Posts Tagged ‘Economic crisis’
Nothing much changes. This post first published on the 4th November, 2009!
Debt stress in Middle Class America – how may this play out?
On Saturday, October 24th Yves Smith of Naked Capitalism ran a Post on her Blog about an anonymous couple who were over their heads in debt. (Yves has given me written permission to reproduce the Post.) The story of this couple then generated a huge response of comments. Read the comments, each and every one of them.
Then ask yourself where this is all heading? These comments may, almost certainly are, just be the tip of the iceberg. Seems a long way from Lincoln’s Gettysburg address in which he was reputed to have used the words: “… government of the people, by the people, for the people, shall not perish from the earth.”
Some days I worry; worry a lot!
The extract from Yves Post about this couple is reproduced below but far better is to go and read the whole Post and all the comments.
UPDATE: Since writing this Post Yves has published a further Post on the topic again generating a huge volume of comments. That was Sunday, November 1st. Then bright and early on November 2nd James Kwak of Baseline Scenario weighs in with his version, Do smart, hard-working people deserve to make more money? 150 comments (at the time of writing) for that one. Interestingly, as the days have gone on the mood of the commentators has become more reflective and thoughtful thus partly negating the theme behind this Post.
This is the original Post from Naked Capitalism:
Some readers like to demonize those who get in over there heads with debt as people who lived high on the hog and had their day of reckoning come upon them. This story, forwarded from a reader, shows the picture is more complicated.
When I was young, savings of six months of living expenses was considered to be a good cushion against risk. Is that true any more? I doubt it. Although this couple didn’t even have that much stashed away, the sort of buffers that worked a generation ago are insufficient now. People spend longer between jobs than in the past, and if/when they do find new work, it is often at a lower level of pay than before.
Job loss and major illness rather than an overly lavish lifestyle are still the biggest causes of bankruptcy. And now that the average tenure at a job has shrunken considerably, people need to have more in the way of savings, yet the high cost of unemployment means it is even harder than before to build up a big enough kitty.
Via one a correspondent:
Just like most everyone I know, my husband and I are in big debt with our credit card companies. My husband was laid off on New Year’s Eve last year. We were in total shock. I am retired from the USAF and receive a small monthly check, and my husband began collecting a meager unemployment check. He searched all over the US and made several trips out west knocking on doors and handing out his resume. NOTHING. Anyway, we had no saving and a little bit of stock which was cashed in at an all time low. No help there. Then we started living off our credit cards. Without them, we would have not made it, period. Our daughter and her family moved in upstairs and her husband was working of a whopping $8.50 an hour. No help there. So basically we were supporting them as well.
We have a mortgage payment of $1175 and $30,000 equity still in our home, but we are unable to refinance at a lower rate BECAUSE my hubby was unemployed!
Getting back to my B of A card, I have NEVER been late on a payment in 10 years (until last month). I have always paid more than the minimum (until January 1st). BUT, my interest rates have inched up and up in the last few months and then, BOW! I tried to use my card about 3 weeks ago at the grocery store and it was denied. Needless to say, I walked out without the food. We don’t waste anything, not money, not food, not heat or lights, nothing, but we are going down fast. The good news is that my husband got a job this week (at a much, much lower wage) and will finally get a pay next week after almost 10 months. The bad news is that B of A is killing me and will ruin me soon. I sent them a “token” $10 payment on the $450 monthly that I owed. The payment was on time, but the $10 sure didn’t make them happy. They slapped a “LATE FEE” of $39 even though my “payment” was not late AND of course the dreaded overdraft fee of $39. Yesterday I got a statement from them saying that my next payment due 11/11 is $950. I can see the snowball at the top of the hill ready to roll. What do I do? Do I revolt and refuse to pay? Do I keep sending them $10 as a promise to pay? OR do I write Kenneth Lewis and say I want some of their TARP/bonus money back so I can apply it to my B of A account? It’s not fair, although I know we lived off our credits cards and much of what I owe is money that I spent on essentials, BUT, the ultrahigh interests rates combined with their slap-on-every-extra-fee-we-can mentality is outrageous. We have worked all our lives to have and keep our excellent credit ratings and now all that is shot.
What do I do? What do we do? Like I mentioned before, my husband just got a job, but he will be making much, much less than he used to. Our mortgage is behind, the bank is on us about that, our credit cards a behind and they want even MORE blood, our kids and their families aren’t making it even though they work and pinch every penny, no insurance is within reach for them or their babies, so we have been shuffling payments to help our grandchildren, the list goes on and on and on and on…
Please, what do we do? How can we stop the madness that has engulfed us? We are good citizens, worked hard all our lives, paid all our bills on time and paid more than the minimum – until lately -, penny pinch, reheat the reheated leftovers, eat toast, never go out, never hurt anyone, love our family and served our country, and now this.
Please, what do we do?
Could have been written yesterday!
More on those revised US GDP figures
On the 2nd August there was a Post that highlighted the way that officialdom was changing figures that painted a very different picture to that promoted at the time the figures were released.
I linked to a recent article from Karl Denninger showing how previous US GDP figures had been significantly revised downwards.
Well Karl has now published a smart chart showing what happened in a way that makes it very easy to understand.
The chart is below, but please support Karl by going to the article which is here.
Do read the original article at Karl’s Blog site simply because he sets out in his usual clear (and forthright) manner just what this all means. And it isn’t just affecting the US – this ripples across the pond!
Finally, another perspective on this issue is here – with the same implications being presented. It’s gloomy ahead!
By Paul Handover
The fundamentals always win, in the end!
Those that know me or have followed Learning from Dogs for the last year (and thank you!) know that I am pretty pessimistic about the economic future for North America and Europe (at least!). I speak not as an economist, far from it, but as someone sufficiently old to think that many millions of individuals and their countries have been living on borrowed time for decades.
Twenty years ago I didn’t really do anything than feel uncomfortable when friends announced another new house with mortgages far in excess of the old ‘rule’ of 1.5 to 2.0 times one’s annual income.
Then I came across David Kauders of Kauders Portfolio Management who explained in fundamental ways why this was all going to end in tears, so to speak. Wasn’t he right!
Thanks to David, I am moderately more well-off than I would have been – without a doubt. Not only did David manage my private pension, he greatly influenced my modest personal investments outside his portfolio.
Where’s this heading? This Blog is an attempt to show that integrity in all that we all do is not only the best personal strategy, it is the only viable course for mankind in bringing us back from the brink of global disaster. So a couple of recent items about economic matters from people of great integrity underlined the value of mentioning them in this Blog.
The first is a talk given by Elizabeth Warren two years ago, in January 2008, entitled The Coming Collapse of the Middle Class. It’s nearly an hour long but very well worth watching especially in the way that Ms. Warren shows how counter-intuitive is our understanding of how family costs have risen over the last 30 years. Although it applies to the US, it certainly has relevance for British viewers. Do watch it.
Here’s how the video is described:
Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America’s credit economy, which she has linked to the continuing rise in bankruptcy among the middle-class.
Next is that stalwart Karl Denninger. How he finds the energy and enthusiasm for publishing his Market Ticker is beyond me. He’s not subtle but his personal integrity is beyond reproach in my opinion.
Karl was recently interviewed by Bill Still (Bill produced the highly acclaimed film The Money Masters) and despite the videos being heavily edited Karl says “and for the most part accurately captures my views on the topics covered.”
Again these interviews are not short but, again, if you want to understand how dangerous the fundamentals still are – then watch them.
Karl Denninger, author of Market Ticker and winner of the 2008 Reed Irvine Accuracy in Media Award explains the roots of the current crisis and why real economic growth is impossible. He explains why the stock market rebounded in 2009 and why that can’t continue. He explains what needs to be done with the banks and predicts that all the big banks will fail.
Finally back to David Kauders. He also publishes an opinion website Contrary View. Here’s what David wrote in February 2010.
No. 73 22nd February 2010 Predicting lost decades
There is plenty of evidence from Japan about lost decades for investments. Japan has now lost two decades in equity and property investment, during which time only Government Bonds provided any sanctuary. All policy options failed, because none tackled the real problem, which is that there is already too much debt. What lessons can be drawn for Britain?
Shares here have certainly had a lost decade. On the Japanese evidence, they may well suffer another lost decade. Property has only hit minor bumps, so the Japanese experience suggests that property may suffer a long decline for two decades. In the UK, the Bank of England’s support for mortgages will be withdrawn over the next two years, which itself threatens prices. Why, though, the hysteria about Government debt?
It is questionable whether pundits appreciate the extent of the private sector debt problem, which explains why two groups of economists can offer totally contradictory remedies. In a world with no Gold standard and therefore no anchor to the monetary system, Government debt is relatively safe. The global economy is perched on a knife edge, with a permanent loss of output that must cause income loss and therefore restrict the capacity of households to service their debts. Seeing the commercial risks, banks are still restricting lending, which means there can be no sustained recovery.
There is a misconceived demographic argument being touted at present, which completely ignores the real driver of the post-1945 expansion, namely increased credit. That credit growth has simply gone too far and now brings its own problems. For those people who neither saw the credit crunch nor the long fall in interest rates and inflation coming, to now be credible in predicting a lost decade for bonds, is itself unbelievable.
You see how it all makes sense – the fundamentals are in charge, and always will be!
You be safe out there!
By Paul Handover
Congratulations to Martin Wolf of the Financial Times
An article was published in the FT on the 29th June that beautifully describes the ways in which we are all being so beautifully ‘screwed’ by the world of finance. (Note, you may need to register to see this article, but please do. Registration is free and the FT is full of great content.)
It starts like this:
This global game of ‘pass the parcel’ cannot end well
By Martin Wolf
Published: June 29 2010 23:31 | Last updated: June 29 2010 23:31
Paul here. Pass the parcel is a game for kids’ parties that involves passing a multi-wrapped ‘present’ around where the kid holding the parcel when the music stops gets to unwrap one sheet, then passes it on, etc., etc., until the kid holding the parcel with just one wrapper on it when the music stops gets the present.
Our adult game of pass the parcel is far more sophisticated: there are several games going on at once; and there are many parcels, some containing prizes; others containing penalties.
So here are four such games. The first is played within the financial sector: the aim of each player is to ensure that bad loans end up somewhere else, while collecting a fee for each sheet unwrapped along the way. The second game is played between finance and the rest of the private sector, the aim being to sell the latter as much service as possible, while ensuring that the losses end up with the customers. The third game is played between the financial sector and the state: its aim is to ensure that, if all else fails, the state ends up with these losses. Then, when the state has bailed it out, finance can win by shorting the states it has bankrupted. The fourth game is played among states. The aim is to ensure that other countries end up with any excess supply. Surplus countries win by serially bankrupting the private and then public sectors of trading partners. It might be called: “beggaring your neighbours, while feeling moral about it”. It is the game Germany is playing so well in the eurozone.
It’s an article that really does need to be read in full. Martin concludes thus:
Yet it is quite clear that an isolated discussion of the need to reduce fiscal deficits will not work. These cannot be shrunk without resolving the overindebtedness of damaged private sectors, reducing external imbalances, or both.
The games we have been playing have been economically damaging. We will be on the road to recovery, when we start playing better ones.
Now I really don’t want Learning from Dogs to focus on ‘doom and gloom’. There’s more than enough of that to go round twice and thrice.
But when someone writes in such a great clarifying way – then it deserves the widest promulgation. The more we all know about the games being played, the better we can change the rules to benefit society. Well done, Martin.
By Paul Handover
Fiddling with gravity!
Financial crises can be very difficult events to understand. Even for those who have spent a great deal of time studying such areas as finance and economics, comprehension of these disasters can be elusive. However, analyzing shared elements in the recent American and Greek financial crises can help give even the economic layman insight into their common causes.
One word can be used to sum up the basic concept behind both of these crises – overextension. Both the American and Greek governments attempted to take on a much heavier economic load than either could handle. While, in both cases, this has been painted by some as a noble, humanitarian effort to help those in need, methods such as inflationary monetary policy tantamount to theft and the disguising of massive budgetary deficits (in both cases with the help of Goldman Sachs) would not justify the means employed even had these efforts been successful, and certainly should be taken to task considering the disastrous ramifications of these actions.
In both cases, many are citing unrestrained spending as the source of the problem. For example, CNN wrote of the Greek crisis that “years of unrestrained spending, cheap lending and failure to implement financial reforms…whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits that exceeded limits set by the Eurozone.”
Without suggesting that CNN was attempting to be deceptive in this explanation, as the points made certainly are important, it must be noted that things like unrestrained spending, cheap lending, and fiddled statistics are merely symptoms of the deeper disease. Instead of asking the government to spend less, tighten lending laws, and implement financial reform, one should instead ask the deeper question – how does the government even have the power to cause such problems in the first place, and why are the results of such government power so often much more hurtful than helpful?
This deeper problem, whose symptoms we are now dealing with, is central banking. The Federal Reserve System and its Greek counterpart, the Bank of Greece, each had a heavy hand in their respective nations’ financial collapses. This is due to these banks’ attempts at economic manipulation – the Federal Reserve directly sets interest rates, while the Greek system uses more indirect methods to do nearly the same thing. Note that it is due to their attempts at economic manipulation, as attempting to set economic law is about as useful as attempting to set gravity.
Consider this metaphor of setting gravity. A man claims to be able to set the force of gravity on the earth. He tells a stunt biker that he can set gravity to be half as much as normal. So, the biker attempts to jump a distance that is much longer than he normally would attempt. Upon jumping, the biker finds that, obviously, the first man never was able to set the nature of gravity at all, and he falls to the ground long before reaching his destination.
This is exactly what happened due to the actions of central banks in the cases of both the United States and Greece. Interest rates and other natural economic restrictions were said to be more flexible than they truly were. Thus, individuals who based their actions on this information ended up engaging in activities that were far more risky than usual. However, once they had “jumped,” so to speak, they found that, in fact, economic law was as strict as ever, and they “fell.”
However, if the answer is so obvious, why are we not hearing more about it? Each of these financial crises is extremely complicated, and the above described scene is, it must be admitted, an oversimplification. This is not to say that it is not accurate, but rather that this nature of the crises’ root cause is not immediately apparent to all upon examining the situation.
For example, a person who has been educated their entire life in an economic school that praises central banking, deficit spending, and government action in general would certainly seek to find another cause for the crisis, perhaps by blaming business owners for making risky investments or stating that government controls were not strict enough. However, a person who has studied and understands the damage done by central banking and government economic controls will be quick to realize what has occurred.
People with such knowledge are becoming more and more common in both the United States and around the world. “Even today, with an economic crisis raging, the response by our government and the Federal Reserve has been characteristic,” Ron Paul writes in his recent book, End the Fed. “Interest rates are driven to zero and trillions of dollars are pushed into the economy with no evidence that any problems will be solved. The authorities remain oblivious to the fact that they are only making our problems worse in the long run.”
While he may be one of the most popular adversaries of central banking, it is not just Ron Paul, or even Austrian economists, who are calling out government for its role in these financial crises. In an e-mail to supporters, Democratic congressman Dennis Kucinich cited “the 1913 Federal Reserve Act, the banks’ fractional reserve system and our debt-based economic system” as major factors in the American crisis.
Such complex and important issues as economic crises need all the attention we can give them, and it is impossible here to provide the in-depth analysis that these situations merit. It also must be noted that while both the United States and Greece have to an extent both engaged in central banking to their detriments, each country does have a different system. Still, the general principles hold, always returning us to that first word – overextension. As long as nations attempt to manipulate the laws of economics to engage in far grander pursuits than they can sustain, we can expect to see such economic crises as have been seen in the United States and Greece in the future.
By Elliot Engstrom
Removing the fear of the unknown
I’ve been working with most of my clients recently through painful transformations brought about by the economic downturn.
An interesting metaphor really because since the first wave of uncertainty triggered panic, first noticed in the UK banking system, I have been picking up on that uncertainty that feels like it’s stalking the globe at the moment.
Interestingly, I, too, have been aware of an underlying fear that was difficult either to name or source.
It has been rather like a deep river in that whilst the surface feels slow moving, currents are moving things powerfully below.
So this ‘fear’ has caused a few household changes.
We now are the proud owners of 9 chickens. Our youngest son, Sami, and I have dug up the back lawn and planted vegetables and built a poly-tunnel.
We have also installed a wood burning cooker. Right back down to the base of Maslow’s triangle really!
These feelings have brought about such change everywhere and I wonder seriously whether we will ever return to what was; indeed would we want to?
I might not have mentioned it in previous blogs but as well as an engineering background, in latter years, I have focused on how interpersonal success in business is linked directly to relationships, integrity and vitally, self-awareness.
To inform this, some 7 years ago, I embarked on an MA in Core Process Psychotherapy, primarily to work on myself so that I could be the best I could be in my relationships, in and out of work.
The point I’m trying to make is that the same panic I notice in many of the companies I work in, and in me, is based on fear of the unknown and on a lack of trust in all its forms. I’ve deliberately underlined that last phrase because it is so incredibly important.
The truth is that we get more of what we focus on.
So we can choose to focus on the constant news of more difficulties, hardship and redundancies, or we can focus on what is working.
In the workplace this positive focus has been pulling people together across functions and sites and pooling resources and ideas.
When we realise we’re not doing this alone it’s amazing how much lighter a load can feel and how much more inspired we feel.
I also notice how humour begins to flow and what a powerful antidote for doom and gloom that is.
Transformation is never easy but the rewards far exceed the effort put in ten fold.
So what is it going to be? Are we all going to bow down to the god of Doom & Gloom, fear and anxiety, heaping more and more gifts around it, or are we going to start noticing and focusing on the other neglected god – that of relationship, joy, trust, abundance and lightness?
Whatever the future holds for us all a belief in our inherent ability to adapt and change and focus on the greater good rather than fear, anxiety, greed and selfishness is the only sustainable way forward.
[If you have been affected by this Post and would like to contact Jon, he would be delighted to hear from you. Ed.]
John Clarke and Bryan Dawe on the million dollar questions – courtesy of the Australian Broadcasting Corporation
This sketch is doing the rounds and deservedly so – it’s a very funny skit on Europe’s troubling financial situation.
As ex-Prime Minister, Margaret Thatcher, is reputed to have quoted, “The problem with socialism is eventually you run out of other peoples money.“
By Paul Handover
The Basel Committee on Banking Supervision
I suspect that you, like me, know diddly-squat about the Basel Committee. As the Bank of International Settlements puts it:
The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.
The Committee’s members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The present Chairman of the Committee is Mr Nout Wellink, President of the Netherlands Bank.
OK, that’s clear then!
Well, according to a good supporter of and Guest contributor to Learning from Dogs, Pers Kurowski, we really ought to know much, much more about this ‘committee’.
Basel Committee, why don´t you just shut up!
Sir who do these Basel Committee regulators really think they are bullying us around with an arrogant “the banks should be sensible and realise that it might backfire if they protest too much”? as reported by Brooke Masters, May 4.
They themselves are the ones who thought everything would be fine and dandy if they just had some few credit rating agencies determine default risks and then gave the banks great incentives, by means of different capital requirements, to follow those credit risk opinions. They themselves are the ones who believing in the abundance of safe triple-A rated lending and investments, caused the world to stampede and fall over the subprime mortgages. They themselves should shut up, because rarely has the world seen such a gullible naive and outright stupid bunch of regulators.
Now the banks, in the midst of a crisis, need to build up the equity they do not have precisely because the Basel Committee did not require them to have; precisely when we need the most the banks to lend. The regulators, instead of bullying banks, should busy themselves day and night finding ways for severely capital stretched banks to be able to lend to those small businesses and entrepreneurs who have had to pay the cost of higher capital requirements but who had absolutely nothing to do in generating this crisis.
And just in case, for the record, I am no banker, only a citizen, very upset with the fact that in the 347 pages of the regulations known as Basel II, there is not one single word that describes the purpose of those regulations. Basel Committee why do you not start defining a purpose for what you are doing? Is that too much to ask?
By Paul Handover
Guest author, Per Kurowski, on a rather sobering topic!
I do not know what worse, the arrogance of the regulators thinking they can squeeze out the risk in banking by imposing different and completely arbitrary capital requirements based on the opinions of some few human fallible credit rating agencies, or their childish innocence not knowing this creates systemic risks of gigantic proportions.
What I do know is that an amazing number of intelligent people have fallen for this absurd and extremely dangerous regulatory paradigm. Honestly… I am truly scared!
How could I not be with regulators who can authorize banks to leverage up 62.5 to 1 on public debts like Greece’s while at the same time placing a 12.5 to 1 ceiling on the lending to the small businesses and entrepreneurs whom we depend so much on for our jobs.
All those financial and regulatory experts who kept mum when they should have spoken out on the financial crisis about to happen are now, quite effectively, circling their wagons in order to promote the myth that no one knew. False many did! In order to benefit from the lessons we must learn, they should not be allowed to succeed.
On October 19, 2004, as an Executive Director of the World Bank (2002-2004) I presented a written formal statement at the Board and that included the following:
We [I] believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.
And I was no investment banker, nor a regulator, nor an investor, and so to me it is clear that all of them, had they done their job right, should have known… and that this crisis should have been nipped in the bud much earlier, as
the real explosion in truly bad mortgages took off in 2004, when the SEC in April delegated the setting of the capital requirements for the investment banks to the Basel Committee, and the G10 in June approved Basel II.
In order to understand it all don’t follow the money… follow the AAAs. In case you missed “The Financial Crisis explained to dummies, non-experts and financial regulators” you can read it here.
By Per Kurowski
PS. I have put up a document that resumes most of what I said before and during my term as an Executive Director.
Market Swings are Normal…nay…Desirable!
Just to try to help put stock market swings into perspective, consider this:
- the 347.8 point fall in the Dow Jones Industrial Average last week, from 10868.12 at the start of the trading day on Thursday, May 6, 2010 to 10520.32 at the close of trading, can be COMPLETELY explained by an increase in the perceived cost of capital from 12% to 12.23%.
- do the math. Using the constant dividend growth model, a very simplified model of the market value of equity, or Market Value = Current Dividend/(cost of equity capital – dividend growth rate), and assuming a long-term average cost of U.S. equity capital of 12% and average growth rate of 5%, we find that the opening level of 10868.12 = 760.77/(.12 -.05), and the closing level of 10520.32= 760.77/(.1223 -.05).
- I think it is entirely possible that the chaos in Greece and surrounding nations, and the interconnections between worldwide supplies of liquidity and financial capital, that an increase in the perceived risk and uncertainty of the returns to equity from 12% per year to 12.23% per year makes perfect sense.
- The market’s are working. Market participants, from the individual investor using on-line trading at 2:00 in the morning from their living room to the most sophisticated computerized large-scale institutional trader, understands that a borrower’s ability to pay back its investors depends on the real productivity and growth of private industry, whether the borrower is a company or a country.
by Sherry Jarrell