Be Rich Blog Knowledge is the currency for success

World On EdgePosted by ahc99 on October 7th, 2008

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Photo by ishrona

Okay, the previous post was about a spoof cover of The Economist, but this time it is the real deal (Lol, did anyone check out the actual Economist’s website to see if it was a real cover? I sure did).

I just read the lead article from The Economist’s October 2nd, 2008 print edition and it paints a frightening reality of how the credit crisis has gone global and nothing short of a recession will ensue. Keep in mind that this article is post the $850 billion bailout that was authorized by the government.

Even if it does, that should not be a cause for optimism. Look beyond the stockmarkets, especially at the seized-up money markets, and there is little to see except bank failures, emergency rescues and high anxiety in the credit markets. These forces are drawing the financial system closer to disaster and the rich world to the edge of a nasty recession. The bail-out package should mitigate the problems, but it will not avert them.

Currently, there is no respite in sight for the credit crisis. The stock market is still in free fall and the banks are still hoarding cash, while freezing their lending practices to both other banks and customers. People are in a panic and withdrawing money from the unstable market and dumping them all into treasury protected securities. However, with all the money the government is promising to the failing corporations, we don’t know how well those securities will fare. It’s just the chance you need to take since there seems to be no other safe investment out there. The bailout bill has just passed but no way can it immediately mitigate the anxiety that has permeated society for the past few weeks. Like the old Chinese saying goes “Far water can’t save close fire.” It’s going to take a while for the money to circulate into the system and cause any type of damage control.

The crisis is spreading in two directions—across the Atlantic to Europe, and out of the financial markets into the real economy. Governments have been dealing with it disaster by disaster. They have struggled to gain control not just because of the speed of contagion but also because policymakers, and the public they serve, have failed fully to grasp the breadth and depth of the crisis.

By some measures, many European banks look more vulnerable than their American counterparts do—and that is saying quite something, given the past week’s forced sale of Washington Mutual, America’s biggest thrift, and Wachovia, its fourth-biggest commercial bank. In America, outside Wall Street, the banks have lent 96 cents for each $1 of deposits. Continental European banks have lent roughly €1.40 for each €1 of deposits. They have to borrow the rest from money-market investors, who are not especially confident just now. Some Europeans, including the British, Irish and Spanish banks, have housing busts of their own. And they must contend with the toxic American securities they bought by the billion, as well as their own slowing economies.

Western Europe is not the limit of this: the panic has also struck banks in Hong Kong, Russia and now India. And it is not just the geographical breadth of this crisis that is alarming, but also its economic depth. Because it is rooted in the money markets, it will feed through to businesses and households in every economy it hits.

The scary thing is, this isn’t just hitting the American front. The whole world is going through a global slowdown all the way from the Atlantic to the Pacific. Countless countries are now following America’s footsteps and bailing out their banks left and right from sure collapse. No reprieve can be found overseas. This isn’t that surprising though, seeing that America is still the number one superpower. Whatever disaster that hits the USA will have reprecussions felt throughout the world. In addition, with the billions upon billions of American securities that the foreign countries have bought, which has become all but worthless now, they cannot avoid the financial hit that America’s economy has been undergoing. Many countries’ finances are deeply entrenched with ours and so if we go through a financial meltdown, they won’t be able to escape one either. Welcome to globalization.

Bankers have always earned their crust by committing money for long periods and financing that with short-term deposits and borrowing. Today, that model has warped into self-parody: many of the banks’ assets are unsellable even as they have to return to the market each day to ask for lenders to vote on their survival. No wonder they are hoarding cash.

This is why those politicians who set the interests of Main Street against those of Wall Street are so wrong. Sooner or later the money markets affect every business. Companies face higher interest charges and the fear that they may one day lose access to bank loans altogether. So they, too, hoard cash, cancelling acquisitions and investments, in order to pay down debt. Managers delay new products, leave factories unbuilt, pull the plug on loss-making divisions, and cut costs and jobs. Carmakers and other manufacturers will no longer extend credit and loans will become elusive and expensive. Consumers will suffer. Unemployment will rise. Even if the credit markets work well, the rich economies will slow as the asset-price bubble pops. If credit is choked off, that slowdown could turn into a deep recession.

The crash on Wall Street will be felt through Main Street in the effects of a nasty recession. As much as I hate to admit it and would like the bastards that got us into this mess to rot in jail, I realize that this crisis is now much bigger than just some corporate executives swindling the public out of billions of dollars. If the finanical institutions that our credit market is based on collapses then capitalism itself would freeze in its tracks. Credit and loans, the lifeblood of America’s economy, will be cut and people will not be able to buy large assets such as houses or cars. Companies will not be able to make new investments or fund current expenditures without lines of credit. Unemployment will skyrocket if corporations cannot sell, make or buy.

This is dangerous territory we are navigating here and it becomes much more riskier now that it has escalated into a global problem. It is crucial now that the governments work together to deal with this crisis. This can be done either through cross-border banking and guarantees of other countries deposits or through central bank coordination of liquidity problems. Either way, only working in unison will any relief be found at a global scale. And with globalization entrenched in every aspect of our lives, there is no other way.

Damn it feels good to be a Banksta!Posted by ahc99 on October 6th, 2008

Comic by Sinfest

How true is this? The public has basically been blackmailed into giving a gigantic sum of taxpayer money to the financial institutions that got us into this mess. And even though the $850 billion bill was massively unpopular, our representatives still went through with it, ignoring the pleas of the masses. The stock market still plummeted the day after and the Dow is now below 10,000. What is the money going to do, besides line the pockets of Bush’s family and friends? And have we heard the last of them? Not by a long shot. Get ready for a long and hard recession cause this money ain’t gonna do jack shit.

Why the Public is Telling Wall Street to Drop DeadPosted by ahc99 on October 3rd, 2008

Photo by hawken.dadako

Across America you can hear Main Street telling Wall Street to drop dead. They are blogging, petitioning, calling, emailing, protesting outside their representatives’ offices telling them how opposed they are to the $700 billion bailout plan to save Wall Street. For once the white-collared, blue-collared, Democratic, Republican, and Independent parties are united together against a common cause to defeat the bailout bill, no matter how much the White House is trying to push it.

But why? As a pretty logical and sensible blogger that has read all the different facets of the current economical crisis and understand how the financial meltdown of Wall Street can have a very real impact on us common people, I am still very much against the $700 billion bailout plan. Although I know government needs to inject Wall Street with funds so that our whole economy doesn’t come crashing down, I still cannot bring myself to support the bailout bill. The reason that I and millions like myself hate the passing of this bill is due to one simple word “retribution“. LiveScience explains this phenomenon very well:

However, psychologist David Schroeder of the University of Arkansas, Fayetteville, doesn’t think revenge is technically the right word for what the public seeks, because it implies an urge to make others suffer at whatever cost. The public wants retribution, he says, for what is seen as a violation of the rules of the game, one they put their trust in.

“Retribution involves a punitive component,” Schroeder said, “and we’re hoping that’s going to deter these people from doing it again and we’ll get them to abide by the rules in the future.”

Exactly. Main Street feels that Wall Street has screwed up this economy. They have violated our trust, broken the rules of the game and as a result, should bear the burden of the costs. But what is the government doing? They want us taxpayers to pay for the gross mistakes that Wall Street has made. They want to hang us out high and dry while their CEOs and higher ups get to make off with tens of millions in executive compensation and fly into the sunset with golden parachutes. They want to cause massive inflation and devalue the dollar when the general public is already suffering from stagnant wages and the highest unemployment rate in five years. They want to give a green light to Wall Street that America will privatize the gains and socialize the losses, basically undermining the bedrock of capitalism.

So what do we want? We want revenge. We want retribution. We want to make sure that there will be very real consequences for Wall Street. We want to stop anything like this from happening ever again. We want the CEOs to cough up their salaries and to confiscate their golden parachutes. After all, why should a CEO get paid $20 million for driving their company to insolvency and causing millions of investors to bankrupt their investment/retirement plans.

“People feel that Wall Street has betrayed our social trust,” Ariely told LiveScience. “In some sense they’ve walked off with our 50 dollars. Actually it’s more than 50 dollars. And now the question is — how do we feel about it? And the truth is we feel really angry. Because of that, we’re willing to take revenge.”

He added, “It means that all of us are willing to lose money in order for those ‘bastards on Wall Street’ — I’m just using a general expression — to suffer even more.”

And so in order for the public to support a bailout for Wall Street, and the thinking goes, for the bill to pass through Congress, revenge must be incorporated, Ariely said.

“In some sense, it’s in [the public's] best interest to have the bailout, but they really want somebody to pay for it,” Ariely said. “So we are all going to lose for these guys to lose more.”

Two types of revenge could give the bill a swifter passage.

Retroactive revenge would make the CEOs and other higher-ups at banks suffer. For instance the bill could include something like, “if we bail out the banks, we are going to take all the stock options of the people in the bank,” Ariely said.

Future revenge would mean “creating more general legislation that will ensure that in the future if people misbehave we will punish them,” he added.

Schroeder thinks the bailout plan just needs to be framed in a different way. That’s because the public seeks a sense of fairness. Right now, he said, the everyday person views the recipients as people who are already making lots and lots of money, so it’s not fair they should be “bailed out.”

“I think the retribution side probably got into play because they [the government] talked about it as a bailout — ‘We’re going to help the people who were cheaters,’” Schroeder said. “If they had talked about this instead as sort of a loan package,” the public may have reacted more positively.

If the White House could understand human nature and put provisions in the bailout that would make it more fair for the common folk then they could get us to back the bill. But instead they don’t do that, they think just throwing more money at the people that got us into the mess would work. Sorry but I personally don’t put a lot of trust in those people, not after everything that has happened. I don’t care if this bill is good for the economy or if it ultimately is good for us. I want those fat cats to hurt and to suffer. And I’ll bet most of the people will agree with me.

Remember, remember the 5th of November. The gunpowder, treason, and plot. I know of no reason why the gunpowder treason should ever be forgot.

- V for Vendetta

Did the word “Bailout” doom it from the very start?Posted by ahc99 on October 2nd, 2008

All over the blogosphere the middle class citizens are vehemently opposed to the $700 billion bailout of Wall Street. Now many news commentators are wondering if the government screwed itself over from the very start by letting the monikor “bailout” stick. Hilariously, they are trying to call it something else, hoping that semantics will help push the bill through.

The following are some of the “revised” names for the $700 billion bailout plan:

• Treasury Secretary Henry M. Paulson Jr. calls it the “Troubled Asset Relief Program”
• Senator John McCain, Republican presidential nominee, offers “Rescue of Main Street America”
• Senator Barack Obama, Democratic presidential nominee, calls it the “financial rescue bill”
• Senator Charles Schumer of New York calls it “just a blank check for a huge amount of money”
• Representative Paul Broun of Georgia describes it as a “huge cow patty with a piece of marshmallow stuck in the middle of it”
• House Speaker Nancy Pelosi’s take is it’s a “buy-in, so that we can turn our economy around”
• GM’s corporate vice president describes it as “Government is underwriting a loan”

Most of the press is calling it the “bailout for Wall Street”, while some Americans have come up with much more unique and creative names such as:

• Leave-No-Banker-Behind Bill
• $700 Billion Blank Check
• Historic Swindle of the American Public
• Crap Sandwich
• The Socialization of America
• The Great Bank Robbery of 2008
• Socialism for the Rich
• Welcome to the United Socialist States of America
• The Mess that Greenspan Made
• “The Death of the Middle Class” Bailout
• Social Insecurity Trust
• Bailie Mae
• No Billionaire Left Behind
• The Patriot Act of Finance
• Banker’s Usurpment of Funds of the US
• Stocks and Housing Insurance Trust
• No Soup For You Bailout
• “Nationalize Banks, Give Away Houses, Nationalize the Auto Industry. But instead of Communism - Let’s call it 21st Century Capitalism” Bailout

Although I’ll admit that this has been a public-relations disaster, I still believe no matter how hard the Bush administration tries to spin this, it still won’t make a damn difference because a skunk by any other name is still a skunk.

Why The $700 Billion (aka No-Banker-Left-Behind) Bill Should Be ApprovedPosted by ahc99 on October 2nd, 2008

Photo by mccun934

In my recent posts I have been smacking down hard on the $700 billion bailout bill. But for amusement, I’ll play the devil’s advocate and detail why we should pass the bill.

Currently America is having a credit crisis, nobody is doubting that; however, many people are shortsighted and only seeing the trees, completely missing the forest.

Let’s rewind the clock back 25 years to the 1980s when we were having the bank failures left and right. Back then the FDIC had to come in on its white horse and pour out money up to the insured amount to the bank’s customers and in return they got all those “bad” loans. There was a fear back then too, though not to the current degree we are having right now, that those loans are worthless and the economy is going to crash. Lo and behold, once the FDIC restructured the loans and changed the terms, the loans started to get repaid and money began flowing back in. In reality, the FDIC made millions on those the purchase of those “bad” loans, though you wouldn’t have known that when the crisis began.

History has a tendency to repeat itself. Right now the FDIC needs money so that it can go buy the “worthless” mortgage loans from the distressed banks. Once they purchase them they can restructure the loan terms and agreements. This would then help keep the banks solvent AND stem the tide of rising foreclosures. In all likelihood, people will start to pay off their houses if the loan terms are changed. Now many people are getting houses foreclosed upon or just plain walking away because they cannot pay.

What do you get when a homeowner just gives up and returns the house to the bank? Basically nothing. The home values for that area plummet. The bank isn’t getting any money for keeping that asset on the books and they lose the previous monthly payments by the homeowner. The homeowner becomes homeless. So the logical thing to do is to restructure the loan so that money still gets paid and the homeowner can keep their house. With history on our side, those “worthless” loans purchased by the FDIC should eventually get repaid and they might even make money (like they did back in the 1980s) when the asset appreciates in value, which houses generally do in ten year cycles.

Now this argument works if we are dealing with a situation similar to the 1980s, but are we? It is likely that the precarious predicament we are in right now is much more dangerous than the 1980s. I think we need to rewind that clock back even more, all the way back to the 1930s: Era of the Great Depression. This is probably a more fitting example of our current circumstances. An article in the New York Times shows the correlation between our current situation and that previous one very well:

But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.

At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.

In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.

Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.

“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.

Sounds eerily familiar doesn’t it? Credit is drying up right now with banks hard-pressed to hoard as much cash as they can in order to stay afloat. The next part is when the article really starts getting interesting:

As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.

The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.

In this information technology age it is crucial to maintain “informational capital”. That is basically what our credit history and score relies on. With banks collapsing you lose that critical information. Without it we can’t get loans or mortgages. Without it we can’t buy houses or cars. Inability to make purchases leads to lower profits. Low bottom lines leads to further unemployment. It’s a vicious cycle you sucked into. Trying to recover is also difficult. It becomes harder to make investments when you can’t get loans. And banks won’t give you loans if you don’t have a good credit history. Catch-22. It’s an unfortunate side effect when financial institutions collapse.

The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.

Could the current crisis lift — could banks decide they really are missing out on profitable investing opportunities — without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that’s as inexpensive and as tough on Wall Street as possible? Absolutely.

But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.

“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”

The government needs to step in and do something. Anything. The current credit crisis needs to be relieved so that it doesn’t get worse. And if nothing is done, then expect credit to dry up and start using cold hard cash. Or bartering, that works too.

For people that are complaining how we shouldn’t help Wall Street, you need to remember that this is going to also affect us, the common man. Like I said before, you are missing the forest for the trees. First Wall Street will go down, destroying both the banking and financial industries, the lifeblood of the American economy. After that it will become clear that without them our businesses cannot flourish and our economy will stay stagnant. So an infusion of funds will not only keep Wall Street alive, it will help keep each and every one of us out of a financial meltdown.