Category Archives: Economics

Matt Taibbi’s Advice to the Occupy Wall Street Folks

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Rolling Stone columnist Matt Taibbi, the guy who's had his teeth into Wall Street for a while now and just won't let go, has some advice for the Occupy Wall Street folks.  You definitely need to read the whole thing to see the point-by-point demands he recommends they make (Break Up the Monopolies, Pay for Your Own Bailouts, No Public Money for Private Lobbying, Tax Hedge-Fund Gamblers, Change the Way Bankers Get Paid), but I thought I'd share this paragraph because it struck a chord with me:

That, to me, speaks volumes about the primary challenge of opposing the 50-headed hydra of Wall Street corruption, which is that it's extremely difficult to explain the crimes of the modern financial elite in a simple visual. The essence of this particular sort of oligarchic power is its complexity and day-to-day invisibility: Its worst crimes, from bribery and insider trading and market manipulation, to backroom dominance of government and the usurping of the regulatory structure from within, simply can't be seen by the public or put on TV. There just isn't going to be an iconic "Running Girl" photo with Goldman Sachs, Citigroup or Bank of America – just 62 million Americans with zero or negative net worth, scratching their heads and wondering where the hell all their money went and why their votes seem to count less and less each and every year.

The Whining 1%

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Paul Krugman's piece, Panic of the Plutocrats, highlights one distinction that I think many people have forgotten – there's a difference between business in the "Main Street" sense and business in the "Wall Street" sense:

What’s going on here? The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is. They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.

Yet they have paid no price. Their institutions were bailed out by taxpayers, with few strings attached. They continue to benefit from explicit and implicit federal guarantees — basically, they’re still in a game of heads they win, tails taxpayers lose. And they benefit from tax loopholes that in many cases have people with multimillion-dollar incomes paying lower rates than middle-class families.

Listen, I get it that we need finance. We need people who can provide capital to the Main Street businesses, and I think there are plenty of fine people working in the financial sector, but just like there are crooks and scam artists working on Main Street there are also crooks and scam artists working on Wall Street. Even if we didn't already have plenty of stories showing that the Wall Street scammers filled their personal vaults while barbequing our Golden Goose, I think the incessant screeching like that currently emanating from halls of power would cause us to say, "The lady (aka the Whining 1%) doth protest too much."

A Modern Day, Budweiser-Drinking Karl Marx

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If I were to paraphrase what PIMCO's Bill Gross wrote in his investment letter it would be, "Financiers of the world your ride on the backs of laborers is coming to an end. If you want to keep living in luxury you better find a way to make sure they feel justly rewarded and not like you're bending them over the rail…so to speak." Here's an excerpt of what he wrote:

Ultimately, however, both labor and capital suffer as a deleveraging household sector in the throes of a jobless recovery refuses – if only through fear and consumptive exhaustion – to play their historic role in the capitalistic system. This “labor trap” phenomenon – in which consumers stop spending out of fear of unemployment or perhaps negative real wages, shrinking home prices or an overall loss of faith in the American Dream – is what markets or “capital” should now begin to recognize. Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor. Washington, London, Berlin and yes, even Beijing must accept this commonsensical reality alongside several other structural initiatives that seek to rebalance the global economy. The United States in particular requires an enhanced safety net of benefits for the unemployed unless and until it can produce enough jobs to return to our prior economic model which suggested opportunity for all who were willing to grab for the brass ring – a ring that is now tarnished if not unavailable for the grasping. Policies promoting “Buy American” goods and services – which in turn would employ more Americans – should also be reintroduced. China and Brazil do it. Why not us?
If structural solutions are not put in place, a six-pac market observer should look at both stocks and bonds as rather flabby knock-offs of their former selves; no resemblance at all to Jack LaLanne but more to a 55-year-old terminator grown fat and rendered out of shape by years of neglect and perhaps greed for short-term profits as opposed to long-term balance. There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years. A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs.”

H/T to Ed for the link.

A Crisis of Confidence

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This article in the Wall Street Journal caught my eye.  Why?  Here's a taste:

Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale. The economics of today's battered housing market mean that lenders are doing so more and more.

Foreclosed homes seldom fetch enough to cover the outstanding loan amount, both because buyers financed so much of the purchase price—up to 100% of it during the housing boom—and because today's foreclosures take place following a four-year decline in values.

"Now there are foreclosures that leave banks holding the bag on more than $100,000 in debt," says Michael Cramer, president and chief executive of Dyck O'Neal Inc., an Arlington, Texas, firm that invests in debt. "Before, it didn't make sense [for banks] to expend the resources to go after borrowers; now it doesn't make sense not to." 

Indeed, $100,000 was roughly the average amount by which foreclosure sales fell short of loan balances in hundreds of foreclosures in seven states reviewed by The Wall Street Journal. And 64% of the 4.5 million foreclosures since the start of 2007 have taken place in states that allow deficiency judgments.

Lenders still sue for loan shortfalls in only a small minority of cases where they legally could. Public relations is a limiting factor, some debt-buyers believe. Banks are reluctant to discuss their strategies, but some lenders say they are more likely to seek a deficiency judgment if they perceive the borrower to be a "strategic defaulter" who chose to stop paying because the property lost so much value. 

For years and years and years owning a home has been seen not only as the American dream but also as a potentially lucrative investment.  There were certainly plenty of personal finance experts who warned against viewing your house that way, who pointed out the inherent risk of homeownership, but given the meteoric rise in real estate values from them mid-90s to the mid-00s it's hard to blame people for viewing their homes as investment vehicles.  Now, of course, it's become all too clear that your house can actually become a financial albatross, decreasing in value to the point that you can't afford to move even if it means getting a job in another city after being laid off. Worse, as the article points out, your home can become a debt grenade that blows apart your entire financial existence.

In my opinion there's a kicker here that not a lot of people are talking about.  Many of the people being decimated by the housing crisis have children who are watching this and who are going to come of age believing that homeownership is a risky endeavor.  They'll have experienced the housing crisis viscerally, in much the same way my grandparents experienced the Depression, and I think their behavior will be affected accordingly.  Let's put it this way – my grandparents never gave up their frugal habits.  They reused everything, they saved all leftovers (you learned real fast that my Granny had no expiration dates on the food in her freezer and you ate at your own risk), and pinched every penny within an inch of its life 40+ years after the depression ended and they were living a very comfortable middle class life in Winston-Salem.  You just don't forget those experiences and I think the number of kids who will have seen the flip side of the American Dream will always view homeownership with a great deal more skepticism than those of us who came of age having only seen the positive side of homeownership.

Note: I need to point out that these opinions are mine and don't reflect an official position by my employer or anyone I work with.  

Governments Don’t Rule the World, Goldman Sachs Rules the World

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I have no idea if the guy in the video below is legit or if he's just a blowhard who happened to score a BBC interview, but his comments raise some interesting questions.  Comments like "The governments don't rule the world, Goldman Sachs rules the world" and "For most traders we don't really care that much how they're going to fix the whole situation. Our job is to make money from it" beg the questions, "How do the Goldman Sachs rule the world without a stable society provided by governments" and "At what point do traders and the rest of the players in the financial market put aside their short term (profit) interests and do what's best for society at large?"  For that last question I'll ask those who are more educated in the ways of the economy – is it possible, or even advisable, to ask financiers to forego short term gains for the greater good or is it always in our best interest for them to always pursue what's in their best interest?

She Makes a Good Point

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I’ve liked Elizabeth Warren since I saw her in a documentary about the credit card industry.  She makes a lot of sense a lot of the time.  If you watch this short clip I think you’ll find what she says to make a lot of sense, but if you’re like me you’ll recognize that in the end she leaves one large question unanswered: “How big a chunk should the successful factory owner pay forward?”  Watch the video and you’ll know what I’m referring to.

Like I said I don’t think anyone, well at least anyone who’s semi-adult and reasonable, will dispute that the successful factory owner didn’t get that way on his own and benefited from the many resources provided by our society and that the factory owner needs to “pay it forward.” I do think, however, that many semi-adult and reasonable people can and will disagree quite vehemently as to HOW MUCH the factory owner should pay forward.

Why We May Not Be Downsizing Any Time Soon

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There are a couple of reasons my wife and I aren't even thinking about selling our house and moving into a smaller place in a few years when the kids are all shipped off to college.  One is that we don't think we, or anyone else for that matter, will be able to sell our house for quite a few years.  In a word the real estate market still sucks in our neck of the woods.

A second reason we probably shouldn't count on downsizing can be found in this article about the slide of the median household income in America to 1996 levels:

As families struggle to make ends meet and young workers navigate the moribund labor market, many have turned to each other. According to the Census report, 5.9 million Americans between 25 and 34, or 14.2% of that group, lived with their parents in spring 2011, compared with 4.7 million before the recession, or 11.8%.

I love my kids, but there's no way I could stand living with them in close quarters which means I'm going to want to keep all the space I can.  On the positive side I'll be charging them rent so I might as well give them a little space in exchange for whatever dollars they might earn while working shoulder-to-shoulder at Taco Bell with the other college grads being sucked into our blackhole of an economy.

Failure is an Option

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In this post Lex shares these thoughts from Barry Ritholtz on what might happen if too-big-to-fail banks are actually allowed to fail.  My favorite line from Ritholtz is this: "Real Capitalists know failure is part of the process. I suspect we may have another chance at a banking reorg. Let’s hope we do it correctly this time."