Category Archives: Economics

The Coming Collapse of the Middle Class

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Below is a video of a speech Elizabeth Warren gave at the University of California about the stress on today's middle class families.  She provides lots of interesting data, but what I found most compelling was her comparison of a middle class family of four (two parents, two kids) in 1970 and 2003:

  • In 1970 most families had a single earner, in 2003 the vast majority were two-income families.
  • Average incomes were up in 2003 compared to 1970 due to the second worker, but fixed expenses (mortgage, health care, taxes, child care, cars) were 50% in 1970 and rose to 75% in 2003.
  • Discretionary expenses for items like clothes and food actually went down significantly between 1970 and 2003.  

It's a long video (almost an hour), but it really is worth a look to see how much pressure is on the middle class these days.  Even if you aren't a fan of Warren's it is still worth watching to get a sense of how things have changed in just one generation.

Last point I'll make is that this speech was given in 2007, before the economy tanked. I wonder how some of these numbers would look now.

Inside Moves

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Did you see the 60 Minutes story on our duly-elected Congresscritters potentially profiting by using information they gleaned from their work on the Hill to inform their investment decisions?  Well, according to this Wall Street Journal story many big-time investors are profiting from information they glean directly from members of Congress and Congressional staffers.

"Hedge funds and other investors have found that Washington can be a gold mine of market-moving information, easily gathered by those who are politically connected," according to Sanford Bragg, CEO and president of Integrity Research Associates, an independent group that analyzes research providers…

Wall Street firms have for years hired lobbyists to scour Congress and the White House for news that could affect stock prices. Now, investors want to hear from decision makers firsthand.

Many turn to William Williams, president of JNK Securities, a firm that brings lawmakers and investors together "to bridge the information gap between Washington and Wall Street," according to a recent news release.

Mr. Williams used to charge clients as much as $10,000 for meetings with lawmakers. That changed last year after a reporter from the publication Inside Higher Ed asked the office of Sen. Tom Harkin (D., Iowa) about an email from JNK showing it was charging to attend a possible meeting with the senator. Mr. Harkin refused to attend.

Now, hedge funds don't pay fees to JNK Securities. If they use information gleaned at these face-to-face meetings they are expected to execute their trades through the brokerage firm, which collects commissions.

There's more, but you get the picture.  I seriously doubt this kind of inside information is restricted to the federal level – I'm willing to bet it goes on at the state and local level as well – and as the reporters point out it's not illegal activity, but I think this is exactly the kind of thing that has escalated the level of mistrust of our public and business institutions to astronomical levels.

If you were to talk to the folks involved in these meetings, both on the government side and industry side, you'd probably get an earful about this dialogue being necessary to make sure the government fully understands the issues so they don't unnecessarily burden industry with misaligned regulation or some such thing.  Sure, it makes perfect sense for government representatives to fully understand the industries they are proposing to regulate, but I'll be darned if I can understand why those discussions can't be publicly broadcast so that everyone is on the same playing field. (Truth be told I can't think of a reason why investors would need to be included in the discussion at all, but for now let's just assume they have a place at the table). Let's put it this way – why shouldn't I, as an individual investor, have access to this information at the same time as a hedge fund investor?  If Congress was a public company and members of Congress were board members of the company then this behavior would be considered insider trading.  It's ironic that because they are essentially board members of USA Inc. their behavior is perfectly legal.

The article goes on to mention some proposed legislation that would prevent this type of inside information trading, but I'm not sure how effective any legislation can be until the entire culture in the halls of power changes. If the people in power can't perceive that it's wrong to play favorites in the public sector, to create a favored class, then there's not a piece of legislation that can be passed that will fix the problem because they'll simply find a way around it to help their friends. 

Long ago some wise people realized that our entire society is constructed on a foundation made up of one element – trust.  Without trust financial markets collapse, bank runs happen (why do you think we even have an FDIC?), government collapses (usually after a bout of totalitarianism) and civil society disappears.  If our leaders don't begin to reestablish trust with the people I fear what my children will inherit.  This probably seems like an over reaction to a relatively minor financial story, but I think this story perfectly highlights what's wrong with our country right now and I very much want to see this fixed before it's too late.

Did a Bear Raid on Citigroup in 2007 Crash the Economy?

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A paper (PDF) from a group called New England Complex Systems Institute seems to make the assertion that a "bear raid" on Citigroup in 2007 may have triggered the economic meltdown that led to the Great Recession:

A paper from the New England Complex Systems Institute claims that they have found evidence that traders executed a "bear raid" on Citigroup in 2007, precipitating the financial collapse. A "bear raid" is a market manipulation technique in which short sellers conspire to dump huge quantities of borrowed shares into the market all at once, driving the price down (short selling is a stock-trading technique in which shares are borrowed for sale; the short seller makes money when the value of the borrowed shares declines).

"Bear raids" have been considered a risk to markets since the Great Depression, and a financial regulation called the "uptick rule" was instituted in 1938 to prevent the tactic. The uptick rule was repealed in in July, 2007, and the alleged bear raid took place in November, 2007.

The paper's authors offered these comments about deregulation in their conclusions:

Within the resulting deregulated environment, it is still widely believed that the crisis was caused by mortgage-related financial instruments and credit conditions, and that individual traders did not play a role [32{35]. Our analysis demonstrates that manipulation may have played a key role. Methods for detecting manipulation and its eff ects are necessary to both inform and enforce policy.

When the SEC repealed the uptick rule on July 6, 2007, one of its main claims was that the market was transparent, and that such regulations were not needed to prevent market manipulation [6]. Our results suggest that, not long after the uptick rule was repealed, a bear raid may have occurred and remained undetected and unprosecuted. Our analysis reinforces claims that lax regulation was an integral part of the financial crisis [30].

In response to requests for reinstatement of the uptick rule after the fi nancial crash,the SEC underwent extended deliberations and fi nally implemented an alternative uptick rule, which allows a stock to fall by 10% in a single day before limitations on short selling apply [36]. This weaker rule would not have a ffected trading of Citigroup on November 1, 2007, as its minimum price was just 9% lower than the close on October 31. Subsequent day declines until November 7 were also smaller than 10%.

The authors go on to recommend some policy changes (adopting preventive measures instead of current retroactive penalties, regulatory agencies investigating individual events like this one, improve access to data, etc.) but given our government's reluctance to go after these folks I'm not confident that their advice will be heeded.

Crappy Numbers Getting Crappier

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It appears that the already depressing sales numbers reported by the National Association of Realtors for previously occupied homes between 2007 and 2010 were actually inflated, which means that whatever the corrected numbers are they're going to be even more depressing:

Among the reasons for the inflated figures, the Realtors group says: changes in the way the Census Bureau collects data, population shifts and some sales being counted twice. Last year's total sales figure of 4.91 million was the worst in 13 years.

The Realtors consulted with several government and private housing market experts, including the Federal Reserve, the Department of Housing and Urban Development, the Mortgage Bankers Association, the National Association of Home Builders, mortgage giants Fannie Mae and Freddie Mac and CoreLogic, the California-based data firm that first raised doubts about the annual numbers earlier this year.

CoreLogic estimated that the Realtors group overstated sales in 2010 by at least 15 percent.

NAR says they'll publish revised numbers on December 21.

Moody’s Says Winston-Salem is Stable

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Moody's Investor Services has upgraded its outlook on Winston-Salem from negative to stable.  If you want to know what that means please ask someone who knows something about municipal bonds, not your friendly neighborhood average English major (me). If I had to guess though, I'd say Camel City (and Greensboro and Guilford County) had negative ratings because of their municipal credits linked to the U.S. Government. Just goes to show that the old saying about lying in bed with dogs has some merit to it.

$7.7 Trillion

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If you've wondered exactly how big the bank bailout was during the height of the financial crisis you can now get a much better idea of the scale thanks to details being reported by Bloomberg as a result of its FOIA request. In a word: stunning.

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.

The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort — and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.

$7.77 Trillion

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

And then there's this:

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue…

…the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.

Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data…

Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.

There's plenty more to be learned in the article. You really should take the time to read it.

Occupy Old People

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Thanks to the "Occupy" movements there's been a lot of talk lately about the wealth disparity between the top 1% and the rest in the US.  Now comes some information about the growing wealth gap between the geezers and the greenhorns in our fair country:

The typical U.S. household headed by a person age 65 or older has a net worth 47 times greater than a household headed by someone under 35, according to an analysis of census data released Monday.

While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.

The analysis reflects the impact of the economic downturn, which has hit young adults particularly hard. More are pursuing college or advanced degrees, taking on debt as they wait for the job market to recover. Others are struggling to pay mortgage costs on homes now worth less than when they were bought in the housing boom.

 

Hopefully I’ll Be Graded on a Curve

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The New York Times' Real Time Economics blog provides a handy-dandy calculator to help you determine where you stand in the United States income spectrum.  Spurred by the whole Occupy Wall Street "We are the 99%" this calculator allows you to input your annual household income and see what percentile you fall under.  Personally I hope I'm graded on a curve.  I, like Ed, like to think that I'm worth more than I make, or for that matter, more than my kids think I'm worth.

WTF TBTF BAC?

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This post by Fec about Bank of America put me off my breakfast:

So that’s $53T in unregulated derivatives being backstopped by $1T in customer deposits. And remember, those derivatives are largely contracts made with the other TBTF banks, so that if one goes down, they all go down. And there’s no way in hell the FDIC (the taxpayers) can cover those kind of losses.

At this point, I can’t imagine why anyone would leave their money, much less own stock, in a TBTF bank.

I remember the deregulation of the '90s. At the time it made sense to me that a bank could start offering their customers investment services since, you know, it let them do stuff with their money without having to inconvenience themselves with dealing with two (or more) different people.  Then again I didn't know jack about banks or the markets so it isn't a real surprise that I couldn't see the possible negatives in a deregulated environment.  In retrospect the deregulation doesn't seem like it was such a good idea, even to a financial fool like me.

**Update**- In a later post Fec provided a link to a good article explaining the Bank of America situation.