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Bob Beaty: Would You Pay For It?

by on June 2, 2011

Huffington Post…

One of the characteristics of toiling in obscurity is the limited shelf life. No sentient being, or company for that matter, can stand anonymity for long. Fortunately, there are three solutions; pray for a miracle, change the perception or shuffle off this mortal coil. In the case of most SmallCap companies, the equivalent of the third eventuality would be to shut the doors. Let’s deal with door number two — change the perception — as the most viable, since miracles only happen infrequently and, dare I say, in obscurity. Other than a fraternity party I attended many years ago in Ithaca, New York, but I digress. Let’s talk fee-based research. Rough segue, but an extremely interesting topic. If you were/are the CEO of a SmallCap company whose stock couldn’t get attention if you yelled ‘open bar’ at an investor conference in Vegas, then you need to familiarize yourself with the genre. As do investors. Once you understand how it works, it amazes me that anyone depends at all on the affectations and frequent conflicts of interest of ‘traditional’ investment dealer research. Begin with the premise that your corporate story or vision is worth telling, which doesn’t include you 40-something game developers eating hot pockets in mom’s basement. The hell of it is, there are some great stories out there: Lifesaving biotech stories, the next Microsoft (or Apple) or a killer electronic device or cost-saving service. If you can objectively conclude the world needs to know, or alternatively hire someone to tell you it has legs, it probably should gain exposure. And inform potential investors. But how do you get noticed? Fee-based research is a viable arrow in the overall IR quiver. I gained some good insight chatting to independent analyst Patrick Murphy, CFA, and principal of www.MurphyAnalytics.com. Some interesting observations: • SmallCaps tend to commission fee-based research when times for the company are good and want those facts disseminated to investors • Disclosures on the report are key. Investors must satisfy themselves that the analyst’s compensation is fully disclosed as well as their ethics • CFA’s are held to very high standards and having that designation ups the independence and credibility of the work • No matter how informational and conflict-free the report, it must be used a one of many research tools. Never make an investment decision based on one report • If a report is too promotional or draws unrealistic conclusions and/or price targets, it should likely be ignored • The majority of fee-based research shops do not take shares as compensation, thereby negating a vested or conflicted interest in the market performance of the shares • The research should work for the investor, not the company In the majority of cases, the company does not see — if the report contains one — the analyst’s price target or rating until publication. The reason is to maintain the independence of the report and not allow the company to exert any influence on the projected price. The company always has the right to spike the report if it feels there are problems, but since investors will never know, the point is moot. The main enigma for investors is that fee-based research is likely going to be positive. A company facing bankruptcy or some other calamity is not going to bring attention to it. Plus, it likely doesn’t have the money to pay for a report. I don’t see this issue as a problem, based on the fact that if these reports are used first and foremost as information sources, the investor takeaway is an in-depth history of the company, good rundown of the financials, comparison to the metrics of peers and a sense of future direction. Analysts, especially those with CFA designations, are not in the habit of making stuff up. The numbers are the numbers and all those used for the report are already freely available to the public. Investors should never confuse a positive tone with a flattering or pandering one; alarm bells should sound if the tenor of the report is overtly gushy. Compared to Wall Street, or traditional investment sealer research, fee-based reports give — or should — a clear picture of all compensation. ‘Traditional’ research rarely does this and while I draw no conclusions as to why, wouldn’t an investor just rather know? All a reputable fee-based analyst receives is a disclosed cash payment. No soft dollar arrangements, no investment banking relationships and no axe to grind. For my money, or rather a SmallCap company’s money, that seems a good deal for all involved.

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Bryce Covert: Debt Collection Agencies Gone Wild

by on June 2, 2011

Huffington Post…

As Elizabeth Warren says , “Nothing will ever replace the role of personal responsibility.” Just as the FDA doesn’t prevent overdoses, the point of consumer protection regulations isn’t to come to the rescue of people who simply don’t want to pay back the money they owe. But debt collection agencies have started using outrageous tactics to get payments on debt. These companies buy up bad debt from lenders — credit card companies, phone companies, health care providers, you name it — for cheap and then hunt down the money owed in order to turn a profit. And in doing so, some act more like organized crime than private businesses. They harass consumers with threats and obscenities. Complaints about debt collectors filed with the Federal Trade Commission, the agency tasked with regulating these operations, rose by about 17% in 2010, which is nearly three times the number of complaints filed in 2002. They account for 27% of all those lodged with the FTC. And of the 54,147 consumers complaining to state level authorities in South Carolina, 4,182 said debt collectors had threatened violence. In 2005, 8,000 consumers told the FTC that debt collectors had used obscene or profane language, according to ” Up To Our Eyeballs .” But it’s not always just about outright harassment. It’s also a mind game. A former debt collector has anonymously blogged about some of the tactics he used, describing how he would “sound educated enough to perform some sort of legal action” by dropping four important phrases: office, file, client, and flat refusal to pay. This careful use of language was often enough to scare consumers into coughing up some money. Debt collectors put people in jail . The Minneapolis StarTribune reported that “the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009.” The Wall Street Journal found similar numbers: More than a third of all U.S. states allow borrowers who can’t or won’t pay to be jailed. Judges have signed off on more than 5,000 such warrants since the start of 2010 in nine counties with a total population of 13.6 million people, according to a tally by The Wall Street Journal of filings in those counties. This has resulted in people being jailed for owing as little as $85, while the rising number of cases has clogged law enforcement computer systems, making it harder for police to work on hard crimes. And in a sign of the times, debt collection agencies have started using social media as a weapon. One man reported that he checked in at a restaurant on foursquare, tipping the debt collectors off to his location, and they repossessed his car while he ate. They also sign up for accounts on Facebook and friend debtors — and while Brad Klein, president of the Arizona Collector’s Association, points out that they can’t misrepresent themselves or send messages or comments without violating laws, they use it to find phone numbers and home addresses. Meanwhile, they can send emails without violating the Fair Debt Collection Practices Act . Why is the industry deploying such aggressive, quasi-legal tactics to hunt down debt? Because it’s a very lucrative business. The industry as a whole made $11.7 billion in revenue last year. Portfolio Recovery Associates, a debt buyer, alone made $44 million on $281 million in revenue, a 16% net margin. This is because that company pays about 2.5 cents for every dollar of bad debt it purchases, but it makes back about 7.5 cents. That profit has jumped from $402,000 in 1998, mostly because so many more lenders are selling bad debt in order to write it off. Even the business community sees this as a golden opportunity: in the third quarter of 2005, private equity firms and venture capitalists invested $1.6 billion in it. Those who take out loans and lines of credit are responsible for paying back what they owe. But the debt collection industry has run amok in the practices it deploys to get repaid. We need some cops on the beat to rein them in. Cross-posted from New Deal 2.0 .

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Bryce Covert: Debt Collection Agencies Gone Wild

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Former GOP Senator Hired By Goldman Sachs

May 27, 2011

NEW YORK — With Goldman Sachs’ latest high-profile hire, the Wall Street giant is unlikely to shake its Government Sachs nickname or the reputation for exerting undue influence in Washington that it implies. Goldman announced Friday that it had named three-term Sen. Judd Gregg an international adviser to the bank. The New Hampshire Republican will “provide strategic advice to the firm and its clients, and assist in business development initiatives across our global franchise,” Goldman said in a statement. “Judd Gregg’s experience and insight will contribute significantly to our firm and our continuing focus on supporting economic growth,” said Lloyd Blankfein, Goldman’s chairman and CEO. “A strong financial sector is critical to our nation and one of the key engines of job creation in our country,” said Gregg, who was the ranking Republican on the Appropriations; Banking; Housing and Urban Affairs; and Health Education Labor and Pensions Committees. “I hope that I can bring to Goldman Sachs some ideas and perspectives that will help the firm continue to be a leader in supporting its clients in their pursuit of the capital, credit and advice they need to be successful.” In the wake of the financial crisis, which has been partly blamed on the excesses of Wall Street banks such as Goldman, Gregg was an outspoken critic of the Obama administration’s effort to tighten oversight of the financial industry. He was also a defender of Goldman during the heated congressional debate over the $700 billion bank bailout. Early last year, Gregg said that Democrats were overreacting to civil charges filed against Goldman for securities fraud by using the indictment to push regulatory reform. He noted at the time that the allegations had not yet been proven in court. “It’s really disingenuous for some people to pursue regulatory reform based off this one instance,” the retired senator said on MSNBC. “This is a single event, we don’t even know what the outcome will be.” During an April 2010 appearance on Fox News , Gregg corrected the host Greta Van Susteren’s assertion that Goldman received a $10 billion bailout. The bank didn’t need the money, and that it’s wrong to criticize them for handing out big bonuses, he said: VAN SUSTEREN: Goldman Sachs got bailed out, right? GREGG: They didn’t ask. I don’t think in Goldman’s case they were looking to be bailed out. VAN SUSTEREN: They took it, right? GREGG: They were told to. If you’re going to go back and do some history, what happened — I was there at the time. [Treasury Secretary] Hank Paulson called in the top 10 banks and said you are all going to take this money, because if only those of you who are in real trouble take the money it is going to be a message to the marketplace that you guys are in trouble and the others are stronger and that is going to turn the playing field against you and you are going to get in worse trouble. He said all the top 10 banks, you have to take this money there. So there were four or five who didn’t want to take it — Wells Fargo, Goldman, a number of others — but ended up having to take it. VAN SUSTEREN: So I’m wrong to think they got a bailout from taxpayers and turned around and paid big bonuses? I’m wrong in being sort of, like, hyper-critical of them? GREGG: In the Goldman case I think it is hard to say that. You can make that case with Bank of America because of the Merrill deal with Citibank, and with a couple of others that clearly got support when they were in difficult straits and then gave large bonuses.

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Ellen Brown: Japan Shows How to Defuse Debt Time-Bomb

May 27, 2011

[T]hreatening to default should not be a partisan issue. In view of all the hazards it entails, one wonders why any responsible person would even flirt with the idea. — Alan S. Blinder , Princeton professor of economics, former vice chairman of the Federal Reserve A game of Russian roulette is being played with the national debt ceiling. Fire the wrong chamber of the gun, and the result could be the second Great Depression. The first Great Depression led to totalitarian dictatorships, war to consolidate power, and concentrations of capital in the hands of a financial elite. The trigger was a default on the global reserve currency, in that case the pound sterling. The U.S. dollar is now the global reserve currency. The concern is that default could create the same sort of global panic today. Dark visions are evoked of the president declaring a national emergency, FEMA plans locking into place, camps being readied for protesters, and the secret government taking over . . . . This may all just be political theater, but do we really want to get close enough to the economic precipice to find out? The conservative ideologues toying with the debt ceiling are doing it to force cuts in the budget, a budget that was already approved by Congress. Congress is being held hostage by a radical minority pushing a risky agenda, one that is based on an economic model that is obsolete. High-stakes Gambling On May 16, the Wall Street Journal published an opinion piece titled ” The Armaggedon Lobby ,” which claimed that a “technical default” on the federal debt was just “political melodrama” and not really a big deal: [B]ond markets can figure out the difference between a genuine default when a country can’t pay its bills and a technical default of a few days if it serves the purpose of fixing America’s fiscal mess. Not so, said Saudi Prince Alwaleed bin Talal in a May 20 interview on CNBC. “That’s gambling. This is the United States. You’re leading the whole world. You cannot play games with that.” It is not just that the government could be brought to a standstill, with a third of its bills now being paid by borrowing or that interest rates would shoot up, forcing thousands of homeowners into foreclosure. Failure to pay on the national debt could trigger a default on the global reserve currency. As one commentator described what could go wrong: [T]he consequences of a US default could spark yet another global financial crisis. The US could lose its triple-A rating, which could cause a sell-off in Treasury notes by institutional and foreign investors. This sell-off could lead to higher interest rates, and banks’ balance sheets might be decimated by the decline in their bond portfolios. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive. A Rerun of 1931? The sort of chaos that could ensue was seen when Great Britain reneged on its deal to redeem pound sterling banknotes in gold in 1931. The result was the worst global depression in history. When the pound went off the gold standard, markets panicked. People rushed to exchange their paper money for gold, in any currencies in which that was still possible. The gold wound up hidden under mattresses and in safety deposit boxes, unspent and the banks from which it was pulled, having no reserves to back their loans, quit lending or closed their doors. Credit froze; business ground to a halt. As other countries ran short of gold, they too were forced to take their currencies off the gold standard. The last holdouts suffered the most, including the United States, which kept its gold window open until 1933. The 19th century had been plagued by bank runs, caused by banks having too little gold to back their outstanding loans. The Federal Reserve was instituted in 1913 ostensibly to prevent those runs, but its levee did not hold back the run of the 1930s. In 1933, the country suffered a massive banking collapse, forcing President Roosevelt to declare a banking holiday and take the U.S. dollar, too, off the gold standard. Freed from the Bankers’ “Cross of Gold” The transition off the gold standard was a painful one but according to Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, the country was the better for it. In a paper read before the American Bar Association in 1946, he said that going off the gold standard had finally allowed the country to be economically sovereign: Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity. Freed from the strictures of gold, Roosevelt was able to jump-start the economy with deficit spending. As Marshall Auerback details , the next four years constituted the biggest cyclical boom in U.S. economic history. Real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. Then in 1937, Roosevelt listened to the deficit hawks of his day and slashed the deficit. The result was a surge in unemployment, and the economy slipped back into depression. What lifted the country out of the doldrums was again deficit spending, liberally engaged in to fund World War II. In wartime, few people worry about the national debt. The debt grew to 120% of GDP — twice what it is today — and wound up sustaining another very productive period in U.S. history, one that set the country up to lead the world in manufacturing for the next half century. On Inflation and Taxes Ruml said federal taxes were no longer needed to fund the budget, which could be financed by issuing bonds. The principal purpose of taxes, he said, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’” The government could spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency. Then, and only then, would the money supply need to be contracted with taxes. “The dollars the government spends become purchasing power in the hands of the people who have received them,” Ruml said. “The dollars the government takes by taxes cannot be spent by the people,” so the money supply can be contracted with taxes as needed. When the economy is in a recession, however — as it is now — the government needs to spend in order to get purchasing power into the hands of the people. Businesses cannot hire more workers until they have more customers demanding their products, and the customers won’t come until they have money to spend. The money (“demand”) must come first. Adding money will not drive up prices until the economy is at full employment. Before that, increasing “demand” will drive up “supply” by setting the engines of production in motion. When supply and demand rise together, prices remain stable. We now know that a government can go quite far into debt without a dangerous level of price inflation occurring — much farther than the U.S. has gone today. Besides World War II, when U.S. debt was 120% of GDP, there is the remarkable example of Japan. Japan has retained its status as the world’s third largest economy, although it has a debt to GDP ratio of 226% — and it is still fighting deflation. Critics of the deflationary theory point to commodity prices, which are soaring today. But if those prices were due to the economy being awash with “too much money chasing too few goods,” real estate prices would be soaring too. Instead, the real estate market has collapsed. What has actually happened is that the housing bubble has transmuted into the commodity bubble, as “hot money” has fled from one to the other. The overall money supply is still in decline . The deficit hawks have been predicting for years that the federal debt would sink the dollar and the economy, and it hasn’t happened yet. In fact the federal debt has not been paid off since 1835, and no disaster has resulted. The debt has not only been carried on the government’s books but has continued to grow, and the economy has grown and flourished along with it. This is not an economic anomaly. The economy has flourished because of the national debt. Nothing backs the currency today but “the full faith and credit of the United States.” Money is no longer a metal; it is an inflow and outflow, credits and debits . The liabilities of the government are the assets of the private economy. The national debt is what backs the money supply. Dealing with the Rising Cost of Debt Service There is a potential time bomb in a growing federal debt, but it is one that can be defused. The debt has risen from $10 trillion to $14 trillion just since the banking crisis of 2008, not from “entitlements” but due to the Wall Street collapse and bailout. Just the interest on this growing debt could cripple the tax base if interest rates were at normal levels, so they have had to be pushed almost to zero. The result has been to create a dollar carry trade . This has facilitated speculation in commodities, a major cause of today’s commodity bubbles. There is, however, a solution to this problem, and it was discovered by Japan. The government can spend, not by issuing bonds at interest to the public, but simply by creating an overdraft at the central bank, as Beardsley Ruml recommended. The Bank of Japan now holds an amount of public debt equal to the country’s GDP! As noted by the Center for Economic and Policy Research: Interest on [Japanese] debt held by the central bank is refunded back to the treasury, leaving no net cost to the government on this debt. . . . Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt. Like the Bank of Japan, the Federal Reserve now returns the interest it receives to the government. With a rising interest tab on the federal debt no longer a problem, private interest rates could be allowed to rise to normal levels. Today the Fed is not permitted to buy bonds directly from the Treasury but must go through middleman bond dealers. But that problem too could be fixed. In a supporting statement in 1947, Federal Reserve Chairman Marriner Eccles discussed a bill to eliminate the unnecessary cost of these middlemen. He said the Federal Reserve had been allowed to purchase securities directly from the government from its inception in 1914 until the Banking Act of 1935. Then: A provision was inserted in that act requiring all purchases of government securities by Federal Reserve banks to be made in the open market, which means purchased chiefly from dealers in Government bonds. Those who inserted this proviso were motivated by the mistaken theory that it would help to prevent deficit financing. . . . Nothing constructive would be accomplished by the proviso that the Reserve System must purchase Government securities exclusively in the open market. About all such a ban means is that in making such purchases a commission has to be paid to Government bond dealers. The interest cost and the bond dealers’ cut could both be eliminated by allowing the Treasury to borrow directly from its own central bank, interest free. Nothing to Fear But Fear Itself We have been frightened into believing that government debt is a bad thing, but nearly all money today originates as debt. As Marriner Eccles observed in the 1930s, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.” The public debt is the people’s money, and today the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy. Originally posted on Asia Times .

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What Would Jesus Spend His Money On?

May 25, 2011

By G. Jeffrey MacDonald Religion News Service BEVERLY, Mass. (RNS) No sooner had 29-year-old Graham Messier joined a small group at his church earlier this year than he found himself breaking an American taboo: talking about how much he earns, and where it all goes. Others in the group did likewise as they kicked off an eight-week program aimed at reconciling personal finances with Christian rhetoric about economic justice. It’s countercultural, they said, but it works. By the eighth meeting, Messier’s group had raised $1,800 for three non-profits simply by cutting back on gourmet coffees, dining out and other non-essentials. Talking about household budgets isn’t “the most comfortable thing in the world,” Messier said. “But talking as Christians about the reality of our money situations should be more of a focus than it is generally if we’re going to be real about loving, giving to the poor and taking care of our fellow man.” Since inception in 2006, the Lazarus at the Gate curriculum has guided some 400 people in more than 30 groups to give away a total of $200,000. Using the biblical story of poor Lazarus seeking help at a rich man’s gate, most participants learn that ordinary Americans rank among the world’s richest 5 percent — and that a few dollars go a lot farther in the developing world than they do at their local Starbucks. What began as a Boston-based pilot has grown into an open-source curriculum. The ecumenical Boston Faith and Justice Network (BFJN) shares Lazarus materials upon request with college student groups and churches in other regions and countries. The Boston group recently received funding from Episcopal City Mission and the Presbyterian Hunger Program to encourage the curriculum’s use in their respective denominations. For small groups in U.S. churches, intimate sharing is familiar terrain, but few go so far as to probe spending practices. This “special kind of discipleship” is rare, in part, because it entails true vulnerability and people often don’t want to “disclose family secrets,” according to Max Stackhouse, a retired Princeton Theological Seminary theologian and co-editor of the book, “On Moral Business.” Talking about spending habits “really does cut to the depth of who you are,” said Craig Gay, a Regent College sociologist and author of “Cash Values: Money and the Erosion of Meaning in Today’s Society.” “It really does lay you bare, and that’s threatening,” Gay said. “Most of us don’t want to be that transparent with each other, (but) being less private and more accountable in this area is probably a good idea.” Discomfort notwithstanding, Lazarus has proven a compelling challenge in various religious sectors, appealing to both evangelicals and mainline Protestants, according to Ryan Scott McDonnell, executive director of the Boston Faith and Justice Network. College students seem especially interested since Lazarus campus groups have attracted interest from non-Christians who sense a portion of their money could be used in better ways for greater impact. “People are looking for a framework for social justice or something, and they have a hunger for it in their heart, and they don’t know how to articulate it or interpret it,” said Mako Nagasawa, co-author of the Lazarus curriculum and an advisor to the Asian Christian Fellowship group at Boston College. “We want to say it comes from being made in the image of God and being redeemed by Jesus.” As a Lazarus group gets started, participants share household budgets with the assurance that others won’t judge them or break confidentiality. Subsequent meetings place those budgets in larger contexts. Participants explain how money was (or wasn’t) discussed at home during their childhoods. Together, they unpack biblical passages that address money and responsibilities. Presenters illustrate how poverty fuels social problems such as prostitution, human trafficking and environmental degradation. In practice, Lazarus groups function as a kind of hybrid between secular giving circles and evangelical accountability groups. When members of Messier’s group convened at Christ Church of Hamilton and Wenham (Mass.), participants would report (or confess) their spending and saving over the previous week. Even with group encouragement, efforts to cut back aren’t always successful. Two artists in the Christ Church group, Matt Allard and Liana Hill, found that visits from relatives and unpredictable cash flow prevented them from saving an extra $20 per week for charity. But they donated $140 anyway. “It’s increased my intentional behavior,” Hill said. Lifting the veil on finances involves risk, Gay noted, and requires vigilance to make sure no one suffers abuse. Yet when trust is warranted, he said, Lazarus groups might help people steer clear of secretive spending habits. Simplicity for the sake of generosity is one the Lazarus goals, but exceptions are allowed. After seven weeks of vegetarian fare at the church, the final celebration dinner at one couple’s home featured flank steak, wine and two desserts. As the final meeting wound down, the group’s 13 members voted to divide their $1,800 equally among three organizations whose work includes microfinance, sustainable agriculture and rescuing prostitutes in Manila. The group agreed to keep meeting monthly and making quarterly donations. And they gave thanks for an experience that’s helped them learn to live more gratefully from day to day. To accrue savings, “we split meals, we didn’t get alcohol, or we would share a drink,” said McDonnell, who was part of the Christ Church group. “And we enjoyed it so much more because we made an intentional decision to go out to eat,” added McDonnell’s wife, Caroline.

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ProPublica: The Heroes Are Really Zeroes in HBO’s Too Big To Fail

May 25, 2011

By Jesse Eisinger , ProPublica HBO’s Too Big To Fail — I just caught up with it last night, thanks to HBO On Demand — is extraordinarily revealing about the financial crisis. Only its revelations are almost entirely inadvertent. The movie is set up in the Hollywood conventional way: A gang of misfits, each with a special expertise, is brought together for an impossible mission. There’s Treasury Secretary Henry Paulson, steely eyed at the moment of truth. There’s New York Federal Reserve head Timothy Geithner, the athlete (he doesn’t just jog, but also plays what appears to be squash). And then there’s Federal Reserve chairman Ben Bernanke, the professor with a heart of gold and secret knowledge of the Great Depression. Ostensibly it’s a story of their success against all odds. Michael Kinsley, reviewing the movie in the New York Times , labeled Hank Paulson [1] the “hero” of the account. Except that the movie actually depicts something entirely different: failure upon failure. Too Big To Fail the movie isn’t the story of how the Three Musketeers saved the global economy. It’s a story of how the three didn’t see the financial crisis coming; hadn’t prepared for it; made mistake after mistake as it was cresting; and then, in their moment of triumph, made their most colossal blunder of all. That, it turns out (whether or not Too Big To Fail knows it), is the true story of the financial crisis. How much did Curtis Hanson and the writers mean for that to be the story? Throughout, the characters drop hints about their missteps, but the plot unfolds like a financial “Die Hard,” with our intrepid heroes battling fiendishly powerful forces toward a happy ending. (Full disclosure in this era of transparency: I write a regular column [2] for DealBook, the New York Times section edited by Andrew Ross Sorkin, the reporter upon whose book [3] the movie was based.) Early on, Paulson complains to his staff that they have been behind on everything as the crisis began to emerge. And that’s true! The crisis actually started in the late summer of 2007 [4] . Paulson’s first effort, late that year, was to get a bunch of banks to assemble a giant off-balance-sheet concoction [5] that would save each individual bank’s off-balance-sheet monstrosity. It was a complete flop. In the movie, as bankers and government officials frantically try to save Lehman, Chris Flowers, the private equity investor and banking impresario, is depicted as informing Paulson and Geithner that AIG is teetering on the edge. In their fumbled response, he immediately grasps the truth. “They’re not on top of it,” he tells a confederate. And they weren’t. In real life, AIG had been struggling since the middle of 2007. Paulson and Geithner [6] of course had some inkling of the problems [7] at the world’s largest insurer. But they didn’t prepare for it. In the movie, the chief executive of General Electric, Jeff Immelt, places a terrified call to Paulson [8] saying that GE can’t borrow. GE is standing in for every Real American manufacturing company. We are reminded it makes light bulbs and washing machines. Paulson is shocked that such a stalwart could be having trouble borrowing. The reality, of course, is that GE was more a finance company than a manufacturer and was teetering because it financed those operations with billions of short-term borrowing. It is also true that Paulson, Bernanke and Geithner had no inkling of GE’s troubles until the very last moment and therefore had no plan to deal with it. Plans are, in the movie, almost nonexistent. The team of heroes races from crisis to crisis, as Bond goes from chase scene to babe, eventually stumbling on the evil SPECTRE [9] plot to take over the world. Intentionally or not, the movie is echoing real life. Despite warning signs [10] , Paulson, Geithner and Bernanke had no evident plans throughout the last half of 2007 and the first eight months of 2008. Not for how to resolve Lehman after Bear Stearns’ collapse, not for AIG, not for recapitalizing the banking system. Indeed, they asked Congress for $700 billion to implement the Troubled Asset Relief Plan [11] to buy toxic assets from the banks, and then, without any further discussion, abandoned that idea and injected capital into the banks. Many economists [12] and financial experts had been urging them to do just that, but when they finally hit on that as a solution, it was so poorly thought out that they gave the money to the banks on overly generous terms. This moment is depicted at the end of the movie, and because it is both a triumph in the conventional narrative sense, but also a major mistake by our heroes, it is the

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Robert Reich: Paul Ryan Still Doesn’t Get It

May 25, 2011

Republican House Budget chief Paul Ryan still doesn’t get it. He blames Tuesday’s upset victory of Democrat Kathy Hochul over Republican Jane Corwin to represent New York’s 26th congressional district on Democratic scare tactics. Hochul had focused like a laser on the Republican plan to turn Medicare into vouchers that would funnel the money to private health insurers. Republicans didn’t exactly take it lying down. The National Republican Congressional Committee poured over $400,000 into the race, and Karl Rove’s American Crossroads provided Corwin an additional $700,000 of support. But the money didn’t work. Even in this traditionally Republican district — represented in the past by such GOP notables as Jack Kemp and William Miller, both of whom would become vice presidential candidates — Hochul’s message hit home. Ryan calls it “demagoguery,” accusing Hochul and her fellow Democrats of trying to “scare seniors into thinking that their current benefits are being affected.” Scare tactics? Seniors have every right to be scared. His plan would eviscerate Medicare by privatizing it with vouchers that would fall further and further behind the rising cost of health insurance. And Ryan and the Republicans offer no means of slowing rising health-care costs. To the contrary, they want to repeal every cost-containment measure enacted in last year’s health-reform legislation. The inevitable result: More and more seniors would be priced out of the market for health care. The Ryan plan has put Republicans in a corner. Some, like Massachusetts Senator Scott Brown and, briefly, presidential hopeful Newt Gingrich, are rejecting the plan altogether. Most, though, are holding on and holding their breath. After all, House Republicans approved it — and voters don’t especially like flip-floppers. Senate Democrats will bring the Ryan plan for a vote Thursday in order to force Senate Republicans on the record. Watch closely. Some GOP stalwarts say the Party must clarify its message — a sure sign of panic. Former Republican congressman Rick Lazio says the GOP “must do [a] better job explaining entitlements.” It’s just possible the public knows exactly what entitlements are — and is getting a clear message about what Republicans are up to. All this should give the White House and Democratic budget negotiators more confidence — and more bargaining leverage – to put tax cuts on the rich squarely on the table. And, while they’re at it, turn Medicare into a “Medicare-for-all” system that forces doctors and hospitals to shift from costly tests, drugs, and procedures having little effect, to healthy outcomes. Robert Reich is the author of Aftershock: The Next Economy and America’s Future , now in bookstores. This post originally appeared at RobertReich.org .

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Don McNay: It’s My Money But I Don’t Want It Now

May 17, 2011

“Freedom is just another word for nothing left to lose” – Janis Joplin (Kris Kristofferson) “It’s my money and I want it now” – Commercial for JG Wentworth, a company that buys structured settlement payments from injury victims. I hate the J.G. Wentworth commercial where people are screaming “It’s my money and I want it now.” I even hate it worse than the Cialis commercial where they are sitting in bathtubs in the middle of a field. I have an obvious bias. I am in the business of setting up structured settlements for injured people. Wentworth is in the business of ripping them apart. 14 years ago, I spent a lot of my time and my own money convincing some legislatures to regulate Wentworth and companies like it. We made it tougher on Wentworth, but they are still around. Wentworth has an easy task. All they have to do is get people to focus on the immediate and forget about the future. I try to get them to focus on the long-term. If you look at the actions of Wall Street, Main Street and Washington during the past 20 years, you can see that the Wentworth philosophy is winning. If you look at Washington’s trillion dollar deficits, Main Street home foreclosures and Wall Street chaos, you can’t really say “I want it now” has worked out. Both Wentworth and I have a different view of “financial freedom.” Wentworth’s idea of financial freedom is that you can get your hands on a wad of money and spend it immediately. I have a different view of what financial freedom is really about. To me, real freedom means stability, security and independence. It means never running-out of money. It means never having to work at a job you hate, because you can’t afford to quit. It means never becoming a slave to your creditors. In short, it means having control and stability in your life. That is what real financial freedom is about. Not many people have true financial freedom. And many who have the opportunity to gain it, screw it up. It’s been said that 90% of people who win the lottery run through the money in five years or less. Sports Illustrated said that 78% of NFL players run out of money within three years after their football careers end. Similar ratios holds true in other sports. In her book, Living Richly, Myra Salter said that 70% of all wealth transitions fail. That means that if you leave money to a loved one, it will be gone within two generations, no matter how much or how little you leave. I’ve spent 28 years working with injured people and their money. My primary goal is to keep them from blowing it. It’s harder than you think. The three hurdles to overcome are complications, choices and lack of controls. The world is an increasingly complicated place, but one rule has held true for centuries: People who have financial security control the destiny of the people who don’t. As the late John Savage, a frequent speaker at the Million Dollar Round Table, once said, “Spenders in the world always work for savers. It never happens the other way around.” The rich get richer for many reasons, but one is that they take a long term view about their money. You don’t hear Warren Buffett yelling, “It’s my money and I want it now.” There are a lot of financial choices in the world. Many companies prey on the “I want it now” mentality. As Gary Rivlin noted in Broke USA, Payday lenders, tax refund anticipation loans, car leases, sub-prime mortgages and credit cards are fairly recent additions to the world of personal finance. All of those vendors will get you immediate cash — at a huge price to pay in the future. Our grandparents didn’t have credit cards. Debt absolutely frightened them. Maybe we should be frightened, too. As Joe Nocera pointed out in A Piece of the Action, his classic history of personal finance, the rise of credit cards, mutual funds, 401(k) plans and individuals investing in the stock market are all things that have happened primarily since the mid-1960′s. Our parents lived in an era where they worked a lifetime at one company and got a monthly pension when they turned 65. Our children will switch jobs frequently and will need to depend on contributions, and the investment results, of 401(k) plans to allow them to retire. Our parents and grandparents had systems to protect them. Our children and grandchildren are on their own. I preach a simple gospel: Think about the long term. Tear up your credit cards. Don’t trust Wall Street, your government or your employer to take care of you. Janis Joplin sang, “Freedom is just another word for nothing left to lose.” Actually Janis, (and Kris Kristofferson, who wrote the song), had it semi-right. Real freedom means living in a way where you can have fun, enjoy life and know that you are never going to hit a time when you are out of cash and out of luck. Instead of “It’s my money and I want it now,” a better way to think is “It’s my money and I want it always.” Don McNay, CLU, ChFC, MSFS, CSSC of Richmond, Kentucky is the founder of McNay Settlement Group. He is the author of the book, Son of a Son of a Gambler: Winners, Losers and What to Do When You Win the Lottery. He has appeared on the CBS Evening News With Katie Couric along with numerous other television and radio programs. You can read more about Don at www.donmcnay.com McNay has Master’s Degrees from Vanderbilt and the American College and is in the Hall of Distinguished Alumni of Eastern Kentucky University. McNay is a lifetime member of the Million Dollar Round Table and has four professional designations in the financial services field

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Poker Is A Game Of Skill, Not Luck, Freakonomics Economist Finds

May 9, 2011

Proving poker is a game of skill, not luck, could be a huge win for the online industry revolving around it. And a new paper could do just that. University of Chicago economics professor Steven Levitt, famous for the best-selling Freakonomics series, has published a working paper alongside fellow University of Chicago professor Thomas Miles entitled “The Role of Skill Versus Luck in Poker: Evidence From the World Series of Poker.” In it, they attempt to answer the central question surrounding the legality of the online poker industry: is it a game of skill or luck? The hugely popular industry of online poker has been controversial for some time now. Despite efforts to curb the industry, most notably the 2006 Unlawful Internet Gambling Enforcement Act, still upwards of 10 million Americans play poker online for money. Just last month, three popular online poker sites — Full Tilt Poker, PokerStars and Absolute Poker — were shutdown by the FBI, and the federal government announced plans to recover $3 billion from them, according to the Los Angeles Times . The central question surrounding the legality of the industry, on which Americans consumers spend $6 billion annually, has been whether poker is a game or skill or luck. Despite this, the paper says, “[s]tate courts that have ruled on whether poker is a game of skill-versus-luck generally have done so in the absence of any statistical evidence[.]” To answer the question, Levitt and Miles looked at information made available by the 2010 World Series of Poker. The annual event, held in Las Vegas, includes 57 tournaments, 32,000 participants and $185 million prize money, including the “Main Event,” in which the grand winner earns almost $9 million. The duo found significant evidence that poker requires skill. Players assumed to be skilled earned 30 percent on their investment, compared to all other players, who lost 15 percent. In dollar terms, and even excluding the highly-skilled “Main Event,” high skill players earned an average of $350 per tournament, while other players lost $400 on average. To put that in perspective, Levitt and Miles compare the return on a poker investment with that common from the financial markets. “The observed differences in ROIs [return on investments] are highly statistically significant and far larger in magnitude than those observed in financial markets,” the paper says, “where fees charged by the money managers viewed as being most talented can run as high as three percent of assets under management and thirty percent of annual returns.” In human speak, that means the money of skilled players is better invested in a poker tournament than Wall Street, despite conventional wisdom that would indicate the opposite. In fact, the paper finds, “the high skilled player wins 54.9 percent of the match ups.” That compares more closely to what is witnessed in Major League Baseball than anything on Wall Street: “Since the year 2007, [baseball] teams that made the playoffs the previous season win 55.7 percent of their games in Major League Baseball against teams that failed to make the playoffs in the previous year. Thus, in some crude sense, the predictability of outcomes for pairs of players in a poker tournament is similar to that between teams in Major League Baseball. To the extent that baseball would unquestionably be judged a game of skill, the same conclusion might reasonably be applied to poker in light of the data.”

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Amtrak, 15 States Get $2 Billion That Florida Lost

May 9, 2011

WASHINGTON — Amtrak and rail projects in 15 states are being awarded the $2 billion that Florida lost after the governor canceled plans for high-speed train service, the Department of Transportation said Monday. The largest share of the money – nearly $800 million – will be used to upgrade train speeds from 135 mph to 160 mph on critical segments of the heavily traveled Northeast corridor, the department said in a statement.. Another $404 million will go to expand high-speed rail service in the Midwest, including newly constructed segments of 110-mph track between Detroit and Chicago that are expected to save passengers 30 minutes in travel time. Nearly $340 million will go toward state-of-the-art locomotives and rail cars for California and the Midwest. California will also get another $300 million toward trains that will travel up to 220 mph between San Francisco and Los Angeles. “These projects will put thousands of Americans to work, save hundreds of thousands of hours for American travelers every year, and boost U.S. manufacturing by investing hundreds of millions of dollars in next-generation, American-made locomotives and rail cars,” Vice President Joseph Biden said in a statement. President Barack Obama has sought to make creation a national network of high-speed trains a signature project of his administration. He has said he wants to make fast trains accessible to 80 percent of Americans within 25 years. The money – initially $2.4 billion – had been awarded to Florida for high-speed trains between Tampa and Orlando. After Gov. Rick Scott canceled the project, the Transportation Department invited other states to bid for the funds. It received 90 applications seeking a total of $10 billion. Scott said he was concerned that the state government would be locked into years of operating subsidies. However, a report by the state’s transportation department forecast the rail line would be profitable. The project initially had been approved by Scott’s predecessor, Republican-turned-Independent Charlie Crist. Two other Republican governors elected in November have canceled high-speed train projects in their states. Wisconsin Gov. Scott Walker turned down $810 million to build a Madison-to-Milwaukee high-speed line. Ohio Gov. John Kasich rejected $400 million for a project to connect Cincinnati, Cleveland and Columbus with slower-moving trains. Both the Ohio and Wisconsin projects had been approved by the governors’ Democratic predecessors. Republican members of Congress have also opposed funds for high-speed trains, rescinding $400 million of the money previously awarded Florida as well as other unspent money designated for trains in budget deliberations with the administration.

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Preeti Vissa: The Crisis of the Day

May 5, 2011

Is it just me, or does the news lately seem like an endless stream of crises that come and go in a flash? Japan! Libya! The deficit! Obama’s birth certificate! Bin Laden! I, too, believe that many of these are serious issues that deserve attention and sympathy, but the drumbeat of daily emergencies is enough to leave one breathless. And confused. Confused enough, in fact, not to notice that at least one old crisis hasn’t gone away. Indeed, Congress has been busy making it worse. In the recent budget deal, Congress and the administration did away with $88 million in funding for nonprofit agencies that counsel families struggling to keep their homes and avoid foreclosure. Maybe that doesn’t seem important, but as this article from Painesville, Ohio makes clear, it has real-world consequences. For one thing, it endangers many who are currently obtaining loan modifications, which may require the completion of credit and homeowner counseling as a condition for the modification to go through. If that counseling isn’t available because the agencies doing it lost their funding, what happens to these homeowners? The need for this sort of help and counseling for homeowners is only going up as the ongoing tsunami of foreclosures continues, but the future of such assistance is very much in doubt. Congress could and should restore this funding in the 2012 budget, but that’s by no means a done deal. And unlike ginned-up controversies about things like presidential birth certificates, this crisis is real, with consequences that literally include families and children being thrown out into the streets. If we must cut spending, does it always have to be from help for the poor and vulnerable? Even when what happens to the most economically vulnerable is going to affect us all? Consider: A Government Accountability Office review of Defense Department weapons procurement released in March found a “staggering” array of weapons programs soaring wildly over budget , amounting to tens of billions of dollars. Without wading into the debate about what weapons are needed, it’s a given that our military will buy tanks, planes, etc. Is it too much to ask that we get our money’s worth, that our money not be wasted due to mismanagment? It’s hard to stomach losing a comparatively tiny appropriation aimed at keeping families in their homes while simultaneously reading that contracting waste is burning through piles of money equal to the GDP of some small countries. While we’re at it, maybe it’s time to glance away from this morning’s crisis-of-the-day — whatever it is — and remember the ongoing foreclosure crisis that continues to decimate American communities, whether the media notice or not.

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Weekly Money Market Review: Swiss franc, Australian dollar hit historic highs

May 3, 2011

Weekly Money Market Review: Swiss franc, Australian dollar hit historic highs

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Florida GOP To Rick Scott: We Won’t Vote For Anti-Union Bill

April 28, 2011

The story has been updated. WASHINGTON — A controversial bill targeting public unions in Florida appears headed for failure, despite a last-minute lobbying effort by Republican Gov. Rick Scott (R). The legislation, SB 830 , would prohibit state and local governments from automatically deducting union dues from employees’ paychecks. Union members would also have to give written consent before their dues are used for political purposes. According to a report in the Miami Herald , Scott made rare personal visits to the offices of four Republican state senators and pleaded with them to support the measure on Wednesday. All of them, however, were unpersuaded. “I’m a conservative Republican,” said Charlie Dean, one of the senators who met with Scott. “I support the governor and I support the president and speaker. But I also reserve the right somehow to make up my own mind.” Dean aide Kevin Sweeny further told The Huffington Post that the senator objected to the fact that the bill only singles out public employee unions for making automatic paycheck deductions. Indeed, in Florida, there are 364 groups or agencies that can take money out of employees’ wages for charitable donations, life insurance, taxes and other deductions. Thrasher’s bill, however, focuses only on union dues. “[Sen. Dean's] main objections are that he doesn’t believe it’s his money to say; it should be left alone,” said Sweeny. “What he would really like to see is if we’re going to take away the option for the state to take the money out of the checks, we should do it across the board.” After meeting with Scott, one of the other GOP senators, Miguel Diaz de la Portilla, said of the bill , “It creates division and turmoil, and doesn’t create jobs.” In an interview with The Huffington Post, state Sen. Rene Garcia (R) confirmed that he met with Scott on Wednesday and reiterated that he would be opposing the bill. He said he had heard from many of his constituents who were union members and wondered why the legislature was targeting them rather than going after all automatic deductions. “If we weren’t a right to work state, I might have been more inclined to vote for it,” he said. “But this is a right to work state, and people aren’t forced to join a union. People can opt in and opt out of a union whenever they want. That’s my main reason for voting against this bill.” Lane Wright, Scott’s press secretary, explained in an email to The Huffington Post that Scott supports SB 830 “because he believes union workers should have a right to know how their union dues are being spent.” Labor unions have been actively organizing against SB 830, as well as an executive order by Scott that would mandate random drug tests of state employees and a proposal to privatize Medicaid. A Florida labor official told The Huffington Post that GOP legislators were hesitant to tie themselves to Scott’s controversial bill, in light of the governor’s rapidly declining poll numbers . “There’s a group of concerned Republican legislators who have heard from their constituents that they don’t like this,” the source added. “This is not creating jobs. The governor is wildly un-liked. His poll numbers are absolutely atrocious.” The bill’s sponsor, state Sen. John Thrasher (R) did not return a request for comment. SB 830 was on the legislative calendar on Wednesday but delayed for supporters to shore up votes. It’s also on the calendar for Thursday, although it’s not expected to move anywhere without significant changes. “This legislation is, at this point in time, for all intents and purposes, completely stalled,” said the labor official. “We won’t call it dead, simply because there is a Republican supermajority. For that matter alone, I won’t call anything dead until the gavel goes down on the final day of the legislature.”

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Robert Reich: The Wageless Recovery

April 26, 2011

This week’s biggest economic show occurs tomorrow (Wednesday) when Fed chair Ben Bernanke steps in front of the cameras for the Fed’s first-ever news conference. The question on everyone’s mind: Will the Fed signal it’s now more worried about inflation than recession? Much of Wall Street thinks inflation is now the biggest threat to the U.S. economy. As has been the case in the past, the Street is dead wrong. The biggest threat is falling into another recession. The most significant economic news from the first quarter of 2011 is the decline in real wages. That’s unusual in a recovery, to say the least. But it’s easily explained this time around. In order to keep the jobs they have, millions of Americans are accepting shrinking paychecks. If they’ve been fired, the only way they can land a new job is to accept even smaller ones. The wage squeeze is putting most households in a double bind. Before the recession, they’d been able to pay the bills because they had two paychecks. Now, they’re likely to have one-and-a half, or just one, and it’s shrinking. Add to this the continuing decline in the value of the biggest asset most people own – their homes — and what do you get? Consumers who won’t and can’t buy enough to keep the economy going. That spells recession. Why doesn’t Wall Street get it? For one thing, because lenders always worry more about inflation than borrowers — and, in general, the wealthier members of a society tend to lend their money to people who are poorer than they are. But Wall Street’s inflation fears are also being stoked by several specifics. First are price upswings in food and energy. The Street doesn’t seem to understand that when most peoples’ wages are dropping, additional dollars they spend on groceries and at the gas pump means fewer dollars they have left to spend in the rest of the economy. Rather than cause inflation, this is likely to lead to more job losses. The Street is also worried that the Fed’s easy money policies are pushing the dollar down and thereby fueling inflation – as everything we buy abroad becomes more expensive. But if wages are stuck in the mud and everything we buy abroad costs more, Americans have even fewer dollars to spend. This also spells recession, not inflation. Finally, the Street worries that if Democrats and Republicans fail to agree to a plan to cut the budget deficit, the credit-worthiness of the United States as a whole will be in jeopardy – causing interest rates to rocket and inflation to explode. Standard & Poors, the erstwhile credit-rating agency, has already sounded the alarm. The Street has it backwards. Over the long term, the deficit does have to be tackled. But not now. When job growth remains tepid, when wages are dropping, and when the value of most households’ major asset is declining, government has to step in to maintain overall demand. This is the worst possible time to cut public spending or reduce the money supply. The biggest irony is that the Street is doing wonderfully well right now, in contrast to most Americans. Corporate profits for the first quarter of the year are way up. That’s largely because corporate payrolls are down. Payrolls are down because big companies have been shifting much of their work abroad where business is booming. The Commerce Department recently reported that over the last decade American multinationals (essentially all large American corporations) eliminated 2.9 million American jobs while adding 2.4 million abroad. What the Commerce Department didn’t say is the pace is picking up. In 2000, 30 percent of GE’s business was overseas and 46 percent of its employees; now 60 percent of its business is outside the U.S., as are 54 percent of its employees. Over the past five years, Oracle added twice as many workers overseas as in the US; 63 percent of its employees now work abroad. Corporations are simultaneously finding ways to cut the pay of their remaining U.S. workers — not just threatening job losses if they don’t agree to the cuts, but also automating the work or sending it to non-union states. (The Wall Street Journal’s editorial page, an unremittingly reliable barometer of Street thought, argued earlier this week that such states offer workers the freedom to choose whether to join a union — in reality, the freedom to lose even more bargaining power and be forced to accept even lower wages.) America’s jobless recovery is becoming a wageless recovery. That puts the odds of another recession greater than the risk of inflation. Wall Street and its representatives in Washington don’t understand — or don’t want to. Robert Reich is the author of Aftershock: The Next Economy and America’s Future , now in bookstores. This post originally appeared at RobertReich.org .

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Weekly Money Market Review: The greenback continues to lose ground

April 26, 2011

Weekly Money Market Review: The greenback continues to lose ground

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BP Greases Palms: Spill’s One-Year Anniversary Marked With Campaign Contributions

April 19, 2011

WASHINGTON — A year after BP’s catastrophic Gulf oil spill, the petroleum giant is easing its way back into the political money race — and the stain of shame candidates originally felt about accepting the company’s contributions appears to have evaporated. The gas and oil giant’s North America Political Action Committee filed its latest report with the Federal Election Commission Tuesday, which revealed $29,000 doled out to federal campaigns on its behalf. These figures mark the first contributions BP made that were not returned by federal office candidates since its drilling platform exploded on April 20, 2010, killing 11 people. “BP’s political action committee had gone completely off the radar for the past year,” noted Dave Levinthal of the Center for Responsive Politics. “It appears they’re back in the political game.” For many years before the spill, BP had been a “heavy hitter” by CRP’s standards, Levinthal said. The company regularly gave more than $200,000 to candidates each year, spreading the wealth to both Democrats and Republicans. But BP seems to be showing more of a partisan tilt upon its re-entry into the money game. “Although they were donors to both Democrats and Republicans before, their initial foray back into the political fray is targeted towards Republicans,” Levinthal said. House Speaker John Boehner (R-Ohio), House Majority Whip Kevin McCarthy (R-Calif.), Energy and Commerce Committee Chairman Fred Upton (R-Mich.), the National Republican Senatorial Committee and the National Republican Congressional Committee each received $5,000 from BP last month. Indiana Democratic Rep. Pete Visclosky got $3,000, and Ways and Means Committee Chairman Dave Camp (R-Mich.) bagged $1,000. Campaigns that accepted the money did so without blushing. “Our employee PAC contributions are a matter of public record and speak for themselves,” the company said in a statement. “From day one, Speaker Boehner has been clear in his position that BP should be accountable for every dime of the Gulf cleanup,” said Boehner campaign spokesman Cory Fritz. “We appreciate the support of all of our donors,” said the NRSC’s Brian Walsh. “Of course when it comes to BP, every Republican is still playing catch-up to President Obama, who is the largest recipient of BP PAC and individual money over the past 20 years,” said Walsh. Obama netted $77,000 in BP-related contributions for his senatorial and presidential campaigns combined, mostly from individual employees. The BP PAC gave him $1,000 during his senate run in 2004, and his White House campaign took no PAC money. The NRSC’s equivalent, the Democratic Senatorial Campaign Committee, received money from BP in the past, but none since the spill. While campaigns starting to accept donations from the oil giant again, it’s too soon to tell how voters feel about it. “The public and the candidates themselves will ultimately be the ones to determine whether enough time has passed for BP to emerge from political purgatory,” Levinthal said.

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Poll: Rich Will Drastically Increase Luxury Spending This Year

April 15, 2011

NEW YORK (Michelle Nichols) – Rich Americans are expected to spend an extra $26.6 billion on luxury goods this year but they will do so with an eye toward value as the country recovers from recession, a poll released on Friday found. Spending on luxuries, excluding cars and travel, is set to rise 8 percent to $359 billion compared to 2010, according to the sixth annual American Express Publishing and Harrison Group survey. While the number of affluent families planning to spend more has almost doubled in the past three years, they are emerging from the recession seeking value, quality and service for their money, said Jim Taylor, vice chairman of Harrison Group. “There will be more money spent, but it doesn’t mean it won’t be spent without the prudent skills learned as the result of a very difficult recession,” Taylor said. “This is a survivor’s economy with people who have succeeded in surviving the recession demanding a new form of respect,” he told a news conference. The Survey of Affluence and Wealth in America polled 1,458 families with a discretionary income of more than $100,000 — representing the wealthiest 10 percent in the United States who account for about 50 percent of all consumer spending. It found that 15 percent of these families plan to spend more in 2011, up a quarter from 2010 and almost double from 2008. The number of families cutting spending was nearly halved from last year to 9 percent and down two-thirds from 2008. LESS ANXIOUS Rich families save an average of a quarter of their incomes annually, the poll found, and 34 percent said they were looking forward to spending more money this year. Taylor said that while 70 percent of affluent Americans still believe the country was in recession, they were less anxious. Concern over job loss has fallen 50 percent from 2010 and worries about the potential failure of their companies are down to 11 percent from 28 percent. Almost three-quarters said they had become more resourceful because of the recession. “In the end, the increase in spending we foresee is not a return to the wanderlust of the past, but rather, an expression of sensible, resourceful, self-confident consumers expanding their portfolio of needs,” he said. “The nearly $4 trillion in their money market funds gives these consumers the power to purchase with cash. Their value equation reflects the price of recession: mature judgment,” Taylor said. A 2010 stock market rally, which pushed up the Dow Jones Industrial Average 11 percent, has also helped sway consumers. Consumer spending, which accounts for 70 percent of U.S. economic activity, grew at a brisk 4 percent pace in the final three months of last year. But U.S. retail sales posted their smallest gain in nine months in March, as auto sales plunged and consumers felt the sting of higher gas prices. The online wealth survey was conducted from January 31 to February 14 and had a margin of error of plus or minus 3 percentage points. (Editing by Xavier Briand) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Raymond Griffith: How To Balance the Budget in One Easy Step

April 14, 2011

OK. I am going to start out by admitting that I am not an economist. Like most people, I hadn’t heard about derivatives, securities or exotic financial dealings until the market crash. With the recession and the emphasis on cutting budgets, taxes are a sore point. Budgets are difficult for everyone. We are living in tight economic times. Banks are tight with their lending — for most people. Interest rates not controlled by law are pretty high. Though money isn’t moving fast in some sector of the economy, money is flowing where the rich know it to be the most productive. These days that seems to be in oil speculation, in derivatives, the stock market and other speculative interests. The market crash was just a blip. The party is on again. The speculation markets are hot. Factories and sales are not. Employment is down, and while businesses keep lobbying for tax breaks to make them willing to employ more people, the fact is that unless sales go up, they won’t employ anyone else. Consumption goes before hiring. This turns the Republican model on its head. Trickle-down economics has become trickle-on economics as the middle and lower classes seem to be getting the wastes from the upper class. As the lower and middle classes get poorer and the rich get richer, adding tax burdens to the lower and middle classes makes no sense. They can’t pay it. So we need to go to where the money is. The Bush tax cuts did not go to hiring, they went to the speculative markets causing the oil bubble (among others). The success in the oil market has speculators bidding on wheat, corn and other products they don’t intend to actually buy, but control and sell for large profits. If we can’t stop the speculation, we can at least tax it. I propose a 1% financial sales tax. You buy stocks worth $10000, you pay up front 1% of that, $100. You sell the stock for $12000, the buyer pays up front $120 to do it. As with a sales tax, the FST is buyer-oriented. Buy a house for $100000 and you owe an FST of $1000. All derivatives would have to be declared. All securities would have to be declared. The purchaser of insurance would have to pay a 1% FST. If the premium for life insurance is $60 per month, add 60 cents for the FST. No FST would apply to depositing money into a bank account or withdrawing money from a bank account. But if you use an ATM that charges you $2.50 to access your money, an extra 3 cents charge would apply. For most people whose lives aren’t caught up in currency trading, playing the markets, etc. the tax would bother us very little. The rising price of food affects us a lot more. But the FST would make those who play with their money in the market instead of making their money work in increasing production of goods at home and hiring people pay just a little bit more for their fun. They borrow the money short-term anyway. 10% down leverages a large contract. A 1% sales tax on the total leveraged would not be a great burden to such players who easily make lots of money on their leveraged deals. There are trillions of dollars worth of transactions in American markets, most of them untaxed. A 1% tax would not drive away investors out of the US. US laws are relatively lax compared to many other markets, and while you can bet that Wall Street would scream and howl, they can easily afford this. America needs the revenue. We need to go where the money is.

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Bond Market Yawned At Budget Showdown

April 12, 2011

But the market for Treasury bonds lately has been exceedingly calm. While the money managers who invest in those bonds say they monitored last week’s drama over a potential shutdown, it wasn’t the major driver of ups and downs in the market. Rather, prices moved based on the usual economic reports and new evidence about what the Federal Reserve will do next.

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Suze Orman Answers Tax Day Questions

April 11, 2011

Personal finance expert Suze Orman, author of the new bestselling book “The Money Class,” joined me for Mondays With Marlo to answer your last-minute questions before Tax Day, and all your other questions about savings, debt, investments, and more.

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Chriss Street: Why Bankers Want a Muni Bond Taxpayer Bailout

April 3, 2011

On May 5, 2009, I testified in front of Barney Frank’s Financial Services Committee that if Congress provided a guarantee of municipal bonds, the United States of America would lose its’ AAA credit rating. Over the next year-and-a-half, I was labeled the “typical Orange County ultra-conservative alarmist” when I spoke at dozens of investment conferences on growing risks of munis to investors. Even as the general market price of long term munis dropped over 20% in the fourth quarter of last year, virtually every major Wall Street investment bank continued to reassure investors that municipal bonds were a great buy. All that hoopla ended yesterday, when Jamie Dimon, the CEO of JP Morgan Chase Bank, acknowledged at a U.S. Chamber of Commerce event in Washington D.C., that hundreds of tax free municipal bonds issues will ” not make it ” and default. Mr. Dimon has intimate knowledge of the municipal bond market, because his firm is the third largest underwriter and issued $47 billion of munis last year. Mr. Dimon added : “I don’t think it’s going to shatter America, I just think it’s a part of the credit cycle.” Mr. Dimon and his bank have obviously sold their municipal bond holdings, but perhaps the timing of the release of this insider’s perspective on a coming market crash has something to do with his bank’s own needs. Currently there are 50,000 municipal bond issuers in America and they have sold over $3 trillion in bonds to mostly individuals, mutual funds and money market funds. A good portion of tax free bond sales were to fund local government worthy projects, such as roads, schools and even city halls. But another huge portion of the money raised in the municipal bond market has gone to support politically connected contractors and other crony capitalists. Mr. Dimon has real insider knowledge of this dark side of the muni market; since his firm in 2009 paid $75 million in penalties and forfeited $647 million to settle SEC charges in an alleged municipal bond kick-back and derivative scam. It seems those nice people at JP Morgan Chase somehow got $3.5 billion in underwriting business after sprinkling $8 million in cash on the friends of elected sanitation officials in Alabama. If one issuer alone could cost a bank almost three quarters of a billion dollars, how much could hundreds of defaults cause the banking industry? And, what if it turns out thousands of these muni deals were tainted by pay to play? How much more could a coming market crash cost the banking industry? Many Americans believe the current financial problems that state and local government are going through are due to high unemployment costs and lower income taxes, but the majority of state and local revenues come from property taxes. If U.S. property tax revenues had risen at the rate of inflation since the start of the real estate bubble in 1996, total property taxes collected this year would have been $296 billion. But collections last year totaled $476 billion, 60% or $180 billion more than inflation. Furthermore, instead of falling back by the 33% plummet in home values since 2006, property taxes rose another 27% or over $100 billion since 2006. The reason for the rising property taxes in this dreadful property market is that local government has been wildly efficient in raising assessed values of property, but incredibly inefficient in cutting values. This has started to create a tax revolt that is growing very rapidly as homeowners are appealing or litigating to drive their property tax bills down. Below is a chart of the State of California projected tax revenues versus budget expenditures. The fastest growing budget cost is snowballing interest and principal payments for municipal bonds. Ten years ago these bond payments were only 3% of the budget, but in two years they will reach 10% of the budget. The State revenue projections shockingly assume property taxes collections do not decline, but a 30% decline in assessed values would cost the state $20 billion. Jamie Dimon is one of the smartest bankers in the world and he fully understands his bank and the rest of the banks are facing a muni bond financial meltdown. The banking industry recently used their money and power to get Congress to stick taxpayers with the $3 trillion bailout of the banks’ busted mortgage loans. The bail-out was so successful for Mr. Dimon, that last year he pocketed a $17 million bonus. I believe Mr. Dimon’s new-found honesty about the risks of municipal bond defaults is part of a strategy to convince Congress to once again saddle taxpayers with a bailout of state and local government. From Mr. Dimon’s perspective, JP Morgan Chase Bank should be about bonuses and taxpayers should be about bailouts.

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Marty Robins: Economic Policy Makers Need to Get Real

March 25, 2011

I wonder if other economic observers were shaken to the extent I was by recent comments by seemingly disparate actors, William Dudley, president of the New York Fed, and President Obama. The former sought to downplay the extent of price inflation by explaining that as is true with iPad devices and other consumer electronics, we are often receiving more for our money today than in the past. “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said referring to Apple Inc’s (AAPL.O) latest handheld tablet computer hitting stories on Friday. “You have to look at the prices of all things,” he said. The latter, referred to cars getting eight or ten MPG as having poor fuel economy. When our policy-makers are out of touch with economic reality to this extent and not even embarrassed about it, it’s hard to be confident about our economic future. Mr. Dudley shows an appalling insensitivity toward and ignorance of economic reality when he invokes the iPad as an indication of anything having to do with the broader economy. While the device evokes a great deal of attention among the glitterati, one sees relatively few actual devices being used in public settings and virtually none in the business environment. One questions the significance to the information technology environment of this development and wonders whether Dudley has any familiarity with the day-to-day affairs of this function in Corporate America. More importantly, while advances in information technology are genuinely relevant to our price levels and individual productivity, which often drives wage levels, they are relevant much more in the long term than in the short term. It is in the short term where people and companies are feeling the effects of substantial price increases for things like food and energy, which they buy every day, and ever-rising state and local taxes, which are constantly in evidence in some form, such as the recent drastic increase in the Illinois income tax. No one updates their computer capability every day or every week, month or year, so that even to the extent that IT advances do moderate inflation, their benefits are not readily apparent. It’s perfectly understandable that someone in the audience for Dudley’s speech would note that “I can’t eat an iPad.” In that the New York Fed has a, if not the, central role in development and implementation of our monetary policy, it’s quite disconcerting when its leader appears to be so far removed from the day-to-day experience of so many economic actors and gets caught up in economic theory as opposed to observation of actual prices. When our President sought to demonstrate his empathy for the common man bedeviled by rising gas prices, he famously declared : “You may want to buy a fuel-efficient car,” quoth Obama, “but you may not be able to afford it. And so you’re stuck with the old clunker that’s getting 8 or 10 miles a gallon.” As anyone who drives or has purchased a vehicle in the past ten years knows, it is virtually impossible to obtain any vehicle, new or used, which gets only 8-10 mpg. Even today’s ‘gas guzzlers’ do far better. No such vehicles have been mass produced for 20-30 years. Even if one wished to waste their money on gas, they would have to buy either an antique or very limited production current vehicle to do what the President has in mind. While there is certainly good reason to seek to improve fuel economy from today’s levels — has anyone heard about the situation in Libya, Yemen and elsewhere in the MidEast? — the credibility of this message is substantially undermined when its lead messenger has so little grasp of reality. In today’s interconnected economy, with the U.S. being the world’s biggest debtor, credibility of leadership is invaluable. No one can rely upon natural resources or military force to shore up their economy when private and governmental counterparties lose confidence. Even the values of intellectual property and technical innovation are increasingly nullified when leadership is called into question. We must have far better from those in positions such as Messrs. Dudley and Obama.

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Sara Ackerman: Over 4 Million Move Their Accounts From Wall Street Banks in 2010

March 25, 2011

More than 4 million accounts have already moved away from the nation’s largest banks and this trend will only increase according to Moebs Services, an economic research firm in Lake Bluff, IL. Previously, large banks with over $50 billion in assets held 45% of the 130 million consumer checking accounts in 2009. That number has been decreasing dramatically with Bank of America losing 400,000 accounts in 2010 alone. This trend will only continue, according to Michael Moebs, CEO of Moebs Services, who predicts an additional 7 to 9 million accounts moving by the end of 2011. The trend should plateau in 2012 after the nation’s largest banks see between 13 and 17 million accounts moving to local community banks and credit unions in just three short years. If Moebs’ predictions come to fruition, the largest financial firms will only hold a third of all free checking accounts in the US by the end of 2012, a huge drop from the 45% they held in 2009. This mass-exodus from the nation’s ‘Too Big To Fail’ firms is by no means accidental. Customers are beginning to wise-up to Wall Street’s abuses and are choosing to vote with their dollars. The Move Your Money project, a campaign that began around a Christmas dinner table by Arianna Huffington and a few friends, encouraged individuals and institutions to divest from the nation’s largest Wall Street banks and move to local financial institutions. One year later, the campaign has been a major success, boasting over 36,000 supporters and coverage in more than 150 different media outlets. The Move Your Money project continues to give the disenfranchised American a chance to truly make a statement against the financial firms who wreaked havoc on our economy. Not only are people seeing the moral imperative to move their money out of the ‘Too Big To Fail’ firms, they are also growing weary of the exorbitantly high fees that Wall Street execs continually dream up and dupe their customers into paying. Previously, banks were allowed to enroll consumers into “overdraft protection” which allowed a person to spend beyond their checking account, but with a hefty fee ranging from $25-35. After the Dodd-Frank Wall Street Reform bill passed in July of last year, the rules have changed and consumers have to opt-in for overdraft protection. Unfortunately, it didn’t take the banks long to come up with new ways to swindle money from their customers. Bank of America, Wells Fargo and JP Morgan Chase have already begun experimenting with new fee structures based on consumer behavior such as maintaining a certain minimum balance, enrolling in direct deposit and using a debit card a certain number of times each month. Banks are also beginning to charge customers monthly fees for what once was a free checking account, and customers are beginning to take notice. Derek Juhl of Seattle went into Chase to close his account after he found a monthly fee had been attached to his once free checking account and was told, “Congress made us do it,” a fairly disingenuous claim considering 65% of banks still offer free checking in-spite of the new rules. Moebs predicts that with an increase in fees, the largest banks have signaled an intention to move away from free checking accounts altogether, in large part because the endeavor is no longer profitable for them. Moebs explains, “If banks have high overhead, deposit accounts are not helpful. Usually banks in the transaction business have to be very efficient and be within their economies of scale.” Moebs, who created a process on economies of scale, patent pending, explains that the large financial institutions have long surpassed this mark and are currently trying to reign in on overhead by getting rid of their least profitable customers–people who maintain low balances and commit too many errors like overdrawing their account and bouncing checks. However, “this is not the death of free checking” says Moebs. Rather, small regional and community banks, as well as credit unions are still willing and able to offer free checking accounts and on average, charge 70% less in overdraft fees. With lower overhead costs and higher efficiency, small financial institutions can still offer free checking accounts and remain profitable. So what are you waiting for? Don’t wait for the Wall Street firms to nickel-and-dime you, move your money today! To find a community bank or credit union near you, visit www.moveyourmoneyproject.org

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Western Union Offers No Fee Money Transfers to Japan

March 21, 2011

Western Union Offers No Fee Money Transfers to Japan

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Mary Bottari: WI Firefighters Spark "Move Your Money" Moment

March 12, 2011

On the day that the bill passed the Wisconsin Assembly effectively ending 50 years of collective bargaining in Wisconsin and eviscerating the ability of public unions to raise money through dues, a new front opened in the battle for the future of Wisconsin families. Bagpipes blaring, hundreds of firefighters walked across the street from the Wisconsin Capitol building, stood outside the Marshall and Ilsley Bank (M&I Bank) and played a few tunes — loudly. Later, a group of firefighter and consumers stopped back in at the bank to make a few transactions. One by one they closed their accounts and withdrew their life savings, totaling approximately $190,000. After the last customer left, the bank quickly closed its doors, just in case the spontaneous “Move Your Money” moment caught fire. The sedate, old fashioned M&I Bank on the Capitol Square has gained some notoriety in recent weeks. Oddly, a tunnel in the M&I parking garage links to the capitol basement. Dubbed the “rat hole to the Walker palace” , the tunnel was used by Governor Scott Walker to ferry lobbyists into the capitol building to hear his budget address during a time when the capitol was in a virtual lock down in defiance of a court order and after Sheriffs has quit the building refusing to be a “palace guard.” Now the bank is getting caught up in the controversy again. Word is beginning to spread that M&I is one of Walker’s biggest backers. Top executives at M&I Bank have long been boosters of Walker. M&I Chief Executive Dennis Kuester and his wife gave $20,000 to Walker in recent years. When you package individual and PAC contributions by employers, M&I is number one — at $57,000 dollars. The firm apparently uses a conduit to bundle much of its money to Walker. Flyers, webpages, and Facebook sites have popped up encouraging WI consumers to boycott Walker campaign contributors and “Pull the Plug on M&I Bank.” Other banks whose employees have donated large sums to Walker, such as Associated Bank and North Shore Bank may also be seeing their customers soon. Economic Transparency Joe Conway, President Madison Fire Fighters Local 311, explained to CMD that the action was totally spontaneous, but that “economic transparency” was going to be a big theme in the fight ahead. “Groups will be sending letters to Walker’s major donors giving them the opportunity to support the teachers, firefighters and police in their community.” Conway is well aware that new polling shows that 74% of Wisconsin families support collective bargaining rights for public workers. Two of these letters are already in the mail to M&I Bank and Kwik Trip. “The undersigned groups would like your company to publicly oppose Governor Walker’s efforts to virtually eliminate collective bargaining for public employees in Wisconsin. In the event that you cannot support this effort to save collective bargaining, please be advised that the undersigned will publicly and formally boycott the goods and services provided by your company,” the letter says. “However, if you join us, we will do everything in our power to publicly celebrate your partnership in the fight to preserve the right of public employees to be heard at the bargaining table.” The letters are signed by the heads of the Wisconsin Professional Police Association, the Professional Fire Fighters of Wisconsin, the International Association of Fire Fighters Local 311, Madison Teachers Inc., Dane County Deputy Sheriffs Association and the Madison Professional Police Officers Association. Just the Beginning Walker’s list of campaign contributors is already in wide circulation on websites like “Scott Walker Watch” and fast-growing Facebook pages like “Boycott Scott Walkers Contributors” . These grassroots efforts are backed up by solid names and numbers extracted from the Wisconsin Democracy Campaign (WDC) database, a nonpartisan, nonprofit organization that tracks money in politics. The WDC data shows that Walker’s major contributors include a diversity of national and state-based firms including Koch Brother Industries, AT&T, Walmart, John Deere Tractor, Johnsonville Brats, Miller/Coors, Kwik Trip, Sargento Cheese, and SC Johnson & Sons (producers of Windex, Glade, Pledge etc). The letter writing effort is being undertaken not to put people out of work, but to encourage workers to let their bosses know it is time to reconsider their support for Walker’s newly revealed radical agenda. Sam Hokin, a Wisconsinite and small businessman who started the Facebook page in the early days of the protest, put the strategy bluntly: “The only thing the Republicans care about is money. The only way you can touch them is through their revenue. They don’t care about signs and protesters. They don’t care about the opinion of the majority of the people in the state, their bottom line is money.” Unions, pension funds, cities and counties and average consumers bank at these banks and support these firms by buying their products and services. They have tremendous clout in Wisconsin’s small economy. Greatest Heist in History Wisconsin workers are keenly aware that they are part of a historic push back that is spreading from state to state. After $14 trillion dollars of housing wealth, wages and retirement savings were taken from the middle class during the 2008 financial collapse, workers are being asked to take it on the chin again. Michael Moore put it best: “We aren’t broke. Wisconsin is not broke. The country is awash in wealth and cash. It’s just that it’s not in your hands. It has been transferred, in the greatest heist in history, from the workers and consumers to the banks and the portfolios of the über-rich.” M&I Bank is in the process of being bought by a Canadian bank. It took $2 billion in TARP bailout money from the taxpayers and have yet to pay it back. “They [state Republicans] came in like the Grim Reaper to drive a knife into the heart of labor,” yelled Jim Garity at a recent rally. Garity is a unionized Jefferson County Highway Department worker and leader. “But we are going to stand and we are not going to bleed. Governor Walker’s plan is to give more money to Wall Street, but we are going to take back our money from Wall Street and put Main Street to work!” Walker’s recent moves include over $200 billion in tax cuts for corporations while stripping $1 trillion from Wisconsin schools and local governments. The “take it back” movement is gaining steam. At the federal level, AFL-CIO, SEIU are joined by consumer groups in a fight to apply a small financial transaction tax to damaging Wall Street speculation in order to recoup over $100 billion dollars a year for job creation and other essential needs. It’s About Power Walker’s collective bargaining bill not only seeks to gut a 50 year tradition in the state where public unions started, but by doing away with automatic check off for union dues he seeks to cripple the the ability of public sector unions to hire employees to organize, grow and be a force in Wisconsin politics. State Senate Majority Leader Scott Fitzgerald, one of Walker’s closest allies in the legislature, admitted as much to FOX News. “If we win this battle, and the money is not there under the auspices of the unions, certainly what you’re going to find is President Obama is going to have a much difficult, much more difficult time getting elected and winning the state of Wisconsin,” said Fitzgerald. While some hold out hope for a general strike and vigorous recall efforts are underway, others remain focused on leveraging the power of the “sleeping giant” to force Walker to back down and to prevent devastating cuts to schools and municipalities. Stay tuned. This fire might be hard to contain. The Madison-based Center for Media and Democracy has been reporting live from the Wisconsin Capitol for four weeks. Learn more at our website PRWatch.org .

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Dean Baker: Greenspan’s Incompetence Badgers Wisconsin’s Workers

February 21, 2011

Alan Greenspan has been strangely missing from the fierce battle over the future of public sector unions in Wisconsin and other states. His absence is strange because he bears more responsibility for the current conflict than anyone else alive. The reason is simple. Mr. Greenspan’s incredible incompetence in allowing the $8 trillion housing bubble to grow unchecked created the fiscal crisis that is gripping Wisconsin and most other states. To be clear, states always face financial stress in economic downturns. Most states had to struggle to balance their budgets in 2001-2002 and earlier in the earlier 1990-1991 recession. During a recession tax revenues fall. Consumers buy less, which means less sales tax revenue. Workers earn less money, which means less income tax. And property values fall, leading to less property tax revenue. At the same time the need for state programs increases. Unemployed and underemployed workers are more likely to need public benefits like unemployment insurance, Medicaid, Temporary Assistance for Needy Families (TANF) and other public support programs. Recessions are part of capitalism and responsible leaders prepare for cyclical downturns. However this recession is no ordinary downturn. The recession officially began in December of 2007, so it is now 37 months since the start of the downturn. At this point following the 2001 recession, the economy was down 1.5 million jobs from the pre-recession level. Thirty-seven months after the start of the 1990-1991 recession the economy had generated 1.1 million more jobs than the pre-recession level. At this point following the 1981-82 recession, the worst prior recession of the post-war period, the economy had 5.5 million more jobs than before the recession. By comparison the number of jobs now stands 7,700,000 below its pre-recession level. Furthermore, no one is projecting that this gap is about to be closed in the next several years. There should be zero doubt: this downturn is the reason that Wisconsin has a budget crisis. Perhaps Wisconsin’s leaders can be blamed for not recognizing that the economy was being managed by complete incompetents – and planning accordingly – but this is the story of the state budget crisis. According to the Congressional Budget Office , the economy is operating at more than 6.4 percentage points below its potential level of output. If Wisconsin’s state economy was 6.4 percent larger, and its revenues increased accordingly, it would have more than $4 billion in additional revenue in its coffers over the next two years. This increase in revenue would easily cover the projected deficit. This is even before we add in the savings from lower payouts for unemployment insurance and other benefits that would follow from a return to normal levels of unemployment. In short, there can be little dispute that Wisconsin’s budget crisis is Alan Greenspan’s work. The allegations of the union bashers can easily be shown to be nonsense. Wisconsin’s public sector workers are paid no more than their private sector counterparts. They tend to get somewhat better pensions and health care coverage, but this is offset by lower pay for comparably skilled workers. Nor has there been an explosion of public sector employment under the period in which Democrats governed the state. The last budget prepared by former governor Jim Doyle projected 69,038 full-time equivalent (FTE) positions for the state in 2011, an increase of 1.4 percent from the 68,092 FTE number in 2003, the year when Doyle took office. It takes some very inventive arithmetic to make a 1.4 percent increase in employment over 8 years into a bloated state workforce. How does it change anything if we know that Greenspan (last seen being feted at the Brookings Institution) is the real villain in the Wisconsin budget crisis? First, it should turn the heat where it belongs: Washington. The problem of the downturn is a lack of demand. A lack of demand is solved by spending money. We have to get our elected representatives to ignore the shrill whining of the Wall Street deficit hawks. We need sufficient stimulus from the public sector to overcome the falloff of more than $1.2 trillion in spending from the private sector that resulted from the collapse of the housing bubble. If members of Congress are too intimidated to do what is needed to fix the economy, then Wisconsin’s legislators should do what common sense dictates: follow the money. Rather than taking pay and benefits from schoolteachers and firefighters, it makes sense to take money from the people who have it. This means taxing Wisconsin’s wealthy and its corporations. The tax increase only needs to be temporary; since the state budget should be fine once the economy recovers. Of course the wealthy and the corporations will claim that they will leave the state and stop hiring, but these are not people who are known for their truthfulness. They are known for their money. If these big winners in the downturn are forced to share more of their wealth until the economy recovers then maybe they will put more pressure on Congress to support the sort of stimulus needed to get the economy back on track. This would be a real win-win for just about everyone.

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Scott Bittle and Jean Johnson: Fiscal Follies: How Long Can We Procrastinate?

February 21, 2011

There’s no shortage of evidence that humans procrastinate when faced with unpleasant experiences. Most of us know this personally. We’ve put in all-nighters in college or done our taxes on April 15 — or this year , April 18. Procrastination is a common enough failing, but it’s the one thing we really can’t afford when it comes to the federal budget debate. This is a problem that gets more fearsome and tougher to solve the longer we put it off. Yet procrastination is what we’re getting. Or worse, procrastination posing as bold action. President Obama’s budget request offered both spending cuts and tax increases to reduce our deficits by about $1 trillion, but offered little on the long-term problems of Medicare, Medicaid and Social Security. The House Republicans are celebrating their vote in favor of cutting $60 billion in federal spending this year, but given that (a) the deficit is expected to be $1.6 trillion and (b) there’s little chance the Senate and President Obama will go along, it may not amount to much. Meanwhile, the risks of inaction just get higher. Consider this: The bond market could de-friend us. For lo these many years, the United States has been able to spend more than it takes in because investors worldwide have been happy to keep lending to us by buying our Treasury bonds. Given the economic mess in Europe and how dicey things can be in the developing world, the U.S. government is still seen as a good place to park your money. But how long will that last if we can’t get our act together on the budget? The scariest part is that bond crises have a nasty habit of popping up out of the blue–like the iceberg materializing in front of the Titanic . In the terse words of David Brooks , “The bond markets are with you until the second they are against you. When the psychology shifts… the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain.” We are being warned. Sheila Bair heads the FDIC which closes banks when they’re about to go under, so she knows a thing or two about what happens when investors lose confidence. Bair is well-respected, and she’s worried : “Financial markets are already sending disquieting signals,” she recently wrote . She’s not the only one. The big bond rating company Moody’s has also made rumblings that our triple-A bond rating isn’t immutable. We could shell out nearly 5 trillion in interest in the next 10 years. According to the Congressional Budget Office, the country will spend about $4.8 trillion on interest payments between now and 2020 . And since the CBO is required to make its projections based on current law, these figures assume that the Bush tax cuts, all of them, will expire at the end of the two-year extension period. Almost no one thinks that will actually happen. In a decade, Medicare costs will top $1 trillion a year. All the budget wonks say health care is the undertow that could drown the budget — and the U.S. economy along with it. In 2010, the country spent $528 billion on Medicare and $280 billion on Medicaid. Together, that’s more than we spent on defense. But with rising health care costs and an aging population, those numbers are set to zoom skyward. By 2020, they will almost double to $1 trillion for Medicare and $458 billion for Medicaid. These numbers are truly fearsome, and no matter what you think of the Obama health plan, at least it included some cuts and cost containment provisions for Medicare. Repeal it without replacing those, and the costs for Medicare will be even higher. 2011 is the time to start. It’s encouraging that there are specific proposals on the table and that the political debate has finally begun. But with elections coming up in 2012–and with straw polls already dominating the news — we don’t have much time before the country goes into its quadrennial “all campaigning all the time” mode. Big national elections are generally not the best times for honest discussions about the budget, and besides everyone is distracted–candidates, journalists, and voters as well. But we still have a few months. We can’t solve the budget problem in that short a time, but if we don’t start, we could lose another two years while the risks continue to mount. Cutting federal spending or raising taxes won’t be pleasant. Local governments will not get money they’re used to getting, and companies and non-profits nationwide will lose government contracts and grants that have, in some cases, been keeping them afloat. There will be layoffs of government workers. The chorus of disapproval greeting President Obama and the Republicans now that they’ve started to get specific on spending cuts shows just how painful and controversial this will be. As for raising taxes, even the smallest uptick is bound to get millions of Americans upset. But there’s simply no way to do this without cutting spending and raising taxes. If we start now, at least we get to decide what to do when. If we wait until the country is up against a bond market crisis or other financial emergency, we’ll have to slash in every direction and raise taxes in one fell swoop. Surely we’re a sensible enough nation to avoid that. So now you can take your pick of advice from two great sources: There’s Lewis Carroll who wrote “‘The time has come’ the Walrus said, ‘to talk of many things.’” That’s true enough here. Or if you’re a boomer, maybe you’d rather go with “The time to hesitate is through ” from Jim Morrison and the Doors. Either way, the message is the same. This time, this year, we simply have to reduce the red ink.

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Weekly Money Market Review: Dollar, yen trade lower; pound recovers

February 21, 2011

Weekly Money Market Review: Dollar, yen trade lower; pound recovers

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Weekly Money Market Review: Dollar, yen trade lower; pound recovers

February 21, 2011

Weekly Money Market Review: Dollar, yen trade lower; pound recovers

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‘Buy Everything’ Sentiment Continues On Wall Street

February 19, 2011

Angela Moon, New York – Investors will continue to ride the speediest rally in U.S. stocks since the Great Depression despite growing concerns that the market is overbought and due for a correction. Wall Street posted its third consecutive week of gains with the S&P 500 now up 6.8 percent for the year and more than 20 percent in just six months. “I’ve never seen a market like this,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont, a market watcher for 35 years. “I’m showing, by every technical and quantitative standard I have, this market is at extreme levels. But no matter where we start out in the morning, buyers come in.” The trend of stocks starting off lower in the morning session but ending higher by the afternoon has been ongoing for weeks as investors view the small dips as reasons to buy. But there is a perceptible level of anxiety in the market. Trading volume has been exceptionally low recently and the CBOE Volatility Index .VIX, Wall Street’s so-called fear gauge, is up on the week despite the gains in stocks. The index is usually inversely correlated to the S&P 500, and a rise in the VIX typically means a drop in the stock market. The VIX, which ended at 16.43, up 4.7 percent on the week, is still historically low but substantially higher than in recent months. That suggests investors see more share gyrations ahead. The driving force behind the rally is the money that poured into riskier assets like stocks in the last quarter of 2010 after the U.S. Federal Reserve pledged to keep interest rates low. “With so much momentum in the market, we are likely to see some sideways consolidation next week but nothing more than that,” said Ryan Detrick, technical analyst at Schaeffer’s Investment Research in Cincinnati, Ohio. LOW VOLUME=SIGNS OF FATIGUE About 7.13 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq on Friday, below last year’s estimated daily average of 8.47 billion. Stocks have been struggling to match last year’s trading levels, hovering in the 7 billion range this week. On Thursday, the volume was the second-lowest of the year at 6.7 billion shares, and Monday’s session was the lowest of the year with a mere 6.6 billion shares. “This is a sign that the market is tired, and unless we see an uptick in this volume,” the level of investor anxiety will not retreat, Detrick said. U.S. markets are closed on Monday for the Presidents Day holiday. Copyright 2010 Thomson Reuters. Click for Restrictions .

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Raymond J. Learsy: It’s All About The Money. Jamie Dimon’s Big Pay Hike While Foreclosing the Homes of Our Servicemen

February 19, 2011

It was always about the money, but over the past few years that truism has descended into a miasma of self interested perversity that has begun to put the entire game at risk with more and more of the nations economically disenfranchised sensing that they have become powerless in a system that looks only after the well heeled and well connected. The disparity between have and have not’s escalating to a degree that earlier generations of Americans post the Civil War, would not have tolerated. The level playing field that was America, even with the occasional pothole, was a system in which Americans believed in and in and in which they took comfort and pride. With the financial events of the past few years, and with the insatiable self-engorgement of the financial sector and a complicit or haplessly blind government, forever coming to the financial sectors rescue at the expense and risk to the nation at large, trust in our institutions has been profoundly shaken. Rather than enough being enough and to add insult to injury, we are given another ignoble example of the tone deafness and the disregard with which the system now works Over the past days we have learned that J.P. Morgan Chase, the nation’s second largest bank, increased its CEO Jamie Dimon’s 2011 payout by more than 50% of the initial value of the one Mr. Dimon received in 2010 (“JPMorgan Gives Dimon a $17 Million Payday” NYT 02.17.11) .- Yes, I know, some ballplayers get paid more. But they don’t have the ability of wrecking peoples lives by foreclosing on their homes as our government shovels our rescue money to the very same financial institutions who do, all the while covering their bonuses and salaries. We, at the very least, have the choice of going to the ball park or not,- Certainly, under Dimon’s stewardship J.P. Morgan Chase brought home the bacon, making some $17.4 billion in profit, a gain of 48 percent from the year before. Big numbers deserve a big salary, or so we are told. After all, it’s all about the money, Right? Well, maybe. First of all it’s not hard to make big money if you have access to virtually cost free money at the Fed window, or vast pools of money from your depositors accounts insured by you and me through the Federal Deposit Insurance Corp. (FDIC) giving Morgan almost limitless chips to speculate in the oil market (thereby helping to push oil prices ever higher without ever having to say thank you to us when we pay at the pump), or engaging in such community enhancing banking services as that reported by Reuters (“JP Morgan holds dominant LME copper stock position-Telegraph” 12.05.10) that JP Morgan Chase “holds between 50 and 80 percent of the 350,000 tonnes of copper held in London Metal Exchange warehouses.” Not to speak of extensive dallying in the silver market and on. Certainly these forays into money making commodity speculation must have held much of Mr. Dimon’s attention. Clearly he was too busy to notice, or perhaps he didn’t care (not much money here) when, in breach of law, members of our military on active duty in Iraq and Afghanistan were being dispossessed of their homes by J.P. Morgan in contravention of the Servicemembers Civil Relief Act, and while more than 4500 servicemen were being overcharged on their mortgages and/or threatened with foreclosure. All the while the servicemen had tried to protect their rights in the courts trying to get J.P Morgan to obey the law (NYTimes Frank Rich Op-ed 02.12.11). A thimble of the money pouring into the J.P. Morgan’s oil and copper trades could have easily accommodated a workout with our servicemen permitting them and their families to have a fragment of continuum in their lives. Yet, in spite of the public opprobrium at J.P. Morgan’s abrogation of its basic societal banking responsibilities, – it clearly wasn’t about the money in sufficient degree to garner the attention of Mr. Dimon and his entourage. That our soldiers were being stripped of their homes on Jamie Dimon’s watch and to J.P. Morgan’s shame clearly didn’t figure in the compensation committee deliberations. Enterprise reputation and its mandate to being responsible tillers of the business soil doesn’t come into play. You see, in this day and age and sadly more than ever before, it’s all about the money.

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Sara Ackerman: State Banks: A New, Old Idea To Increase Growth In Your Community

February 17, 2011

Every year billions of state tax dollars are taken from their respective states and deposited into the Wall Street “Too Big To Fail” banks. These same banks use municipal deposits to give loans to out-of-state big businesses, often shifting wealth from local communities; a huge loss of potential that could be better used encouraging local businesses and creating more jobs. With increased attention to where and how municipalities deposit their operating funds due in large part to the Move Your Money project, many are beginning to wonder: why can’t that money stay local? If community banks could accept public deposits, we could keep local money in the communities where it originated. Unfortunately, community banks are often unable or unwilling to accept large public deposits due to high collateral limits, making the venture unprofitable. That is where the idea of a public state bank–or partnership bank–comes into play. The movement to create a publicly owned state bank has been on the rise this year as multiple states including Washington, Hawaii, and Oregon have already introduced bills in their respective states, with more expected to follow. The idea of a state bank is not new, but rather models after the Bank of North Dakota created in 1919 which today runs at a profit and allows for the state of North Dakota to make significant investments in agriculture, economic development, and student loans- all at no cost to the state. So what has caused a resurgence of an idea nearly one hundred years old? It is in large part due to the remarkable success experienced by North Dakota as the rest of the nation suffers through the global financial crisis. After the economic downturn sent shockwaves felt throughout the world, North Dakota ran counter-cyclical, leaving many to wonder what insulated the state from all the turmoil. While most municipal governments found record deficits, North Dakota found record surpluses and while most communities grappled with high unemployment, foreclosures, and bank failures, North Dakota remarkably survived the brunt of the attack unscathed. Undoubtedly, the fact that North Dakota’s economy which is primarily based on agriculture and oil was a major contributor, but many are also pointing to North Dakota’s state-owned bank as a major impetus to their success. The Bank of North Dakota was created by a non-partisan populist movement in 1919 after farmers were fed up with out of state bankers limiting their access to credit. Farmers, whose livelihood primarily rests on factors outside of their control, revolted against their dire situation in creating the Bank of North Dakota. While the Bank of North Dakota was not an immediate success, over time the bank would serve as a tool to increase capital for local businesses and farms. A common misconception of state banks is that they compete with private banks. This however, is not the case. While the Bank of North Dakota has the legal right to accept private deposits, in practice only 1 percent of their total deposits come from individuals and businesses (many of the current proposals will potentially go one step further and outright ban the ability for state banks to accept private deposits). Rather, a public bank mainly serves as a “bankers’ bank,” allowing a small, community bank to make larger loans by sharing the risk and buying down the interest rate or buying loans from community banks which increases lending for small businesses and agriculture. Small businesses, which account for 70 percent of the nation’s workforce, have been particularly hurt by the credit crunch. In a recent survey of small business owners in Oregon, 67 percent reported problems with accessing capital to expand and 75 percent supported the creation of a state bank. Easing community banks ability to supply loans will not only increase profits for the bank but also help small businesses grow and create jobs. Additionally, a state bank could provide additional services to banks including currency exchange, check clearing, and providing liquidity. Thus, the relationship is more akin to a partnership, encouraging and strengthening community banks and allowing them to compete against the Wall Street behemoths. The benefits of state banks however, go further than just community banks. Since public banks have no shareholders to please, they have more freedom in choosing where they allocate their capital. Start-ups and small businesses that may provide long-term economic growth to a community are often passed over by Wall Street for investments that are more profitable to their immediate bottom-line. Yet a state bank would be able to leverage earned income through more lucrative activities to help subsidize economic growth in local communities. An additional plus of the state bank movement is that it could be a potential source of revenue for the state. The Bank of North Dakota was able to return over $350 million to the state’s General Fund in the last decade, which came in handy when the state faced a $40 million budget shortfall at the turn of the century. A state bank may or may not be the solution for your state, but it is an interesting experiment that some state legislators feel is worth a try. During this legislative session, it will be exciting to see which bills are successful and which fall short. Nevertheless, the creation of a state bank is a new, old idea that is worth a strong consideration.

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Obama’s Wackiest Budget Cuts

February 15, 2011

NEW YORK (CNN Money) — The funding grants nobody wants. The “mobile” policing unit that doesn’t get around much. How about the big fancy telescope that has been mismanaged? President Obama’s 2012 proposal lists more than 200 programs that he wants to cancel or cut, for billions in savings.

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Robert Creamer: No Mr. Boehner, America is Not "Broke"

February 15, 2011

Once again on the Sunday news shows, Republican Leader John Boehner declared that “America is broke” — his premise for why we “can’t afford” important investments that are critical to America’s future. In fact, of course, America is far from “broke”. It is the largest economy in the world. After collapsing as a result of the recklessness of the big Wall Street banks — and Republican economic policies in late 2008 — the economy has, in fact, grown for six consecutive quarters. The stock market has almost doubled since the crash — regaining most of its value. Corporate profits are soaring. And American corporations are now sitting on close to two trillion dollars in cash. What’s more, we still have the same highly-skilled, productive labor force and the same stock of plants and equipment that we did before the financial meltdown — the same ability to create the goods and services that are the real measures of economic wealth. The problem isn’t that America is “broke.” The problem is that economic growth is not being shared with most Americans. The problem is that the very rich are wealthier than ever and everyone else is falling behind. Not only does that mean that the massive store of wealth that we create today is not widely shared. It also means that — taken together — we have less wealth as a nation because so many Americans who could be creating goods and services are unemployed, creating nothing. Of course the implication of the “America is broke” mantra is that we have to make massive cuts in programs and services that benefit the middle class and poor because we “can’t afford them” — us being broke and all. Frankly, you have a hard time taking that kind of talk seriously from a guy who just recently demanded that America continue to give massive tax breaks for the wealthy for the next two years — and who wants to flat out abolish the estate tax that, by definition, benefits only the sons and daughters of multimillionaires and billionaires. Is America broke? Have a look at John Paulson. In 2007, as the financial crisis descended, he made $4 billion in personal income betting against subprime mortgages that helped sink the rest of the economy. Last year he made a record $5 billion in personal income as the manager of a hedge fund. By the way, had he somehow managed to make that astronomical sum of money laying bricks or sweeping floors, he would have paid taxes at a rate of 35% on the bulk of that income. Instead, he paid at a rate of only 15%, since he earned his money by speculating as a hedge fund manager instead of making a useful good or service. Makes sense, right? Last year Mr. Paulson made as much as 100,000 of his fellow citizens who earned $50,000 per year. Paulson’s haul may have been a record, but Appaloosa Management’s founder David Tepper and Bridgewater Associates chief Ray Dalio each did pretty well too — between $2 and $3 billion each. And the rest of Wall Street was back in the money as well. Boehner’s attempt to justify massive cuts in investments that will grow the economy in the future — like education and infrastructure; or his insistence on cutting money that is used by the states to pay firefighters and police; or cuts in programs that take food out of the mouths of poor children — are outrageous so long as most of our economic growth goes into the hands of the wealthy few. Let’s remember a few key facts about our current federal deficit: The last time the federal budget was actually in balance was not under the Republicans — but rather under Bill Clinton. The current deficit was caused exclusively by the Bush tax cuts, two unpaid-for wars that cost trillions, and the largest recession in eighty years — caused by the same Republican economic policies Boehner is trying to sell today. Between 2001 and 2008, the Bush Administration and the Republican Congress rolled up more federal debt than all other Administrations in the history of the United States combined. It is entirely possible to deal with the federal deficit without making the middle class and poor pay the bill. My wife, Congresswoman Jan Schakowsky, who was on the President’s Fiscal Commission, outlined precisely such a proposal last fall. It makes many cuts to spending that go for unnecessary tax expenditures like subsidies to Big Oil and it relies on making the wealthiest among us pay their fair share. It makes the people who had the economic party over the last two decades pay the bill — not middle class and low income Americans who didn’t even get an invitation. The deficit is not some inevitable consequence of our being “broke” — or some law of nature. It was caused by human decisions to allow wealthy people to reduce their contribution to our common activities and to use them, instead for themselves. For example, it is entirely possible to raise the same amount that Boehner has proposed cutting in the 2011 (this year’s) federal budget simply by adding a few new tax brackets to the tax code for those who make more than a million dollars. You bump the tax rate up at a million dollars, at ten million, at fifty million — and a billion. You don’t even have to raise them that much. Right now people who make5 billion per year — America’s economic royalty — pay taxes at the same rate as upper middle class professionals who make360,000 — where the current highest tax rate of 35% kicks in. Often, because of tax loopholes — or because they’re hedge fund managers — they actually pay less. The reason why this approach works so well is that all the new income is going to that tiny percentage of the population. To fix the deficit, you have to go where the money is. Yesterday the President proposed his fiscal 2012 budget. It makes major investments in precisely the areas that will help us out-build, out-educate and out-compete the rest of the world in the 21st Century. His budget includes new investments in education, clean energy and infrastructure. Many of these initiatives have already been attacked by Republicans because “we can’t afford them — after all, American is broke.” We may not be broke now, but we really will be broke if we don’t invest in the future. The President also proposed cuts in a number of areas that we truly can’t afford (and really never should have done in the first place) — like subsidies to the oil and gas companies that are making record profits. He also proposes $78 billion cuts in military spending over the next five years. But the President was also forced to propose cuts in important programs that benefit average Americans. He proposed cutting the home-heating program, community block grants that are critical to low-income communities, and even the fund to clean up the Great Lakes. These are important programs that are critical to real people and to our future. The President himself supports these programs. He was not forced to propose the cuts in programs like these because America is broke — he made these proposals because the Republicans insisted on continuing the Bush tax cuts for the wealthy for the next two years and that limits investment in important priorities. Think of it. It is outrageous that we should cut money that assures that people don’t freeze in the winter so that the likes of John Paulson — the $5,000,000,000,000 dollar man — will not have to pay a couple of percentage points more on his income taxes. But that is exactly the consequence of Republican insistence that the Bush tax cuts for the rich continue. And it is just the beginning of the menu of Republican “priorities” that we will see laid out over the next several weeks. All of this “America is broke” — “just stop the spending” — rhetoric sounds very appealing until you start looking at who is hurt by the cuts, and who benefits by not paying their fair share to finance government — the things we do together. Over the next few weeks, the budget debate will shift from the rhetorical and abstract to the personal and concrete. If progressives can make that happen, the Republicans will be forced into a full retreat when it comes to the budget debate. It’s about time. Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com .

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White House Acknowledges ‘Real Impact’ Of Cuts To Energy Assistance Funding

February 14, 2011

WASHINGTON — The Obama administration acknowledged on Monday that its proposal to slash funding for heating assistance to the poor would, in fact, hurt the poor. “This is a very hard cut,” White House budget director Jacob Lew said during a press conference. “This is a cut that has real impact.” The White House’s proposed budget for fiscal year 2012 halves funding for the Low Income Home Energy Assistance Program, reducing its allocation to $2.5 billion from just over $5 billion. LIHEAP doles out money to states, which then hand it over to local relief agencies, which review personal financial data to ensure that applicants for the assistance really need it. Eligible applicants have the money credited to their accounts with the local utility company. Roughly 8.3 million people used the program last year. Its target population is the elderly and the disabled. The National Energy Assistance Directors’ Association, a group that represents state aid officials in Washington, estimated that the reduction would amount to 3.1 million households going without assistance on heating and cooling costs (not 3.5 million, per a previous estimate). “I thought the administration would draw a circle around the social safety net for low income families. I thought we were part of that safety net,” NEADA director Mark Wolfe said. “These are families who, without LIHEAP, will fall behind on their bills or cut back on basic essentials because they don’t have any discretionary income.” Nearly two-dozen people who use the program told HuffPost in emails and phone interviews what LIHEAP has meant for them in recent years, and what they thought of Obama’s decision to sacrifice its funding to appease deficit hawks. “Obama was supposed to have this image that he was for the everyday person,” said Karrin Herring, a resident of Beaver County, Pa., who said she received $300 from LIHEAP in the fall to pay her heating bill. “It helped me out and I was glad to get it, too.” Herring, a 56-year-old middle school registrar, is disabled with avascular necrosis in her knees. She said she’s still in the president’s corner, despite her frustration over LIHEAP. “For him to go straight to a program like this, especially when there are so many unemployed people out here now, a lot of times through no fault of their own, and more people needing the LIHEAP, I just couldn’t understand why he would even think about this program in particular. They can find someplace else to cut some money if they really wanted to.” Christie Graber of Council Bluffs, Iowa, said she just recently qualified for $350 in assistance for her heating bill after applying for LIHEAP for the first time. Graber, a 60-year-old former event planner, said she gets by on $1,035 monthly Social Security disability checks. “I think he can cut other places,” she said of the president’s proposal to cut LIHEAP. “I’m very disappointed. I campaigned for him. I believed in him. I was thrilled. I had tears in my eyes watching the election results come in … I don’t think he should cut help to the poor.” Michele Tracey of Sun City, Calif., said LIHEAP has paid her electric bill for four or five months during the summer for the past three years. “There’s a lot of people more hurting than us, but that program is one of the really helpful programs. California’s not a real cheap state to live,” said Tracey, 50. She said she and her husband, who is 62, support their family-of-four with his Social Security disability payments supplemented with money she makes as an occasional substitute teacher. “It really helps,” she said. “If it goes, I’ll sure miss it.” Lew defended the decision to cut LIHEAP funding, citing declining energy prices. “Going back to 2008, the program was funded at roughly $2.5 billion,” Lew said. “We had a huge spike in energy prices, and the program doubled to $5 billion. We’re now at a price level that’s close to where we were before that increase. looking at our fiscal challenges, we can’t straight line the program at $5 billion. We went back to the level it was at when prices were roughly the same.” It’s true that energy prices have declined, but as has been pointed out by opponents of the cuts, the economy is in worse shape than when the funding was increased in 2008. “It’s done an enormous amount of good for a lot of people,” Lew said. “It was meant to be a grant program that the states administered. Balancing our fiscal challenges and the funding change from 2008 until now, we made the tough decision. We said in the documents and the budget that we will keep our eyes on what prices go and what the need of the future is, but we can’t cruise at a historic high spending level when we’re trying to make these very difficult savings. In terms of investing in the future, we’ve been very clear that we need to create more opportunities to invest in education, in innovation, and in billing the infrastructure for the future, so we’ve had tough tradeoffs.” The administration’s proposal is not about to skid through Congress. A bipartisan bloc of 32 senators has already insisted that the White House back off the program.

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Mark Miller: Brewing Nightmare: Foreclosures on Seniors’ Reverse Mortgages

February 10, 2011

Reverse mortgage loans, which allow seniors to convert home equity into cash, have become more popular in recent years. But now the reverse mortgage industry and government regulators are dealing with a potential nightmare: a growing number of loan defaults that could lead to foreclosures, and even evictions of elderly homeowners in some cases. Non-performing loans represent a small share of overall reverse mortgages, but their number has grown quickly in the past two years. (Borrowers aren’t required to make monthly mortgage payments, but can end up with a loan in default if they fall behind on their property taxes and insurance payments.) The spate of non-performing loans has raised concerns about the prospect of seniors losing their homes, and also about the risk of losses for the Federal Housing Administration Insurance Fund, which insures the loans. Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap home equity while staying in their homes. Unlike an equity line of credit, repayment of a reverse mortgage typically isn’t due until the homeowner sells the property or dies. Reverse mortgages have been criticized for high upfront fees, which can total five percent of a home’s value. The most popular loan type is the Home Equity Conversion Mortgage (HECM), which is administered by the U.S. Department of Housing and Urban Development (HUD); the current loan limit on a standard HECM is $625,500, although a new “saver” HECM was introduced last fall with lower loan limits and fees. HECMs have no monthly loan payments, but it’s still possible for borrowers to default, because loan terms require them to continue paying property taxes, hazard insurance and any required maintenance on their property. About five percent of the 550,000 loans outstanding are non-performing under those terms, according to Barbara Stucki, vice president of home equity initiatives at the National Council on Aging (NCOA). Get the full story at Reuters Prism Money .

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Marty Zwilling: Top 10 Business Plan Follies That Will Make Investors Cringe

February 9, 2011

After struggling to create your business plan for months, every entrepreneur likes to think that their document is inspirational and will reach someone who is smart enough to see the brilliance of the idea, intuitive enough to recognize their business acumen, and enthusiastic enough to offer the money required to make it happen. Every serious investor, on the other hand, has a stack of these in their in-basket (email or real plastic) awaiting review, and is looking for the flaw or less-capable entrepreneur in each that predicts failure, allowing them to discard it like another piece of junk mail. Many VC firms and investment banks receive as many as ten plans per day, so it’s hard to get them salivating. Thus, I think it’s helpful to know some of the most common turnoffs that investors encounter in plowing through this stack of requests for money. Here is what I hear from investors that you shouldn’t do, and can attest to from my own meager efforts: Tease or spam the investor. Every investor is annoyed by persistent messages that say “Give me a call to hear about the most disruptive technology since the wheel.” You can bet that if he ever sees a real business plan from you, it will go to the bottom of the pile. Asking him to check out your website first and comment is equally bad Send the plan without a summary. An Executive Summary is a one page elevator pitch of the whole plan (may be separate from the plan), which gives an investor a net perspective on the key business parameters. Too many plans don’t have a summary section, or the summary is all you get. You lose in either case. No plan in the business plan. Many plans investors see are really modified product specifications, which tell you more than you want to know about the internals of the product, but almost nothing about how and when you plan to sell it and make money. Embarrass your English teacher. Obvious draft markings, handwritten, or unprofessional results, like misspellings and grammatical errors in the plan, will only convince investors that your business will be run the same unprofessional way. Remember, investors invest in people before ideas. Fill the text with acronyms. Remember that the people reading your plan are smart, but not intimately steeped in the acronyms of your technology. They assume heavy use of acronyms in inconsiderate, lazy, or maybe an intentional obfuscation of facts. Stick to laymen’s terms. The base plan is a book. Avoid being excessively wordy or redundant in your plan. The base plan should be in the 20-page range. Stick to the facts, state them clearly, and do not repeat them unnecessarily. At best, long plans make your business seem complex and more risky. It’s all in an appendix. Investors don’t mind supporting documents with the base plan, but the base should make sense and be complete without jumping to an appendix. Making the total plan heavier, with ten appendices, or a hundred pages is not impressive. Don’t be negative. Don’t say things about your competitors or customers that you wouldn’t be able to defend if they were in the room with you. I see lots of statements about poor usability, poor quality, fat and slow, all without even anecdotal data. Investors read these as unprofessional and even unethical, unless supported by third-party data Prototypes and demos attached. Remember that early prototypes and demos usually break or don’t work for unfamiliar users, and we can’t see all the work and love you have already put into them. Pictures and words leave a much better impression at this stage. Letters from your friends. Introduction letters from friends of the investor are always appreciated, but letters of praise from your friends don’t carry the same weight. Customer testimonials and vendor contracts are much more impressive. When you send a business plan to an investor, remember that the purpose is not to sell your product or service, but to sell you and your business model. You are looking for scarce investor financial resources, and your competition at this stage is your peers who may have more convincing and credible proposals. You need real brilliance, not turnoffs, to win.

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Kelly Rigg: Your Tax Dollars at Work: Helping BP and Exxon Kill Clean Energy

February 9, 2011

President Obama’s call for a reduction in fossil fuel subsidies elicited predictable cries of outrage from the American Petroleum Institute and others who have a vested financial interest in feeding our addiction to fossil fuels. Let’s be clear, this addiction is killing us just as surely as tobacco causes cancer. And like the tobacco industry in decades past, the fossil fuel industry hopes you won’t notice until it’s too late. The current debate about energy subsidies brings to mind Catch-22 , Joseph Heller’s 1961 novel about World War II, and the challenge of living in an inescapable conundrum: …Orr would be crazy to fly more missions and sane if he didn’t, but if he were sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle. Being concerned about the real and immediate dangers of climate change should most certainly qualify you as “sane.” CO2 and other greenhouse gases are warming the atmosphere, and the burning of fossil fuels is the primary source of increased CO2 in the atmosphere. It stands to reason we should be phasing out the use of fossil fuels. Not to mention the fact that our tax dollars are actually going to companies like ExxonMobil and BP to help keep the prices of oil, gas and coal artificially low. Sounds like “big government” to me. I wonder why the Tea Party isn’t shouting from the rooftops about that one. Here’s the energy Catch-22, and it’s just as warped and confusing as Joseph Heller’s version: Fossil fuels cause massive impacts on the environment and human health which leads to higher taxes and health care costs. Fossil fuels (and nuclear power for that matter) are artificially cheap because they enjoy billions of dollars of government subsidies, which also leads to higher taxes. Renewable energy receives a fraction of that amount in subsidies , and is creating new jobs which generate government income without having to raise taxes. The fossil fuel industry is employing fewer people as a result of technological advances ( PDF ), which means less government income and therefore higher taxes. Cheap fossil fuels reduce incentives to use energy more efficiently, which makes businesses less competitive, which in turn costs jobs, which costs taxpayers money. Fossil fuel lobbyists argue that renewables are too costly to compete with other energy sources. Catch-22, 1970 It is highly doubtful that Yossarian would have whistled respectfully about the Catch-22 of energy subsidies. It doesn’t take a genius to see that phasing out the subsidized use of fossil fuels is a no-brainer for economic reasons, let alone all of the other benefits it would have. And if some of the money going to the energy giants is used to alleviate the burden on the poorest people, it would create a win/win situation for everyone (well, almost everyone). President Obama is not the only leader calling for change. G20 leaders meeting in Pittsburgh in 2009 agreed: To phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest. Inefficient fossil fuel subsidies encourage wasteful consumption, reduce our energy security, impede investment in clean energy sources and undermine efforts to deal with the threat of climate change. Unfortunately, the G20 leaders still have a way to go before they fulfil this promise. Oil Change International recently conducted a review of G20 action to phase out fossil fuel subsidies. “The bottom line” according to the organization’s Director Steve Kretzmann, “is that no subsidies have been removed as a result of the G20 commitment.” The US has the opportunity to be the hero of this story, by leading the world in breaking the Catch-22 of fossil fuel subsidies. And if there’s one thing the climate needs right now it’s heroes. If nothing else, won’t you feel better knowing that your hard-earned money is not helping fuel the obscene profits of these corporate giants? How do we send a message that it’s time to end Big Oil and other fossil fuel subsidies so Clean Energy solutions can have a fighting chance?

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Dan Solin: Clueless

February 9, 2011

I’m sure Pat Dorsey is highly intelligent and very competent. He is the director of equity research for Morningstar, which is a big job that gives him access to vast resources about the stock and bond markets. As he noted in an article published January 17, 2010 in Money Magazine ‘s Investor’s Guide 2010 entitled “10 stocks that can keep running,” the analysts he works with at Morningstar cover 2000 stocks. Wow. With such an impressive background and extensive resources, I am sure many investors paid close attention to Mr. Dorsey’s 2010 predictions about stock market trends. His primary observation was that we were in the “first phase of a bull market” where “smaller and junkier stocks tend to lead the way.” However, he confidently predicted that “…speculative frenzy eventually gives way to the fundamentals, and that should bring your focus back to high-quality blue-chip stocks this year.” He was very negative on “lower-quality small stocks” noting they could “get killed if reality falls short of high expectations.” Many investors no doubt dumped their small stocks and focused on blue chips. After all, Mr. Dorsey is the director of equity research at Morningstar. Presumably he can accurately predict whether large or small stocks will outperform in a given year. Not exactly. In a thoughtful analysis not available to the investing public, Weston J. Wellington, vice president of Dimensional Fund Advisors noted that US small stocks had their best year since 2003. The S&P Small Cap 600 index was up 26.31%, compared to an increase of 15.06% in the S&P 500. It gets worse. Wellington did an analysis of the ten blue chip stocks recommended by Mr. Dorsey and found they had an average return of 6.3% , significantly under-performing the S&P 500 index. Let’ see if I got this right. Mr. Dorsey was dead wrong in his prediction that blue-chips would outperform small stocks in 2010. His selection of blue-chips did not come close to the returns that were yours for the taking by investing in the comparable index. Yet investors continue to rely on the financial media which features pundits of all stripes, confidently predicting the direction of the markets and advising you to buy this or that stock. It’s all errant nonsense, akin to voodoo, designed to separate you from your money and to continue the transfer of wealth from you to those who “manage” your money. Mr. Dorsey, and his colleagues who pretend to be able to predict random, future events, may be clueless. You don’t have to be. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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Robert L. Cavnar: Responding to the Hydraulic Fracturing Issue

February 8, 2011

As we’ve discussed before, the practice of hydraulic fracturing to produce oil and gas has grown into a controversy being argued about in local townhalls all over the country all the way to the halls of Congress in Washington.

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Middle East Unrest Could Be ‘Exceedingly Dangerous’ For The Global Economy

February 3, 2011

With the crisis in Egypt showing little sign of abating, its effect on trade increasingly poses a threat to the global economic recovery. The prices of oil and other commodities have been rising since the protests began last week, as purchasers fear trade channels could be disrupted. Speculation is driving a dangerous trend, one that could drain economies and consumers of vital resources, as gas and food become more expensive. But the real risk lies ahead, experts warn: If the unrest spreads to other countries, then the global recovery, which lately has been picking up steam, could face a major barrier. World economies have in recent months shown promising signs of recovery. In the U.S., where high unemployment and falling home prices continue to impede progress, manufacturing and lending have picked up, and the stock market has enjoyed a steady rise. But oil could change that. “We can digest what’s happened so far reasonably gracefully,” said Mark Zandi, chief economist at Moody’s Analytics. “If the trouble spreads over the Middle East, and the oil supply is significantly disrupted, that would be a problem.” The price of Brent crude oil, an industry benchmark, rose above $103 a barrel on Thursday. It’s the highest value since September 2008, after a summer of record-high oil prices helped drag the economy into recession. Egypt serves as a crucial link in the transport of oil. In 2009, Egypt’s Suez Canal and Sumed pipeline conveyed 2.9 million barrels daily, according to the U.S. Energy Department. As fears of a blockage mount, the Egyptian army has increased security around the canal, and some shipping companies have ordered vessels not to change crews in Egypt. If the trade passages were blocked, ships would be forced to add 6,000 miles to their journey. Though blockage hasn’t happened and oil supplies haven’t been disrupted, rising prices suggest buyers fear the worst. “Right now I don’t think what we’re seeing is a permanent shock,” said Gregory Daco, a senior U.S. economist at IHS Global Insight. “You’d have a permanent shock were the fundamentals to change, were supply and demand to change.” Further risk lies beyond Egypt’s passageways. Just weeks after protesters in Tunisia took to the streets, demonstrations began in Egypt, and then in Yemen. Activists have organized in Syria, and the Algerian government has taken steps to defuse tension. If the unrest spreads to oil-producing countries in the Middle East, the region’s oil supply could be compromised. Such an event would likely drive the price of oil still higher, with potentially devastating consequences. “If it went up to $150 and stayed there for the rest of the year, then all the benefit of the tax cut deal would be wiped out,” Zandi said. “The economic recovery would probably remain intact, although the risks would be very high.” “If anything else went wrong, a double-dip scenario would look very likely,” he added. Oil-producers do have methods for dealing with a compromised supply. Abdullah al-Badri, secretary general of the Organization of Petroleum Exporting Countries, said this week that his organization could put millions more barrels on the market if need be. But there’s no guarantee that would prevent inflation. If the price of a barrel of oil were to rise by $10.70 — or roughly 10 percent — and stay there for a year, the American economy would lose 270,000 jobs, according to a new simulation produced by IHS Global Insight. After a year, the country’s economic output would be 0.4 percent lower than it otherwise would have been. After two years of a sustained price increase, output would be 0.6 percent lower, the simulation predicts. A higher cost of oil impacts Americans in myriad ways. It boosts gas prices at the pump, it raises heating costs and it deprives consumers of the money they would otherwise spend on other things. As transportation in general becomes more expensive, the cost of airplane tickets rises, and it becomes more costly to ship goods, which, again, hits consumers’ wallets. A dollar increase at American gas pumps tears more than a billion dollars from the economy each year, economists say. “The oil price is woven into virtually the entire fabric of most economies,” said Jeffrey Garten, a professor of international trade and finance at Yale, and a former undersecretary of commerce for international trade in the Clinton Administration. As high prices would sap consumers’ wealth, governments would be placed in a difficult position. A possible remedy, Garten suggested, would be to raise interest rates, in attempt to bring prices down. But in the wake of the recession, and in the years leading up to it, American monetary policy has been premised on the idea that low interest rates spur growth. Raising rates would likely stall lending, dealing untold damage to the economy. “The thing about the global economy today is it is stretched very taught,” Garten said. “We always talk about inflation and eyes glaze over, but inflation at this particular time could be exceedingly dangerous.” The Egyptian unrest has affected the prices of other commodities as well, but oil prices stand out at the principal threat, experts say. Egypt is a major exporter of cotton, and trade with the U.S. accounted for more than 30 percent of the cotton export business during the first half of last year, according to Egypt’s records . The price of cotton , which more than doubled over the course of last year, shot higher as protests began. But cotton isn’t oil. “Cotton will have some impact, but cotton isn’t that important for the U.S. economy,” said Dean Baker, co-director of the Center for Economic and Policy Research, in Washington. “If people spend 10 percent more on clothes, they’ll be unhappy, but it’s just not going to be that big of a hit to their pocket book.” The potential pain likely won’t be limited to the U.S. The current crisis, if it worsens, could have devastating effects in the Middle East, as investors move dollars out of the region. After protests began, the Swiss Franc and the U.S. Dollar have strengthened, a sign that investors are buying those currencies. Much depends on the crisis’ spreading. But already, the Egyptian unrest is moving global prices. “The world economy is so interwoven that nobody really understands all the connections,” Garten said. “It is very easy to underestimate what a little country like Egypt could do.”

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‘We Couldn’t Cut Enough’: Newark Mayor Cory Booker

February 3, 2011

Since he became mayor of Newark in 2006, Cory Booker has had to make cuts that previously seemed unthinkable. Under his watch, the city closed libraries , imposed furloughs on employees and, late last year, laid off about 13 percent of its police force. While the police department says there are no fewer officers on patrol — thanks to reassignments within the force — a spike in crime in the two months since the layoffs has left some residents worried about safety. Newark isn’t alone. After the worst financial crisis since the Depression, cities across the nation have seen revenue wither . As they struggle to get their books in order, cities are increasingly finding that they don’t have the money to fund even the most basic of services. But while Booker faces a common problem, his strategies for dealing with it are unusual. He spoke with HuffPost about how he navigates the budgeting process, and why he has hope for the city of Newark. HuffPost: A trailer for the new season of Brick City starts with a quote from you, on the screen, where you say, “Squeeze everything else but police and fire.” But late last year, the city laid off 164 officers, about 13 percent of the force. How did it come to that? Booker: Look, budgets across the country — 60 percent of American cities have had reductions in their forces of public safety. And, so, this is not something that’s unique to Newark. In fact, right now it’s plaguing major cities in New Jersey. Camden has had major layoffs. Paterson is facing layoffs. Atlantic City. Jersey City. We’re facing, literally, the worst economy of our lifetimes. So, we have dramatic losses in revenue. And public safety, frankly — police and fire — make up the significant majority of our budget. We were squeezing and starving every other area of our city. Furloughing employees, cutting staff. But it came to a point where we couldn’t cut enough to make up for the tremendous budgetary shortfall. Challenges demand creativity. I’m grateful that the police director and my team really came forward with a substantive plan to make sure that the loss of those police officers didn’t affect the progress we were making in the street. And, look, it’s been a difficult adjustment. We had really some challenges in the month of December. But now, as we’re going through January, things are really getting back on track. And I’m really encouraged. Remember, the first three years in office, we led the nation in percentage reduction of shootings and murders. And I’m really confident that now we’re beginning to get back to that nation-leading pace. HP: I’ve heard that there are the same number of officers patrolling the street. But I also have heard from some of the union officials that in order to accomplish that, older officers have had to be re-deployed: People who were looking at retirement are now on street patrol. Are you concerned about officer safety? CB: I’m always concerned about officer safety. I think when you are the leader of men and women who put their lives on the line — whether it’s firefighters and police, or national guard members in the military — that’s the most horrific thing, I think, for an executive, when guys who put their lives on the line get hurt or injured. That’s a concern that hasn’t changed as a result of the layoffs. But in many ways, we have more experienced officers on the streets. Guys with more years under their belts, not people that are six months out of the academy. It’s a give-and-take in many ways. Look, I’m very happy: We have our chief, who used to be doing other jobs, now in precincts, running our precincts. In many ways, we have the best talent of the agency closer to the street and closer to the ground on a daily basis. HP: The city has also laid off other workers. How deep can the city cut before it just stops to function? CB: Money is a necessary but not sufficient resource with which to get the job done. And I found out when I first came in — we were dialing down our budgets every year that I’ve been in office. What I’ve been finding is, if you are more creative, if you bring more resources to the table from outside your taxpayer base — you know, we’ve raised well over $200 million in private philanthropy for our strategic needs here in the city of Newark — it’s if you bring people together to volunteer, and do things that they weren’t doing before, you can still make tremendous progress. A lot of our best innovations since I’ve been mayor have been public-private partnerships. Whether it’s our ex-offender reentry programs, or even the camera system that we put up all around the city — all paid for by philanthropy — Newark is creating a real good model for government effectiveness and advancement, based on its partnership with non-profits and the private sector. HP: Does that include your own involvement in citizens’ lives? Especially via your Twitter feed? CB: Today’s a great day. We got out early this morning. I’ve been myself inspecting streets, but I’ve got now thousands of more eyes on my streets, and people tweeting me about what’s wrong. In the last month alone, my Twitter feed has helped me get water main breaks addressed before I even knew they existed — to even traffic lights, to even bigger things, like people that are in need of emergency services but can’t get through. Government in the 21st century in America is going to change dramatically. We’ve seen government obligations mushrooming, like pension costs and health care costs. It’s gonna squeeze out a lot of the other things that we expect from government, unless we get more creative and change the way government does business. This is what Newark is trying to do. Under tough circumstances, in the worst economy of a lifetime, we’re actually making strides in areas, from affordable housing, to re-entry services, to grassroots financial empowerment and literacy, to public safety efforts. We’re able to make some strides, even though this is such a tough time, because we’re thinking creatively. We’re bringing in new partnerships, we’re introducing technology. It’s not easy — we’re stumbling and falling, and we’re occasionally being set back. But all in all, if you look at Newark compared to five years ago, our shootings are dramatically down, murders are dramatically down, our population is dramatically up. There’s a lot of hope in Newark. The arena, and the arts culture in Newark, is booming. There’s more basketball games — college and professional — played in Newark right now than any place in America, except for the Staples Center and Madison Square Garden. So much is happening in Newark right now that’s making me downright proud. But every day, every inch of ground you’ve got to earn. It’s tough, it’s hard, but I’ve got great partners helping me in and outside of government. HP: How do you make these budget decisions? How do you determine whether to close libraries, or lay off workers? Or cut toilet paper from the city offices? CB: Well, the toilet paper never got cut. [Laughs.] It is tough decisions. I often joke that the decisions we had to make last year were between awful and godawful. But at the same time, that’s what you’re elected for. I would rather be in a game where you’re 20 points behind than 20 points ahead, because we can rally people together to do what other people don’t think we can do. If we’re willing to make the tough decisions, but at the same time be humble enough to reach out for help and engage others, we can make strides where other people can’t. If you walk around the city of Newark today, you will see at least two dozen new parks all over the city that were built during this worst economic downturn. That’s because we’re bringing people together to do things other people can’t do. Literally, the largest parks expansion our city has had in over a century has happened in the worst economy, because of all the partnerships that we’ve been bringing together. That’s how you have to get things done now. You have to find creative coalitions. We had a horrible spike in car-jackings in December. What we did was we brought together a state, Federal, local coalition, and we beat it back within weeks. It was amazing. The law enforcement community in New Jersey rallied together in a way that left me humbled and inspired.

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Wall Street Preps For Exodus Of Talent To Hedge Funds

February 2, 2011

BOSTON (By Aaron Pressman) – The usual flurry of brokerage firm traders seeking to join hedge funds after the payout of annual bonuses could be more of a blizzard this year, with compensation shrinking on Wall Street and a regulatory crackdown in the offing. Wall Street’s leading banks cut bonuses by an average of 5 percent for all employees, according to a Reuters survey conducted last month. But executive recruiters say the drop for traders was more severe, closer to 25 percent to 30 percent, because of weaker results and the expected implementation of the Volcker rule ending proprietary trading at the banks. “People on proprietary trading desks are showing a greater level of interest in hedge funds than in the past,” said Paul Sorbera, president of executive recruiter Alliance Consulting. “Even if their bank isn’t shutting the desk down, the pending rules make people in the seats concerned for their longevity.” Details of the rule, first proposed by former Federal Reserve Chairman Paul Volcker, are expected from U.S. regulators within months. Mandated as part of the Dodd-Frank financial reform law last year, the Volcker rule seeks to ban proprietary trading at banks, but it is not clear how tight the restriction will be. Last week’s headlines about hedge fund star John Paulson’s $5 billion 2010 paycheck also certainly got the attention of Wall Street’s top traders. Goldman Sachs’ recent award of a $2 million annual base salary and $12.6 million in stock to its chief executive officer, Lloyd Blankfein, pales in comparison. GLORY DAYS OVER? Hedge fund compensation overall is recovering from a dip during the credit crisis. And after a burst of fund closings and client redemptions, the $1.9 trillion industry is getting an influx of cash again. “Where we are now, it’s certainly much more difficult for the banks to compete for that talent,” said Lawrence Lieberman, senior managing director at Orion Group, an executive recruiting firm that focuses on the money management industry. On average, senior equity professionals at hedge funds — including portfolio managers, traders and analysts — made $875,000 last year, up from $800,000 in 2009, according to a survey by compensation consultants at Greenwich Associates and Johnson Associates. The average for fixed income pros rose to $1.1 million from $1.0 million. While pay for bond traders at the hedge funds slightly exceeded pre-crisis levels, equity market specialists still have a lot of ground to make up before they again reach the 2007 average of $1.7 million. The Greenwich/Johnson survey found much lower salaries in its “other” category, which includes banks, but the group’s data is skewed by the inclusion of much lower pay at insurance companies and government agencies. In equities, senior professionals made $385,000 on average in 2010, up from $350,000 in 2009. On the bond side, the average pay increased to $450,000 from $400,000. Making comparisons between average pay at hedge fund and Wall Street firms is almost impossible, Johnson Associates Managing Director Alan Johnson said, but people are moving for more money. “It’s driven by pay — that’s a lot of it,” he said. On Wall Street, compensation is shrinking for many traders. Profits are down from the glory days, and new rules from Dodd-Frank and the Securities and Exchange Commission have increased pressure to curb pay. Morgan Stanley not only reduced bonuses, but also increased the portion of the payouts that cannot be spent for up to three years to 60 percent from 40 percent. Senior executives will see 80 percent of their bonuses deferred, the investment bank said. Even before the figures had leaked out, Morgan Stanley’s head of proprietary trading, Peter Muller, had decided to take his group independent. Top traders at Goldman Sachs, including Morgan Sze, Pierre-Henri Flamand and Daniele Benatoff, have left to open their own funds or are making plans to do so. In October, private equity firm Kohlberg Kravis Roberts & Co grabbed nine Goldman traders led by Bob Howard. Moving to a hedge fund may not be an option for everyone who wants to leave a Wall Street trading desk, given the smaller size of the fund industry, Johnson noted. “We are not talking about thousands of people because there aren’t enough jobs,” Johnson said. “But you will see a lot of the most valuable and most prominent people go.” Beyond 2011, further regulations will probably determine the long-term trend in the sector, according to University of Virginia economics professor Ariell Reshef, who studied the after-effects of Depression-era regulation on Wall Street. Rules put in place so far pale in comparison to what was done in the 1930s to curb risk-taking, including the Glass-Steagall Act of 1933, which separated banking and underwriting, Reshef said. “We have not seen any significant regulatory changes,” he said. “What has transpired is small cash compared to 1933-34 regulatory reforms — pun intended.” (Reporting by Aaron Pressman; Editing by Lisa Von Ahn) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Julian Block: Bad Debt Deductions for Worthless Loans to Spouses

February 1, 2011

These being the times they are, you may be tapped for a loan by a relative or friend who is unable to come up with the down payment for a home or who wants to start a business or keep it afloat. And what if the loan goes sour, as so often happens? The tax rules on deductions for bad debts can be more bad news for you. So before staking someone, it’s a good idea to know how the Internal Revenue Service looks on worthless loans. The IRS says you can deduct a worthless loan if there is no likelihood of recovery in the future. But you can’t take a deduction for an outright gift. That’s why the agency looks closely at bad debt deductions where the lender and borrower are related and why it may insist on proof that the “loan” wasn’t really a gift. Unpaid Loans and Marriage. The law presumes that loans from one spouse to another don’t create valid debts. To get around that snag, Carolyn Marlett claimed that her marriage to husband Charles was a “relationship maintained for financial convenience only.” Hence, her co-signing of a joint income tax refund was a loan to Charles, as were her other “advances” to him. However, Carolyn couldn’t convince the United States Tax Court that the advances were valid debts. In a 1976 decision, the court noted that she never asked Charles to sign notes or bothered to set an interest rate or repayment schedule. But the Tax Court isn’t completely inflexible on this issue. It ruled that June M. Rogers could deduct loans made to her husband, who declared bankruptcy after their divorce. The loans weren’t gifts; he used the money in an unsuccessful business venture and signed promissory notes for repayment. Can an Unreturned Engagement Ring be a Deductible Bad Debt? The Tax Court ruled in favor of the government in 1982 in a case involving Jack Wolfson. Jack was a Dallas salesman whose territory included Houston, where he met and ultimately became engaged to Yvonne Gibbs. To seal their engagement, he gave her a diamond ring. But just a week later, she broke things off and sold the ring (a decision triggered by Jack’s refusal to honor his promise to reimburse her for the cost of housing her poodle in a kennel during her visits with him in Dallas). Jack sued Yvonne for the ring’s cost and won a default judgment of $1,000, which he made no attempt to collect. Instead, the spurned lover took a bad debt deduction for $1,000. The IRS invoked two arguments to justify its disallowance of the deduction. First, Jack didn’t offer any proof he tried to collect. Therefore, the debt wasn’t worthless at the end of the year in issue, a requisite for the write-off of a bad debt. Second, simply giving an engagement ring doesn’t create a debt. Approving a bad debt deduction for that act alone “would, in essence, open the doors of litigation to allow every rejected lover to come into the Tax Court and ask it to allow him a deduction” for an unreturned ring. The IRS urged the court not to assume “part of the cost of the romance” of Jack with Yvonne. The judge deemed it unnecessary to rule on the second argument, as he agreed with the first one. Jack offered no evidence of Yvonne’s insolvency or other inability to pay during the year in question. Hence, he failed to prove the debt’s worthlessness during that year. **** Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as “a leading tax professional” (New York Times), “an accomplished writer on taxes” (Wall Street Journal) and “an authority on tax planning” (Financial Planning Magazine). His latest books are: “Julian Block’s Tax Tips for Marriage and Divorce: Savvy Ways for Couples to Trim Their Taxes;” “Julian Block’s Home Seller’s Guide to Tax Savings: A Tax Guide for Buyers, Sellers, Foreclosures, Short Sales, and More;” “Julian Block’s Easy Tax Guide for Writers, Photographers, and Other freelancers; ” and “Julian Block’s Tax Deductible Travel and Moving Expenses: How to Take Advantage of Every Tax Break the Law Allows.” His Web site is julianblocktaxexpert.com.

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Howard Schweber: Laffer Curves and Tax Cuts: What Does It Take to Kill a Zombie?

January 31, 2011

I. The Theory: Laffer Curves, Supply Side Tax Cuts, and Demand Side Tax Cuts We are hearing a lot these days about the lessons of the Reagan tax cuts. We are also being treated to a revival of the Laffer Curve. Which is… interesting. There are two basic arguments for using tax cuts to stimulate the economy. One is the supply-side version: that’s the argument that cutting taxes for high earners will cause them to invest more in the economy, which will ultimately produce more jobs. You may recall this as the “trickle down” theory, later rebranded as the “rising tide lifts all boats” ideal. This argument makes sense so long as two things are true: that the economy is being held back by a shortage of capital available for investment, and that high earners are being held back from investing because they do not have the money to do so. Given that we are currently in a situation in which corporations are sitting on record amounts of uninvested capital and have just recorded the most profitable quarter in all of American history, it’s a little hard to see how those descriptions apply. The demand-side approach to tax cuts favors cuts for low and middle earners, in the hope that they will spend the extra money and thus stimulate the economy; this is essentially using tax cuts as a form of Keynesian stimulus. That argument makes sense so long as two things are true: that the economy is being held back by a lack of demand, and that there are lots of people who would buy more things if they had the money to do so. In the current economic climate, that seems like a fairly plausible pair of assumptions. But! The Laffer Curve provides supply-siders with a different explanation for why tax cuts for high earners will stimulate the economy. Laffer’s curve describes a theory about human motivation. It goes like this. Suppose you have someone earning $100 a year and paying 25 percent in taxes. That is, he gets to keep $75 out of that $100. Now suppose he has an opportunity to earn $120 next year, but the tax rate on that next $20 will be 35 percent. Laffer argued that a certain number of people would rather not earn that extra $20 if they only got to keep $13 of it — they would rather earn $100 and take home $75 than earn $120 and take home $88, maybe because there is extra work or risk involved in earning that next $13. As tax rates get higher, the number of people who are unwilling to earn more money if they will have to pay higher rates on that additional income goes up. At a certain point — the tipping point in the curve — cutting tax rates at the top of the scale will persuade enough people to be willing to make more money who otherwise would have refused to do so that the total tax revenues received will go up. Laffer never claimed that tax cuts will always result in increased revenue — it all depends on where you start on the curve. (To see the theory explained in Laffer’s own words, go here .) George H.W. Bush called this “voodoo economics,” and it’s not hard to see why (not that liberals talking about health care reform are above engaging in a bit of voodoo economics of their own.) On the one hand, it’s hard to quibble with Laffer’s contention that many people would decline to earn more money if it were going to be taxed at a rate of 100 percent — it’s what happens at other levels that becomes a matter for speculation, and perhaps some historical evidence. II. What Are Actual Tax Rates? There is something very strange about the way both Democrats and Republicans have been framing the conversation about tax cuts. The question a month ago was whether to retain all of the Bush tax cuts (the GOP’s position), or only those affecting income below $250,00 for a household and $200,00 for an individual. Here’s the strange part. Both sides were framing this in terms of distinguishing among persons, as in “we want a tax cut for the middle class but they want a tax cut for the rich.” But that is simply not true. We are talking about marginal tax rates here. That is, it is not the case that a household making more than $250,000 would pay the old, pre-tax cut rate on all their income, only on income above the $250,000 cap. On all their income up to that limit they would pay the same rate as everyone else. When we say that the top federal income tax rate is 37 percent, we don’t mean that the taxpayers who are in that bracket pay 37 percent in taxes on all their income, only on the income that the earn above the cut-off. The effective tax rates are quite different. Then, of course, there is the matter of the relentless focus on federal income taxes. Leaving aside state and local taxes (a significant omission given the importance of property taxes, state sales taxes, licensing fees, and so on). Focusing only on federal taxes, here are the effective rates as of 2005, according to the Congressional Budget Office. For each of several categories of households, I include the effective rates for all federal taxes, individual income taxes, payroll taxes, and corporate taxes. (I am not including federal excise taxes, which are not significant.) Note that these categories overlap, as the top 1 percent is included in the top 5% percent and so on. – top 1%: all taxes, 31.2%; income tax, 19.4%; payroll taxes, 1.7%; corporate tax, 9.9% – top 5%: all taxes, 28.9%; income tax, 17.6%; payroll taxes, 3.5%; corporate tax, 7.4% – top 10%: all taxes, 27.4%; income tax, 16.0%; payroll taxes, 4.8%; corporate tax, 6.1% – top 20%: all taxes, 25.5%; income tax, 14.1%; payroll taxes, 6.0%; corporate tax, 4.9% – everyone: all taxes, 20.5%; income tax, 9.0%; payroll tax, 7.6%; corporate tax, 3.1% That’s just the effective federal tax rates. A different question is what share of federal tax revenues, in each categories, come from each of these segments of the population? Again, these are 2005 data from the CBO: – top 1%: all taxes, 27.6%; income tax, 38.8%; payroll taxes, 4.0%; corporate tax, 58.6% – top 5%: all taxes, 43.8%; income tax, 60.7%; payroll tax, 14.4%; corporate tax, 74.9% – top 10%: all taxes, 54.7%; income tax, 72.7%; payroll tax, 25.8%, corporate tax, 81.6% – top 20%: all taxes, 68.7%; income tax, 86.3%; payroll tax, 43.6%; corporate tax, 87.8% (Source: Historical Effective Federal Tax Rates, 1979 to 2005 (Congressional Budget Office, December 2007), here . What about fairness? Don’t the highest earners pay more than their share in taxes? The answer is, “yes, by a little bit,” but not nearly as much as most people tend to think. Here is a look at the distribution of wealth, divided into all wealth, non-home wealth (known as “financial wealth”), and income. These data come from a study of 2007 Survey of Consumer Finance conducted by the Federal Reserve: – top 1%: all wealth, 34.6%; non-home wealth, 42.7%; income, 21.3% – top 5%: all wealth: 61.9%; non-home wealth, 71.4%; income, 36.9% – top 10%: all wealth, 73.1%; non-home wealth, 81.5%; income, 46.8% – top 20%: all wealth, 85.1%; non-home wealth, 91.6%; income, 61.4% (Source: Edward N. Wolff, “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze–an Update to 2007,” Levy Economics Institute of Bard College working paper, March 2010.) So, for example, in 2006 (located neatly between the two years of the data presented above), the top quintile of households earned 55.7 percent of pretax income and paid 69.3 percent of federal taxes, while the top 1 percent of households earned 18.8 percent of income and paid 28.3 percent of taxes. But note that these last numbers are distorted by the fact they compare income to all taxes, not just taxes on income — If you look at the overall distribution of only federal taxes, the system is slightly progressive, and if you factor in the regressive effects of state and local property and consumption taxes, the entire system is even less progressive than that. III. What Did the Reagan Tax Cuts Actually Do? Historical discussions often lead into an impossible maze of information. For starters, there is the correlation-causation problem (if a tax cut is followed by growth, does that show that the tax cut caused the growth?) Nonetheless, we can at least look at some of the claims being made and try to focus more precisely on the areas of ambiguity. There are four major periods of tax cutting in modern history: the 1920s, the Kennedy administration, the Reagan administration, and the George W. Bush administration. I will focus primarily on the Reagan administration, with a few comments about the very large tax increases that were signed into law by Franklin Roosevelt. We frequently forget that in addition to several tax cuts focusing on income taxes, Reagan also signed off on about a dozen tax increases, primarily on payroll and excise taxes. Measured in dollar value, the tax increases were about half as large as the tax cuts. In one way, this complicates the picture: What if there had been no tax increases? (Or, conversely, what if there had been no tax cuts?) If our question is “what is the effect of tax cuts on economic growth,” this makes things complicated. On the other hand, if our focus is on the effects of tax rates on federal tax revenues — the Laffer Curve claim — we have a genuine experiment: by tracking the tax revenues that flowed in from the increased taxes and the decreased taxes, operating under the same economic conditions, we have an actual empirical test. Another question is how we separate the effects of tax cuts or increases from changes in the overall economy. Again, the fact that these cuts and increases occurred simultaneously helps solve that problem. It is also the case, however, that economists measure the effects of tax rates on revenues in terms of a percentage of GDP rather than in gross dollar amounts. During periods of growth, this begs a very large question: what if economic growth would not have occurred but for the tax cuts in question? On the other hand, Reagan approved both tax cuts and tax increased during a recession. I’ll come back to both of these points in a minute. A. Tax Cuts and Tax Revenue: the Reagan Case The main Reagan tax cut was the Economic Recovery Tax Act of 1981. That law had a number of elements that were phased in over time, reaching full implementation in 1983. By a nice coincidence, 1983 was also the year in which the most important tax increases took effect (the Tax Equity and Fiscal Responsibility of 1982, raising payroll taxes and certain excise taxes) took effect. Those and other Reagan tax increase were seriously regressive : In 1980, according to Congressional Budget Office estimates, middle-income families with children paid 8.2 percent of their income in income taxes, and 9.5 percent in payroll taxes. By 1988 the income tax share was down to 6.6 percent — but the payroll tax share was up to 11.8 percent, and the combined burden was up, not down. To test the effects of the two laws, I looked at the average for the four years following complete implementation (1983-1986), and compared that to the average for the preceding four years (1979-1982), using data compiled by the Tax Policy Center. The results : – income tax revenues: 1979-82, 9.075% of GDP; 1983-86, 8.05% of GDP (down 11.29%) – payroll tax revenues: 1979-82, 5.925% of GDP; 1983-86, 6.275% of GDP (up 5.5%) – corporate tax revenues: 1979-82, 2.125% of GDP; 1983-86, 1.375% of GDP (down 35%) But actually, the corporate tax cuts took effect in 1982. If we shift the years to that 1982 is included in the post-tax-cut category, the results are even more stark: the average corporate tax revenues from 1979-81 were 2.33% of GDP; from 1982-86 that average falls to 1.4%. And just for comparison, for the four years from 2006-2009, the averages are: – Income tax revenue: 7.65% of GDP – Payroll tax revenue: 6.275% of GDP – Corporate tax revenue: 2.125% of GDP To repeat the point, during the very same years, in the very same economy, tax cuts resulted in a decrease in tax revenues measured as a portion of GDP while tax increases resulted in an increase in tax revenues measured in exactly the same way. Which, of course, leaves the question of the relationship between tax cuts and overall economic growth. B. Tax Cuts and Growth Here, we can range a bit more widely, recognizing that the larger the historical sweep of the discussion the more we are certainly omitting critical variables. Nonetheless, this exercise may be useful as an antidote to the kind of monocausal, ahistorical claims that are sometimes made on behalf of cutting taxes, such as this statement from the Heritage Foundation : There is a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase…Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues…President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent. The preceding discussion was premised on the idea that we should look at tax revenues as a share of GDP. What if, instead, we look at the average annual change in tax collections? Here I do not have data breaking everything down by specifics, but on the other hand we have some long-term historical data which is potentially informative: – FDR 121.3% – Truman, 3.7% – Eisenhower, 2.4% – Kennedy, 4.8% – Johnson, 6.9% – Nixon, 0.3% – Ford, 6.4% – Carter, 3.0% – Reagan, 2.4% (Source: U.S. Office of Management and Budget, Historical Table 2.1, Budget for FY 1997.) That figure for FDR is not a misprint — over 13 years, the total increase in tax revenues was 1,865%. FDR raised the top rate from 25 percent to 91 percent (that rate had been lowered in the 1920s from 75 percent). What about general rates of economic growth? Here are the figures for increase in real GDP during the key years of FDR’s administration, according to the Bureau of Economic Analysis: – 1934,+10.9%; – 1935,+8.9%; – 1936, +13.0%; – 1937, +5.1%; – 1938, -3.4%; – 1939,+8.1%. What makes that 1938 figure so interesting is that in 1937, under pressure from conservatives in Congress, Roosevelt cut back on stimulus spending programs. Looking across a range of administrations , we get the following figures for overall economic growth: Kennedy-Johnson (49 percent over eight years), followed by Clinton (34 percent), followed by Reagan (32 percent), Nixon-Ford (24 percent) and Eisenhower (21 percent). IV. Conclusions(?) Actually, there are no clear affirmative conclusions to be drawn here except that we have overwhelming reasons to reject the claims being made by supply-side tax cut enthusiasts. The data certainly do not show that tax cuts never stimulate economic growth, nor even that they never stimulate economic growth enough to pay for themselves — the data on the Kennedy tax cuts suggest that this is exactly what happened. But those were primarily demand-side tax cuts, similar to the tax cuts that were the largest element in Obama’s stimulus package. The supply-sided, Laffer-curved theory of tax cuts as stimulus started out as voodoo economics 30 years ago. Today, Paul Krugman calls them ” zombie ” theories. Which brings us to the question that has been plaguing Hollywood and cable television lately: Just what does it take to kill a zombie?

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Elinor Steele: Talking With Iraq’s Women: Big Dreams and Enormous Challenges

January 31, 2011

In my six years managing worldwide communications for Tupperware, I’ve met with businesswomen from around the globe, from accomplished cosmopolitan women in European capitals to incredibly resourceful women in places like Indonesia and South Africa with no formal education who practically willed themselves to succeed. I’ve always been moved and motivated by these wonderful women, but the women I met — in, of all places, Baghdad — have affected me like few others. First, let me explain what brought me to Iraq. Tupperware CEO, Rick Goings, and I were invited as part of the Department of Defense Task Force for Business and Stability Operations partnering with Business Executives for National Security Delegation. The goal of the delegation was to learn about Iraqi businesswomen, the challenges they face in their country’s rapidly changing (and rapidly growing) economy, and the potential business and investment opportunities there. As studies have repeatedly shown, providing earnings opportunities for women is critical to a country’s growth. The World Economic Forum’s 2009 Global Gender Gap report suggests that closing the gender gap could boost U.S. GDP by as much as 9 percent, European GDP by as much as 13 percent and Japanese GDP by as much as 16 percent. The potential for growth is even greater in developing countries. As the Atlantic pointed out in a powerful article last summer, the greater the economic and political power of women, the greater a country’s economic success. Iraq is an interesting case, because juxtaposed with its long history of empowering women and incorporating them into the traditionally male-dominated Arab society, is a disturbing increase in violence against women since the start of the war. Female Iraqi professionals are often targeted for abduction and murder. Solving this problem will be the first critical step toward the success of women in Iraq, and likely the success of the Iraqi economy as a whole. My natural orientation is to believe that with sheer determination anything is possible. I’ve seen that first-hand working at Tupperware. But seeing the challenges women in Iraq are up against puts my belief to the ultimate test. After 30 years of war, Iraq has become a brown, dusty and fractured country. The infrastructure to rebuild is nearly nonexistent. We stayed in a compound in the international zone. There are heavy and huge metal gates with round-the-clock armed guards — one of many security checkpoints that you must pass through to go in or out of the Green Zone. As many of you know, the Green Zone is a 5.6 sq. mile area in central Baghdad that is the main base for foreign and Iraqi government officials. The official name is the International Zone, or as referred to locally, the IZ. The Red Zone obviously connotes danger, and refers to anything outside the Green Zone — which, in practical terms, is the rest of the country. Parts of the IZ were originally home to the villas of government officials and a number of palaces belonging to Saddam Hussein and his family. It was the center of Ba’athist Iraq. Our visit began with an introductory session during which we spoke with nine Iraqi businesswomen. Nearly all of them own construction or supply businesses that they built through contracts with the American military or American companies and non-governmental organizations (NGOs). I was especially impressed with a strong and confident woman named Azza. Azza returned to Iraq from the United States with her husband in 2004. He is a government official who works on educational partnerships for Iraq and the U.S. She leads training and development seminars aimed at helping small and women-owned Iraqi businesses win contracts. She also coordinates with NGOs to fund Iraqi women’s initiatives. Azza has a bachelor’s degree in business administration and a master’s in information technology, and she is determined to use her knowledge to help Iraqi women develop and grow businesses. Best of all, Azza has been encouraging every woman she meets with to be a leader in her community and to work with other women. This is essentially the model we’ve used to grow the Tupperware business in emerging markets — provide one woman with an earning opportunity that gives her money and self-confidence, then encourage her to serve as a mentor to others so they can achieve the same things. However, Iraq has unique obstacles that could make this model, or any business model, difficult to implement. While the women we met are amazing, this group was much different than businesswomen in other countries, due to the nature of their work. Most of the women’s businesses are heavily dependent on one customer — the U.S. government. Our government is not only the source of much of their income, but also the root of many of their contacts. When the U.S. pulls out of Iraq at the end of the year, most, if not all, of these contacts will disappear and these Iraqi businesswomen will have to transition to either contracting with the Iraqi government or establishing their businesses in the private sector. Two major challenges with this are an inherent distrust of the Iraqi government and the fact that these women aren’t able to find banks to lend them money. There’s a vicious cycle at work here. These businesses can’t transition to the private sector without financing, yet no bank will lend them money without 30 percent collateral and a business plan that demonstrates proof that they can be profitable. We asked why the women we met can’t take the knowledge they gained working with the U.S. government and use it to generate contracts with the Iraqi government. They responded that they don’t know if the Iraqi government will pay on time — or at all. However, they all hope that things will improve with the new government in place and that corruption will decrease. Of course, the problems go deeper than just the business environment. There are social obstacles that must be overcome as well. I’ll talk about those in my next post. In the meantime, I’d love to hear your thoughts on how American businesses can help improve the situation in Iraq.

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Robert Lenzner: Why The Financial Crisis Could Not Have Been Prevented

January 29, 2011

The multi-trillion dollar meltdown of financial markets in 2007-09 could not have been prevented. It was absurd speculation on the part of the special Presidential Commission to even suggest this impossible nirvana. No way Jose! Let me tell you why. As my esteemed friend Jim Stone, chairman of Plymouth Rock Assurance, headquartered in Boston, puts it so succinctly; “We have wagered our place in history on our relative strength in finance. Bad bet.” The financial markets crisis could not have been prevented because Alan Greenspan, chairman of the Federal Reserve Bank, for 18 long years the power center in the nation for monetary policy, did not believe in reining in the animal spirits on Wall Street. He chose to ignore pleading from wise titans like Loews Corp. Laurence Tisch, and Wall Street great John Whitehead, who begged him to turn off the spigot of easy money and rock-bottom interest rates. Yeah, it could have been prevented if Greenspan had actually taken steps to dampen down “irrational exuberance,” his description of the craziness that began in the mid-1990s– and continued to accelerate until mid-2007. Regrettably, Greenspan’s utter and naive faith in free market ideology, makes him look a fool– not the God-like figure we all created. Yeah, it could have been prevented if the Clinton administration led by Robert Rubin and Larry Summers had not blithely agreed to deep-six the discipline of the Glass-Steagall Act- which in 1933 wisely separated the activities of the investment banks and the commercial banks– and had ensured relative stability on Wall Street for over half a century. Sure, the meltdown could have been prevented if these very same chaps in cahoots with the SEC and some conservative members of Congress had not ambushed an attempt to regulate the fastest growing financial market in the world– the explosion in the use of derivatives– from being regulated in any way, shape or form. The leverage unleashed by these new securities was never understood or considered to be a danger despite warnings from wise heads like Warren Buffett. Ignorance ruled the day. Yeah, the meltdown could have been prevented in 2004 if SEC Chairman Bill Donaldson and 2 of the other 4 Commissioners had not buckled under to Wall Street’s demand that the ceiling on the use of leverage– borrowed money– be raised to unimaginably dangerous levels like being able to borrow $30 or $40 for each $1.00 of capital the banks held. So was endangered the entire financial system with the verdict applied from Washington, DC. Yeah, the meltdown could have been prevented if only Tim Geithner, then President of the New York Federal Reserve Board, had only carried out the duties handed him to oversee, i.e. regulate the money center banks like Citigroup. He did nothing to protect the system before the crisis exploded and the financial system was threatened. I’ve been dying to ask Geithner if he ever reviewed Citigroup’s financial statements to recognize just how dangerous to its survival were the excessive off-balance sheet operations that were not at all in the “shadows” of the shadow banking system– but were right there in front of him. Need I remind you that Citigroup shares fell from $60 to 97 cents in 2009? Yeah, maybe the panic that ensued in September, 2008 might have been prevented if Hank Greenberg– while he was CEO and Chairman of AIG– had liquidated the $240 billion of risky credit default swap contracts on his balance sheet– or if his successors had comprehended the hari-kari they were committing by doubling the 100% leveraged book of insurance to over $500 billion of disaster waiting to happen. And I could go on. But, I’ll leave you with this uncomfortable and disturbing thought. The absurdity of this commission’s conclusion is expressed so bluntly by Douglas Holtz-Eakin, the Chicago economist, who revealed yesterday that the majority Democrats on the commission and the Republican minority were so alienated from each other they weren’t even communicating– well before the reports were even written. All this sordid and tragic mess that Wall Street made for itself with the passive lack of assertion by those responsible for cleaning up the mess. And how ironic it comes in the wake of hedge fund operator John Paulson making for himself some $5 billion in one year of operation– an unbelievable multiple of what the chairman of Goldman Sachs, Morgan Stanley, JP Morgan Chase earn– which is not chump change either. So, I turned to a financier I highly respect, Jim Stone, chairman of the CFTC in the Carter administration, now the CEO and Chairman of a private insurance company in Boston, Mass.– Plymouth Rock Assurance– a hardy competitor to Berkshire Hathaway’s Geico. Here’s what Stone sent me; It’s definitely food for thought. “I think the crash would have been easy to prevent: leverage limits of 5 to 1(or even less) would have done that. Cut leverage and we can all relax a bit” ” A society can be judged by whom it chooses to reward most highly. The closer the reward scale is to the contribution scale, the better for the nation’s future. A trader may be brilliant and honorable, as many are, but their work is not of the sort that will keep America a great, strong nation. That problem is not so easily correctable. We have wagered our place in history on our relative strength in finance. Bad bet.”

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Robert Lenzner: How John Paulson Made $5 Billion Last Year

January 29, 2011

The secret to the spectacular returns Paulson and his employees reported for 2010 is due to their keeping much of their money- $14.9 billion or 42% of the total assets under management($35 billion)- in the funds. That’s called putting your money to work alongside your clients. That $14.9 billion commitment is revealed in Paulson’s yearend letter to investors. Some of Paulson’s personal share must come from the $4 billion he made going short against the subprime mortgage bubble in 2007. The Paulson funds made gross gains in 2010 of $8.4 billion before fees. So, 42% (their share) of the $8.4 billion meant $3.5 billion in gains for Paulson and his employees. Add to that a 2% fee on $35 billion of capital- $700 million- and then the 20% fee on the total profits made adds another $1.7 billion to the pot shared by Paulson and his team. By my figuring then, the total take comes to roughly $6 billion before taxes. Overall, the fund’s strategy made a transition during the year from a short equity bias with a focus on being long distressed securities to a long equity event focus, according to Paulson’s yearend letter. This growing bullishness on the stock market is due to Paulson’s careful tracking of the equity risk premium measured by J.P. Morgan; the difference between the yield on equities and the yield on bonds. Paulson is a buyer of stocks because he sees the equity risk premium in the market as “the highest it has been in over 50 years., indicating to us that equities are due to rise as the current economic environment is by no means the most challenging it has been in 50 years,” he wrote in his yearend letter which was posted Friday on the internet. Last year, for example, Paulson made a 43% return or over $1 billion on Citigroup- buying shares at $3.20 a share and selling them for $4.60 a share later in the year. The Paulson Gold Fund was up over 35% on the year, as positions in Anglo Gold, Osisko and GLD, the giant gold ETF all paid off bigtime. Paulson is optimistic that gold will outperform for the next 5 years and is “the ideal vehicle to hedge against the risk of the U.S. dollar.” The funds held $20 billion in 40 different distressed situations where most of the companies have “repaired their capital structures.” He also sold off positions in major banks like Bank of America, and went long Anadarko, the oil and natural gas producer. Paulson’s hedge fund has piled up gains of 26 billion since inception in 1994- 3rd biggest killing of all hedge funds. Quantum Endowment Fund, begun by George Soros in 1973, has racked up $32 billion in net gains. Renaissance Medallion Fund, founded in 1982 by James Simons, has delivered net gains of $28 billion. He expects all his funds “to outperform in 2011.”

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Tim Berry: Y’Want Jobs? Small Business? Then Fund Education

January 27, 2011

Everybody agrees that small business is good for an economy, that it promotes jobs, and so on. But what does anybody want the government to do about it? And what can governments really do about it, effectively? More small business loans , perhaps? Lower taxes ? Cut regulations ? Sure, all easy to say, but then we get into partisan politics. Who puts up the money for the loans? How do you lower taxes for business owners without getting into partisan politics? And how do you cut regulations when most of them are supposed to protect employees and customers? Tough problems, and I don’t have direct answers; in fact, what I’ve seen in about 30 years of owning my own business and helping others to start theirs, is that people starting or not starting businesses isn’t about tax rates or regulatory environments. It’s about opportunity, education, technology, infrastructure, risk, custom, and attitudes. In ” Entrepreneurship is a Passion, Not a Program ,” Kevin Swan offers a good list of things “entrepreneurship is not” (emphasis is mine): It is not a program set in place by decision makers. It is not a building you put innovation in and commercialize. It is not grown from public money. It is not developed by having a bunch of venture capital available. It is not focus on certain sectors or markets. It is not an easy way to get rich. It is not chaotically chasing after ideas and projects. I think he’s right on all points, and particularly, on those points in bold that cast doubt on public policies. To help explain, he cites Vivek Wadhwa’s ” A Better Formula: Connecting Risk Takers .” Vivek counters the cluster theories of government-sponsored entrepreneurship growing in a would-be petri dish of favored locations and industries: All of those are well-intentioned efforts to build Silicon Valley-style technology hubs, but they are based on the same flawed assumptions: that government planners can pick industries they want to develop and, by erecting buildings and providing money to entrepreneurs and university researchers, make innovation happen. It simply doesn’t work that way. It takes people who are knowledgeable, motivated, and willing to take risks. Those people have to be connected to one another and to universities by information-sharing social networks. So what — if anything — should governments, whether federal, state, or local, actually do? (That is, aside from lowering the volume on the partisan politic.) Could this be a classic quicksand problem for governments, meaning a problem they can make worse, but not better? Perhaps, but maybe there is something. Vivek has some good ideas. He recommends, for example, “work toward removing the stigma associated with failure.” And “teach entrepreneurship, not just to university students, but also to experienced workers.” And, one of my personal favorites: “Bring in skilled immigrants from all over the world” (which I think means relax restrictions, rather than actually bringing them in). In short: To boost entrepreneurship, they need to focus their energy not on infrastructure, but on people. They have to be connected to each other and be given the means to innovate and take risks. The obstacles in their path need to be removed. I like that: Remove the obstacles . And really, for those of you who haven’t started a company, or worked in a startup, or been involved in any way with a startup, I can confirm this for you: nobody’s startup business plan hangs on tax rates or employer regulations. Those aren’t the real triggers. Vivek takes it a step further, and relates it to higher education: “Reward university researchers …

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