:
• Fannie Mae or Freddie Mac hold your loan.
• You have no equity and/or owe up to 105% of your home's value.
• You are considered a “strong borrower” or a good risk (you have a good job).
If the above doesn’t work, you MIGHT be able to negotiate a refinance under HAM if:
• You are a “strong borrower” who owes less than $729,750.
• You’re payments (taxes, insurance, etc.) currently eats up more than 31% of your income.
• You've had, or anticipate, a change in your financial situation (divorce, job change, etc.) .
• You have a lender that’s willing to renegotiate, which may mean credit counseling. This will be a hard sell if you are seriously under water (or are working with Countrywide).
You WON’T be able to get your home refinanced if:
• Your current home loan is for more than $729,750.
• You’ve had a significant jolt to your income and/or finances.
While this post is designed to provide information, I feel obligated to say the following (it is my blog) . . .
The crime in all of this is that Countrywide – which was one of the earliest chump companies to stick out its hand for a bailout, after dumping their toxic debt products on the U.S. taxpayer – is increasingly saying “No” to homeowners in trouble. They’re doing this at the same time that it’s former president,Stanford Kurland, is making a killing purchasing delinquent home mortgages for his new company (as I noted here almost a year ago), some times for pennies on the dollar.
Kurland was forced out of Countrywide for helping run the company into the ground, but not before he cashed out hundreds of millions in stock right before Countrywide took a hit in the stock market. Now he’s going to get rich(er) picking up the pieces. I don’t know if Kurland has a conscience, but I have to think there’s a special place in Hell for him (if you believe in that kind of thing).
On the (potentially) bright side for those left out of HAR and HAM, the House is going to discuss a bill that could give bankruptcy judges the power to change mortgage terms on primary residences, while protecting loan-servicing companies from lawsuits by investors ... many of whom recklessly “invested” anticipating big and forced payouts on adjustable rate mortgages, CDO buyouts, and CDS guarantees.
Stay tuned.
- Mark
P.S. Here's an excellent interactive from the NY Times which also explains the mortgage programs (click on the piece to expand).
In The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb tells the story of how we once understood the swan world. There was a time when we believed that it was made up of nothing but white swans, because that’s all we saw. Then came the discovery of the first black swan in Australia in 1697, and all we knew about the swan world changed. Taleb then tells us that this is how we look at and understand markets today. In a few words, what we see is a function of what we know about markets which – as we’re seeing today – is not much.
Part of the reason for this is that we are obsessively focused on efficient and smoothly functioning markets. We don’t make much room for human frailties, like greed and stupidity because we like to assume market players operate rationally. Today, like the discovery of the black swan, we are finding that we don’t know as much as we thought we did about markets. What we thought we knew has been collapsed by reality. Why? Because market players find it’s easier to place short-term gains ahead of long-term considerations, which leads them to do stupid things that affect us all. This helps explain why the ideas we have about free markets are, quite frankly, a myth (which I discuss in my book).
The cumulative effects of seeking favorable legislation, exploiting gaps in the regulatory system, or simply acting irresponsibly is neither pretty, nor predictable – as the collapse of AIG illustrates. The activities pursued by AIG not only undermined market expectations but make a mockery of capitalist markets and our free market beliefs.
This is important to understand because if we don’t know as much about capitalist markets as we thought we did, you can be assured that the people talking about creeping socialism have no clue what they’re talking about. How can they? In order to understand socialism you have to understand capitalism (ask me later about private ownership, the existence of free labor, and the allocation of resources via the price mechanism).
For the record, here’s a socialist primer: The state ...
(1) seeks to own the means of production while controlling the price mechanism,
(2) promotes guaranteed (and egalitarian) forms of compensation, and
(3) curtails individual rights by cracking down on unwelcome dissent, stifles the press, and punishes political enemies.
What we are currently living through is a Black Swan moment, made worse by inarticulate observations of impending doom. In order to fix what ails us we need to embrace the Black Swan and ditch the doomsayers.
- Mark
For those of you who want to read more, see NPR's interview with Taleb and his intellectual mentor, mathematician Benoit Mendlbrot here. They think what we're facing could be bigger than the Great Depression.
Insurance giant AIG continues to flounder and just posted the largest quarterly loss in U.S. history: $61.7 billion. Not surprisingly, they're now coming to the U.S. taxpayer for another bailout.
After already having provided a $60 billion loan, $40 billion in the form of purchases for preferred shares, and $50 billion to soak up some of the company’s toxic assets AIG's CEO, Edward Libby, is asking for another $30 billion. Liddy - who came in after the company went south in September, and earns just $1 per year - is saying that the company and the financial conditions are "in much worse condition than I thought.”
Look, if we're going to give these guys more cash - and we will - how about a stipulation that says no more "hideout" junkets for executives, like this one in Phoenix. Better yet, if we're going to guarantee their survival, their profits, their payroll, and their losses, why don't we just take the entire thing over?
