Yesterday’s News

In a rapidly changing society, anticipation and quick reactions are key. 2009 is almost here, and the new Congress (along with the President) will be beginning their term in the harshest economic climate since the Great Depression. They will be feeling the pain from a failed holiday shopping season with little reason for consumers to reverse this terrible trend in the foreseeable future. They will see continuing job loss, troop movements in Pakistan toward India, the in-fighting as Iraqi politicos jockey for power as America withdraws her forces, and the exchange of military horrible between Gaza and Israel. Even with the direction and focus of a new President, who has embraced both sides of the aisle in his cabinet, is Congress ready… well… not to be the same old, same old anymore?

The problem, when we make a “federal case” out of it, is that if we leave it up to Congress – a body of politicians beholden to ideologies and special interests that got them elected – the answers are often determined in the least practical and most doctrinaire method possible. Here’s an interesting quote from the December 14 Los Angeles Times: "Congress has not been anticipating crisis, but at least they have been reacting to it," said Sarah Binder, a political scientist at George Washington University. "But every time Congress acts, you can watch the markets tumble."

On the other hand, if you take the legislature out of the regulatory process and let the markets do whatever they want, if you allow the Executive Branch to rule by executive order or Presidential signing statement, well, you can take a good look at the economy and our status in world affairs and see where that strategy got us. The problem seems to be a vacuum in the “leadership” aspect of a majority of our elected officials.

As Janet Hook noted in the above L.A. Times article: “Polarized, beset by crises, and preoccupied with ideological and regional politics, this Congress followed a pattern all too familiar in the past decade. It railed and wrangled over the nation's toughest problems, but in the end failed to advance solutions… The House and Senate this year did pass major legislation in response to the nation's economic problems -- but for the most part, they waited to act until a crisis could hardly be ignored. Each time, lawmakers had to struggle to reach agreement. Sometimes, as in the auto bailout, the legislation was not even approved.”

In the end, we need leadership – not just at the Presidential level, but in our legislative bodies as well. Someone needs to ask bigger questions and let go of outdated reliance on ideological rigidity that has not worked at all, from the left or the right. We need to focus on jobs that can sustain, an educational system that can carry us back to being a growth economy and on preserving the remaining shreds of our national net worth. This is no longer a popularity contest, and sometimes, a legislator needs to take a position that might not, at this precise moment, be popular with that body of ideologues or special interests that got him or her elected.

But that’s precisely what we need… Congress men and women who are ahead of the curve, not desperately following an aimless and desperately meandering curve. We need leadership, and if the next Congress fractionalizes over its regional pork projects and wraps itself around irrelevant and inflexible doctrinaire philosophies, we need to vote them out. We need pragmatism to win now. The American constituency needs to be vociferous in our demand for our elected representatives to find solutions, implement them wisely and LEAD!

I’m Peter Dekom, and I approve this message.

A Currency at Risk

It’s the day after Christmas, and I’m watching the dollar continue to fall against currencies like the Euro and the Yen. The New York Times did a piece today on how China’s willingness to take U.S. government debt – an unfortunate saving grace for us – and supply us with cheap manufactured goods added to our simple expectation that, with a little credit card and real estate debt, we could live the good life and have the “things” we so desired. We did ourselves in, but we took the world with us. But focusing on our expectations and the risks we may see in the future when it comes to the value of our currency are worthy of exploration. Look at the signs.

People and companies are buying U.S. Treasury bills that today yield approximately a zero rate of return (even slightly less for an instant in time) just to have an asset that won’t collapse in value. This clearly “deflationary” evidence is normally associated with something worse than a recession; some folks call what’s going on a “managed depression,” what the Great Depression of 1929 might have looked like with some government intervention. The demand for this zero interest paper is soaring, but there are also signs that the markets are beginning to worry about a different risk, the one associated with high government borrowings, failed stimulus packages and over dependence on this financial instrument… the rapid decline of what is currently a solid dollar as compared to other currencies around the world.

Although I think that this scenario is unlikely at least until we have hit bottom and begin to surface again, there are some who look to that “default insurance” instrument – the nasty derivative called a “credit default swap,” that floats in the international marketplace at a volume that is six to seven times our entire national debt, for answers. You see the pricing of these default instruments is based on risk analysis, and the solidity of risk has usually been measured against the creditworthiness of the U.S. government. The December 11 theDeal.com noted: “[I]f the credit default swap market is to be believed, as the cost of contracts protecting against an American default have topped 60 basis points [that’s 0.6% equivalent interest rate], indicating the U.S. is a bigger risk than Japan, Germany or Campbell Soup Co.” But what’s the worst that can happen if this scenario accelerates?

TheDeal.com continued: “FT Alphaville quotes one view from Monument Securities: ‘Though a Treasuries bubble might appear unproblematic, however, its bursting could turn out to be more dangerous than the collapse of any other kind of bubble. If confidence eventually returned to other markets, investors would shun the low yields on Treasuries. The Fed would then face the choice of monetizing most or all of the Treasuries market, as funds fled to higher-return investments, or else of allowing Treasuries yields to race higher. Because foreign holdings represent a significant proportion of the stock of Treasuries outstanding, a collapse in Treasuries prices might soon be reflected in a collapse of the US dollar, with the accompanying threat of hyper-inflation in the USA and depression elsewhere. At that point, many investors might wish they still enjoyed the comparative calm of the 'credit crunch'.' ”

Let me address this issue another way. When the world begins to recover economically, I suspect that currencies will be revalued based on a complex analysis of how much we have borrowed reduced by how much more productive we are at the time. If we don’t continue spending on training and education, you can pretty much guess what the productivity portion will look like. Clearly, education is the best hedge we have against this debacle. We already know that as a nation, we will have borrowed significantly more than any other major nation on earth. As the currency falls, the price of our exports (but we don’t export much in the way of manufactured goods anymore) will become more competitive, but the cost of globally priced products and commodities (oil, copper, foreign manufactures, etc.) will rise, spiking inflation.

The Federal Reserve typically counters inflation by cooling down the economy by raising interest rates. High interest rates slow real estate and consumer purchases, corporate expansion… well, you can guess the rest. Funny that multinational corporations, those whose trade is not necessarily primarily governed by American consumer activity, can actual weather this currency devaluation the best, sometimes even growing and prospering during the process.

The problem with playing with monetary and fiscal policies – which is most certainly a necessary evil when you a battling the demon of super-recessionary times – is that there are always unintended consequences. The other problem is that you won’t really know until the problem appears, and the measures you take to defeat that could also cause those secondary unintended consequences. And you thought theme park rides were exciting.

I’m Peter Dekom, and I thought you might be interested.

The Ripple Effect of Fear & Powerlessness

Some of us have over-extended ourselves, while many are just plain victims of the collective bad decisions of others and a government focused more on doctrinaire non-regulation than any semblance of common sense. Being a victim can only take you so far. There are steps that each one of us can take. Where do you fit?

Borderlines: Where there is a judgment call as to whether to make a decision to contract or eliminate an economic benefit to an individual homeowner or group of employees, err in the direction of preserving the most you can. If things get worse, a momentary delay won’t matter, but if there are enough “momentary delays,” maybe we can kick some of the steam out of this economic monster. Insurance companies, please have a moment to find a heart for the holidays. The taxpayers have supported your industry; now show us that you appreciate that effort.

Sacrifice: This is an easy call for executives and even middle managers. Eliminate those bonuses, don’t take those raises, but set an example. Downscale perks and eliminate as much excess as you can. Fly coach even if you are a CEO. And think about give-backs. Unions? Sit down with management to preserve the greatest number of jobs possible, even if fellow employees take a pay-cut. It’s now about the jobs, working conditions and wage rates can wait; besides, in a world of deleveraging, prices are falling like snow anyway. Those pay raises aren’t as necessary anymore; keeping your friends and neighbors in their jobs is mission one. If workers gather to make specific sacrifices to help others hold on to their jobs, we’ll beat this one sooner rather than later.

One Major Purchase: This one’s not for everybody, but if you were planning to make a major purchase, particularly if it is based on American labor and the only thing stopping you is fear (not your wallet), swallow hard and take the step. If enough Americans make that purchase, we can steady this foundering vessel.

Look Around You and Help Where You Can: If you don’t have cash to share or donate, think about giving your time. Somebody needs your help.

Government Officials, Think the Big Picture: Every unnecessary hoop that might be required, every decision to delay over an inconsequential matter, and every enforcement of a governmental policy needs to be made within the context of this great meltdown. The solution will always be a combination of little steps. Assume that whatever you do will get multiplied thousands of times over.

Dream: It’s okay to dream of and believe in a better future, to do whatever it takes to see that education remains a priority and to know that all this will pass. If all we do is rely on the actions of third parties, then this malaise will drag on. Believe your individual efforts will make a difference, because, in fact, they will.

Be Kind: Hard to do when the world is melting, but unkindness only makes things worse; it adds nothing to the mix.

Powerlessness leads to depression (emotional and economic), the ability to act and know you are making a difference is empowering and is also the ultimate solution to this horrible economic condition. We’re Americans; we really can do this. Merry Christmas and Happy Chanukah!

I’m Peter Dekom, and I approve this message.

The Barriers to Recovery

Toyota Motor is destined to succeed a severely damaged General Motors as the number one car manufacturer on earth. Toyota’s plodding steadfast growth (averaging 3% a year for the past decade) has been continuous for seven decades. Their hybrids have set the standards, their executives not overpaid or over-perked, and their factories are global with many plants here in the United States. They are the automotive barometer of what’s possible in this industrial sector; and they have announced that even they are going to lose money in the current fiscal year, slow down production, suspend expansion and readjust their near term goals. That’s a first for this car company, not one that they would like to repeat.

With new car factories scheduled to come on line in Brazil, China and India, to name a few, it seems that there will be a monumental pause in this growth statistic. According to the December 23 New York Times: “Global vehicle production fell 16 percent in the fourth quarter, according to the firm IHS Global Insight. ‘The collapse is far sharper than anything previously expected or previously experienced,’ said George Magliano, the firm’s head of auto industry research for North America.” U.S. car sales in November were off more than 37% from the year before.

With projections of hard unemployment reaching 9% in 2009 (almost 17% if you look at people who have given up looking or only can get part-time work), adding in the reductions in overtime, bonus compensation and raises, taking into account the reduced work orders for self-employed contractors, this is hardly the time for most folks to go shopping for a car, no matter what the bargains and incentives might be. It’s a time where consumer confidence has become earnings and employment confidence.

For those at the bottom of the economic spectrum, poverty just dropped a notch to dire poverty. But as far as the U.S. economy goes, the big slam goes to the middle class. They’re the ones whose retirement accounts were crushed, whose homes plunged in value and whose jobs are being sacrificed as “contractions” or “layoffs.” Sure rich folks lost big bucks, but with enough big bucks still present in their “net worth portfolio,” most still have more than enough to sustain a luxurious lifestyle. There are a few exceptions, of course, and Bernie Madoff didn’t help, but the American middle class pain is where this managed depression has taken its greatest toll and where the solution to recovery definitely resides.

So anything that keeps people in jobs or creates new work when old employment ends is the focus. Tax cuts, when you’re not paying taxes, most certainly are not the solution. Regressive tax increases (sales tax, use taxes, etc.) kill jobs and presses for further economic collapse. Incentives to “buy green” can also help create jobs, save energy costs and boost sales figures. And stabilizing the housing market becomes one of the pillars of any recovery.

This is most certainly a global meltdown, but some nations can weather this better than others. India, for example, never let its banks engage in any form of lending in the subprime market, insisted that borrowers clearly be able to pay their debts, and generally practiced fiscal conservatism. Contrast that to Iceland’s over-borrowed growth strategy that completely tanked an entire nation.

This managed depression will go a long way to change the attitudes that got us into this mess in the first place. The theory that deregulation and laissez faire always work best has been shattered. The test is now what this new government, in conjunction with its international partners, is willing to do and can do to reverse dangerous trends that could expand this meltdown further. The people are scared and need genuine leadership willing to take prudent risks to lead us back from these depths. 2009 could be a very long, sad year, or it could just allow us to hit that bottom from which there is no place to go but up.

I’m Peter Dekom, and I approve this message.

Doin’ It Wrong, California Style

Funny how states and local governments prioritize when times get tough. They don’t have the capacity to “print money” (the old world way of saying “increase the money supply”) that sits with the Federal Reserve, or to incur deficits and automatically release tradable bonds like the Congress with Presidential support. Their ability to incur a deficit is limited by their access to the financial markets and the willingness of the federal government to lend or grant money.

So states have to “balance” their budgets but cutting programs or raising taxes. That’s bad enough, but when you have a requirement of a legislative super-majority (2/3 in California) to approve a state budget, things can get quite ugly. When former governor Gray Davis saddled his state with a sucker bet of paying way too much for energy futures, he was recalled and replaced by Arnold Schwarzenegger, who inherited a system that doesn’t work and mired in a fiscal mess that seemed insolvable. But California is decreasingly the “place to be” anymore.

Sure, most Californians don’t really want to leave the state – according to the December 17 Los Angeles Times, 69% of native-born Californians remain in the state as adults, a pretty solid vote of confidence, but things are changing and not for the better. With housing prices plummeting far faster than the rest of the country, living in California or running a business here is still a whole lot more expensive than the nation’s average. California hubris that “we’re worth it” seems to be becoming a narrow list of positives like good weather and lots of ocean frontage.

The Times noted that when looking at population movement between states, California has been a net loser since 2005 – this last fiscal year we 135,173 more people moved to other states than moved in. True, this is a drop in the bucket for a state with a population (38 million) bigger than all of Canada, but it is disturbing trend. Simply put, even with the real estate drop, between car insurance, rent or home prices, transportation costs and taxes, it just plain costs too much to live in this sunny state. Between international immigration and the birth rate, the state still grew at mild 1.16%, but reasons for interstate migration is troubling.

As the legislature debates even more taxes and massive layoffs and indefinite postponement if needed infrastructure repairs and upgrades, California is faced with the one of the highest unemployment rates in the country – 8.2% (and if you apply the same analysis that the federal government does in its “alternative measurement” – which adds part-timers looking for full time and people who want jobs but don’t have anywhere to look – the number tops 15%). When you look to the “subprime” Los Angeles bedroom counties of Riverside and San Bernardino Counties, the unemployment rate is a staggering 9.5% (almost 18% if you apply the alternative measurement ratio). Los Angeles itself is socked with a 7.7% unemployment rate (which tops out at over 14% using the alternative measurement fraction).

With bad traffic, long commute times, mostly terrible public schools and a high cost of living, the people hit hardest are those whose skills would, even in good times, only score only an average American job with wages that just don’t measure up to the quality of life that such a wage scale might buy elsewhere. We lost a lot of people in the mid-1990s when aerospace started moving elsewhere, and people followed the jobs, but population growth through interstate migration returned in 1998.

So the legislature (joined by lots of local governments) is talking about making the state more expensive when people can afford that cost least, laying off huge numbers of people and cutting construction (infrastructure jobs) which can only further erode the tax base because most of the state, particularly in the southern half, is badly managed with archaic rules and out-dated policies. The polarization of the mega-wealthy of Beverly Hills/Bel Air contrasted to people just out to make a decent wage only makes life that much less tolerable out here. But then I have to chuckle as New York, our “right coast nemesis,” is considering adding a tax on iPod downloads to NY residents.

Without the jobs and home-price stabilization, what our state legislators are creating is a downward economic spiral that will only make things worse in the long term. We’re killing our future. Go figure.

I’m Peter Dekom, and I approve this message.

Holidays for the Home

With 4.4 million non-conforming American home loans (subprime, but also including the larger, “jumbo” loans) approaching 60 days or greater delinquency levels in the near term, and with average value of those loans, according to an article released on CNBC.com (December 18), hitting around $200,000 and the underlying average appraised value falling to $183,300, that creates an average underwater value loss of $16,700. We can work with that.

CNBC reported the frustration of angry Congressmen and women at the government’s relative lack of providing what appears to be an obvious need stem the foreclosure tide that is tanking the value of innocent homeowners who did not borrow without the means to repay the debt: “ ‘You don't have a comprehensive plan to deal with foreclosures,’ lamented Rep. Maxine Waters , D-Calif., echoing widespread anger and disappointment over the Treasury's execution. ‘Please don't come here and ask for another penny,’ she told [the governmental Troubled Asset Relief Program boss, Assistant Secretary of the Treasury for Financial Stability Neel] Kashkari…

“Waters recently introduced legislation calling for $24.5 billion in foreclosure modification and prevention to be funded under the TARP, based on a plan developed by FDIC Chairman Shelia Bair… The goal is to modify half of the 4.4 million non-[conforming] loans expected to become problems in 2009. Based on a 33 percent re-default rate, 1.5 million homeowners would be spared foreclosure… Under the plan, the government would pay companies that service the mortgages $1,000 for each modification and share up to 50 percent of any loss if a modified loan re-defaults.”

My own suggestion, presented in earlier blogs, made the following proposal (which would require Congressional authority), which might actually be more effective (with an additional modification to cover those ARM loans that are about to come due):

1. When requested by the relevant homeowner, originating banks or their successors would be required to review individual loans for people for whom they issued a mortgage (even if they sold the loan to a third party), but only as to owner-occupied residential property. Maybe the above $1,000 fee can apply to pay the banks for that service, bourne by the government. Any company that bought the loans or aggregated them would be bound by the terms renegotiated by the originating bank, but to the extent of underwater payments (see 2 below), the actual current lenders would receive the relevant benefits.
2. Subject to a verification by the originating bank that the subject homeowner has the means to make the requisite monthly payments (i.e., apply a reasonable loan application process) and an actual appraisal of the home or the application of a more generalized fraction of depreciation of nearby home values (zip code or sub-zip code analysis, which is even available online), and subject to a federally established interest cap (6%?) and a loan period of no less than fifteen years and no more than thirty years, banks would have the right to require that the federal government fund 100% of the amount that the value of the home is worth less than the current mortgage. We’d actually use some bailout funds to make those payments, but taxpayers would not be punished under the next point, and we wouldn’t be funding folks who would inevitably default anyway.
3. A new loan would then be substituted at the lower appraised value and the new interest rate, the government would get a right to a percentage of the sales price (not to exceed 15-20% of the total, and only to the extent of any appreciation), if and when the property is ever sold. The fraction could easily be determined by applying the underwater amount under the old loan against the new appraised value.
4. Adjustable rate mortgages (ARMs) would be subject to separate set of standards: (a) there would be an interest cap (6%), and (b) provided that the homeowner were not delinquent or were otherwise proven qualified to make the requisite monthly payments, if the term of the ARM were set to expire within the next three years, presumably with a balance to be repaid as a balloon payment, the term would automatically be extended for an additional five to ten years depending on the loan amount.

Hey, we’ve got to get this nation back on track! For the people who make up this economy!

But wait, there is another plan out there, which is being offered by Credit Suisse (a global financial giant) as a Christmas bonus to its executives, according to the December 18, theDeal.com: “Credit Suisse may have finally figured out a way to curb the risk-taking behavior of its senior employees ... by giving them bonuses in the form of $5 billion of the toxic mortgage-backed assets that lie at the heart of the credit crisis. … The deal actually works out well for both the Swiss bank and the employees, since the risk from the $5 billion in assets no one wants is moved off of Credit Suisse's books, while the senior managers who might not have received anything considering the state of the bank, get something ... which… is better than nothing (and certainly shouldn't prompt the public outrage of giving cash bonuses).”

I’m Peter Dekom, and I approve this message.