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Sramana Mitra: Indian Entrepreneurs Are Maturing

February 6, 2011

For this week’s One Million by One Million round-table, we partnered with the Indian Angel Network (IAN). India, as you all know, is a rising power in the entrepreneurship firmament, and the country’s entrepreneurs are making a long-awaited switch from pure outsourcing and labor arbitrage to now venturing into building Internet companies, cloud businesses, and, as you will see in today’s presenters, some very cool hybrid businesses that leverage India’s cheap labor pool and combined with sophisticated technology, deliver solutions to hairy and hard core problem domains. It is particularly satisfying for me to work with these entrepreneurs, because I have long believed that India needs to diversify out of pure labor arbitrage. I deliberately wrote a highly controversial series of articles in 2008 [ Death Of Indian Outsourcing ] to provoke a debate on the topic. Other discussions on India’s need for product companies have also been equally controversial. But in the end, I believe, we have arrived at a better place as an industry where Indian entrepreneurs are thinking beyond outsourcing. Meanwhile, outsourcing itself is absolutely booming. You can read more on the topic in Top 10 Outsourcing Trends Of The Decade , while I discuss some of the entrepreneur pitches we discussed today. First up today was Ankur Tripathi with IRTEX: Indian Road Transportation Exchange . Ankur has underscored a very real and substantial problem in the transportation industry spanning road, rail, ship – that very often vehicle capacity goes under utilized due to lack of information on cargo and its whereabouts, and lack of communication among shippers and their clients. I like this business very much, and believe it can be a large, and important company. It reminds me somewhat of RedBus, India’s largest online bus-ticketing company , that went into a very low-tech, inefficient industry and completely changed its dynamics. In today’s session, we primarily discussed Ankur’s scaling challenges and prioritization issues. We also discussed how to move this cash transaction oriented business to a more efficient, electronic payment mode. The industry is extremely low-tech, but in today’s India, everyone uses mobile phones. I pointed Ankur to Obopay, a mobile payment solution , by which, conceivably, he can turn the cash-intensive nature of the business to a more efficient and accurate workflow. Then Praful Thachery pitched Delyver Retail Network – a home delivery solution through which Praful is already delivering food, flowers, and a variety of other products and services (like dry cleaning) to over 5,000 customers in Bangalore. The value proposition is sound. The Indian cities are incredibly crowded today and traffic is an absolute nightmare. Upwardly mobile consumers, I am sure, would welcome a service like Delyver. Praful is looking to scale his business, and needs cash to open additional hubs in Bangalore, as well as elsewhere. He also wants to build optimization technology to make the delivery process — today managed largely by hand — better optimized. For an investor, Praful needs to present a thorough financial analysis — based on his first 5,000 customers — on what are the margins and mechanics of the business he is trying to build, and also a clear articulation of the growth levers. Next Kiran Reddy presented Saagam.com . I learned that there are educational institutions in India that cater to non-resident Indians, and out-of-state students on a quota basis, but the information flow is extremely limited. Kiran is trying to bring transparency to the industry that currently has some awkward behavior like admission in exchange for donations! I detected a major flaw in Kiran’s business model assumption. He wants 8% commission off the admission fee for every students that he helps the institutes recruit, yet the institute wants to slap that fee on top of their regular fee, and pass the charge on to the student. This creates a pricing model disparity, whereby, the tuition fee on Kiran’s site is 8% higher than if the student goes directly to the institute. Well, guess what? The students will do all their research on Kiran’s site, and then go buy from the institute directly! Up last was Tuanni Price presenting Zuri Wine Tasting , a wine education service for African American women with a household income of $40,000 a year. Tuanni has come to realize that this segment has a somewhat specific palette – they like sweeter wines. And of course, at a $40k HHI, they cannot afford to buy Opus One or Stag’s Leap. But in their price range, say, $10-$25 a bottle, there are very nice wines from different parts of the world, and of those there are some that are better suited to the African American palette than others. I like the precision of the positioning in Tuanni’s business. I also think this is a perfect e-Commerce / Web 3.0 opportunity with a well-defined context. And she is also interested in doing a somewhat hybrid business with a physical tasting room in Los Angeles. Speaking of which, I like this trend of hybrid online businesses. I like the way Ankur is using physical resources to address the challenge that his clientele is low-tech, non computer-savvy (forget Internet savvy), and hence unable to provide data through electronic means. Over time, Ankur will be in a position to solve this with technology, but for now, human intervention is just fine. Similarly, Praful’s business is very much a hybrid business where, conceivably, consumers would order online (or by phone), and human beings do the actual delivery. I think, hybrid e-commerce will be a trend this decade. A very good case study to refer to is Fresh Diet , in this context. Overall, I’d like to suggest that entrepreneurs look at the trend more carefully, especially since these kinds of businesses also create a lot of jobs. You can listen to the recording of today’s roundtable here . Recordings of previous roundtables are all available here . You can register for the next roundtable here .

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Richard (RJ) Eskow: What If Ben Bernanke Was Hosting Our Super Bowl Party Instead of My Friend Pete?

February 4, 2011

Federal Reserve Chairman Ben Bernanke held a press conference today, and my friend Pete is holding a Super Bowl party this Sunday. This is the second year in a row that two pre-expansion teams will go head-to-head, which means their names would’ve been familiar to people back in the 1950′s when I was a little kid in Utica, NY. If you had tried to tell the old Italian and Irish and Polish and other ethnic guys in our neighborhood that someday we’d have football teams with names like the “Marlins,” the “Buccaneers,” and the “Jaguars,” know what they would’ve said? They would’ve said, “Get outta here!” What if Pete managed his party the same way Bernanke’s running the Fed? Well, we’d have a lot of unhappy people watching the game, along with a couple of very happy ones. Since the presence of a large-screen TV is a given, Pete has two obligations as host: to provide a pleasing gustatory experience (aka “good eats”), and to ensure that costs don’t get out of control. Pete’s two goals can be tracked using two simple measurements: the “did it cost more than a meal at Red Lobster?” budgetary indicator, and the “where my nachos at?” food availability rate (also expressed positively as the “got my nacho on” index). These indicators track Pete’s two areas of responsibility, and his performance should be measured against them. Word to Florida fans: Don’t get me wrong. I’m not knocking your franchises, so please don’t flame me. I’m just explaining how unusual those names would have been sounded back when I was a little kid. Any new team names would’ve looked odd and unfamiliar back then. Things are terrible and that’s okay. Know what else would’ve looked wildly unfamiliar to Americans in the fifties? Today’s unemployment figures . We’ve got an official unemployment rate of 9.4%, with figures for discouraged workers and long-term unemployed that are even worse. Unemployment in the 1950′s ranged from a low of 2.5% to a high of 5.4%. Even allowing for changes in the way the number’s calculated, that’s a staggering difference. The fact that joblessness isn’t considered a national emergency shows how differently politicians view their responsibilities today. Leaders of both parties had a common vision of our country’s best interests during the period of our greatest prosperity. Where has it gone? Bernanke’s remarks came less than a week after Treasury Secretary Tim Geithner said that the economic expansion currently being enjoyed on Wall Street is “not a boom. It’s not an expansion that’s going to offer a rapid decline in unemployment.” And he didn’t say it as in, “and so we’ve got to do something about this horrible situation.” He said it as in, “Hey, it’s too bad, but sh*t happens.” Geithner made his remarks at Davos, where the bankers responsible for these staggering unemployment numbers – through incompetence, dishonesty, and often through out-and-out crime – met to celebrate their renewed wealth and figure out how to get more of it. They’ve got a lot to celebrate. The overall economy has expanded for six quarters. Banks are enjoying record revenues and surging profits, and bonuses are soaring. Put it this way: Nobody’s sweating about the cost of their first-class ticket to Switzerland, or the price of that chartered helicopter to fly them from the Zurich Airport straight to their mountain resort. (Limos are for nobodies. Who wants to spend two hours in the back of a stretch when you can be luxuriating among evergreen-carpeted peaks in less than 30 minutes?) The Administration keeps echoing the Right’s cost-cutting rhetoric, despite the ongoing pain of millions of Americans. And Republicans are in full-tilt crazy mode, pushing radical budget cuts that could mean another million lost jobs. Yet Bernanke offered only empty rhetoric about unemployment. You know what the old guys back in Utica would’ve said to that, don’t you? They’d have said, “Get outta here!” (Actually there would’ve been a couple of other words in there too – one of which starts with an “f” – but this is a family publication.) The State of the Nacho Economy at Pete’s House, February 2011 Bernanke’s remarks reflected the one-dimensionality behind much of today’s macroeconomic thinking, which tends to deals only in averages and can therefore overlook fundamental problems. Consider our party analogy: Let’s say there weren’t enough nachos at last year’s Super Bowl, and everybody went home bitching about it. Pete promises he’ll fix it – that’s the host’s job, after all – so he buys more nachos this year. But he doesn’t pay any attention to how they’re distributed. So the first couple of guys show up, get out a couple of shopping bags, pack up all the nachos, and take them home. That’s great for them – they’ll be snacking for days. The other eight guys show up starving, but there’s nothing for them to eat. And I mean nothing – no nachos, no Doritos, no buffalo wings, not even a freakin’ Pringle they can divide eight ways. (Yes, it will be all guys on Sunday, but that doesn’t we’re “no girls in the treehouse” men. My wife’s a basketball fanatic, for example, but she has no interest in football. The party’s gender uniformity was a market-driven outcome, the product of demand rather than regulation.) Back to the nacho problem: Pete, understandably, gets some heavy criticism from the eight hungry guys. If he were Bernanke, he’d … well, let’s just paraphrase Bernanke’s statement, changing a word here and there so that it describes the party rather than the national economy: “Guys,” Pete says, “we have seen increased evidence that a self-sustaining recovery in nacho spending may be taking hold. Notably, we learned that attendees increased their nacho consumption in real terms at a rate of more than 4 percent.” Pete goes on, acutely aware of the guys who are pissed about the snack situation: While indicators of overall chowing-down have, on balance, been encouraging, the “got-my-nacho-on” rate overall has improved only slowly … It will be several years before the “got-my-nacho-on” rate returns to a more normal level. In sum, although snack growth will probably increase this year, we expect the “where-my-nachos-at” rate to remain stubbornly above the levels that Big Game party planners have judged to be consistent over the longer term with our mandate to foster both full “got-my-nacho-on” satisfaction and “didn’t-cost-more-than-a-meal-at-Red-Lobster” overall stability. Yes, that’s exactly what Bernanke said, adjusted for our analogy. Picture what a roomful of hungry football fans would say if Pete gave that speech. Now ask yourself why Bernanke’s comments are any more acceptable. If you had a friend like Ben … The fact that Bernanke held a press conference at all shows how unusual things have become. The Fed Chair typically keeps contact with the press to an absolute minimum, because any offhand or misinterpreted comments can move billions of dollars in the market. The Chairman’s remarks are studied with the same obsessive fascination courtiers once directed toward their Emperor: Did he raise an eyebrow slightly while he nodded, indicating that this offer has truly pleased him? It’s worth re-examining an economic system which places so much power in one person. But given that the Fed chair does have that power, Bernanke’s caution is understandable. The Fed’s two primary missions are to ensure “price stability” and maintain “full employment” (roughly equivalent to our “Red Lobster budget” and “nacho” party goals.) There was a time when Bernanke didn’t even acknowledge the “employment” aspect of his mandate, so presumably it’s a sign of progress (or, more likely, of political pressure) that he even mentioned it today. But he didn’t say the situation was unacceptable. He said “we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability.” In other words, he’s saying he knows its in his job description, but it’s not going to happen. What’s more, he’s not going to try doing anything new to make it happen. How would your boss react if you said that? Feeding the Python Let’s use a complete different analogy for a second. Let’s say you’ve got a python and some hungry leopards in a cage. What happens if you feed a rat to the python? There will be a big bulge in the python, but the leopards will still be hungry. Bernanke’s approach “creates” money. But if banks don’t invest that money in job-creating investments, they’ll become more profitable but unemployed Americans continue to go without work. Will his policies create jobs? Maybe a few. But there are much more efficient ways to reduce unemployment, and right now targeted government spending is the best approach. Instead of supporting stimulus spending, Bernanke made a point of praising the destructive austerity economics of the Simpson/Bowles Deficit Commission. The commission chairs’ proposals (the commission itself failed to deliver a report) would kill millions of jobs while further enriching the well-to-do. Bernanke indicated he’ll keep pursuing monetary policies that do little or nothing to reduce unemployment, and his premature emphasis on deficit reduction undermines the investment we need to stimulate economic growth and create jobs. In a cage full of hungry leopards, he’s about to feed another rat to the python. Whaddya gonna do? Why does Bernanke say that the unemployment rate is “stubborn”? The unemployment rate is a thing , not a living creature. It’s the product of human decisions and human behavior. It has neither emotions nor a will of its own. Consciously or not, Bernanke performed a little rhetorical misdirection by anthropomorphizing this figure. He’s drawing our attention away from the effect of his own actions. He’s saying that unemployment doesn’t “want” to come down, instead of saying that he can’t or won’t do more to bring it down. What do you think would happen at the party if Pete said the nachos don’t “want” to be available to everybody? Let’s get real: The unemployment rate isn’t being “stubborn”: Bernanke, Geithner, and our other economic planners are. If the stock market had fallen as catastrophically as employment has, and had stayed down as long,, don’t you think they’d be in full “Defcon 4″ mode trying to fix it? Of course they would. They’d use every tool at their disposal – and if that didn’t work they’d invent new tools. But when it comes to unemployment, they’re all shrugging their shoulders and saying “whaddya gonna do?” They’re saying there’s nothing more they can do to fix the problem. That’s not an acceptable answer – and it’s not an honest one, either. It’s crunch time We can have a little fun with our party nachos analogy, but economic pain isn’t funny. Institutions like the Fed and the Treasury Department are charged with managing unemployment and sustaining economic growth, and they’re failing. But hey: Enjoy the game. I’ve been planning to root for Pittsburgh this year, because I love the people there and because Pittsburgh reminds me of my home town. But wait — I’m being interviewed on Madison radio tomorrow, and I’ve never even been to Green Bay. Maybe I should reconsider … As for who I think will win, that’s a deeply personal matter, to be discussed only in the strictest confidence with my bookie religious confessor. Both towns have been hit hard by the loss of jobs. Who hasn’t? And nobody in either town wants to hear our leaders say that the worst unemployment figures in modern history are the “new normal,” or that they don’t feel the need to come up with a new game plan. But they better find one, and fast. It’s crunch time for Washington, and we need some come-from-behind job creation along with a whole lot of smash-mouth economic stimulus. It ain’t over ’til it’s over, but if they don’t get their act together it’s gonna be over. Now pass the nachos, wouldya? _______________________________________________________________ Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

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Learning To Walk: Fear, Shame And Your Underwater Mortgage

February 3, 2011

WASHINGTON — Nearly one in every four homeowners across the country owe more on their home than it’s worth. Once a month, those 10.8 million are faced with a question that cuts to the core of the American Dream and offers a confusing collision between a deep-seated sense of personal obligation and a cold, simple business calculation: Should I pay my mortgage? For decades, there was only one answer for most people: Of course I should keep paying, it’s the right thing to do. Besides, the argument went, a home is a great investment. Today, in the wake of the most seismic housing collapse in the nation’s history, that logic has increasingly been challenged by homeowners despondent about their lack of options. Although researchers find that some underwater borrowers who could continue paying their mortgages strategically default anyway, the vast majority continue to pay. Many homeowners, out of a combined sense of fear, shame, courage and morality, resist making what is otherwise a logical financial decision. Walking away from a home, however, is more than the sum of a few business decisions. For many homeowners, it’s either an act of civic defiance against a system they no longer buy into or the end result of being shuffled around by institutions that don’t help them solve their financial problems. While walking away is a frightening and dangerous step into the unknown, millions have beaten the path in the past few years. To find out what it’s like to walk away, The Huffington Post asked readers who were considering making the move, or who had already done so, to write in and share their stories. That was in January 2010. A year later, we followed up with them to see how they reflected on the experience. We initially heard from 58 people from all over the country who fit the criteria. Ten of them have become unreachable over the past year, but the remaining 48 were eager to share their stories. A year later, only eight of them are still paying their mortgage. Some requested anonymity because of the shame associated with foreclosure; others requested it because they don’t want to draw retribution from the banks. But there were those who were happy to share their tales on the record. Almost universally, the homeowners we spoke with took personal responsibility for their situations, declining to blame the banks or politicians. Yet nearly all of them faced similar struggles in their attempts to work with their banks: lost paperwork and little interest in finding a financial compromise. The hostility people felt from their banks made the decision to walk away easier for many, and some now even revel in it, celebrating a break from a system they see as rigged against them. “We get daily calls from creditors and banks that threaten this and that, and I just laugh knowing I am helping to bring down the system that has brought us all down and continues to reap giant profits at the expense of the little guy,” said one. Others are still haunted with shame by the decision. Most said they felt a mix of both. Many of the homeowners said they felt alone and powerless in their interactions with the banks and were curious to hear what other people in similar situations had to say. “There should be support groups for people who have to deal with these banks,” said Richmond Burton, 50, a soon-to-be-former resident of Long Island’s East Hampton. “It can drive you crazy. I’m very good at dealing with pressure, and they made it feel like you’re at their mercy.” Following Burton’s suggestion, HuffPost contacted Meetup.com and set up the infrastructure for underwater homeowners to do just that. This coming Tuesday, homeowners across the country can use Meetup’s tool to organize small gatherings of homeowners who have walked away or who have considered doing it. Often, the best advice comes from a neighbor. Burton’s effort to get out from under his home became a second job, he said. “I never would have thought that the American Dream was to not own a home, but that’s what mine became. I’m not ever going to take another mortgage. If I can avoid it, I’m not ever going to borrow money again,” said Burton. After years of failing to get approval for a “short sale” of his home, or even a decent mortgage modification, Burton said he stopped paying in August 2009 to help himself financially and to get his bank’s attention. (A short sale occurs when lenders accept a sum less than the outstanding value than a mortgage loan, in lieu of forcing a borrower into foreclosure.) He contacted HuffPost several months later and said he was still trying to get a short sale approved or persuade the bank to take the house in exchange for simply letting him walk away. The bank was refusing. When we reconnected a year later, he said he had just signed documents that would let him walk away without a penalty, but he was forfeiting his $120,000 down payment. What did it feel like to walk away from that much money? “It feels great,” Burton said without hesitation. “I’m starting again. I’ve still got my talent, I’ve got my intelligence. I’ve got my health. At least I’m free of the enormous amount of stress that I had and the frustration of doing the best I could and it wasn’t good enough. It wasn’t working. Ultimately, I made a decision that my physical and mental health was more valuable than this house and my investment in it.” Burton went more than a year without paying his mortgage before persuading the bank to accept a short sale. “The mortgage company was not wiling to work with me. The businesses that we have created to serve us are enslaving us. They’re not listening to us, they don’t even pretend to care about us. Really, our only option is to do what I’m doing, which is to fire them all. I’m doing everything I can to remove them from my life,” he said. Lenders and servicers say such decisions will destroy borrowers’ credit record and render them non-entities in the U.S. economy. Burton said that when he bought his Long Island home in 2000, his credit score had been somewhere in the 600s, an average figure. He allowed HuffPost to run his credit score through Equifax, one of three major credit-monitoring bureaus. As of Tuesday, after his ordeal of three years, his score is 614 — below average, but not savaged. A few months ago, he had no trouble buying an iPhone. He ignores the many credit card solicitations that come his way. The purpose of HuffPost’s investigation was not to determine who or what was to blame for the predicament that the homeowners found themselves in or whether they are deserving of sympathy — twin concerns that dominate the foreclosure discussion and will no doubt continue with ferocity in the comment section below this story. Our question was more direct: What are the costs and benefits of walking away from an underwater mortgage — not for the banks or the neighborhood or for society as a whole, but for the real people making the decision? MORAL STRUGGLE When Ernie Soto first wrote HuffPost, his mechanic business was falling apart and he was behind on his mortgage. Efforts to modify his loan had gone nowhere and he was considering filing for bankruptcy, walking away and buying a mobile trailer for his family to live in. “We laugh about it now, but we went through hell and back and back to hell,” he said a year later, after filing for bankruptcy and telling the bank it could have the house. Rock bottom came when he drove to the local vet to have his dog put to sleep. The repo man was in the parking lot. “I can’t leave until I take your truck,” he told Soto, 47. “It was just another low moment in our lives,” Soto said. Soto drained his savings paying the mortgage so he could keep his credit score high and maintain hope that a loan would come through for his small business. But it never did. Shortly after writing to HuffPost at the beginning of 2010, he and his family walked away. “We’d had enough. We moved to a trailer park, a mobile home. We bought my dad’s RV, figured we’ve gotta live somewhere.” Technically, Soto still owns his home and he routinely finds gigantic bills in his mail. At this point, he says, he can only chuckle darkly at the letters. The bank doesn’t seem to understand that he has walked away, that he’s done with them. Had he realized it would take his bank so long to foreclose, he said, he could have stayed in his house for free, but he was afraid that his bank would move faster than the guy who repossessed his truck. And didn’t want to put his family through the trauma of an eviction. “I was in unfamiliar territory. I don’t lose houses every so often,” he said. “I was thinking it’d be like the car, they’d come throw me out in three months.” Soto, a conservative Republican, said he has come to terms with his choice. “It was a tough decision. We thought about it and thought about it. I want to do the honorable thing, but wait a minute here — I didn’t get respect from the mortgage companies when I was asking for help. I didn’t get respect from the banks when I was asking for help. Now here we are, we bailed everybody out,” he said. “Am I just supposed to be the good Samaritan and just stay there? I asked the mortgage company, ‘What’s gonna keep me from giving you the keys?’” Banks are responding to that question by using their power in Washington — influence purchased with the checks people send to their banks each month — to make it financially tougher to liberate oneself from an underwater mortgage, just as millions are on the brink of making their break. ‘THERE IS SUCH A THING IN THE BIBLE’ Shelley Kluz said she saw a house in her neighborhood just like her own selling for $90,000. “It made me sick to my stomach, because we were already house-poor,” she said of the place she and her husband paid $325,000 for in 2004. Her husband, she said, wanted to cling to the house, but she wanted out, with three kids in a 960-square-foot home in Vacaville, Calif. “It was a big moral decision for us. We talked to our pastor, talked to our parents and had a really hard time coming to grips with the idea that we might not pay our mortgage, because we were always the people who paid their bills,” she said. The pastor said that if making the payments was harming the family, it was okay to walk away. “There is such a thing in the Bible as debt forgiveness,” she said. “We didn’t want to get in bad with God, doing something morally He thinks is awful.” In July 2009, on the informal advice of a bank representative, the Kluzes stopped paying their mortgage to encourage their bank to approve a short sale. The bank initially accepted a short sale offer, but the couple was told that investors had later rejected it. The bank suggested Shelley Kluz apply for a modification, apparently unaware she’d been trying for the past year. She did so anyway and was rejected. The family was still in the house when she wrote to HuffPost in early 2010. “We are in a weird limbo state of waiting. So, long story short, we are walking away. We are so fed up with this whole process,” she wrote at the time. Six months later, she and her family moved out, a year after they stopped paying. For $1,550, she said, they now rent a three-bedroom, two-bath home with a yard in the front and back — a feature their first home, with a monthly mortgage payment of $2,250, did not have. The new home is twice the size of the old one with twice as many bathrooms. Their old home was foreclosed upon a month after they left and, Shelley Kluz said, is still on the market for $142,000. They only moved five minutes away, she said, and she still drives by it occasionally. Her 7-year-old has taken it the hardest, having known no other home, she said, followed by her husband. “I think that’s just a guy thing,” she said. “I think he was more emotionally invested in the house because he spent a lot of his free time fixing it up. And then there was the whole stigma of being part of the foreclosure crisis.” “The American Dream, I don’t think that that’s really something that everyone should aspire to. There’s more to life than owning a home,” said the 37-year-old mother of three children. “This teaches you, what do you place value on? A piece of property? What things are really important?” Her family, she said, felt guilty about not upholding their end of the contract. “But that said, it was the best thing we could have done. Since we walked away, our house has only dropped further and we had no hope of getting out from under it,” she said. Now, “We actually have available spending money to do fun things with our family, we pay less money for a completely finished house, my kids have a backyard with grass, and best of all, we can breathe.” ‘PEOPLE SHOULDN’T FEEL ASHAMED’ Del Phillips stopped paying on his Chicago condo in November 2009, two months before he contacted HuffPost and 10 months after he lost his job. His short sale efforts were rejected and he was denied a modification because, according to a letter sent to him by his bank, his “unemployment is not of a permanent nature.” He was also rejected by Obama’s Home Affordable Mortgage Program, he said. He took his story to the local press and was stunned at the vicious response from readers. “We encourage people to work hard, get an education and strive for things. But, when there’s a bump along the way and we need a helping hand for a short time, we’re spit at without any support,” he said. “For a country that touts its devout following of Christianity — which is rooted in the teachings of a Jesus who said to love thy neighbor and help thy brother and sister — it was really a fun lesson in hypocrisy.” And the reality was that every institution Philips dealt with — from the government to his bank — offered him no choice but to walk away. Phillips filed for bankruptcy and plans to move out in March, knowing he could be foreclosed on any moment. More than 15 months of paying only the condo association fees helped him get by during his jobless stretch. And the bank was right: his unemployment was not permanent. He found a job in October that will pay enough for him to afford to rent when he moves — this coming Saturday, 16 months after he stopped paying his mortgage. “I feel like we have a stigma on things like bankruptcy, but those people shouldn’t feel ashamed,” Phillips said. “Yes, some people abuse, like Teresa on ‘Real Housewives,’ but I’m hoping everyday people who are going through this can find some strength in what I’ve done and ask, ‘Why should I care about the bank if the bank doesn’t care about me?’” Despite his bankruptcy, he said, he has more offers for credit cards than he can handle. HAPPIER, BUT NOT PROUD Andrea of Oakland, Calif., who let her property go into foreclosure last year, says it was “clearly financially the thing to do.” After buying her first condo in the Oakland foothills, her property’s value dropped from $440,000 to $250,000 in just three years, and her marriage fell apart. “In terms of quality of life and emotional pressure, I’m much happier now,” said the 38-year-old Andrea, who didn’t want her last name used in this story. Now she pays $1,500 a month for an apartment in Rockridge, one of the East Bay’s most coveted areas. Its leafy streets and atmospheric cafes make it a particularly desirable neighborhood for singles. In some cases, the mortgage money not going to banks finds its way into the local economy and gives walk-aways an ability to breathe easier. “I bought groceries and not just a few bags, but the liberating feeling of filling ones pantry for a change,” says Zannah Becker, who stopped paying her mortgage in Seattle. “I did not have to walk to the market with calculator in one hand and coupons in the other and make choices between what we had to have to get by and a few simple extras like a bottle of diet soda for my husband or a small treat for our daughter.” Having worked as a loan assistant, Andrea told HuffPost she initially thought she’d be able to navigate the system. “I figured I would be well-equipped in my knowledge from my previous job about how to figure it out,” she said, “and I was shocked honestly at their level of disinterest — it was either disinterest on their part in working it out, or lack a of just being organized. But to me, them not being organized to work it out was a symptom of there not being a financial incentive for them to work it out.” When the bank finally foreclosed on her, Andrea said she just let it happen — she felt there was nothing else she could do. “I had gotten in over my head, and I had gone through a divorce, and I was struggling to re-balance my life financially,” she said. When asked if she had advice for homeowners in similar situations, she said people shouldn’t be afraid of walking away. “I think if someone is being responsible and trying to work it out, and they give it everything they can, then it’s okay to do what you have to do, like a business would,” she said. “A lot a lot of people are going through it right now, so maybe five or 10 years down the road, there won’t be so much stigma.” Still, she asked HuffPost to keep her full name a secret. “To be honest, it’s just embarrassing and not something I’m proud of,” she said. Shaming homeowners is one option for a bank dealing with someone who has made the calculation that they are better off walking, and that’s part of the pressure to stay that homeowners we spoke to felt. Homeowners also say they’ve felt little support from the federal government, particularly through its highly-touted, and largely ineffective, Home Affordable Mortgage Program, or HAMP. The Obama administration set up the program to help homeowners modify their mortgages but very little modification has occurred. In fact, HAMP may have been more helpful to banks than to homeowners A group of senior Treasury officials, which included Secretary Tim Geithner, admitted as much to financial bloggers at a meeting this summer. “Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole,” wrote one blogger of the meeting. “Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least…The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks.” Politicians and the media tag-teamed homeowners thinking of walking away last summer. Republicans cited the Wall Street Journal in successfully pushing language through the House that would punish strategic defaulters. “The Wall Street Journal has reported on families that have chosen to stop paying their mortgage and instead use the extra money they are saving each month to ‘buy season tickets to Disneyland…take a Carnival cruise to Mexico…’ and go out to dinner more often,” reads an email from a top House floor staffer GOP offices. House Republican leadership in an e-mail to colleagues explaining the anti-strategic-default effort. The legislation didn’t become law, but it sent a signal. Fannie Mae, the government-owned titan of the mortgage industry, has also been ready to warn homeowners about their financial duties. “Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting,” Terence Edwards, a Fannie executive, said in a June statement . Edwards said homeowners who strategically default or fail to work “in good faith” to avert foreclosure would be ineligible for new Fannie Mae-backed mortgages for seven years. Freddie Mac, Fannie’s government-owned counterpart, has adopted the same policy. Fannie, in its statement, also warned it would pursue “deficiency judgments” in court that would allow it to recoup from borrowers the difference between the value of a home in foreclosure and the outstanding loan a bank still has on its books. After inflating the bubble until it burst, banks essentially now want to be insulated from their mistakes by dunning borrowers for every last penny. Deficiency judgments are allowed in 39 states and were a nagging concern to many of the homeowners we spoke to. The IRS may also loom over homeowners who walk away. Under current law, thanks to a measure spearheaded by Rep. Brad Miller (D-N.C.) in 2007, the IRS cannot come after homeowners after they walk away. Before that law took effect, if a bank took, say, a $200,000 hit on a foreclosed home and “forgave” the debt, that forgiveness would be counted as taxable income for the former homeowner. A note to the fence-sitters: Miller’s law expires at the end of 2012. FAMILY VALUES Ray Scott, 45, lives with his wife and two kids in Ferndale, Mich., a suburb of Detroit, where the house he bought for $140,000 five years ago is now worth $90,000. “Last year we were trying to figure out whether it would make sense to walk away from the house or not, considering we’re never going to make it back — at least not in my lifetime — the equity that we already lost,” he said. Scott mulled many options, including foreclosure and a short sale, but the bank wouldn’t approve a short sale and he feared walking away would ruin his credit. Scott said he ultimately decided it was in the family’s best interest to stay. With his wife in nursing school, she needed a good credit rating to qualify for student loans. “If we’d decided to let the home go into foreclosure, or tried to go through with a short sale, that would have had an immediate negative impact on her credit rating, and it would have made it really difficult for her to qualify for student loans,” Scott said. “I didn’t want her to be in that position, where she wouldn’t be able to finance her education.” Further, with both his sons recently diagnosed with autism spectrum disorder, Scott felt staying put and having a stable place for his kids was important. “We live in a good community,” he said. “There are good schools, good people, we know all our neighbors. People look out for each other here.” If not for the family concerns, Scott said he would have walked away in a heartbeat. “If it had just been myself and my wife, if the kids hadn’t been involved and she’d been all done with school, it would have been a really easy decision to make to walk away,” Scott said. “We’re so far under, we’re never going to recover the amount of money that we’ve already lost.” HOME IS HOME Kirk Arthur, a 43-year-old software sales manager from Miami, bought his house for $285,000 in 2008. At the time, he thought it was a steal: the house had been on the market for $450,000 only a year earlier. Now he estimates it’s worth just $150,000. “We figured the price couldn’t drop much lower,” Arthur told HuffPost. “Now we can’t foresee our condo appreciating even close to the $285,000 we paid for it two years ago.” Fortunately, Arthur said, he and his husband were able to negotiate with the bank to refinance their mortgage loan to a 4 percent interest rate, reducing their payments by $500 per month. He feels like things have turned out all right. “At the end of the day we were never in any danger of being homeless or even losing our home,” Arthur said in an email. “Yes, one of us lost our job during the hard times (me), but we managed through … I found a job within two weeks of getting laid off — twice. The job I have now is in line with my salary requirements. It’s sort of a happy ending.” Though the value of his home continues to drop, Arthur says he’s not interested in moving. It was hard to find a home that fit his needs and budget in an area where he wanted to live, Arthur said, and moving again would be expensive. “I’m not 25 years old, I’m 43,” he said, “I’ve got stuff.” What’s more, Arthur says that while property values in the area have dropped, the price of rentals has risen, minimizing any potential walkaway savings. But more than anything, it’s the idea of home that Arthur is unwilling to relinquish. “It comes from my parents,” he said of his desire to own. “Your home, your house is such a symbol of status, an important indication of where you are in life,” he added. “You can paint it, express yourself, make it your own … We’re happy in Miami.” FORECLOSURE AS THE NEW DIVORCE Jon Maddux is CEO of You Walk Away, a California-based company that helps homeowners navigate foreclosure. Founded in 2007, the company has assisted more than 4,000 people navigate foreclosure, according to its website. Maddux told HuffPost that fewer and fewer people are sobbing when they call for help. He said that’s because of growing cracks in the old chestnut that foreclosure victims are “financially irresponsible” or “deadbeats.” Same as what happened with divorce, he said. “People thought of it as horrific if someone was to get a divorce,” said Maddux. “And then, over the years, it was like, well, okay, they got divorced. It’s understandable because that’s what a lot of people do.” Some 60 to 70 percent of You Walk Away’s clients actually can afford their mortgage payments, Maddux says; most people just need assistance in handling an exceptionally-bad property investment. Maddux thinks renting is the future; statistics bear that out. According to U.S. Census data released this week, homeownership rates have dipped to their lowest level since 1998. “You can do whatever you need to do,” said Maddux of renting. “It’s important to be able to move if you find a job … in another city.” TRAPPED ON AN ISLAND Brian Shiro, 32, lives with his wife and 3-year-old son in Ewa Beach on Oahu, where he said the house he bought for $411,000 in October 2005 is now worth only around $250,000. Shiro, who said he earns a six-figure salary working as a geophysicist, says he can afford his mortgage, but half of his income goes to making the monthly payments. The bigger problem though, is the lack of freedom. He’d like to pursue other career opportunities, he says, but stands to lose hundreds of thousands of dollars if he moves now. Shiro bets that in 10 or 15 years, his home will recover its value, but even that assumption is a gamble. In the meantime, he’s unhappy being trapped on the island. “I’ve had to turn down some job offers, I’ve had to reconsider educational opportunities,” says Shiro, who recently applied to a doctoral program in civil and environmental engineering in the San Francisco Bay Area. “All sorts of things that would advance my career would require relocation,” he said. What’s more, his wife is pregnant with their second child, and Shiro feels his family has outgrown the space. “A four-member family in a small town home is a little cramped,” he said. “It’s an aspect you don’t hear talked a lot about too is people who are playing by the rules, making the payments, but for whatever reason just want to try to get on with their lives and can’t because they’re stuck in a holding pattern.” PEER PRESSURE When he contacted HuffPost last year, Wayne King said he was trying to do a short sale on his house in Columbus, Ohio, which he’d bought in 2002 for $128,000. Six years later, in 2008, he left his job as a professor at Ohio State University for a new gig at a software company outside of Boston. The short-sale process hadn’t been going well, despite the new floors and carpets King said he and his wife had installed. “When I owe $107,000, I can’t afford to take $80,000,” he wrote, referring to the lowball offers he’d received. “I am up-to-date on my mortgage, but I don’t know how long I can afford to keep paying the mortgage along with utilities and upkeep in one state and rent in another state.” By then, King had already soured on the folk wisdom about homeownership. “People are fed this storyline that buying a home is the best investment you can make,” he wrote. “Something that will always appreciate and never lose value, but buying a home has been the worse investment I have ever made.” His attempts at a short sale didn’t pan out. King said this year that his lender appraised the home at a level nobody would pay. He said he looked into renting the place out, but discovered that at the going rate for rents, he’d still be losing money. He can afford to continue paying the mortgage, but doing so would squeeze the family finances — he said he and his wife just had a baby — so now he’s ready to walk away. King is trying to do a deed-in-lieu of foreclosure, which is a process similar to a formal foreclosure but widely believed to be less damaging to a homeowner’s credit. His understanding, after speaking to his bank and to counselors from the Department of Housing and Urban Development, is that he needs to be delinquent by at least one month for this to work. Then, he said, his bank told him it will take five months or more for the process to finish up. (HUD’s guidelines say a DIL should not take more than 90 days and that current borrowers can still be eligible.) “It’s this hopeless situation where there’s nothing I can do except sit on my hands while these four or five late payments end up on my credit report,” he said. Every month the deed-in-lieu process continues, the Big Three credit-monitoring bureaus will hear from the bank that King is delinquent, and they’ll plug that info into their proprietary algorithms for determining his credit score, which will sink lower and lower. King, a mathematician who works for a company that creates algorithms, is frustrated that his credit score is calculated in a secret way and that it’s impossible for him to know exactly how much lower the score will go. King’s algorithmic background makes him particularly sensitive to the vicissitudes of his credit score, but everyone else in the pack also spoke either with concern about their score or relief that they had been able to let go of it — like a Taoist on the path to a higher state of being. There’s a practical reason for that: a low score makes credit harder to access and life harder to live. But it’s also part of the reality that a low score will destroy someone’s personal finances. A spokeswoman for Experian, one of the Big Three credit reporting bureaus, said there’s no way to know exactly how badly any given financial decision will hurt a person’s credit score, or even if a deed-in-lieu will be better than a foreclosure. “There are hundreds of different credit scores out there in the marketplace,” the spokeswoman said. “Credit scores analyze the information from an individual’s credit report, and no single factor can be considered in isolation. For that reason, any given item can have a different point impact for each individual, even when the scoring system used is exactly the same. It’s not a formula, such as ‘Two delinquencies plus a foreclosure plus seven accounts all in good standing equal this score.’ It’s much more complex, and that’s why we really can’t provide an exact point value for a deed-in-lieu-of-foreclosure, a short sale, foreclosure or a bankruptcy.” Meanwhile, King’s ongoing mortgage mess is an occasional topic of water cooler discussion at the office. “It’s embarrassing for me because I have to work in a very educated, more well-off environment, because most of the people I work with have Ph.D.s and probably make far above the median income,” he said. “So to be in the position where you’re — they’re constantly asking about the house. They all knew I had a house I was trying to sell.” While concerned about his credit score, King doesn’t want to feel like a deadbeat, either. “I’ve always paid my debts. It’s something that’s instilled in you,” he said. “You get it from the media. I was just watching Kudlow not that long ago and he was harping on the obligation to pay your debts. It just kind of permeates.” LET THEM EAT CAT FOOD CNBC anchor and noted oligarch Larry Kudlow articulated the mainstream position against strategic defaulters in a May column on CNBC.com. “[J]ust because a home loan is ‘underwater’ — meaning its value is lower than today’s current market price — why should a responsible person whine about it and walk away?” Kudlow wrote. “Why not service this loan for the longer term and wait for prices to improve? That’s called personal responsibility.” This is in keeping with received wisdom about the evils of foreclosure. As Brent White of the University of Arizona’s law school noted in an October paper, “the predominant message of political, social, and economic institutions in the United States has functioned to cultivate fear, shame, and guilt in those who might contemplate foreclosure.” One can think of keeping the strategic default rate low — White’s paper put it between 2.5 percent and 3.5 percent — as a slow-drip bank bailout. With rescued banks now profitable yet refusing to modify underwater mortgages, the widespread fear that prevents more strategic defaults “has led to distributional inequalities in which individual homeowners shoulder a disproportionate financial burden from the housing collapse,” White wrote. In other words, homeowners who shy from strategic default are collectively doing Wall Street and the banking system another favor — beyond just footing the bank-bailout bill as taxpayers. Yet the moral argument is out of sync with some basic financial logic. As White sees it, plummeting home prices mean: “Millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages.” Data suggest that wealthier Americans, not those with lower or mid-range incomes, have a greater proclivity for punting their mortgage obligations by embracing strategic defaults. The New York Times reported in July that more than one in seven homeowners with loans of more than $1 million are seriously delinquent, compared with one in 12 homeowners who owe less than $1 million. It’s a stat analysts chalk up to strategic default. “The rich are different: they are more ruthless,” Sam Khater, CoreLogic’s senior economist, told the Times. So are some big, well-heeled corporations. For example, investment bank and bailout recipient Morgan Stanley walked away from five San Francisco office buildings at the end of 2009. Real-estate company Tishman Speyer — which also leases space to HuffPost for its Washington, D.C. office — strategically defaulted on the biggest residential property deal ever in January 2010, around the same time Wayne King and others were pulling their hair out over whether they should do the same. And the Mortgage Bankers Association, lobbyists for mortgage lenders, walked away from their own headquarters in Washington, D.C. in February 2010. (The MBA did not respond to requests for comment for this story.) Peter Fredman, a foreclosure defense attorney in California, said he was getting so many calls from people who wanted to sue over their exploding interest-only mortgages that he decided to set up a “strategic default” calculator online as a public service. Instead of suing some penniless broker, he kept having to suggest, why not just walk away? “Ironically, a lot of people who feel that special obligation [to pay a mortgage] are the people in the worst position,” Fredman said. “Upper-class people, they have no problem with what’s going on. They have bigger considerations.” Fredman’s website puts it like this: “From the institutional lenders’ point of view, you should eat cat food and take your kids out of school before you stop making your mortgage payment. But that is because institutional lenders don’t eat or have kids. They are fictitious entities, constitutionally dedicated solely to the pursuit of money. Repaying your debts may be a matter of personal integrity that you may or may not be able to afford. But you have no moral obligation [to] the financial institutions because they do not operate in a moral universe.” ‘WE KNEW THESE PEOPLE’ Howell Ellerman teaches real-estate classes at Folsom Lake College in Folsom, Calif. Last fall, a student in his thirties asked Ellerman about the meaning of financial responsibility and the hard realities of home ownership in the wake of the housing meltdown. “He’s in a house that is $500,000 underwater. I think they bought it for $1 million,” recalled Ellerman, 51. “He asked me in front of the whole class, ‘Should I walk away from my house?’” “I can’t give you advice,” Ellerman said he told his student, “but in the world we live in, there isn’t a better time to walk away. You shouldn’t feel any compunction.” Ellerman himself had been prepared to walk away from the home where he and his wife and kids had lived for 12 years. They wanted to buy a bigger house 10 miles away asking $595,000 as a short sale after initially listing at $1.5 million. “We made an above-asking price offer and are now in contract to buy the house and move with our five kids there,” Ellerman wrote. “The question is what do we do with our current house, which we love and have taken great care of.” He wrote that they wanted to sell or rent out the previous house but were willing to walk away and take the credit hit if the bank wouldn’t cooperate. It didn’t — Ellerman said the bank initially approved them on a loan for the new house but then decided to foreclose on it instead, so they’re still in their old house. It sits on a cul-de-sac with 10 others. Ellerman said four emptied in the past few years. He’s certain two are foreclosures. He has no idea where any of the families went; he figures they couldn’t handle the shame. “Seriously, we knew these people. They’d been over for Christmas, and then all of a sudden we see the U-Haul truck pull up,” he said. “When people leave their houses they don’t even say goodbye. They leave like in the cloak of darkness in a U-Haul truck and you don’t even know where they go.” THE AMERICAN DREAM When Bob Balint of Sarasota, Fla., wrote to HuffPost last year, he was asking for advice rather than looking to tell his story. We told him to consult with a lawyer — good advice to anybody thinking of walking away — and he did. Balint, 55, a father of two, is a dispatcher for the local transit system, and his wife teaches young children. He said their combined income of $51,000, boosted by occasional overtime, was enough to make their mortgage payments. But overtime has given way to furloughs and their house, which they owe $225,000 on, is falling apart. Balint lives in a part of the country particularly ravaged by the housing collapse and similar houses nearby are going for as little as $40,000, he said. “It’s like buying a Lexus,” he said. “You can almost come up with that in cash. Gimme two years without paying every Tom, Dick and Harry that I owe and I’ll have it.” The Balints were late on a few payments through 2010 but made them up each time. “We’re hanging in there by hook and crook,” he said. After a year of wrestling with the decision, however, the Balints are finally pulling the ripcord. This January, they made their last mortgage payment. They’re walking away from the home they’ve lived in since 1994 to rent a better, cheaper place. He’s looking forward to the freedom that will come with renting. “You’re almost better off not owning. If you’re company buckles up, you’re stuck, you can’t move to the jobs,” Balint said. “The American Dream is for shit.”

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Richard (RJ) Eskow: Afghanistan’s "Too Big to Fail" Bank Is Failing — Guess Our System Doesn’t Work There, Either

February 2, 2011

The collapse of Afghanistan’s largest bank will seem familiar to Americans, and so will the upcoming reports of its bailout. We’ve heard the story before: Unheeded warnings. Lax (or nonexistent) law enforcement. An American auditor who said nothing as the books imploded. Sloppy, reckless, and greedy lending. Politicians in bed with banks. And a corporate crime wave led by bankers who can break the law with impunity, knowing they won’t be punished even if they’re caught. The Kabul Bank story is a sad inversion of nation-building. It might have provided some moments of black humor for the recession-ravaged middle class, if only Americans and Afghans weren’t paying for it with their lives. We promised to teach the Afghans everything we know about running a modern economy. Apparently we did. Exporting hypocrisy The financial collapse of 2008 discredited an economic philosophy which had dominated both political parties for decades. That philosophy created a toxic cocktail of deregulation, ineffective oversight, concentrated wealth, and incentives to cheat. The end result cost the economy trillions in lost wealth, ongoing hardship for tens of millions of people, and a bailout whose true cost is still being hidden from the public. And what did we learn from all of that? Not very much, judging by the evidence. The list of institutions advising the Afghans includes the US Treasury Department and the Department of Justice — both of whom have, shall we say, underperformed when it comes to regulating banks and prosecuting financial crimes. And the consulting group that was awarded nearly $100 million to help the Afghans develop sound financial practices went bankrupt in the middle of its assignment. That’s right — bankrupt. But the source of our failure in Afghanistan isn’t in the government’s choice of advisors or its failure to manage its developmental efforts properly, as harmful as those things have been. The real problems in Afghanistan are philosophical, not managerial, and they’re the same ones that have plagued us at home: a continued belief in failed economic theories; indifference or hostility toward regulation and regulatory agencies; a too-cozy relationship between banks and politicians; and, worst of all, the willingness to tolerate (and therefore condone) a list of bank crimes that includes fraud, forgery, and laundering drug money. “Thin Tightrope” Cables released by WikiLeaks reveal that U.S. Ambassador Karl Eikenberry considered it necessary to walk a ” thin tightrope ” when working with corrupt officials. The cable indicated that Eikenberry collaborated with an “allegedly corrupt official because he could serve as a “stabilizing… force” (militarily, in this case.) This official’s “illicit (drug) trafficking” was not to be tolerated in the interests of security. That philosophy extended to banking, where the now-failing Kabul Bank and other banks were widely understood to be helping Afghans get illicit drug money out of the country. Kabul Bank is no different from Wells Fargo, either in its willingness to handle drug money or its apparent impunity from the law. As Bloomberg News originally reported, Wells Fargo’s internal screening unit repeatedly turned a blind eye to money laundering on behalf of mass-murdering Mexican drug cartels. Regarding these drug laundering charges, Bloomberg reported that “no big U.S. bank — Wells Fargo included — has ever been indicted. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.” As Bloomberg explains, “Large banks are protected from indictments by a variant of the too-big-to-fail theory.” In other words, once a bank is big enough to pose a threat to the economy it receives effective immunity for past and future criminal behavior — a license to commit crime. Yet “too big to fail” provisions were removed from last year’s US financial reform law by lawmakers on Capitol Hill whose own favorite investments included Bank of America, Goldman Sachs, and JPMorgan Chase. And Afghanistan’s largest bank, a corrupt collaboration between its president and the bank’s principal owners, grew large enough to become a “systemic risk” to the nation’s economy… as our own government stood and watched. Meanwhile, here at home, corporate lawbreakers like Bank of America, Wells Fargo, Goldman Sachs, and JPMorgan Chase are apparently still considered a “stabilizing force.” Too big to fail As the New York Times reported this week: Fraud and mismanagement at Afghanistan’s largest bank have resulted in potential losses of as much as $900 million — three times previous estimates — heightening concerns that the bank could collapse and trigger a broad financial panic in Afghanistan, according to American, European and Afghan officials. The extent of these losses make it clear that keeping the bank afloat — something the government has said it is determined to do — would require large infusions of cash from an already strained budget. The crisis was a long time coming. As the Times reported last September , Afghan President Hamid Kharzai has family ties and a personal financial interest in the bank, and agreed to bring the brother of one of the bank’s principals into the government as his Vice Presidential running mate. (But then, American Administrations from both parties (including the current one) have hired a string of senior bank officials and watched others leave government to join big banks — not as egregious, perhaps, but a clear conflict of interest.) If an institution is allowed to become “too big to fail,” it’s rarely an accident. The corruption has already taken place somewhere along the line. Austerity and Deregulation We’re told that Deloitte, the auditor in place at Kabul Bank, was not specifically tasked with reviewing its accounts. Deloitte apparently acquired the contract when it purchased BearingPoint, the consulting firm that went bankrupt. But unless there are more contracts being awarded than have been widely reported, the original BearingPoint contract (worth a reported $98 million) was designed to help banks “improve economic governance.” There were reports as far back as 2005 that some of the consultants on the project were “subpar” and that US contractors were receiving widespread criticism locally. BearingPoint has promoted a privatization-oriented approach during its richly (and, let’s not forget, publicly ) funded tenure in Afghanistan, as it has in other countries. The firm and its successor unit within Deloitte have done some good work, but remain part of a well-paid consultant nexus that emphasizes the same set of shared values that undermined the US economy. In other words, BearingPoint and like-minded vendors have been faithful in the execution of an austerity-minded philosophy — a philosophy that can sometimes become anti-government in many ways, and whose philosophy of “austerity” rarely extends to its own practitioners. The Afghan Research and Evaluation unit, a group set up by the international aid community in Afghanistan, assessed Afghan aid as follows: “Consistent with the current consensus on development held by the donor community and international financial institutions (IFIs), the privatisation process has gained increased momentum in Afghanistan … Fifty four fully state-owned enterprises (SOEs) have been slated for privatisation as going concerns or through liquidation by the end of 2009.” In BearingPoint’s case, their sympathy for this downsizing-government approach isn’t surprising. Alice Rivlin, the economist best-known for relentlessly advocated Social Security cuts, was a member of the Board and the company’s leading economic figure — before it went bankrupt. They say they weren’t doing the bank’s books. But if they were there to “improve the economic governance” of Kabul Bank, an institution whose misdeeds were well-known and whose implosion could topple the economy, then it’s certainly fair to say that their work has been “subpar.” Toxic Assets A report commissioned by the International Monetary Fund got the problems right. “As of March 2008,” the report noted, “the two largest domestic private banks accounted for almost 50 percent of total banking system assets. The combined loans of these two banks were 70 percent of total commercial bank lending.” The mayor of Kabul was indicted by the Afghan government on corruption charges, but U.S. officials wound his explanation credible: He was arrested by corrupt officials after he exposed their own misdeeds. Specifically, he told officials that he found files for more than 30,000 applicants who paid for “nonexistent plots of land in Kabul.” These toxic assets were part of a larger get-rich-quick schemes for officials who apparently found his investigations inconvenient. The IMF report also included this observation: “Most banks did not attach particular importance to analysis of borrowers’ balance sheets, cash flow, or business plans.” That kind of lax underwriting will be familiar to observers of American lending practices. The report also noted, somewhat laconically, that “banks that lend extensively domestically engage in extra-judicial, non-traditional contract enforcement. ” Extra-judicial? As in illegal? It sounds like we’ve exported foreclosure fraud, too. Do as we say, not as we do The procurement process for USAID projects in Afghanistan seems to be a mess. Sen. McCaskill was surprised to learn that major contractors there were not being asked to file the usual tracking reports . The Obama Administration was criticized for awarding a major contract to a Democratic party donor , and for using the “no-bid” process it has criticized in the election campaign to do it. After Kabul Bank’s impending failure was reported, the US government insisted that the Times update its story to include a quote from a Treasury Department spokesperson saying that “no American taxpayer funds will be used to prop up Kabul Bank.” But that doesn’t have any more credibility than Treasury Department claims that bank bailouts in this country have been fully repaid — a claim that doesn’t count aid funneled through the Federal Reserve, the cash value of low- and zero-interest bank loans, and other taxpayer-funded measures. Ninety percent of Afghanistan’s national budget was financed by foreign countries last year, with the US assuming a significant chunk of the cost. When the Afghans conduct their first bank bailout, under United States supervision, the funds will undoubtedly come from the Afghan treasury. And then funds from ours will help make up the shortfall elsewhere. Yes, corruption among politicians and other officials is a much greater problem there. They’re a drug-based economy whose principal export is poppies. Their country is divided, impoverished, and largely illiterate. But economic behavior is universal. Their bankers are subject to the same “moral hazard” as bankers everywhere: When “too big to fail” banks can gamble with absolute certainty that they’ll be rescued, that’s exactly what they’ll do. When bankers know they can commit crimes go unpunished, they’ll commit crimes. And they won’t stop until people start going to jail — in both countries. “You complete me …” A jargon-laden report from the Congressional Research Service addressed what it called “ROL,” an acronym that stands for the “rule of law,” and concluded: “Helping Afghanistan build its justice sector … suffers from the same difficulties that have complicated all efforts to expand and reform governance in that country: lack of trained human capital; traditional affiliation patterns that undermine the professionalism, neutrality, and impartiality of official institutions; and complications from the broader lack of security and stability in Afghanistan.” In other words, they’re saying that Afghans are too tribal and primitive to do things the American way. But that’s not true. Yes, education and training is needed. But their lack of law enforcement, especially in the financial sector, directly reflects the level of emphasis we’ve placed on it ourselves — in their country and here at home. We’ve lavishly funded privatization efforts and the unrestrained growth of private and morally corrupt banks, while at the same time devaluing the role of regulation and law enforcement. The problem with the Afghans isn’t that they’re not like us. The problem is that we’re too much alike. People everywhere are, pretty much, especially where money’s concerned. So until we change the way we govern, the results are likely to be the same wherever we go. Crimes will still be committed, banks will still fail, and we’ll all keep paying the price for a moral, legal, and economic blindness that keeps leading us off the same cliff over and over again. Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

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Daniel Dicker: SOTU Misses on an Easy Win: Natural Gas

January 26, 2011

Disappointingly missing from President Obama’s State of the Union address was any real talk about energy policy. Aside from his mentioning a goal of 80% electric power from renewables by 2035 — a difficult if not impossible task — nothing was mentioned about global warming or an abandoned cap and trade bill in the Senate. Most disappointing was a failure to follow up on what is so clearly the easiest energy choice this president can make today to stimulate the economy and free us from imported oil — natural gas. I’ve been consistently talking about the many advantages to be gained from conversion to natural gas and I’ve hardly been alone; just this morning, T. Boone Pickens on Morning Joe again discussed the importance and inevitability of domestic natural gas and the need for leadership and government incentives to jumpstart the process. Natural gas is inarguably cleaner, greener, cheaper and entirely domestic. The US supply of proven reserves of natural gas is more than 200 trillion cubic feet and the estimated potential supply of natural gas from shale and other sources is more than 1800 trillion cubic feet. This makes the United States the single largest potential producer of natural gas on the globe and puts it close in potential supply to the entire supply in the Middle East or Asia. Such a massive supply just cannot be much longer ignored. We are yearly donating more than $200 billion to foreign nations that don’t much like us for crude oil imports, imports that could be replaced by fully domestic natural gas supplies. But Boone’s right — despite the fact that he has investments that would benefit from government incentives — the price of developing natural gas and technologies for vehicles, generation, storage and transport of this fantastic fuel will not come from the private sector alone with gas prices hovering around $4 dollars. If the president is convinced about “investment” — a major theme of last night’s SOTU — he will hopefully soon consider investment in federal incentives for natural gas. There are admittedly environmental hurdles to overcome, but for the sake of job creation, a recovering economy and frankly for national security, he couldn’t steer energy policy on a more positive course.

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Robert Lenzner: Bernanke’s QE1 and QE2 Pushed Stocks Skyward

January 23, 2011

No doubt about it, Fed Chairman Ben Bernanke’s use of well over $2 trillion in Fed funds did help push higher the price of many securities, especially those in natural resource or commodity businesses- increasing the paper wealth of the investing class. A related goal was to buttress the rate of inflation and defeat the fear of a deflationary spiral, a double dip in economic activity. Credit Bernanke hugely for the rise of share prices from a despairing time. Indeed, the market ONLY rallied after Bernanke’s August 27 speech to central bankers where he promised the Fed would “do all that it can to ensure continuation of the economic recovery.” His method?; additional purchases of longer-term securities.” And this followed 2009′s injection of $1.5 trillion on mortgage backed securities in a QE1 manoevre that enbaled the mortgage sellers to turn around and buy the safer Treasuries that financed Obama’s deficit. And, as those treasuries went up slightly in price, so too did their yields go down, encouraging other investors to buy equities. Now comes my friend the admirable Barry Ritholtz of fusioninvest.com, who goes so far as to suggest that the Fed action to pour money into the financial markets has “distorted the stock market.” We’re not sure the “distortion” is right, but suggest we wait until the summer, when the $100 billion a month transfusion of cash by the Fed’s purchase of Treasuries and mortgages will end. If stocks tumble, I guess we;’ll need another “distortion, QE3. I have been curious myself how those $100 billion injections of buying power in fixed income securities them translate practically speaking into market participants using the Fed’s money by pushing up stock prices. And I mean to get to the nitty-gritty bottom of it. One major unexpected result of QE2 has been the failure of the Fed’s attempt to lower interest rates to stimulate activity in the housing market by means of cheaper mortgage rates. On the contrary, the interest coupon on mortgages has risen along with the interest costs of Fed borrowings. So strike one Bernanke victory for higher stock prices, and one defeat in money markets, where the attempt to stimulate the purchases of homes through lower interest rates backfired. On balance, we have to admit the nation is better off. But, hold your breath come June 1 that the stimulus from QE2 will be enough to keep the economy growing and employment gaining. Edit

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David Katz, M.D.: Walmart’s Health Changes: Fact Or Fiction?

January 22, 2011

At a press conference this week featuring none other than First Lady Michelle Obama, Walmart made pledges that should, in principle, put more nutritious food within easier reach, literally and figuratively. Literally, because the nation’s largest grocer promised to reduce sugar and sodium in its own product line, and eliminate added trans fats over the next five years. They also plan to develop a logo to signify foods that meet their internal standard for better nutrition. These promises sound good, and along with my public health colleagues, I commend Walmart for making them, and in anticipation of Walmart keeping them. But I must append some precautionary caveats. Perhaps ironically, even as Walmart was promising both to provide more nutritious foods, and tell us which ones they are, the national non-profit, Prevention Institute, issued a report indicating that entities selling us food are not reliable judges of nutritional quality. The report, based on an examination of various front-of-pack claims indicating “more nutritious” children’s foods, found that nearly 85 percent of the products with specific shout-outs about their nutritional virtues were unhealthy by the evaluators’ objective standards. I can validate this worry with a personal view from altitude. NuVal scores for overall nutritional quality have been generated for over 90,000 food products thus far. These scores require a database of ingredient lists, nutrition facts and scanned images of packaging for every product. In fact, to our knowledge, this is by far the largest and most detailed nutrient database on the planet. It provides a disquieting view of how marketing claims and nutritional reality part company . The NuVal database includes examples of sugar-reduced kids’ cereals that are less nutritious than the original, because of added sodium, reduced fiber and other changes. The average score for regular peanut butter is a respectable 20; the average score for seemingly more nutritious fat-reduced peanut butter is a far-less-respectable 7, because of copious additions of sugar and salt in place of the removed fat. In fact, the consistency with which front-of-pack nutrient claims and an objective measure of overall nutrition go in opposite directions is so compelling that we are currently pursuing a formal analysis. Will Walmart offer us truly more nutritious products, or products tweaked to allow for claims of better nutrition belied by an objective measure of overall nutritional quality? Time will tell. As for putting nutritious foods figuratively within easier reach, Walmart also pledged to reduce prices of healthful foods — produce in particular. Here, too, the commitment sounds good. But here, too, some caveats attach. First, with the possible exception of the produce aisle, more nutritious food does not necessarily cost more right now, despite the urban legend that it does. In a research paper currently in press, my colleagues and I report what happened when we sent a volunteer grocery shopping with nutrition standards ( freely available to you , by the way) and instructions to buy equal numbers of foods from a variety of categories meeting, and failing the standards. We compared price, and found no difference. Why the urban legend in the first place? Because health conscious shoppers are willing to pay a premium for more nutritious foods, so there is an incentive to make foods that call out their nutritional virtues on the package, whether or not they are in fact nutritious overall, and charge extra for them. That practice prevails. But by and large, such foods are not more nutritious — just more expensive! Often, a less expensive, more humbly packaged alternative offers better nutrition as well. Walmart may simply be engaging in good corporate citizenship (I know some of the good people in high places there, and this is by no means implausible); they may be propping up their argument for real estate in New York City ; or they may be making some promises they will have a hard time keeping. But come what may, we all know that the business of business is business, and no publicly traded company will go very far in a direction that makes share holders unhappy. What Walmart does must ultimately be good for their bottom line, whether or not it’s good for yours. Logically, there is only so much a company that sells food can benefit from lowering the price of food. If we want real action in the area of making more nutritious foods more affordable, we need it from those directly involved in paying the health care costs that relate in no small measure to the bad food choices that currently prevail. The development and course of obesity, diabetes and cardiovascular disease are powerfully and directly associated with food choices . For cancer, osteoporosis, arthritis and a number of other conditions, the causal chains are a bit longer and more twisted, but diet is still quite clearly among the key links. Thus, policies that meaningfully shift food selection and diet pattern in a healthful direction with financial incentives could also meaningfully reduce the population burden of these conditions, which in turn could slash health care costs. The SNAP program would be a great place to prove the principle (my lab is working on that!). A little money spent to discount objectively more nutritious foods could generate vastly larger savings related to chronic disease care costs. Large employers, private insurers and the federal government could all win big. And so could we. But only when the promise of truly better food, truly within easier reach of all, is truly kept. Dr. David L. Katz www.davidkatzmd.com www.turnthetidefoundation.org

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Robert Reich: American Competitiveness, and the President’s New Relationship with American Business

January 22, 2011

Whenever you hear a business executive or politician use the term “American competitiveness,” watch your wallet. Few terms in public discourse have gone so directly from obscurity to meaninglessness without any intervening period of coherence. President Obama just appointed Jeffry Immelt, GE’s CEO, to head his outside panel of economic advisors, replacing Paul Volcker. According to White House spokesman Robert Gibbs, Immelt has “agreed to work through what makes our country more competitive.” In an opinion piece for the Washington Post announcing his acceptance, Immelt wrote “there is nothing inevitable about America’s declining manufacturing competitiveness if we work together to reverse it.” But what’s American “competitiveness” and how do you measure it? Here are some different definitions: It’s American exports. Okay, but the easiest way for American companies to increase their exports from the US is for their American-made products to become cheaper internationally. And for them to reduce the price of their American-made stuff they have to cut their costs of production in here. Their biggest cost is their payrolls. So it follows that the simplest way for them to become more “competitive” is to cut their payrolls — either by substituting software and automated machinery for their US workers, or getting (or forcing) their US workers to accept wage and benefit cuts. It’s net exports. Another way to think about American “competitiveness” is the balance of trade — how much we import from abroad versus how much they import from us. The easiest and most direct way to improve the trade balance is to coax the value of the dollar down relative to foreign currencies (the Fed’s current strategy for flooding the economy with money could have this effect). The result is everything we make becomes cheaper to the rest of the world. But even if other nations were willing to let this happen (doubtful; we’d probably have a currency war instead as they tried to coax down the value of their currencies in response), we’d pay a high price. Everything the rest of the world makes would become more expensive for us. It’s the profits of American-based companies. In case you haven’t noticed, the profits of American corporations are soaring. That’s largely because sales from their foreign-based operations are booming (especially in China, Brazil, and India). It’s also because they’ve cut their costs of production in the US (see the first item above). American-based companies have become global — making and selling all over the world — so their profitability has little or nothing to do with the number and quality of jobs here in the US. In fact, it may be inversely related. It’s the number and quality of American jobs. This is my preferred definition, but on this measure we’re doing terribly badly. Most Americans are imprisoned in a terrible trade-off — they can get a job, but only one that pays considerably less than the one they used to have, or they can face unemployment or insecure contract work. The only sure way to improve the quality of jobs over the long term is to build the productivity of American workers and the US overall, which means major investments in education, infrastructure, and basic R&D. But it’s far from clear American corporations and their executives will pay the taxes needed to make these investments. And the only sure way to improve the number of jobs is to give the vast middle and working classes of America sufficient purchasing power to get the economy going again. But here again, it’s far from clear American corporations and their executives will be willing to push for a more progressive tax code, along with wage subsidies, that would put more money into average workers’ pockets. It’s politically important for President Obama, as for any president, to be available to American business, and to avoid the moniker of being “anti-business.” But the president must not be seduced into believing — and must not allow the public to be similarly seduced into thinking — that the well-being of American business is synonymous with the well-being of Americans. 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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AUD/USD: Trading the Australia Consumer Price Report

January 21, 2011

AUD/USD: Trading the Australia Consumer Price Report

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Dan Dorfman: Big Gold Pop Apt to Follow Gold Drop

January 20, 2011

Even Superman has his bad days. We saw that last Sunday when the New England Patriots, widely viewed as the Superman of football, were beaten by the underdog New York Jets. We saw it again in recent months when gold, the investment arena’s Superman, switched from the man of steel to a powder puff after racking up 10 straight years of gains (30% last year) during which it shot up more than six fold from $228 an ounce in 2001 to a recent all-time high in early December of $1,432.50. But since then, the yellow metal, which is looking quite toppy,has backtracked to around $1,350. This decline, though hardly awesome, has led to a series of warnings, such as “the gold bubble is about to burst” and “a collapse in gold is imminent.” One of the country’s dogged trackers of precious metals, a skilled market timer who warned of the recent gold selloff, is online investment adviser, Mark Leibovit, editor of the VR Gold Letter in Sedona, AZ. His latest thoughts: More gold weakness could be in the works into March which might knock down the price 10% to 25% from its recent high (which raises the prospects of a possible drop to as low as roughly $1,070). But after the gold drop, he sees a likely gold pop. The metal, as Leibovit sees it, has to overcome the lack of strong upside volume and the recent resistance to re-establish its short-term uptrend. As a result, he’s sitting on the sidelines insofar as his trading position is concerned. “We always run the risk of a shakeout and where and when it ends is anybody’s guess,” he says. Famed global commodities investor Jim Rogers is also hoisting warning flags, noting that gold is overdue for a rest and is likely headed lower over the short run. Shortly after gold crossed $1,000 an ounce in September of 2009, Leibovit made what I thought was an off-the-wall forecast: “Gold will never again trade below $1,000 an ounce in our lifetime!” he told me. Since the fluctuating metal is on a constant see-saw, how, I wondered, could he be so cocksure about the stability of such a volatile investment? Also in the back of my mind was what George Soros once told me over breakfast many years ago — namely, “owning gold is like playing poker” and who about a year ago described the metal as “the ultimate asset bubble.” Nonetheless, Leibovit is sticking to his guns about his bold forecast. “The wind is at gold’s back,” he says. “We’re in a big 20-year up cycle that has another 10 years to go.” He also views the recent drop in gold as a gift — an opportunity to buy the metal cheaper. Although he holds out the possibility of a near-term drop in gold to around $1,070, he thinks a more realistic low during this period is between $1,250 and $1,300. By year-end, he figures the metal will be trading at a new high of around $1,600, on the way a few years out to between $2,000 and $3,000. He’s also a bull on silver, which he sees rising from its current price of $28.75 to $36 by the end of 2011. Adding to gold’s allure at this juncture, Leibovit points out, are a bevy of worries and demand factors… Chief among them: — Continued quesions about the longevity of the euro. — A near-certain resumption of a sizable decline in the dollar, which Leibovit argues is “terminal over the long term,” in large measure reflecting $80 trillion of funded and unfunded debt that will never be repaid. — The inevitability of higher inflation stemming from 24/7 money printing around the globe and ballooning commodity prices. — Increasing global demand for gold, notably from China and India. — America’s loss of worldwide leadership as the baton is being passed to China, which is in the process of strengthening its military. A cold war between the U.S. and China is inevitable, Leibovit believes. His favorite gold investment is the Central Fund of Canada, which holds gold and silver bullion. He also likes Agnico Gold mines Ltd., Market Vectors Junior Gold Miners ETF and Northern Dynasty. Leibovit’s bottom line on the metal: Don’t let the bubble talk or the recent weakness scare you away. It’s still the best financial bullet vest around because the fundamentals remain so positive that gold in the long run still looks penthouse bound. In brief, gold, looking ahead, still looks golden. What do you think? E-mail me at Dandordan@aol.com.

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Leo W. Gerard: Time to Wield the Foreign Policy Stick

January 20, 2011

America plays the role of abused partner in its relationship with China. Although the Asian giant repeatedly injures U.S. industry by violating international trade rules, America has responded, almost exclusively, by pleading and begging for China to stop. China says it’s sorry. And continues to violate the rules. America respectfully beseeches China to discontinue manipulating its currency, and China says it will. Then it allows the value to increase a completely insignificant amount. Still America does nothing. Nothing. It simply accepts the abuse. U.S. Sen. Bob Casey, D-Pa., and Michael Williams, senior vice president of U.S. Steel stood with me Wednesday at a press conference in Pittsburgh to urge President Obama in his meetings this week with Chinese President Hu Jintao to announce that America is done with soft talk. We want President Obama to tell President Hu that America has heard enough promises; the United States is bucking up and pulling out that big stick that Teddy Roosevelt carried in foreign policy negotiations. This is a rare issue on which politicians, Republican and Democrat, manufacturers and organized labor all agree. Here’s what Sen. Casey said at the press conference, “In my estimation, and that of a lot of Americans, the time for talking is over. The time for action is now.” He, Sen. Sherrod Brown, D-Ohio, and Sen. Debbie Stabenow, D-Mich., plan to introduce legislation next week to force the federal government to hold China accountable, to enforce compliance with World Trade Organization (WTO) rules – rules that China agreed to comply with when WTO countries permitted it to join even though it is a non-market economy. Mr. Williams described the effect of China’s unchallenged trade practices on American steel production: “Our facilities in Pennsylvania and throughout the United States are among the most advanced in the world: We make the highest quality steel for the most demanding applications; Our technology is world competitive; and Our workers are second to none in skill and know-how. However, the more than 21,000 U.S. Steel employees nationwide, and the more than 4,700 employees here in Pennsylvania, know all too well that we do not always operate in a fair global marketplace. Instead, we are often faced with the reality of a distorted market – a market where we have to compete against job-stealing dumped and subsidized imports from countries that abuse the rules to gain a false competitive advantage. No country more than China hurts all American manufacturing by the way it artificially undervalues its currency – making its exports artificially cheap and making competitive imports from the U.S. and elsewhere artificially expensive.” Here are the facts: American industries have found that they can produce products, ship them to China and price them lower than Chinese competitors. But all too often, China prohibits sale of the American-made products on the mainland. Sen. Casey gave an example, C.F. Martin & Co., which manufacturers its world-famous guitars in Eastern Pennsylvania. Martin tried to register its mark to sell its instruments in China. But it has been unable to do that because a Chinese manufacturer already registered the mark and is counterfeiting the guitars. “To say it is unlawful does not begin to describe the gravity of it,” the senator said. In addition to countenancing counterfeiting, China provides illegal subsidies to its export industries, violates international regulations forbidding forced technology transfer when American companies seek to manufacture in China and deliberately undervalues its currency to falsely lower the price of its exports. When Mr. Williams, Sen. Casey and I all said this must be stopped with enforcement of international regulations, someone in the audience asked if that would prompt a dreaded trade war. That won’t happen because we already are in a trade war. The United States simply is not fighting back. We are playing the passive partner in a perverted relationship, repeatedly allowing the abuser to pound us. Mr. Williams said it best: “U.S. Steel wants a strong America. To have a strong America, we need a strong manufacturing base. To have a strong manufacturing base, we need strong enforcement of international trade regulations.” Sen. Casey agreed, “Our government must take every step necessary. It is not enough to say to the unemployed, ‘We are trying and we are asking.’” Wield the stick, President Obama.

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Raymond J. Learsy: ‘Noble’ OPEC Criticzes The International Energy Agency

January 19, 2011

OPEC (the Organization of Petroleum Exporting Countries supplying over 40% of the world’s oil consumption) feels put upon. It’s Secretary General lashed out at the International Energy Agency for having categorized current oil prices as “alarming”, calling for OPEC to show more flexibility in boosting supplies (see CNBC “OPEC Says World Well Supplied, Criticizes IEA” 01.1811). OPEC’s Secretary General Abdalla Salem El-Badri immediately countered that “At the moment there is more than enough oil on the market… Oil prices have been driven by technical means… the weak dollar and speculation” all the while critical of the IEA for warning of the risks to economic growth due to rising oil prices. It is significant that El-Badri’s comments come while OPEC’s official output quota has remained unchanged since instituting a record cut in its production in December 2008. December 2008 was a fateful moment for OPEC and the price of oil. At the time oil was hovering around $40/barrel and OPEC and its minions in the oil universe were rattled, to say the least. Even the Saudi monarch, King Abdullah got into maelstrom by promulgating that he considered $75 a barrel to be a “fair price” (please see “Big Oil Prices Put in Jeopardy by Fall in Oil Prices” New York Times 12.15.08). But with the price at $40/bbl we were summoned to a far higher calling. You see, according to that font of wisdom on all matters oil, Saudi Oil Minister Ali al-Naimi instructed, “You must understand that the purpose of the $75 price is a much more noble cause. You need every producer to produce, and marginal producers cannot produce at $40 a barrel” (please see “OPEC’s Noble Cause” 12.17.08). That was then, and the price was $40/bbl. This is now with West Texas Crude selling for over $90/bbl and London Brent crude selling just under $100/bbl at $98/bbl. More than a doubling of price since December 2008, shooting past Al Naimi’s “noble” and King Abdullah’s “fair” price of $75/bbl months ago. The IEA opined in a report last Tuesday that OPEC would need to pump 400.000 barrels per day more than expected this year to balance the market. El Badri said OPEC would respond if there is a need for more supply. “OPEC”, he reiterated “as always, is watching the market carefully. We remain committed to market stability.” Translation. OPEC is prepared to do little or nothing to help reduce the current level of prices. Their lack of willingness to hold the price at moderate levels gives the speculators a one way bet on ever higher prices. What if El Badri had said in response to the IEA, “Yes we agree with you, current prices are alarming and a risk to the world’s economy. Especially a levels so significantly higher than the $75/bbl we consider to be “fair”. We will do what we can to rectify the situation. As you are aware Saudi Oil Minister al Naimi has at his disposal some 4.5 million barrels per day (bpd) pumping capability which are being held idle and on standby. Certainly he and all of us at OPEC will do our utmost to bring about a price which we consider as “fair” and tolerable to the world’s economy.” Don’t hold your breath, but were it to come to pass it would send the speculators running for the hills and evolve and entirely new relationship between suppliers and consumers around the world, one of mutual respect and true interdependence. One last observation. We in the United States are by far the largest consumers of oil in the world. Yet we have done little or nothing to significantly reduce our oil consumption and to politically confront an intransigent OPEC with the authority and interplay that an industry’s largest consumer normally has on the sway of a given industry’s outlook and policies. We have been silent and have permitted our Department of Energy to remain mute while prices have escalated by well over 200% or $1 billion rent a day on the nation’s economy ($90/bbl plus today – $40/bbl December 2008 = $50/bbl x 20,000,000 bpd US consumption= $1 Billion/day). Or more to the point, gasoline at well over $3.00 a gallon. We have permitted our oversight agencies such as the CFTC to stall and stall and equivocate rather than bringing massive and destructive speculation to heel. The lack of meaningful oversight and action by our government agencies is exemplified by a Department of the Interior and its Minerals Management Service whose ineptitude has already bequeathed to us the massive Deepwater Horizon oil spill disaster. Where is our national policy on this issue? We not only owe it to ourselves but to oil consumers throughout the world who are paying a heavy price in part because of our lack of meaningful leadership.

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How Chinese Inflation Could Impact The U.S.

January 12, 2011

BEIJING — When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker shock. “They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”

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‘Super Big Gulp Fan Says 7-Eleven Duping The Public Out Of 4 Ounces’

January 4, 2011

Take Paul Sunby, 50, a biologist with an environmental consulting firm who is all over 7-Eleven for “trying to dupe people” over the actual size of its Super Big Gulp fountain drink. Sunby said the convenience store has reduced the size of the drink from 44 to 40 ounces in a sneaky way — or as he put it, “cleverly, quietly, and diabolically.” Meanwhile, he said, the price remains the same: $1.50.

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U.S. Home Prices Weaken Further as Six Cities Reach New Lows

December 30, 2010

Data through October 2010 released this week by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices show a deceleration in the annual growth rates in 18 of the 20 metropolitan areas it tracks. Home prices decreased in all 20 metropolitan statistical areas in October and only four MSAs – Los Angeles, San Diego, San Francisco and Washington DC – showed year-over-year gains. While the composite housing prices are still above their spring…

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Video: Kass Says U.S. Recovery, Stock Rally May Be Short-Lived

December 29, 2010

Dec. 29 (Bloomberg) — Douglas Kass, a partner at Seabreeze Partners Management Inc., discusses the outlook for the U.S. economy and the price of gold. Kass talks with Carol Massar on Bloomberg Television’s “In the Loop With Betty Liu.” (Source: Bloomberg)

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Dave Johnson: Education For We, The People Or For Private Profit?

December 24, 2010

In his press conference this week President Obama said the economic focus is no longer saving the economy from crisis, but “jumpstarting” it to make a dent in unemployment. He listed education as one of the pillars of that effort. Later in the press conference he talked about making colleges and universities being open not just to people who are well-to-do, but to all of us. Progressives For A We, The People Economy Progressives believe that a We, the People economy works best when we act as a community where “we are all in this together,” and watch out and take care of each other. We mutually benefit from this approach: the better off we all are, the better off we all are . Conservatives, on the other hand, believe we should all be on our own, looking out for only ourselves and our families, and it is up to each of us, alone, to take “personal responsibility” for our own success. Our differing approaches to education reflect these different philosophies. Progressives believe that education is good for all of us, and should be available to all of us. We believe that the economy does better when more of us can receive a good education, whether this brings a vocational or advanced degree, in a community college or a university. We try to enact policies that make this education affordable for everyone. Conservatives, on the other hand, believe that “the government” (We, the People) has no business helping people. So they resist providing free public or university education. They call this “socialism.” And so America’s conflict continues, one side asking for public investment in all of us for the long-term benefit of We, the People while the other side tries to harvest the public good for the short-term benefit of a few. Compromise With Conservatives A compromise of sorts has existed in recent decades in which the government helps students get loans, enabling them to go to more expensive schools. But these loans increasingly leave students with a very high debt to pay off after they graduate. In recent years students are graduating with more student loan debt than they can reasonably be expected to pay off. Result: Increasing Debt CNBC reports: Student loans leave crushing debt burden The cost of a college education is rising faster than the cost of medical care and as much as three times as fast as consumer prices in general. But that’s just the beginning of the price of admission. This is the story of a debt crisis few are talking about. Americans now owe more on their student loans than they do on their credit cards — a debt fast approaching $1 trillion with no end in sight. Please read the entire CNBC report on the crushing debt load that students are taking on, just to get an education that will help our economy. Here is a clip of the video available at the link: USA Today reports: Student loan debt exceeds credit card debt in USA , Total student loan debt exceeds total credit card debt in this country, with $850 billion outstanding, according to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com, websites that provide information about student aid and scholarships. Consumers owe about $828 billion in revolving credit, including credit card debt, according to seasonally adjusted numbers in a report on July credit from the Federal Reserve. Result: Increasing Defaults With the increasing debt load and the resulting crushing monthly payments come increasing defaults. From the Dept. of Education, Student Loan Default Rates Increase , “This data confirms what we already know: that many students are struggling to pay back their student loans during very difficult economic times. That’s why the Administration has expanded programs like income based repayment and Pell grants to help students in financial need,” said U.S. Secretary of Education Arne Duncan. And, of course, along with the for-profit privatization of what should be a public function, and the compromise of federal help for loans comes the companies profiting from federal dollars. “The data also tells us that students attending for-profit schools are the most likely to default,” Duncan continued. “While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not. Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole,” Duncan continued. Result: Increasing Quick-Buck For-Profit Scams Along with increasing and crushing debt and defaults another problem has cropped up. Just like with the housing bubble, the private predators have arrived to prey on the public. Private schools like Kaplan University are increasingly scamming their students with schemes reminiscent of the worst of the housing bubble, running up loan debt greater than any job they would ever get could pay, even hitting them with excessive fees and outright fraudulent charges. A Huffington Post report of their investigation of Kaplan University, At Kaplan University, ‘Guerilla Registration’ Leaves Students Deep In Debt , exposes Kaplan’s practice of “guerilla registration” in which they register students and charge them tuition for classes they don’t want or take, even in some cases after they have withdrawn from the school. And then they send the debt collectors after them for the money. Despite having attended only two online sessions, Castillo had remained officially enrolled at Kaplan for nearly a year after her withdrawal. Far from an aberration, Castillo’s experience typifies the results of a practice known informally inside Kaplan as “guerilla registration”: academic advisors have long enrolled students in classes they never take, without their consent and sometimes even after they have sought to withdraw from the university, in order to maximize the company’s revenues, according to interviews with former employees. Please read the whole Huffington Post report , there is much, much more there. Kaplan University, by the way, is owned by The Washington Post company. Speaking of Kaplan , this is also in the news: NY Times, E.E.O.C. Sues Kaplan Over Hiring , Sending a sharp warning to employers nationwide, the Equal Employment Opportunity Commission sued the Kaplan Higher Education Corporation on Tuesday, accusing it of discriminating against black job applicants through the way it uses credit histories in its hiring process. . . . In the E.E.O.C.’s suit, which was filed in federal district court in Cleveland, the agency said that since at least January 2008, Kaplan had rejected job applicants based on their credit history, with a “significant disparate impact” on blacks. . . . The E.E.O.C. typically brings discrimination cases only when it is convinced that serious abuse has occurred. Resources: Demos: Student Loans and Student Loan Debt , links to Demos resources and research on this issue. The Project On Student Debt This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture . I am a Fellow with CAF. Sign up here for the CAF daily summary .

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Video: Gaidamaka Says Oil at $80-$95 a Barrel `Quite Likely’

December 23, 2010

Dec. 23 (Bloomberg) — Andrei Gaidamaka, director of strategic development at OAO Lukoil, talks about the outlook for growth and the price of crude oil. Gaidamaka talks with Lisa Murphy on Bloomberg Television’s “Fast Forward.” (Source: Bloomberg)

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Steven Bulwa: How Much Can a Business Grow? The Limitations of a Finite Economy

December 22, 2010

While I congratulate Mark Zuckerberg on being named Time ‘s person of the year it makes me wonder whether we have taken our social networking euphoria to bubble extremes. The stock market is salivating over a Facebook IPO and from what I read the current valuation is somewhere north of $43 billion . Speculation is that Facebook’s current year revenues are around $2 billion . Google’s (GOOG) market valuation is almost five times that at $190 billion and current year revenue is about $22 billion . These two Internet behemoths sport a combined market valuation of $230 billion on $23 billion in revenue. There have been times in history when the U.S. stock market traded at a Price to Earnings below 10, less than these companies’ combined Price to Sales. That is a rather shocking comparison. Unreal Expectations Last week, Wedbush Morgan analyst Lou Kerner raised his rating on Google to Outperform from Neutral and set a $750/share price target for the company’s shares , saying: We are raising our rating and price target on Google based on our belief that mobile and social secular trends are accelerating the growth of time spent online and the growth of global searches. Coupled with the increasing global domination of Android, strong moves in local, rapid market share gains by the Chrome browser, and the potential of Chrome OS, we believe Google is remarkably well positioned to benefit from the major secular trend of our times — the digitization of human life. The problem with this thesis is that even as we “digitize” our lives, the population’s consumption patterns remain finite. Growth is constrained by the absolute spending power of businesses and consumers. Even if the form of consumption shifts there are still limits on the value attainable. While the market gets creative with new ways to justify higher valuations, remember “price per click” from the first internet bubble, as a company’s size increases, growth becomes more difficult. In a recent blog post, author and former venture capitalist Peter Sims talks about the challenges Google faces not to suffer the same fate as every other dominant tech company before it : The company has run out of easy growth opportunities and must now find big chunks of new revenue. With the core search business maturing, Google increasingly seems to increasingly feel the need to make some “big bets.” That is a problem that maturing companies face that CEOs call “the tyranny of large numbers.” Great Companies/Bad Stocks There is no doubt both Google and Facebook are fantastic and wildly innovative companies that have changed consumers’ lives and consumption patterns. What they have not done is changed the rules of investing or altered the limitations posed by a finite economy. Both companies carry massive and historically unprecedented valuations only witnessed in previous stock market bubbles. During the internet bubble of 2000, InfoSpace (INSP) stock traded for $1300, it now fetches $8/share. So while we take a moment to toast Zuckerberg’s accomplishments, I wonder if it marks the top of the current iteration of the Internet stock bubble.

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The Cities Where Its Better To Buy Vs. Rent

December 22, 2010

Below is an updated list of rent ratios — the price of a typical home divided by the annual cost of renting that home — for 55 metropolitan areas across the country. We last covered this subject about eight months ago, and you’ll notice that most ratios have not changed much since then.

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Parsons Appoints Price as Managing Director, Northern Mediterranean

December 21, 2010

PASADENA, CA–(Marketwire – December 21, 2010) – Parsons announces the appointment of William D. “Bill” Price as Managing Director for the Northern Mediterranean region (Portugal, Italy, Greece, Spain, and Turkey). In this capacity, he will be responsible for overseeing the sales and operations of Parsons’ work in these markets.

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Higher Pump Prices May Linger Into 2011

December 20, 2010

Those stubbornly high gas pump prices might seem like an unwelcome house guest who overstays his welcome, come January. Drivers in many states already pay at least $3 a gallon for regular and analysts don’t expect any relief soon. That’s because crude oil has hovered between $83 and $89 a barrel since Thanksgiving. The national average for regular gasoline was $2.981 a gallon Monday, according to a survey by AAA, Wright Express and the Oil Price Information Service. That’s about the same as a week ago and more than a dime higher than a month ago. A year ago the average was $2.59 a gallon. Motorists in Washington, California, Hawaii, Illinois and Maine are among those paying the highest prices – from $3.092 a gallon to $3.618 a gallon. The Rockies, Texas and parts of the Midwest have the cheapest gas, ranging from $2.738 a gallon to $2.827 a gallon. A new study from business management firm PortiaGroup with data supplied by OPIS finds the average U.S. household will spend about $305 on gasoline this December, up almost 14 percent from last December and 76 percent more than December 2008. Gasoline is taking a bigger bite of median household income this year: 7.4 percent, compared with 6.5 percent last year and 4.2 percent two years ago, the study says. Energy analyst Jim Ritterbusch believes the national average for a gallon of regular will range between $2.90 a gallon and $3.07 a gallon through February. “We’re going to see comparatively high prices here for a while,” he said. “We’ve seen a stronger-than-expected economy and that tends to augur toward stronger gasoline prices, unfortunately, despite the fact that unemployment is still high.” Tom Kloza, publisher and chief oil analyst at OPIS, expects prices to fall during the winter and then begin to climb again. He has forecast prices between $3.25 and $3.75 a gallon from March to May, barring an unforeseen global economic issue. Pump prices could rise above $4 a gallon again in some states for the peak driving season, if oil prices continue to climb. And oil prices climbed again on Monday, as China’s thirst for energy showed little sign of being quenched. Platts, the energy information arm of McGraw-Gill, said China’s oil demand in November hit an all-time high of 9.3 million barrels per day. Traders also are monitoring the stock markets for clues about where the global economy may be headed in the New Year. Stocks wavered between small gains and losses in afternoon trading Monday. The Dow Jones Industrial Average lost about 2 points. The NASDAQ and the S&P 500 were a little higher. Benchmark oil for January delivery rose 79 cents to settle at $88.81 a barrel on the New York Mercantile Exchange. Since the contract expired Monday, many traders shifted their focus to the February contract, where the price rose 77 cents to settle at $89.37 a barrel. In other Nymex trading in January contracts, heating oil added 1.58 cents to settle at $2.4895 a gallon, gasoline futures gained 6 cents to settle at $2.3778 a gallon and natural gas gained 17.1 cents to settle at $4.129 per 1,000 cubic feet. In London, Brent crude rose $1.07 to settle at $92.74 a barrel on the ICE Futures exchange.

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In Tough Economy, Santas Are Also Suffering

December 20, 2010

(AP, By Tamara Lush ) — Craig McTavish — a.k.a. Santa — has the beard. He has the belly. He even has a few tricks up his sleeve, like pulling up to parties on his Harley-Davidson in full Kris Kringle garb. But there’s one thing he doesn’t have: work. For freelance Santas, this holiday season has been more “no, no, no,” than “ho, ho, ho.” Bookings have declined as paying $125 an hour for Santa to visit a holiday party has become an unaffordable luxury. It’s the second year of declining parties and events, Santas say. “This year has been a bust as far as making any money,” said McTavish, a retired firefighter who co-owns a landscaping business with his son. “I’ve booked nothing. Usually there’s always something for Christmas Eve, but I don’t even have that.” In addition to knowing which children have been bad or good, the modern-day Santa also hears which families don’t have enough money for presents. “You can see the downturn from the chair,” said Nicholas Trolli, the president of the Amalgamated Order of Real Bearded Santas — a 1,700-member social group the Boston Herald once dubbed “The Nation’s Premier Fraternity of A-List Santas.” Trolli lives in Sarasota, Fla., but travels around the country as a hired Santa. On a recent day, he worked a mall in Kansas City that had to lower photo prices by 20 percent. “People are telling us they just can’t afford a photo with Santa,” Trolli said. Even in-demand Santas with real beards have had to slash rates, Trolli said. They once commanded $200 an hour, but now they’re charging half that. Trolli said that anecdotally, his members’ bookings are off about 25 percent. Other Santas around the nation said that in good years, they booked 40 events a season and are down to fewer than 10. Others who once booked 10 events a year are down to none. Most Santas don’t rely on the gigs as a primary source of income, but they say they enjoy doing it and the extra money is nice. John Wenner, a Santa with a real beard from Woodbury Heights, N.J., said his last good year was 2008, when he booked dozens of private parties and corporate jobs. This season, he’s only had a few gigs. “They’re way down this year,” Wenner said. “It’s amazing how down. I’ve even cut back my price a little bit, to help sway a little more business. As it is, the way the economy has been, it’s getting tough.” Despite the less-than-jolly economic climate, Santas said the joys of the job mostly make up for the tough times. They love talking to kids, making adults laugh and spreading some holiday cheer in a year where joy has been in short supply. Several mentioned buying presents — or even Christmas trees — for needy families. Trolli’s group encourages members to book charity events for free or reduced prices if they don’t get paying gigs. A lucky few — mostly in wealthier parts of the country — are reporting a booming business. Doug Peters of Davie, Fla., said he’s had an excellent couple of years; last year, a wealthy customer on the exclusive South Florida enclave of Fisher Island asked him to work Christmas Eve. Peters charged $500 an hour and the customer didn’t blink. Still, being Santa isn’t cheap. A decent-looking fake-fur trimmed red jacket, hat, pants and boots cost upward of $1,000. And that’s not even counting an authentic-looking beard. Walter J. Wood — also known as Santa Woody — is a Phoenix-area Kris Kringle who looks like something out of a holiday Coca-Cola ad. The $100 an hour he charges “really doesn’t recoup the costs,” he said, especially when you take into account gas, travel time and the expense of miscellaneous items like beard glue. “I glue my beard on — no one else does that,” said Wood, whose other job as a painting contractor also hasn’t had much success this year. “I can eat a cookie in front of a kid and the kid won’t know.” Steve Robinson, a 47-year-old Santa in St. Petersburg, Fla. whose main job is as a grocery store baker, has another suspicion about why he’s gotten fewer bookings this year. “The kids are learning younger and younger that Santa isn’t real and that mom and dad buy the presents,” he sighed. “I can pretty much light up a room as long as the kids are 10 and under.”

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Google Startup Lab Propels Budding Tech Firms

December 16, 2010

SAN FRANCISCO (By Alexei Oreskovic) – A small team has toiled away since early October in a quiet corner of Google Inc’s sprawling campus in Mountain View, CA on a project related to the discovery of human antibodies. The group is not part of Google, and has nothing to do with Google’s flagship Internet search business. But Google has provided the team — part of the secretive New Hampshire-based biotech company Adimab — with a workspace fitted with top-notch amenities, including high-speed Internet access, conference rooms, even a ping-pong table. Adimab and four other companies are among the first tenants of the new Startup Lab managed by Google’s venture capital arm. The lab represents the latest expansion of Google Ventures, the search engine’s $100-million-a-year fund which launched in March 2009, providing Google with an opportunity to chase the big financial payoffs that can come with venture investing while helping it build ties to the fast-paced world of start-ups. The on-campus lab is designed to let young companies funded by Google Ventures draw from the deep well of resources within the world’s No. 1 Internet search company. Google staffers offer tips on anything from product design to recruiting, while also providing the startups with an instant Silicon Valley presence, said Bill Maris, managing partner of Google Ventures, in an interview at Google’s headquarters earlier this month. And with growing competition to fund the youngest, early-stage start-up companies, Google Ventures wants to set itself apart from other venture firms and angel investors. “We plan to be very active in 2011 in the seed space,” said Maris, referring to the funding of early-stage companies. “Startup Lab is an expression of that interest.” The 15,000-square foot facility can accommodate 100 to 120 people, and is composed of equipment that Maris and Google Ventures Partner David Krane pulled together over the summer. The pair found a vacant building owned by Google and furnished it with desks inherited from Google’s acquisition of mobile ad firm AdMob. The lab’s 1-gigabyte broadband network is separate from Google’s corporate network so it can provide a layer of separation and privacy for the labs’ tenants. In addition to the five startups that use the lab, Google entrepreneur-in-residence Craig Walker, the former group product manager of Google Voice, has also set up shop with a small team as he develops a new company. “We wanted to have a place where someone like Craig, or other talented entrepreneurs… maybe they don’t even have a company yet; they just want a place to work,” said Maris. At this point, Google Ventures does not plan to bring on further EIRs into the Startup Lab. GOLDEN TICKET The lab’s opening comes as Google’s domination of the Web faces challenges from smaller rivals, like social networking companies Facebook and Twitter. Over the past year, several of Google’s top engineers and executives have defected to Facebook. One such defector, Google Maps co-creator Lars Rasmussen, said in a newspaper interview that it can be “very challenging” to work at a company the size of Google. The Startup Lab underscores how Google, which has more than 23,000 employees worldwide, is seeking to wield its size as an asset to help it forge ties with entrepreneurs and startups. “The Google calling card in Silicon Valley, it’s the equivalent of a golden ticket at Willy Wonka and the Chocolate Factory,” said Tom Hale, the chief product officer of Austin-based HomeAway, which operates vacation rental sites like VRBO.com and is funded by Google Ventures. HomeAway has one engineer working in the Google Ventures Startup Lab two to three weeks a month, and plans to station a small product development group at the site in the coming months. Since moving in to the lab, HomeAway has worked with Google on technical issues involving scaling the architecture of its Web properties. HomeAway is also seeking guidance from Google on how to manage a program that allows engineers to devote a portion of their work time to personal projects, similar to a well known Google policy that lets employees devote 20 percent of their time on other pursuits. Google Ventures, which has grown from two partners in March 2009 to roughly 20 staffers today, has a small team of experts whose job is to help portfolio companies design their products. Google Ventures is also about to bring on its first full-time recruiter to help startups hire engineers. The Startup Lab is different from other programs that combine mentoring and early-stage funding, like Y Combinator, he said. The plan, he said, is not to bring in a new batch of entrepreneurs every year and give them a set curriculum, but to provide an easy way for startups to take advantage of Google’s resources. Nor is Google Ventures turned off by the competition to fund early-stage companies, which has led some venture investors, like Marc Andreessen to declare that seed investing has become less attractive than it was a few years ago. “Everyone kind of talks about this seed bubble and whatnot, but it doesn’t enter our calculus when we’re making our investment decision,” said Maris. “A price isn’t high or low, it’s either fair or not. So maybe for a seed round or series A, the price seems high, but maybe it’s deserved.” (Editing by Kenneth Li and Robert MacMillan) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Senate Passes Obama-GOP Tax Cut Deal

December 15, 2010

(AP) WASHINGTON — The Senate Wednesday overwhelmingly passed a sweeping tax package that would save millions of Americans thousands of dollars in higher taxes while also reducing their Social Security taxes and extending jobless benefits. President Barack Obama swiftly urged the House to pass the $858 billion bill without changes, a slap at Democratic liberals eager to toughen a part of the measure that permits up to $10 million to pass to heirs estate tax-free. A wide array of tax cuts enacted under President George W. Bush is scheduled to expire on Jan. 1 – just two weeks away – affecting taxpayers at every income level. The bill passed by the Senate, 81-19 , would extend those cuts for two years. Obama urged quick action in the House. “I know there are different aspects of this plan to which members of Congress on both sides of the aisle object. That’s the nature of compromise,” the president said. “But we worked to negotiate an agreement that’s a win for middle-class families and a win for our economy, and we can’t afford to let it fall victim to either delay or defeat.” House Democratic leaders said they expect to vote on the bill Thursday. Obama negotiated the package with Senate Republicans, and then administration officials worked for days to persuade congressional Democrats to support it, signaling a possible blueprint for future legislation. Because of November’s election victories, Republicans will take control of the House in January and gain seats in the Senate. “Middle class families need a boost in this economy, and that is exactly what this plan gives them,” said Senate Majority Leader Harry Reid, D-Nev. “It is not perfect, but it will create 2 million jobs, cut taxes for middle class families and small businesses, and ensure that Americans who are still looking for work will continue to have the safety net they rely on to make ends meet.” The bill would extend expiring tax cuts at every income level. It also would renew a program of jobless benefits for the long-term unemployed that is due to lapse, and enact a one-year cut in Social Security taxes. The bill’s cost, $858 billion, would be added to the deficit. “Opposing this bill is tantamount to supporting massive tax increases that threatens our economic future,” said Sen. Orrin Hatch, R-Utah. “Allowing middle-class families, small businesses and investors to keep more of what they earn, while denying Washington hundreds of billions in new tax revenue to spend, is the right thing to do.” Other Senate Republicans, however, balked at the price tag, noting that Obama’s deficit commission recently outlined the massive fiscal problems facing the nation. “The American people are going to be looking, and they’re going to say, does the Senate get it? Do they understand the severity and the urgency of the problems that face our fiscal future?” Sen. Tom Coburn, R-Okla., said Wednesday. At the insistence of Republicans, the plan includes a more generous estate tax provision: The first $10 million of a couple’s estate could pass to heirs without taxation. The balance would be subject to a 35 percent tax rate. The lower estate tax infuriated some Democrats who were already unhappy with Obama for agreeing to extend tax cuts for individuals making more than $200,000 and couples making more than $250,000. “This administration fights for nothing,” said Rep. David Wu, D-Ore. The estate tax was repealed for 2010. But under current law, it is scheduled to return next year with a top rate of 55 percent on the portion of estates above $1 million – $2 million for couples. House Democratic leaders want to bring back the 2009 estate tax levels. That year, individuals could pass $3.5 million to their heirs, tax-free. Couples could pass $7 million, with a little tax planning, and the balance was taxed at a top rate of 45 percent. House Democrats said they are considering a vote to impose the higher estate tax, perhaps as an amendment to the package. But even critics of the lower estate tax say they expect the package to be enacted without changes. “Let’s find out if Republicans really want to jeopardize income tax, payroll tax and estate tax relief for every American in order to provide a budget-busting bonanza to the country’s richest estates,” Rep. Chris Van Hollen, D-Md., wrote in an op-ed in Wednesday’s Washington Post. “House Democrats think this trade-off should be debated and voted on in the light of day.” Rep. Bill Pascrell Jr., D-N.J., said, “We can jump up and down all we want about the higher-end estate taxes, and I don’t think anything’s going to change because the Senate isn’t going to change it.” Thirty-one members of the conservative Blue Dog Democrats sent a letter to House Speaker Nancy Pelosi urging quick passage of the bill. “It is time for us to put aside the partisan talking points and accomplish what the American people sent us here to do,” said the letter.

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Michael Pento: Wall Street Gives Uncle Sam Too Much Credit

December 15, 2010

Despite the fact that the S&P is up over 80% in the last 21 months, US financial firms are currently tripping over each other in their zeal to raise their S&P 500 and GDP targets for 2011. JPMorgan’s chief US equities strategist, Thomas Lee, came out on December 3rd with a target of 1425 on the S&P for 2011, which would be a 15 percent gain. Barclays Capital last Thursday released a 1420 estimate. Not to be outdone, Goldman Sachs also recently released its forecast, and it sees a more-than-20 percent increase next year, to 1450. Meanwhile, PIMCO’s idea of a “new normal” has translated into a 2011 GDP forecast raised from 2-2.5% to 3-3.5% due to “massive” government stimulus. In the midst of this collective ‘hurrah,’ very little attention is being paid to what is going on over in the bond market. With my due condolences to Fed Chairman Bernanke, the yield on the 10-year Treasury note has increased from 2.33% on October 8th to 3.29% today. And, if there is any notice at all given to that recent run-up in yields, it is merely explained away as a sign of robust growth returning to the economy. In reality, growth doesn’t cause an increase in interest rates; it is either lack of savings or inflation that is responsible. To refute the ‘robust growth’ reasoning, turn your attention to the fact that the spike in yields just happened to coincide with the news that the unemployment rate jumped to 9.8% in November. A slightly broader explanation for the surge in borrowing costs might be the failure of the Bowles-Simpson deficit commission to implement any cost cutting measures. Or, perhaps it was the intimation from Bernanke himself that QE III may already be under construction in his infamous interview on 60 Minutes. Or, maybe it is the fact that the $150.4 billion November budget deficit was the highest total for that month… ever, and was the 26th straight month of red ink! I often wonder to myself, where in the midst of all this good news do I summon a bearish attitude? I think it’s pretty clear that ‘robust growth’ is going the way of ‘green shoots’ and knickers – right into the dustbin of history. So, what will the increase in interest rates – ignored by all of Wall Street – actually mean for the economy in 2011? For starters, the National Home Price Index already fell 2% in the third quarter of 2010. On a national basis, home prices are 1.5% lower year-over-year, and 15 out of the 20 cities measured were down over the last 12 months. On a month-over-month basis, 18 cities posted a price decline in September, compared to 15 MoM drops in August, and just 8 cities experiencing price reductions in the July report. Therefore, home prices, which were already headed lower before this recent spike in mortgage rates, are set to take another tumble downward. According to Freddie Mac’s weekly survey of conforming mortgages, the average rate on the 30-year fixed is at its highest level in six months. 30-year rates averaged 4.61% for the week ending Dec. 9, up from 4.46% last week. It’s the fourth week in a row that the mortgage rate has increased. The ramifications for the real estate market and bank lending are clear. Lower home prices will send more mortgages under water and force many more homes into foreclosure. Higher borrowing costs will lower the demand for borrowing and place more strain on the capital of lending institutions. On top of that, household debt as a percentage of GDP still stands at a lofty 91%. It should be clear that with near double-digit unemployment, the last thing consumers can now tolerate is a significant increase in debt-service payments. The rising cost of money is even worse news for the federal government and its chronically ballooning debt problem. According to the Federal Reserve’s Flow of Funds Report, total non-financial debt reached an all-time high of $35.8 trillion in the third quarter of 2010. In fact, household debt, business debt, and government debt increased at a 4.2% annual rate last quarter. To put that record level of nominal debt into perspective: in 1980, the total non-financial debt-to-GDP ratio was 144%. In the height of the credit boom, at the end of 2007, that figure was 226%. Today, the figure stands at a mind-blowing 243%! So you can forget about all that deleveraging talk. The US is in fact still leveraging up, both in nominal terms and as a percentage of GDP. I think the rising cost of money will become the story of 2011. Its effect on consumers, the real estate market, and government borrowing costs will be profound. Apparently, most major brokerage firms have no fear of soaring interest rates causing our economy to implode. However, it’s clear to me that the bond market has already started to crack due to inflation and massive oversupply from the Treasury. Prudent investors should think twice before overlooking what could be the initial holes in the biggest bubble in world history – the full faith and credit of the United States. Michael Pento is the Senior Economist for Euro Pacific Capital

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Andrew Fieldhouse: Any Payroll Tax Cut Should Be Designed Not to Hurt Lower-Income Workers

December 15, 2010

Under the tax cut package negotiated by President Obama and Senate Republicans, a one-year 2 percent payroll tax cut would be substituted for the extension of the Making Work Pay (MWP) refundable tax credit proposed in the President’s budget request for fiscal year 2011. Many liberals have objected to the payroll tax credit on political grounds because it potentially undermines the dedicated funding source for Social Security, but there is also a compelling economic argument against this trade-off. While the payroll tax cut comes at a much higher price tag and would thus have a greater net impact on job creation, the cut would actually lower disposable income for all tax filers earning less than $20,000 a year. Dedicating the revenue associated with the payroll tax cut to an expanded MWP refundable credit would address both concerns. Alternatively, if political constraints require a tax cut rather than a refundable credit, we recommend adding a “hold harmless” provision to the payroll tax holiday to protect lower-income earners from seeing their disposable income reduced. The “hold harmless” provision would be relatively inexpensive, carry a particularly high “bang per buck” (by increasing disposable income of those individuals with the highest marginal propensity to consume), and help alleviate the rise in poverty associated with the recession. The MWP refundable tax credit — the largest tax provision of the American Recovery and Reinvestment Act — refunds 6.2 percent of earned income up to a maximum credit of $400 for individuals ($800 for joint filers). Making Work Pay also included a phase-out of 2 percent of income on earnings above $75,000 for income ($150,000 for joint filers), so individuals earning over $95,000 ($190,000 for joint filers) would not receive any credit. The payroll tax cut, on the other hand, would temporarily reduce payroll taxes from 6.2 to 4.2 percent (on the employee side only) for all tax filers. The taxable earnings threshold for Social Security payroll taxes is currently set at $106,800 — above which no Federal Insurance Contribution Act (FICA) taxes are charged — so the maximum credit under the payroll tax cut would be $2,136. Because of the higher cap and lack of a phase-out threshold for higher-income earners, the payroll tax cut would increase disposable income for almost all tax filers. The payroll tax cut would, however, hurt individuals earning less than $20,000 relative to the MWP credit because of the slower phase-in rate and lack of refundability. For example, a tax filer earning $10,000 would see a $400 credit under MWP (having hit the maximum credit amount) but only a $200 credit under the payroll tax cut. The breakeven point for a lower-income tax filer would be $20,000, where the value of the 2 percent payroll tax cut would rise to the $400 maximum credit under Making Work Pay. Thus, compared to the president’s proposal to extend Making Work Pay, the payroll tax cut serves as a tax increase for all earners making less than $20,000. Economic theory suggests that adding a “hold harmless” provision would see a very high “bang per buck” and would pump even more stimulus into an economy that desperately needs to create jobs. Econometric evidence is also supportive of the higher economic return on refundable tax credits than many other short-term countercyclical policies. Moody’s Analytics chief economist Mark Zandi estimates that the payroll tax credit will see $1.09 in economic activity for every dollar spent, a less cost effective stimulus than the Child Tax Credit ($1.38), Earned Income Tax Credit ($1.24), or MWP ($1.17) refundable credits. By way of contrast, extensions of the Bush income tax cuts would generate only 35 cents on the dollar and the “accelerated depreciation” business expending credit would yield only 24 cents on the dollar. We estimate that the additional estate tax relief ($25 billion more expensive than reinstatement at the 2009 parameters) would have a much lower — indeed negligible — impact on economic activity and employment. While many liberals would have designed a tax relief and stimulus package quite differently (particularly with regards to the estate tax), the projected economic impact of the package is nonetheless compelling in many respects. For instance, the Center on Budget and Policy Priorities (CBPP) estimates that the expanded EITC, the CTC, and the payroll tax cut will keep 2.4 million Americans — half of them children — out of poverty. Given that poverty climbed to a 15-year high of 14.3 percent in 2009 and is likely to climb higher in 2010, cutting the disposable income of working Americans earning less than $20,000 annually would unconscionably worsen poverty in America. CBPP estimates that continuing the refundable MWP tax credit instead of enacting a nonrefundable payroll tax cut would keep an additional 500,000 Americans out from under the poverty line. Based on the Tax Policy Center’s distributional analysis of the two tax cuts, we estimate that a “hold harmless” provision for low-income workers would cost roughly $6.5 billion. The Congressional Budget Office estimates that the payroll tax cut would cost $112 billion, so both the tax cut and the “hold harmless” provision could be funded under the $120 billion placeholder in the negotiated tax cut deal. While costly extensions of the Bush tax cuts for the wealthy and additional estate tax relief may be the concessions to Republican lawmakers needed to move any additional stimulus, including middle class tax relief, there is no defensible reason to concede a tax hike on those earning less than $20,000. Short of replacing the entire payroll tax cut with a more progressive and stimulative refundable tax credit, a “hold harmless” provision would make for sound economic and social policy.

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Marian Salzman: Tapping Consumer Minitrends: Predictions for 2011

December 14, 2010

This is the 11th in a series of 12 posts expounding on the 2011 forecasts in the annual trends report from Salzman, president of Euro RSCG Worldwide PR and an internationally respected trendspotter. How does a trend get legs? Some trends start small and grow elephantine as if by force of nature, like the rise of women in power and the strength of Asia, both unstoppable trends here for the long term. Others, especially the ones that really spell opportunity for innovators, can need nudges — as well as that special brand of foresight that always looks prescient in retrospect. The people who succeed in today’s fast-paced world are those who have their eyes on the future and on such opportunities. Microtrends: The Small Forces Behind Tomorrow’s Big Changes , the book by Mark Penn, worldwide CEO of Burson-Marsteller, who writes a weekly “Microtrends” column in The Wall Street Journal and was the pollster who identified soccer moms in 1996, is perhaps the definitive source on minitrends, but he didn’t see that the U.S. election was one big trend: Change. That said, minitrends are exactly what communications people can tap to generate news, to be in and of newsmaking. A trend’s growth factor depends, like all things do, on timing: Is the right technology in place in the right hands for a tech trend to take off? Or, if it’s a new product or service, has it hit the price-point sweet spot in such a way as to get a handle with the right number of the right people? Here are some minitrends I’m calling out for 2011: The rise of African consumers. The continent of Africa has more than 1 billion people, with 35 democracies (compared with nine a decade ago). And as an “emerging market,” investment bankers are bullish on it , citing the IMF’s forecast for a growing GDP in sub-Saharan Africa–home to 84 percent of the continent’s population–at 5 percent this year, accelerating to 5.5 percent in 2011. Havas Worldwide, Euro RSCG Worldwide PR’s parent, has invested in South Africa, such as with a sports and entertainment marketing arm , and, indeed, South Africa is increasingly seen as an entry point for doing business on the continent in various industries, but the trend will be pan-African . MIT’s Technology Review reported that cell phones are one technology that have migrated well to Africa despite the poor infrastructure and political instability that have been barriers in the past. The report described customers using them for applications including digital banking and payments. Leading to another minitrend… Money-transfer services. This is mobile banking, aka mBanking or SMS banking. A BusinessWeek report (in 2007) quoting forecasts from Nokia Corp. estimated worldwide mobile subscriptions to grow to 5 billion by 2015, when two-thirds of the people on earth will have phones. Clearly, while mobile banking spells convenience in the developed world, in the developing world it can mean the difference between banking and not banking . TMCnet has cited reports that emerging markets will collectively compose about 60 percent of the mobile banking market share in 2013. Gavin Krugel, director of mobile banking strategy at the GSMA , “goes a step further,” says Mint.com, claiming that ‘…one billion consumers in the world have a mobile phone but no access to a bank account.’” The GSMA Development Fund has started Mobile Money for the Unbanked , and its intention is to deliver banking services to those who live under U.S.$2 per day. Mobile health care. Our colleagues at Havas Health, Larry Mickelberg in particular, tipped us off to this trend. Vodafone, which Technology Review cited as having big expansion plans for Africa, estimated in 2009 at the Mobile World Congress that there are 2.2 billion mobile phones in the developing world but only 11 million hospital beds. The U.N. Foundation reports on its initiatives at the intersection of mobile tech and health care. In South Africa, for example, Project Masiluleke’s AIDS hotline through SMS showed a 350 percent call volume increase (click on the report’s Current Impact & Future Needs link). This all demonstrates — as I said in a previous trend — the strong benefits for traditional businesses that adopt social-good profits into their mission. For health nuts in the developed world, medical apps for smart phones — did you know you could track your blood pressure with your iPhone or Android ? — are the latest craze. A smarter way to read. Mobile readers are, of course, here to stay, with reports that the iPad tore out of Apple stores at a rate of 8.8 per hour on the recent Black Friday. Estimates are calling for about 7.1 million iPads to be sold this year, doubling in 2011 and nearly tripling in 2012. E-readers are already great ways to read magazines and newspapers, but new free apps such as Flipboard , which put people’s SoMe shares into magazine format (flipping pages) for easy readability, make these devices smarter and more ergonomic all the time. Jeff Bezos told TechCrunch that dropping the price of the Kindle — whose sales beat hardcover book sales at Amazon by a rate of 143 to 100 — to $189 saw sales triple. So even though conversations might continue about people “preferring” real books and magazines to e-readers, great interfaces such as The New York Times app — and one the Times touted, Reuters News Pro — make reading even complex articles onscreen perfectly comfortable. There’s every gain in portability, too; they don’t even have to be removed from carry-on luggage in the airport security line. Small-scale solar. Even though the recession has hit big solar projects in the developed world, in emerging markets I forecast small-scale solar energy growing in leaps. Renewable Energy World magazine is strong on technologies such as micro-inverters, which eliminate the need for a central inverter in a solar installation. Given that in 2009, it was reported that nearly 44 percent of the population in the developing world lacks electricity, it is also estimated that by 2020 developing countries–especially in Asia, Africa and Latin America — will represent huge markets for solar. The challenge of making such installations cost-effective, experts argue, lies also in getting these countries to adapt (and funding widespread initiatives to this end) to energy-efficient lightbulbs and other efficient appliances so that outdated household gear doesn’t put undue power demands on a system that indeed promises to change the face of the developed world’s energy-use patterns. As ever, technology is a key driver in minitrends; the developing world and mobile tech will prove to be a new direction for opportunities in the near future. Previously: “Mad as Hell–and Only Getting Madder” “Talk to the Hands” “Net Gain” “Public Mycasting System” “Booting Up” “Yes, We Can…Reinvent Ourselves” “Reinvention, Part II” “Separated at Worth” “Gender Bender” “Who’s in Control?” Tomorrow: Wrapping Up

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MIT Entrepreneurship Review: When Should You Think About Price?

December 14, 2010

A few years ago, I worked with a product manager for a medical device company who had a burning question for me. His game-changing product was ready to go, the sales force was lined up and beginning to make contacts with customers, and his CEO was expecting this to be a $100 M product. He now just needed to slap a price on it, and wanted to know what I thought. My response: you should have been thinking about this a long time ago. Pricing is an incredibly important aspect in the success of nearly every business. Yet somewhere in the commotion of building their enterprise, an entrepreneur often lets it slip through the cracks. Sooner or later (usually later, unfortunately) my medical device client’s question will pop up: “When should I start to think about price?” The answer is that if you have a business plan, a potential customer, a prototype, or anything beyond an idea on a napkin, you should already be thinking a lot about price. Generally speaking, if you find yourself asking that question, you are probably already late and need to start catching up. Over the next few months, we will dig into best practices and useful techniques to drive more profitable revenue in your business. However, we need to first examine the urgency of thinking about price early and often. For starters, price is one of the most effective levers a manager can pull to drive profits. But to effectively do so over the long-term, it cannot be a one-time decision. Pricing is a mindset that needs to be integrated throughout the entire lifecycle of your product and must infiltrate every functional area of your business. Effective pricing is driven by the value you are able to deliver to your customers. Managers must constantly assess this value and look for ways to increase it. In many cases, it is an economic value (e.g., labor savings, access to a new customer segment). This is most common in B2B markets. Sometimes there is a psychological value delivered (e.g., a “coolness” factor of a new gadget), which is often a factor in consumer markets. But to capture this value, to truly monetize your new business, you need to be thinking about price at all stages of the game. Launching Your Business This mindset is particularly necessary for entrepreneurs. When developing a business model or drafting your business plan, price (and accordingly, value) needs to be at the top of your mind. Why would anyone pay me for this? What are they getting? How will this specifically help to improve a company’s financial position? What are my customers using now (the next best competitive alternative, to be discussed more in a future article on quantifying value) and how is my solution better? Thinking about these questions from the moment of your business’s inception will ensure you are driving toward a profitable outcome — one where you are going to truly deliver value that the market will pay for. Remember that you are starting the business to make money, not to make stuff. The challenge for entrepreneurs is to succeed in this task by doing more with less. But the “less” comes through higher efficiency — a greater degree of focus in your actions — not through simply doing fewer things (or worse, just doing everything 50 percent of the way). Focusing on price at the planning stage and throughout the company’s lifecycle will help you keep your eye on the prize, and ensure you are spending your limited resources in the right areas — the ones that return the most money. So when you think about launching a new business, think about price. Launching New Products and Services All too often, the end goal of driving value is forgotten in the chase to make stuff. As the product begins to take shape, new features are added daily. Wouldn’t it be cool if we had an extra flashing light? It wouldn’t be hard to make the product function as a toaster, too, so let’s add that. The result of this product-centric process is a lot of time and money spent developing a more costly product that doesn’t deliver any more value to the market. When the product launches with the inevitably higher price required to cover the additional features, no one buys it, as the value delivered does not merit the high price. The product development and launch processes need to be done with price at the forefront. Will adding this feature allow us to capture higher profitability? Why? What is the value that the new feature delivers — is it a totally new value driver, or does it just increase the impact of the original value driver? Is this the most important value driver to my customer, or the 10th most important? Are the same customers interested in both of these value drivers? As an entrepreneur, your time and resources are stretched thin. Focus on developing your products in a way that creates the biggest impact on the most important value drivers. When you think about developing and launching your product, think about price. Finding and Meeting Customers Have you ever met with a potential customer, even just in exploratory conversations, having not given serious consideration to price? If so, fear not; you’re not alone. Entrepreneurs can easily get caught up with other aspects of the business and think that it’s not the “right time” to think about price. But what happens? A potential customer eventually asks, and you don’t have the answer. Do you throw out a number? Marginal cost plus 10 points? The first price mentioned to a customer, even if informally, creates a very powerful reference point. What you do today affects what your world looks like tomorrow. Pricing decisions are not made in a vacuum, and will not magically reset a year down the road when you’re ready to get into the black. Once a reference price is set, you’ve given customers an anchor that they will not quickly forget. Dramatic moves away from this initial price will not lead to pleasant conversations. What would your best customer say when you tell him or her that the price is about to double? And if you cut price in half, customers may wonder if you were being “fair” initially, or perhaps that the price is falling because no one is buying (and they can therefore get even further discounts). Instead, use these early conversations as a source of information to further develop your pricing decisions and understand how you can deliver value. Before you show up, do your research. Read a 10-K and find a line where you think you can have impact. Are you trying to impact a $1 million cost bucket, or a $500 million cost bucket? If a customer is focused on reducing costs, realize that a revenue driver may not be as attractive to them. Is there a better way to frame your value story? Talk specifically about how they would use the product in their company — what processes, divisions, people and financial line items would be affected. What are the most attractive aspects of this product and why? Don’t assume you know the answer — ask the question. Ask what could be done to improve the value of the product. When you are talking with customers, you need to be thinking about price. The “Right Time” for Pricing Thinking back to my medical device client and his innovative $100 million product, a major opportunity to drive profitability was lost by waiting until the 11th hour to think about price. After a few months of hard work using some of the strategies and tactics that we will discuss here in the coming months, the product launched at a price over ten times that of the current market leader and has been very successful. Even so, money was lost by not infusing price into the development process. For example, early stage consideration may have led them to develop studies to validate his performance claims, increase the speed of revenue growth and perhaps open additional segments in the short term. Who is to say it couldn’t have been a $500 million product? For all the reasons discussed here, the right time to think about pricing is now . Companies are by and large rational decision makers. They will buy when they get something in return that is greater than the opportunity cost. Understand why buying your product is a good decision, and use that information to become an even better supplier. In doing so, stay focused on monetizing your value at all stages of the game. Remember: you’re here to make profit, not to make products. (Special thanks go out to my friends and former colleagues on the Monitor Group’s pricing team, especially Georg, without whose support over the years, I would not have much to write about.) The post originally appeared on the MIT Entrepreneurship Review . It is written by Jim Schuchart , an MBA candidate at MIT Sloan who previously spent five years as a consultant at Monitor Group.

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EUR/USD: Trading the U.S. Consumer Price Report

December 14, 2010

EUR/USD: Trading the U.S. Consumer Price Report

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OPEC Weekly Oil Price Shots Up $2.90

December 13, 2010

OPEC Weekly Oil Price Shots Up $2.90

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Goldman Sachs Accused Of Trading Abuses By Dem Senator

December 10, 2010

Just as the housing market was tanking in 2007, Goldman Sachs tried to shove out investors who were betting against it, to secure the best price for itself, a Senator alleged Wednesday. An email in which a Goldman trader encouraged a colleague to “kill” other pessimistic bets — as he tried to strengthen the bank’s own short position — prompted Carl Levin, chairman of the Senate permanent subcommittee on investigations, to say Goldman perpetrated “trading abuse” and used a “short squeeze strategy” the Financial Times reports. Levin has accused Goldman, essentially, of attempting to artificially drive down the price of bets it wanted to make. After housing prices started to decline in 2006, and borrowers across the nation began a wave of defaults, the securities based on their mortgages began to lose value. Meanwhile, the price of insurance on these securities, which allowed investors effectively to bet against them, was rising. When the housing market tanked, Wall Street investors who had placed bets against it profited handsomely. Investors who kept piles of these mortgage-backed securities on their books, however, lost billions. Few understood just how explosive these securities were. Goldman’s response to Levin’s allegation: “This type of language sounds awful and is very disappointing, but it does not reflect the reality of what happened.” In the spring, when the SEC pursued civil fraud charges against Goldman, flamboyant emails from Goldman trader Fabrice “Fabulous Fab” Tourre caused some embarrassment for the bank and added evidence to the accusation that Goldman willfully sold bad deals to investors. (Goldman internal emails called these deals “sh–ty”.) Goldman paid $550 million to settle the SEC lawsuit — a record sum, but peanuts for a bank that earned $13.4 billion last year. The case against Tourre is ongoing.

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Anthony Tjan: In Negotiations, Play Stupid to Win Smart

December 7, 2010

In my last blog, I shared with you one of my partner’s sayings that he learned from his uncle, “play stupid, and win smart.” His uncle was a skilled poker player with an uncanny ability to hide his emotions. Other players bought into his “play stupid” routine, and he’d later disarm them with his winning hands. This is a real skill, since in general, the brain lags the mouth. Our impulse is to speak our minds, talk first, think and act later. As a natural extrovert, I never fully appreciated the importance of this play stupid, win smart philosophy until I reflected and noted common patterns in business negotiations and other high stakes tasks where pausing before reacting would have made a significant difference in the outcome. This has made me more cognizant to try (and this is difficult because emotions often override logic) to follow this DVR-inspired approach in important and sensitive business situations: Pause. Consider business situations as a mini movie in production in which you are the director. When you have any new and sudden disruption to filming (i.e. new information, a new competitive entrant, a new shift in available resources, etc.), the first call to action should be to take a pause. Play. Let the movie play out in your head and think about the various scenarios and how you can use the new information or situation to your advantage. Mute. Remind yourself to hit your internal mute button so that you keep your thinking to yourself unless there is a compelling reason to share. Think like a poker player and ask if there is any upside to sharing what you know with the counter-party. There usually isn’t. Rewind and Record Again. Appropriately reset your actions and hit “record” again to move toward your desired “win smart” ending. The act of pausing to contemplate the various scenarios that are likely to play out is critical. As in physics, every action has a equal and opposite reaction. The key is to avoid any unwanted consequences. In a recent negotiation with a company, it came to our attention that another party had put an offer on the table. It turned out that the other party was a group with whom we were actually planning to partner on the deal. We had proposed the opportunity to them shortly before the negotiation. My knee-jerk response was to call up the person with whom I had been dealing and offer some harsh criticism on what they had done and to effectively tell them that we were done working with them. Period. But I paused to ask myself how that course of action would benefit me. In truth, the only benefit would have been to make me feel better right at that moment. Unfortunately this seems to be a common mistake that people make in their “talk first” decision-making process in order to feel better in the moment — but it doesn’t move them toward their goal. Playing the movie forward and carefully considering the likely outcomes, I realized that remaining silent and using the knowledge to our advantage was a far better approach than flying off the handle. Why? Scenario A: Get mad, other party has no chance to explain themselves and our reaction will hinder the probability of working with them; Scenario B: Get mad before thinking about what alternative partners might do the deal with us, which may lead to no deal at all; Scenario C: Get mad, tell the other party we can do the deal on our own, which would have made them bid up the price on the deal to try to win it for themselves. We’d be putting the dog in the corner, so to speak, and they’d be left to bark or bite. By remaining silent, we could effectively play stupid and win smart. Having that knowledge gave us two pieces of valuable insight: first the other party showed how much they really wanted to do the deal, and second, their behavior to try and get the deal on their own illustrated a lack of professional protocol and gave us an early and helpful signal that this might not be the type of partner with whom we wanted to work. We quickly mobilized another partner on the deal and we proposed a joint deal at the original agreed-to price, which was accepted. It is too easy to forget the desired goal in moments of emotion. Here the goal was to win the deal at a reasonable price and silence and restraint were our best friends toward winning smart. This article first appeared on Harvard Business Publishing on November 30, 2010.

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Dan Dorfman: Jobs Shocker: Fact or Fiction?

December 5, 2010

It was big news over the weekend, front-page coverage everywhere — the unemployment shocker. That was Friday’s dismal November jobs report of a spurt in the month’s unemployment rate to 9.8% from 9.6%, an obvious sign of more economic distress. But how real were those numbers that came from the Bureau of Labor Statistics, which reported the creation of just 39,000 jobs, versus a widely expected addition to the employment rolls in some quarters of about 150,000 workers? Could the BLS report, like the illusion of a pool of water in the steaming desert, have been a mirage? The answer is an emphatic YES from TrimTabs Research, a West Coast liquidity tracker partially owned by Goldman Sachs whose TrimTabs clients include many of the country’s top hedge funds. The way TrimTabs figures it, the economy actually produced 117,000 new jobs in November, 78,000 more than what the BLS reported. Why such a disparity? As, Madeline Schnapp, TrimTabs economics skipper explains it, it’s a reflection of the radically different methodologies used by the two to determine the actual employment numbers. For example, the BLS derives its numbers through a survey of just 60,000 households, whereas TrimTabs’ figures are based on the taxes paid by all employees whose wages and salaries are subject to with-holding. Noting that the BLS is afflicted with the dilemma of having to make seasonal adjustments when it comes to issuing jobs numbers — which is especially difficult at this time of the year because of the heavy temporary retail hiring — she views its November report as a seasonally-adjusted fluke. “It’s like trying to hit a needle with a sledge hammer,” she says. “It ain’t easy.” Schnapp further believes the BLS numbers may also be fouled up because the agency failed to recognize that retailers hired their year-end workforce earlier this year than last year it did last year because of this year’s earlier launching of holiday sales. “We suspect,” she says, that October employment growth (a higher than expected 151,000 jobs) borrowed from November.” The BLS, which tells me it’s sticking by its November figures, is notorious for revising its monthly jobs numbers both up and down in ensuing months. And that’s precisely what Schnapp predicts will occur again with regard to the November report. In this case, she sees a sharp upward revision closer to the Trimtabs numbers. Interestingly, last Thursday Automatic Data Processing reported its closely watched monthly employment figures, which for November were closer to TrimTabs numbers than those of the BLS. ADP reported 93,000 new jobs, driven by growth in small business hiring. Schnapp rates the November employment showing (her estimated 117,000 job creations) as “okay, but not great,” noting a considerably higher number of new jobs (150,000 to 200,000 a month) are needed to keep pace with new entries into the work force. In recent weeks, a fair number of economists, given perkier retail numbers, including lively auto sales, and somewhat more positive consumer sentiment, have upgraded their GDP growth forecasts for 2011 to between 3% and 4%. The thought of a double-dip recession seems to have largely gone the way of the rotary telephone. Schnapp doesn’t share this ebullience. Her outlook: GDP growth next year will muddle along at about 2.5%, largely due to the drag from housing, the financial woes of local and state governments and a consumer population that is deleveraging. “We’re not on the road to a robust recovery, no way and not on your life, but stuck in a low growth mode for at least another year,” she says. “And don’t ignore the potential shockers, such as a spike in the price of oil, Iran going nuclear or North Korea attacking South Korea. As for the stock market, Schnapp sees a ho-hum 2011, with the S&P 500 (currently around 1,225) trading sideways in a narrow range of say 1,050 on the downside and 1,225 on the upside. In other words, a go-nowhere stock market; so don’t be hot to trot. What do you think? E-mail me at Dandordan@aol.com

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Jacob S. Hacker and Paul Pierson: The High Costs of Cheap Talk

November 30, 2010

Perhaps the best that can be said about President Obama’s preemptive sacrifice to the deficit-reduction gods — a two-year freeze on pay for non-military federal workers — is that it represents small change. Amid widespread calls for big immediate cutbacks that could endanger a painfully weak recovery, the president’s proposal might seem a modest offering to calm the screeching deficit hawks. But the price isn’t as small as the numbers suggest. In one fell swoop, the president has validated three dangerous myths that, if accepted, are likely to consign the United States to years of economic struggle and a continued widening of the huge gap in our society between the richest and the rest. Myth #1: Public-sector workers are the root of our economic problems Anyone who watches Fox on a regular basis might be forgiven for thinking that the biggest problem facing our nation is overpaid public workers. So it’s worth pointing out that study after study has shown that public workers are generally underpaid. Yes, federal employees don’t receive the bottom-floor wages seen in private service jobs — a border patrol agent may well make more than a private security employee — but neither do we see the exorbitant pay at the top. As the economist Nancy Folbre puts it, “Some oinking can definitely be heard out there in the labor market, but anyone willing to follow the numbers can tell that the biggest piggies are not those employed by the federal government.” But these statistics are somewhat beside the point. The deeper problem is that there’s no credible case that the pay of public-sector workers has anything to do with our current crisis. After all, if public-sector workers are overpaid today, they were also overpaid a year before the economy tanked. By contrast, we know that many of the private-sector “piggies” on Wall Street had a lot to do with our current crisis. Their pay, however, is not freezing, but getting hotter and hotter. Myth #2: The number one priority is to cut spending now to reduce the deficit Most Americans think that getting the economy back on track is far more important than the tackling the deficit. In Washington, however, fiscal austerity–or at least lip service to it–has become the defining test of seriousness. Perhaps it’s easier to feel this way when your family, friends, and neighbors are not among the millions of Americans who are out of work or working part time despite wanting a full-time job. How else can we explain why Congress cannot muster sufficient support to extend unemployment benefits to the two million Americans whose benefits are set to expire at the end of this month even as its leaders are poised, with the president’s tacit support, to extend the Bush tax cuts for the wealthiest Americans — at a cost that vastly, vastly exceeds the savings produced by a federal spending freeze? Getting the deficit under control requires an economic recovery. After all, this was the story of the 1990s. The real work of tackling the national debt is figuring out a long-term plan that will bring spending and revenues in line over the coming decades, and this work will only succeed against the backdrop of a reasonably strong economy. In the current context, deficit fixation is actually a dangerous distraction from the real and present danger that our economy will slip into stagnation. Myth #3: There’s no will or ability to challenge the runaway gains at the top of the economic ladder even as middle-class Americans lose ground Many who accept arguments #1 and #2 nonetheless call for “political realism.” They say we have to take into account that there’s not sufficient political support for any proposal that involves tackling inequality or raising taxes, even taxes on those who have done the best over the last generation. The blueprint released by the bipartisan cochairs of the president’s deficit commission–which will slash spending on Medicare, Social Security, and vital public services while tilting the tax code in favor of the top — appears to buy into just this sort of depressing realism. Perhaps this is also the president’s rationale for reinforcing the two bad arguments just discussed; he has to bow to the new priorities. But it is simply not the case that Americans’ priorities are Washington’s. Even among the more conservative electorate that went to the polls in November, the majority was against extending the Bush tax cuts for the richest, and the number one concern by far was the economy. Making the case for a strong response to our present crisis and criticizing those who talk about the need for immediate restraint yet continue to shower tax cuts and other goodies on the most fortunate wouldn’t just be good economics. It would also be good politics. Too bad it’s a course the president seems reluctant to take.

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Zachary Karabell: Cancun and Climate: Government Won’t Act, But Business Will

November 29, 2010

Over the next two weeks, Cancun will be in the spotlight for something other than spring break madness. As host of the annual climate summit that once saw such promise in Kyoto in 1997, Cancun in 2010 is framed by the spectacular failure of last year’s Copenhagen talks and by the stark realization that nearly 200 nations simply cannot agree on anything of consequence. No matter how unequivocal the scientific evidence is that climate is changing and human activity is a central factor, nearly 7 billion people loosely represented by a few hundred governments are agreed on nothing. We know the reasons why action on climate is frozen: emerging countries such as China, India and Brazil will not accept limits that stifle their rapid emergence; developed countries such as the United States and the European Union can’t or won’t subsidize efforts abroad; and the U.S. federal government can’t even agree on binding limits for America itself. While everyone shares the sentiment that they do not want to destroy the earth or ruin it for their grandchildren, there is no consensus on how to shift global economic activity in a more sustainable direction. That should be cause for despair, and much of the commentary this week will likely conclude that we are on an inexorable and negative path towards deleterious climate change. But that is only because we collectively focus too much on government and its failings rather than on business and its successes. For many in the self-identified community that identifies climate change as humanity’s greatest challenge, big business is seen as an obstacle to a better future. That attitude is a legacy of the 1970s, when the green movement ranked big business as a culprit that couldn’t be redeemed but might be coerced. Today, however, global businesses aren’t being pulled kicking and screaming to innovate and become more sustainable: they are racing ahead of government and may in the end be the one real hope for the future. They aren’t doing so because management has gone green or awoken to some moral environmental imperative. They’ve done so because of the current imperatives of the market: with the price of raw materials skyrocketing in the face of China rapid industrialization and economic growth in the affluent world flat-lining, companies have ample new markets but no real pricing power. In short, they can sell, but any rising input costs they have to absorb. That is a powerful spur to use less stuff, to become more efficient, and to embrace sustainable growth. My recent book Sustainable Excellence (co-authored with Aron Cramer) charts just how companies are doing that. They are too numerous to list, and range from behemoths such as Walmart (yes, Walmart – which has aggressively pushed for more sustainable products), Unilever, Nike, Marks & Spencer, Nestle, and Shell to newer less familiar companies such as Better Place (which is trying to redefine transportation), Masdar (which is building a carbon-neutral city in the deserts of Arabia), Schneider (which is at the forefront of meters and energy efficiency), ICICI Bank (an Indian financial power that is addressing rural poverty), and hundreds of others. They are addressing consumer needs and recasting global supply chains, and doing so in a way that reduces their costs and thus, their carbon footprint. They are doing so largely in spite of government inaction and inconsistency. And they show no signs of reducing their efforts after the financial crisis of the past two years. If anything, that crisis led to redoubled efforts to use less stuff and enhance efficiency. And so while there will be hand wringing and consternation at what Cancun will not achieve, that should be placed against a backdrop of incredible dynamism in corporate land, driven not by idealism but by the urgency of the market. Costs of everything raw are spiking; that includes food, fertilizer, iron ore, copper, rare earths, oil, and even coal in China. And with costs soaring, innovation is as well. It would be lovely if governments were to find concord, and better for the world. But it won’t happen in the coming weeks, and it may not need to. Humanity has always been in tug-of-war between the ability to destroy life and the inexorable capacity to save it and create it. We don’t know which force will win in the future. But we are here now, and that says something about which has come out on top so far. This post originally appeared at www.time.com at http://curiouscapitalist.blogs.time.com

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Christopher Brauchli: Flying the Unfriendly Skies

November 26, 2010

“I travel not to go anywhere but to go. I travel for travel’s sake. The great affair is to move.” – Robert Louis Stevenson, Herewith an explanation of what might appear to the casual traveler to be nothing more than the kind of corporate greed to which we have become accustomed. It is an explanation for the reason for changes that airlines have introduced to the traveler that significantly increase the cost of travel while not affecting the price of tickets. This apparent anomaly has a simple explanation that is often overlooked. Before offering the explanation, however, it is helpful to look at some examples of increases in the cost of travel. For purposes of this piece we focus on the Friendly Skies of United Airlines (UAL) although the changes described and the motives as well, are equally applicable to those less friendly airlines. Among the first of recent changes was one affecting passengers’ suitcases that was announced in about 2008. For many years the suitcase accompanied the traveler as a matter of right without additional cost. Today the charge for the first suitcase at UAL is $25 and for the second $35. In order to lessen the resentment many travelers felt at this additional charge, UAL came up with a solution. It sent customers an e-mail announcing that “United is the first airline to save you time and money with this simple and convenient service.” The simple and convenient service required the passenger to pack a suitcase a couple days before traveling and then call FedEx to pick up the suitcase and ship it to the traveler’s destination. Travelers who took advantage of this service did not have to pay UAL $25 for checking the suitcase. Instead they paid FedEx somewhere between $149 and $250, depending on where the suitcase was going, a figure that according to UAL’s website, has now dropped to $99 per bag. Ever looking for new ways to improve the convenience for suitcases’ travels, UAL has added a new luggage service for those who don’t want to use FedEx. According to its website the traveler can pay the airline $349 for the one year privilege of checking two bags each time the traveler flies. That is much cheaper for the frequent flier than paying FedEx and more convenient than having to pack a couple days before traveling. Having taken care of suitcases, UAL came up with another new idea. This improvement involved travelers’ comfort. In the cheap seat section of the airplane it installed a few rows of seats where what would have been considered intolerable leg space 20 years ago became highly desirable. At first the seats were given at no cost to those who had attained privileged status with the airline. Then it occurred to someone that the company could make them available to others by charging an additional amount. To make the offer attractive, those seats were advertised for sale with pictures of a flyer with legs stretching into infinity which, of course, is no reflection on how much space is actually between those seats. Travelers flying from Chicago to Madison pay $9 for the better seats. Those flying from Denver to Seattle pay $49. Now, UAL has come up with the newest, most exciting innovation yet. For years it has encouraged people to become members of their Mileage Plus Program because of all the good things that accompany the accumulation of great numbers of miles. One of the best was using the miles to remove oneself from the cheap seats into the business class seats. The number of miles required to accomplish this feat depended on the distance travelled and required the purchase of a more expensive coach class ticket than the least expensive one being advertised. Realizing that travelers didn’t like to have to buy a more expensive ticket in order to upgrade, UAL changed the rules. Anyone wishing to upgrade can now buy the cheapest ticket being advertised and use miles to upgrade. There is, however, a catch. It had the catchy name of “co-pay.” With the new program, a member of Mileage Plus who wants to use miles to upgrade from coach to business class when going to Europe, buys the cheapest coach ticket, takes miles from the mileage plus account and then participates with UAL in the “co-pay.” The co-pay for those traveling to Europe is $900 for round trip travel in addition to the price of the ticket. Those traveling to the Far East pay $1,000. And now, the reason for these additional charges that have helped the airlines keep ticket prices low. The answer can be found in taxes. A 7.5% excise tax is imposed on passenger fares. The excise tax is not imposed on the assorted fees charged passengers described above including, presumably, the co-pays. No one likes paying taxes. UAL and other airlines have figured out ways of avoiding them. No one likes being gouged. Airline passengers have not yet figured out how to avoid that. Christopher Brauchli can be e-mailed at brauchli.56@post.harvard.edu. For political commentary see his web page at humanraceandothersports.com

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TV Sales: Sharp Holiday Price Drops Seen For Flat-Panel TVs

November 26, 2010

SEATTLE — If you’re in the market for a new flat-panel TV, it’s a good time to buy. TV prices usually drop from year to year, and the decline will be sharp this season thanks to a supply glut. Consumers have been holding out all year for better deals, leaving lots of unsold televisions on the shelves. Prices for high-definition LCD TVs will fall more than twice as fast as they have so far this year as manufacturers and retailers clear out inventory, analysts predict. New sets will also be cheaper because TV makers have been getting great deals on the most expensive parts, the glass LCD panels. However, DisplaySearch analyst Paul Gagnon expects prices for those components to level off early next year, so discounts won’t be this steep again until the holidays next year, or even later. For the consumer, that means that if you pull the trigger on a new set in the next few months, you probably won’t be kicking yourself next year for not waiting a little longer. The law of supply and demand is at work here: _ A TV-buying spree in late 2009 led to component shortages, which kept prices high in early 2010. That discouraged consumers. _ Makers of LCD panels invested profits from last year’s buying spree in more manufacturing capacity. Thinking 2010 would be as strong as 2009, they flooded the market. But the economy didn’t improve as expected. _ As a result, there’s an oversupply of panels, and prices started dropping over the summer. That means cheaper sets should be making their way to stores now. Already, Wal-Mart Stores Inc. has slashed prices for some older models. Among the deals: a 32-inch Vizio set that went to $298 from $348. Amazon.com Inc. and Best Buy Co. are starting to advertise deals, too. Some of the best deals this season will be on 32-inch LCD TVs, the most popular size. They will sell for rock-bottom rates of $300 or less, compared with about $400 last year. That’s because manufacturers are selling raw panels of that size for only slightly more than the cost of making them – $160 to $170 each, far less than the $210 to $220 they fetched earlier this year. Prices for 40-inch and 42-inch sets will drop about 20 percent, approaching $500, said Gagnon, the DisplaySearch analyst. Deep price cuts also are coming for higher-end models, including LCD TVs with LED backlights, which use less energy than regular sets and can be thinner or provide improved picture quality. Manufacturers have increased production capacity for parts specific to LED sets; that will drive down prices for components and, ultimately, the TVs themselves. Overall, good deals will be 15 percent to 20 percent lower than holiday 2009 prices for regular LCD TVs. The price drop had been slimmer at 7 percent earlier this year, Gagnon says, and the decline should return to the single digits by spring. Of course, the longer a buyer waits, the lower the prices go. But that has to be weighed against the value of having a new TV. If a 32-inch set turns out to be $20 cheaper next summer, the buyer could have gotten six months of better TV for $20. “In this industry you always know that in the future, you will buy new technology at a lower price. That’s not the point,” said Sweta Dash, an analyst at iSuppli Corp. “Especially this holiday, the price you will see is very good.” ___ AP Retail Writer Mae Anderson in New York contributed to this report.

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Oil Scene: Weak dollar may be behind talk of higher price bar

November 21, 2010

Oil Scene: Weak dollar may be behind talk of higher price bar

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Charles Gasparino: GM IPO Continues Trend of Rewarding Those Who Failed

November 18, 2010

What do the General Motors and the nation’s big banks have in common? They’ve both been bailed out by the federal government and, were it not for government largess, neither would be here today celebrating the automaker’s largely successful stock offering. It’s an irony that has escaped most of the media amid all the hoopla over GM’s “initial public offering,” which is an odd way to describe what is happening now regarding GM’s return to the public markets. IPOs, of course, are usually reserved for relatively new companies that have created new products or services in such a way that investors see promise in their future. GM, on the other hand, is a washed up maker or inferior cars. Its laundry list of problems — from failing to compete with Japanese brands to a bloated work force — pushed the company into bankruptcy in 2009, from which it emerged only after a $50 billion bailout from the government. Thanks to yesterday’s stock sale, GM is about 2/3 the way through paying back the money it owes the taxpayer. The rest is expected to be paid back over the next few years. So far, it’s unclear if the taxpayers will benefit from any of this; now stripped of many of its liabilities and flush with government handouts, GM is marginally profitable again. The stock opened at a healthy $33 a share (it “popped” on the opening a couple bucks before coming down a bit in price). But some analysts say it will have to double in value over the next year or so for the taxpayer to be made whole. While it’s unclear whether taxpayers will make money out the GM fiasco, it’s pretty clear Wall Street already has. Yesterday’s rally in the stock market was attributed to strong demand for the IPO of a company designated Too Big To Fail. Traders who managed to get their hands on the new GM shares were “flipping” them or selling them sometime after the market opened, which is why the price shot up at the opening before settling down as investors took profits on the initial run up. Even worse were the fees raked in by the big Wall Street firms that underwrote the stock issue. Let’s not forget that GM has company on the government’s Too Big To Fail list, and it’s the big Wall Street firms like Morgan Stanley, JP Morgan, Bank of America, Goldman Sachs and Citigroup, the top underwriters of the deal. Combined, the banks received $135 billion in bailout money during the 2008 financial crisis, and that doesn’t consider the countless billions they received through guarantees and other subsidies over the past two years. They are said to split a little under $120 million in fees, which we are all told is low compared to some other corporate deals. Recently some people at the Wall Street firms have complained not just about the relatively low fees but also about the fact that they had to split those fees with several minority-owned firms, which also have positions in the underwriting group. These outfits, of course, received a much smaller portion of the deal, so they made less money than the big firms. But executives at the large banks noted that many of the minority firms and their executives have made political donations to President Obama, which given the government’s ownership stake in the company, accounted for their presence on the deal. Give me a break. The saddest part about this nonsense is that it actually made its way into the deal’s coverage by a financial news television station (hint: it’s not the one I now work for now). Why is it such nonsense? Aside from the fact that many of GMs’ employees are in fact minorities, that all of the big firms in the main underwriting group were also big contributors to the Obama presidential campaign (for more on this check out my new book Bought and Paid for ), or that in just one example of political cronyism, Tom Nides, the No. 2 executive at lead underwriter Morgan Stanley has been appointed for a top position in the Obama White House, not one minority-owned firm needed a bailout in 2008. In other words, maybe it should be the minority-owned firms running the deal instead of the likes of Morgan Stanley and Goldman Sachs?

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Dan Solin: WSJ Misses the Point on 401(k) Fees

November 17, 2010

In an informative article , Eleanor Laise at the Wall Street Journal laments the limited progress the U.S. Department of Labor has made with its new rules for 401(k) fee disclosure. Ms. Laise bemoaned the lack of transparency concerning 12b-1 fees, which she correctly described as “the murkiest of mutual-fund expenses.” Unfortunately, the thrust of her article misses the forest for the trees. Why focus on disclosing how bad the system is, rather than fixing it? Full disclosure of 401(k) fees, while a step in the right direction, will do little to remedy a system that practically insures most Americans will retire, if at all, with a sharply diminished quality of life. Here’s what real reform would entail: 1. Require all advisers to 401(k) plans to be “real” fiduciaries . Technically, this would mean their agreement to serve as as “ERISA 3(38) fiduciaries”. They could have no conflicts of interest and would be required to act in the best interest of the beneficiaries of the plan. The advisers would confirm their fiduciary status in a written agreement and would agree to accept 100% of the liability for the selection and monitoring of investment options in the plan. 2. Abolish revenue sharing : The practice of accepting kickbacks from fund families as the price of admission to a 401(k) plan’s investment options destroys both the appearance and the reality of objective investment advice. Plan advisers should be required to select funds based on merit alone, and not on the size of the kickback. 3. Require all plans to have at least five pre-allocated, globally diversified portfolios of low cost stock and bond index funds, passively managed funds or Exchange Traded Funds in the plan . The portfolios would be of varying risk levels, ranging from conservative to aggressive. What sense does it make to provide plan participants with a dizzying array of investment options? Most employees have no idea how to put together a risk adjusted portfolio suitable for them. The only reason most of the funds in a typical plan are high expense ratio, underperforming, actively managed funds is because those funds generate the maximum revenues for the fund families and the advisers. Returns of plan participants could be increased by as much as 200% if low cost, indexed based portfolios were substituted for these funds. That’s the way the massive $240 billion 401(k) plan for government employees is structured. It’s difficult for most Americans to understand why their congressional representative have a better plan than theirs. Those employees who persist in the discredited belief they can “beat the markets” could have the option of a directed brokerage account where they could freely gamble with their retirement funds. 4. Require advisers to plans to provide real investment advice to plan participants. Currently, most advisers “educate” but will not provide “investment advice” to plan participants. Why? Because they are concerned about liability — as they should be under the present system. An adviser who is providing the options I am recommending has nothing to fear. His advice is based on reams of academic data. Advisers collect a hefty fee for their services. If they won’t stand behind their advice, what value are they to the plan participants? Of course, fees should be transparent and unbundled. They should also be low. Low fees correlate directly with higher returns. But the fee tail should not wag the 401(k) dog. The entire system is broken and needs to be fixed. Taking baby steps is not the answer. 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. Here is the trailer for my new book, Timeless Investment Advice .

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Tom Grasty: Thinking "Inside" the Box: How Freeloaders Can Make You a Load of Cash

November 16, 2010

Maybe it’s the low barrier to entry. Maybe it’s a downtrodden economy that’s forced a displaced workforce to become more entrepreneurial. Or maybe, to update the old adage, there really is “gold in them thar clouds.” Whatever it is, more and more people lately seem to be looking to the sky in search of that proverbial pot of gold. As a former entertainment executive turned internet entrepreneur, I, too, have been looking beyond the horizon. And the question I’m asked most often (interestingly, the inquiry often comes before I even tell them what our sites does) is this: “How are you going to make money?” When I tell them the plan isn’t to charge for our service (our service being a collaborative online video editing platform, thank you for asking), the reaction is always the same: “So you’ll be giving it away?” “Actually, yes,” I reply. “For a while, anyway.” What happens next never fails. They smile, arch their eyebrows and nod their heads in a slow, synchronous bob. Not a word is spoken. But I know what they’re thinking: “Well, that’s certainly one heck of a way to run a business.” As it turns out, it actually is. “Free” has long been a mantra for aspiring entrepreneurs and investors willing to cut the cost of their wares to as close to nothing as possible in exchange for traffic that can be converted downstream. And while “free” may fuel a business’ growth in terms of name recognition and word-of-mouth, the concept of “free” often runs out of gas when it comes to actually filling the financial tank. “Free,” it turns out, is a fickle thing. Consumers typically don’t like to pay for something they’ve been getting for nothing. But then again, consumers can surprise you. Just ask Jason Rosenthal. Last March, Rosenthal took the CEO reins of Ning, the popular online service that allows users to create and share their own customizable social networks. Shortly after being promoted, Rosenthal announced he was going to take a hard look at how Ning did business. Thirty days later, Rosenthal fired a fateful shot across the “freemium” model’s bow, “This process has brought real clarity to what’s working and what’s not, and what we need to do to make Ning a big success.” And with that, Ning bid farewell to “free”: If you wanted to keep your Ning account, it was going to cost you. The ability to let consumers design their own social network, and do so for free (the core offering at the center of Ning’s value proposition), had often been cited as a shining example of how to leverage a free, open online platform into massive market share with impressive customer acquisition to boot. The conventional wisdom last March, therefore, was that Rosenthal’s decision to abandon the “freemium” model would cost Ning dearly. But that hasn’t happened. According to Forbes tech writer, Taylor Buley, since freeing themselves of “freemium,” 35,000 of the 300,000 Ning networks have signed up for paid plans. Of course, the flip side of that equation is that 265,000 presumably balked at Rosenthal’s “pay or play” ultimatum. But no matter, Buley maintains, “Ning wooed nearly 12% of its non-paying customers into opening up their wallet — more than double its previous conversion rate. Ning’s paying customer base is three times its previous size.” In hindsight, things turned out quite well for Jason Rosenthal. After five years in the marketplace, the company is on track to turn a profit early next year. But it could have just as easily gone off the tracks. What Rosenthal did was risky. At the time, his decision to discontinue non-paying sites left many in the social media space questioning the move: “What could Rosenthal possibly be thinking abandoning a business model that’s at the core of Ning’s success?” I submit Jason Rosenthal was thinking inside the box. Don’t you arch your eyebrows at me. No, I don’t mean “outside the box” — I mean inside the box. The “shoebox” to be exact. Rosenthal’s ploy to turn a profit for Ning is what I pithily refer to as the “shoebox effect,” and it lays out something like this: Whether we want to admit it or not, we’re suckers for sentimentality. We take photographs, we shoot video, we save every drawing our kids commit to paper. And what do we do with all those photographs, video clips and assorted scribblings? We pack them away in closets, cabinets, cupboards and, yes, shoeboxes. And we forget about them. Then one day, we stumble across that old shoebox. And when we do, we realize those photos, videos and drawings that once seemed a nuisance to keep track of are, in fact, a treasure trove; the shoebox in which they are stored is a treasure chest. So we do what any self-respecting sentimentalist would do. We replace that cheap, corrugated shoebox for a photo album (maybe one with an embossed leather cover and a nice gold trim?) that can give our memories the respect they deserve. In case the point is lost on anyone, allow me to spell it out. Shoeboxes are free. Embossed leather photo albums with gold trim cost money. And there’s a point when you gladly pay the price. Returning to the Ning example for a moment, many maintain that Rosenthal wasn’t thinking inside the box at all when he abandoned Ning’s longstanding business model. To the contrary, they argue, since Ning’s infrastructure makes it virtually impossible for customers to port their content out of Ning and into another platform Rosenthal was actually boxing his customers in. And while I would concede Ning’s remarkably high conversation rate can, to a certain extent, be attributed to the fact Rosenthal turned the proverbial shoebox into something more closely resembling an iron-clad locker, I would suggest something else is at play here that’s contributed to Ning’s remarkable retention rate: the perception of value. There’s no question Ning had their share of users who reveled in the fact they were getting something without having to pay for it. But I suspect after using the Ning platform, a sizeable percentage of those freeloaders saw real value in the service. And because a variety of price points were offered to keep their accounts current, they found one that aligned with their perceived value. Now they’re gladly paying for it. I further suspect this is precisely what Pandora, MailChimp, Flickr, LinkedIn, Evernote and Skype all are banking on. All have successfully been built on the back of the “freeloader.” Ning was just the first company to prove those pesky freeloaders can actually be converted… and make you a boatload of cash in the process. All of which is why I endure all those incredulous eyebrow arches when asked how my new internet endeavor is going to make money. In an age “cloud computing” when we’re all are looking for a ‘locker in the sky’ to store our stuff in, the key isn’t building a better mousetrap — it’s building a better shoebox. I feel confident we have one. Tom Grasty is a novelist, screenwriter and 15-year veteran of the entertainment, advertising and internet industries. He is also a co-founder of Stroome, a collaborative online video editing community that connects friends, family and aspiring content creators.

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NCUA Sets Price On 55 Bln RMBS

November 11, 2010

The National Credit Union Administration is said to have set the price on its offering of 5482 billion in residential mortgagebacked securities reports The Wall Street Journal

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NCUA Sets Price On 55 Bln RMBS

November 11, 2010

The National Credit Union Administration is said to have set the price on its offering of 5482 billion in residential mortgagebacked securities reports The Wall Street Journal

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Robert Lenzner: QE2 Dangerous for American Wage Earners

November 9, 2010

QE2 has already damaged the ordinary lives of the middle class and the poor by driving up the price of basic foodstuffs required in the average American’s diet. Sugar is up 5.7%; wheat, 5.8%; oil, up 8%; soybeans, up 5% — all inside of the first week of QE2. This instant run-up in commodities makes the underlying producer price inflation rate soar at a 20% rate — far far greater than the CPI, by which we reckon our rate of inflation is running at a measly 1-2% rate. How ordinary American families will survive putting food on the table and driving to work and back is going to even more difficult to achieve than it is now, when so many Americans are out of work and losing their homes. The contrast between accelerating commodity prices and a decelerating economy is troubling. A policy that makes fortunes for commodity traders, for hedge fund operators, for the gold and silver crowd while squeezing 90% of the nation is a terrible price to pay for replacing deflation with inflation. The unintended consequences of QE2 will be more dastardly on more people than Ben Bernanke ever figured on. If the PPI stays at 20% or goes even higher, won’t it act as a brake on economic growth? After all, it is like a tax on income, and as such is not a symptom of growth. The higher the price of gold, silver, copper, oil and agricultural foodstuffs — the higher the tax on consumption must be.

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Florida Mom Faces Charges After Allegedly Selling Baby To Buy Car

November 9, 2010

(By Jane Sutton and Cynthia Otserman)-A Florida woman was charged with trying to sell her infant son in order to pay for a new car, police said on Tuesday. The baby’s grandmother brokered the deal and initially demanded $75,000 but agreed to cut the price to $30,000 when told the prospective buyer could not get a bank loan, the Florida Department of Law Enforcement (FDLE) said. The mother of the eight-week-old boy, Stephanie Bigbee Fleming, 22, of Bradenton, Florida, was to receive $9,000 of the proceeds, the FDLE said. “Fleming planned to purchase a new vehicle from the money received,” an FDLE spokeswoman said. Fleming also needed money to pay court costs for an unrelated probation violation, the arrest documents said. Fleming was arrested on Tuesday. The grandmother, Patty Bigbee, 45, was arrested last week with her boyfriend Lawrence Works, 42, both of Holly Hill, Florida. All three were charged with the illegal sale of a child, and Bigbee was also charged with communications fraud, the department said. The arrest report said Bigbee offered to sell the baby to a female relative in October, explaining she had been caring for her grandchild but “was not mother material.” The relative alerted police and worked with them during the negotiations. Bigbee and Works were arrested when they collected a $30,000 cashier’s check and handed over the baby to an undercover agent in a Daytona Beach parking lot, police said. The baby remains in state custody. (Reporting by Jane Sutton; Editing by Cynthia Otserman) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Grant Cardone: Automotive Sales Trainer Shows Tricks to Buying a Car Quick and Easy

November 9, 2010

Below is a step-by-step plan of how to get a great deal on your next car without going through a long, drawn-out and painful process. Because of the internet, manufacturers’ influence, and competition, much of the older advice on how to buy a car written in books, articles and seen on TV is now outdated and actually makes buying your next vehicle more painful than necessary. And I should know because I have been providing automotive sales training to auto dealers for 25 years and know all the secrets. With so many sources of information available from dealerships’ inventory postings, manufacturers’ sites, Kelly Blue Book, Edmund’s, Auto Trader, Autobytel, and more, it is clear that information is not in shortage. All this information without a simple buying plan is just information overload, adding unwanted time and confusion. The goal when buying a car should be to know you got a good deal without spending three weeks in research, shopping at six dealerships and spending countless hours in painful negotiations. These six steps will guarantee you get what you want without wasting time: 1) Approach the dealer as a buyer. Your best offense when buying a car, contrary to popular belief, is to identify yourself as a buyer, not a shopper. Don’t be defensive; present yourself as wide open and easy. This will actually make the dealer easier to deal with. The customer that approaches a car dealer in a defensive and pushy way tends to cause the dealer to respond the same way. 2) Price is not your greatest concern. Let the sales person know that the most important thing to you is not price but knowing that you are on the right car. This will be music to the sales person’s ears and will make them butter in your hands. Communicate that you are confident than once the vehicle is perfect, the dealership and you can come to agreeable terms. This is going to make the sales process quicker by reducing confrontation and, later, making getting your best terms even easier. 3) Make sure you are on the right vehicle. The single biggest mistake a buyer can make is buying the wrong product. Putting price in front of selection is an outdated buying tactic. If the product is not right, the terms can never be good enough! The best way to determine the right unit is not online or on the phone but at the dealership. A trick to make sure you are on the right vehicle is to look at the vehicles just above and just below what you think you want. Any interest on either of the other two product choices means you are not yet on the perfect product for you. 4) Test drive the vehicle. Dealerships love you driving their products. This makes the dealership feel like they have done their job and provides them with more confidence in giving you their best price. Taking time to demonstrate the vehicle will save you time later and give both parties more confidence when negotiating. 5) Ask for a computer-generated proposal. Ask the dealership if they could please present their offer to you electronically rather than by hand. Because of technological advances, the most progressive, customer-satisfaction-driven auto dealers today utilize software technology to provide the buyer with computer-generated proposals. The proposal should include price, trade figures, purchase and lease payment, down payments and interest rates all at one time. Ask your dealer, “Do you use EPencil or electronic proposals?” Computer-generated proposals avoid wasted time in the negotiations and unnecessary figuring by management. An electronically generated proposal can produce nine purchase payments and nine lease payments in less time than it takes to fill out a credit app. This also reduces chances of mistakes and wasting time going back and forth. Computer-generated worksheets guarantee a full disclosure, complete transparency, and a quick and easy negotiation process that is non-confrontational. Car dealers know that time is important to the 21st-century buyer and that extending the negotiations only negatively affects the buying experience and ownership. 6) How to determine a fair price? Just so you know, franchised automotive dealers in the U.S. operate on about the same net margins as a grocery store: about 2 percent net margin (after all expenses). Most car transactions generate more money to state and local taxes than profits for the dealer. For instance, the taxes in California are 8.75 percent, so if the dealer has a mark-up of 6 percent on a $20,000 car, they will have a gross profit (before any expenses) of $1,200 while the state will collect almost $1,800. Keep in mind that the State of California isn’t even in the car business, doesn’t wash the car, service it, or inventory the products; it only promises you schools, roads and hospitals for the taxes they collected. If it were not for dealerships’ service departments and pre-owned cars, the car dealer wouldn’t be able to even stay in business to sell new cars. Can you find another dealer 50 miles away to sell for a couple hundred dollars less? Probably, but your local car dealer, with whom you will be servicing your car, is a human being, too. Remind him when you need something that you came in, didn’t create a problem, weren’t hard to deal with and made the whole process painless for everyone. Most auto dealers are not interested in taking advantage of you and are highly interested in making you happy. It is outdated thinking that a buyer has to shop five locations to get a good deal. So the next time you are ready to roll in something shiny and new, just follow my steps: let your dealer know you are there to buy, be sure you are on the right car, ask that they present their proposal electronically and tell them you know automotive sales training guru Grant Cardone. Follow this advice and you will have a great car-buying experience, avoid wasting valuable time and know you received a great deal. Grant Cardone is Automotive Sales Training Expert and New York Times bestselling author.

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Robert Lenzner: Celebrating QE2,Republican Victory,Bush Tax Cuts

November 5, 2010

Celebrating QE2, Republican Victory And The Bush Tax Cuts The results of the midterm elections are a fiscally necessary surprise gift for investors. Robert Lenzner All those investors who liquidated stocks for bonds must be licking their wounds after the great reflation of assets was inaugurated this week. The Bernanke Bump, the well-orchestrated promotion of Quantitative Easing along with the debasing of the dollar have been driving commodities, emerging markets and precious metals into a frenzy. The Bush tax cuts will survive. QE2 wasn’t a surprise at all. But the better than expected results for Republicans in Congress prefigured an Obama compunction to compromise with his opponents. A very fiscally necessary surprise gift for investors. The tax on the sale of stocks, bonds and other assets–what we call the capital gains tax–will remain at the at the historically low rate of 15%, as proposed by the George W. Bush administration in 2003, when the tax cuts were passed in order to improve the lot of investors after bear market of 2000-2002. In fact, the lower tax led to a greater number of transactions and far large tax revenues for Uncle Sam. For 2011 at least, and maybe longer, the capital gains tax will remain at 15%–not double or triple that, as the Obama administration was threatening. So refocus your animal spirits on high-yield bonds (through the iShares High Yield Corporate Bond Fund ( HYG – news – people ), stocks that have a record of increasing their cash dividend for the past 25 years (the SPDR S&P Dividend ETF ( SDY – news – people )), and REITs that pay out a high percentage of their income in dividends. Gold lovers must have woken up Thursday to celebrate QE2, a printing of more dollars with the purpose of driving the price of assets into the wild blue yonder. As a joyous occasion, Gold is still relatively inexpensive in comparison with the Dow Jones industrial average. If gold continues to run up, major gold miners like Randgold Resources ( GOLD – news – people ) could move up at a multiple of two to three times the price of bullion. According to U.S. Global Investors ( GROW – news – people ), a mutual fund group in San Antonio, Texas, another, smaller gold holding that hasn’t run up as much is Medoro Resources, a Colombian gold producer (MRS), according to Frank Holmes, U.S. Global’s CEO. Related Stories In the metals area, copper producer Freeport-McMoRan Copper & Gold ( FCX – news – people ) has run up mightily since the summer, from $60 to $105, and is still selling at only 12 times earnings. A classic example of a stock you must hold for the big move: Its copper reserves are being funneled off to China ever more quickly and at rising prices. Here’s the November Irony to remember: QE2 seems a reward from Ben Bernanke to investors, speculators, gold and silver fanatics and the holders of currencies that rise as the dollar falls (Australia, Singapore, Korea, Brazil).

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FOMC Rate Decision To Dictate U.S. Dollar Price Action, British Pound Outperforms Ahead of BoE

November 3, 2010

FOMC Rate Decision To Dictate U.S. Dollar Price Action, British Pound Outperforms Ahead of BoE

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Raymond J. Learsy: America’s Anger at the Great Financial Bailout and the Press’ Continuing Inability To Understand Why

October 31, 2010

Just last week two of America’s leading newspapers, the New York Times and the Wall Street Journal presented opinion pieces discussing why Americans remain bitter about the federal bailouts. The WSJ’s contributor Matthew Winkler’s “Time for Bailout Transparency” 10.28.08 lamented that the public outrsage is centered on the governments lack of transparency given the government’s refusal to date to disclose all facts attendent to the bail out. Information such as how public funds were disbursed, who made the decisions, how it was allocated, which firms borrowed from the Federal Reserve and accessed the Federal Reserve discount window. All interesting, well and good. And could even be embarrassing to the likes of J.P. Morgan Chase, Citigroup and Wells Fargo who are suing to have recent rulings mandating transparency reversed. Just a few days before Ross Douthat expounded in the New York Times with “The Great Bailout Backlash” 10.25.10, declaring “Nothing this election season, no program or party or politician is less popular than the Troubled Asset Relief Program of 2008 (TARP).” He then went on to quote one Matthew Yglesias of the Center of American Progress, that the Wall Street rescue package is “one of the most unfairly maligned policy initiatives of all all time.” Douthat then continues to put us at further ease, stating “As it stands the government may actually end up turning a modest profit on the money injected into Wall Street’s failing banks.” There is much in each Op-ed piece about necessity of TARP, without which the nation would have slid into depression and far greater unemployment. And that is understood by most Americans. What they can’t abide was the patent unfairness of it all. The financial engineers that very nearly sank the ship of state were permitted to reward themselves munificently while the public bailout brigade that did the bailing were left holding their rusted buckets, and even then, if they didn’t bow humbly and comply to the financial engineers’ admonitions, even those rusty buckets along with their homes were taken from them. This while the financial engineers could take shore leave from their saved ship and tear up the town. What galls most Americans is the manner in which Wall Street rewarded itself after it was the public that took the risk of bailing them out. While millions of Americans were losing their homes and their jobs Wall Street was setting aside humongous bonus pools such as Goldman Sachs’s $23 billion in 2009. Earlier this month we learned that Wall Street would achieve a record in 2010, setting aside some $144 billion as compensation (“Wall Street Pay: A Record $144 Billion”, WSJ 10.11.10). Had the companies been permitted to fail. or had they been administered under some form of managed bankruptcy the bonuses of the “failed” companies would never have been paid out, or if they had, the bankruptcy courts would have recaptured them as ‘fraudulent transfers’. Only a vigilant government initiative to ‘clawback’ these dubious payouts would have abated the public’s feeling that they were being taken for a ride and gamed by well connected insiders. Sadly, our government, probably under pressure from Wall Street lobbyistsand the meek of heart did practically nothing. Yes, they did delegate that stalwart fighter for all things fair and equitable, Ken Feinberg, as the Administration’s ‘Pay Czar’ who came away soft pedaling the outrageous bonuses as “ill-advised.” and left matters at that (please see”The Administration’s “PayCzar” Soft Pedaling Ban Bonuses as “Ill Advised.” What Is This Man Talking About?” 07.25.10). The issue may have come to an end for the Administration but American’s are still seething. Yes, more openess will be helpful but that is not the core issue. The Wall Street perpetrators were rewarded while Main Street and the rest of America paid the price. Is this the new American Way??

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