Busted: Bankers and The Global Economy

January 23, 2009

U.S. Employment and Recovery Dilemna

The U.S. government is in denial of classic facts the majority of the time. Even though Barack Obama has been reasonably honest concerning the immediate future, the figures he used before the inauguration to promote his plans to Congress are hopelessly underestimated and fail to add up on a mathematical level. In the meantime, Americans have the magic and charisma of a new president to chart the uncertain tragic waters of what will ultimately be a recovery given enough time. However the bad news and underlying economic factors coming out of 2008 do not speak of a speedy recovery on any level. When Barack Obama suggests that the American population in general will sacrifice, he isn’t kidding. Even the most optimistic reports paint “a bleak economic landscape ahead” with real unemployment approaching 18% with a sudden increase expected (see recent Digital Economy articles for more details).

Bankers have seen the massive destruction of their net worth and the ability to conduct business. As a result, so have we all. What was your hard-earned 401K last year? What was your net worth two years ago? The Bush administration had only seen to slowly respond to the crisis in addition to adding sweet Federal Reserve liquidity to keep failing institutions and most of the relevant power structure in place solvent. They used laissez-faire economics as an excuse to do little or nothing until their hand was forced by extreme circumstances and the national plight of total economic failure. Henry Paulson admitted his team’s inability to find and deal with the real scope of the national banking toxic-debt, instead choosing the easy course of simply recaptalizing bank with nationalized capital from taxpayers. As a confessed seasoned professional insider, Paulson was unable to determine or realize the full extent of the national collateral damage or he simply isn’t saying, which may be closer to the truth.

America has this plight to look forward to in 2009 barring other unforeseen issues:
* A huge rush of residential housing mortgage failures due to ‘housing resets’, the blight of unemployment and the inability for Americans to qualify for loans because of tightening banking rules which were conveniently ignored previously.
* A tsunami of commercial mortgage foreclosures.
* Billions in credit card defaults that threaten to further decimate the banking system coupled with banking cutbacks in anticipation of the same.
* As unemployment skyrockets, a tsunami of auto repossessions and loan defaults.
* Economic decimation through toxic banking instruments and complex debt instruments combined with $500 trillion in unmanageable credit default swaps.

25% real unemployment is realistic by the summer of 2009, near the estimated high of depression unemployment charted in the 1930s.  Unhappily, the resulting fallout will simply get worse and the economy spirals downward as more unpredicted events occur. Some areas in close relation to the Big Three automakers could see unemployment much higher than that. This commentary just touches the beginning as municipalities and states sink into further debt this year. The nation that used to live on credit will truly be living on credit in order to sustain America on any level. The profitaking of the last decade coupled with predatory banking designs has truly taken its toll. The U.S. economy didn’t have enough energy to maintain a stagflation last year. Deflation will be the ultimate result as the nation pulls into recovery years down the road. These are likely the unpleasant facts unless central bankers have a better idea. That is unlikely unless they start thinking outside the box they have built. ~ E. Manning


January 18, 2009

Economic Panic: Frying Pan to the Fire

As the economy risks spinning out of control and banks continue to run up multi-billion dollar losses, the Obama administration will face tough choices with the $350 billion remaining in the bailout plan. With the bailout of General Motors by converting it to a bank holding company, some boundaries were set where corporate welfare is concerned. This has stopped most of big corporate Main Street from expecting direct government bailouts so far. There are many institutions that still want a piece of the bailout pie. The result is likely to be a shortage of bailout money.

The rumor is that the Troubled Asset Relief Program (TARP) will be used to build a “bank” that holds the toxic debt, a repository of toxicity that moves those debts firmly into government hands. The government is hoping beyond hope that at some time in the future, those debts will increase in value once the recession is in hand and the economy has returned to health. (more…)

December 3, 2008

Credit Cards Portend to Lengthen Recession

shooting-foot1The venerable credit card has become a major tool of liquidity for the American consumer next to their own employment. The very tool that retailers and politicians are begging for is the tool most likely to take large hits in the very near future, constraining the U.S. economy at a time when recovery is being dreamed about.

The U.S. credit card industry is preparing to cut back $2 trillion in servicing to avoid the risks of default and to comply with recent regulatory changes. Meredith Whitney of Oppenheimer and Company notes, “We expect available consumer liquidity in the form of credit-card lines to decline by 45 percent.”

The consumer liquidity that business and bureaucratic mavens insist on is due to vanish quickly, further putting a further crunch on the economic crisis and the national ability to recover, at least in a typical “approved” way. Strangely, about the time that many economists are advertising as the end to this recession, in mid-2010, the curtailing of consumer credit will further preclude opportunities to artificially fuel an economic boom using conventional credit lines.

Pulling credit during a time of unprecedented job losses is going to put incredible pressure on the well being of the economy where established authorities are concerned. Lenders are going to be restricted from repricing credit card lines as part of new Unfair and Deceptive Lending Practices legislation. ~ E. Manning

October 11, 2008

August 21, 2008

Wages in America: Faking Lifestyle

web of deception

wages: web of deception

The concept of wage stagnation is in the news once again even though the economic blight is a mere 35 to 40 years old. The media and economic bean counters are curiously worried about the “standard of living bubble.” Imagine the idea that this news at all. Most Americans, except during times of heady expansion in certain markets, have been fully aware of the concept as jobs head out of the American economy in droves because of corporate multinationals and careless politics. For years, the idea was that you could beat wage stagnation with a well-heeled education, but reality has proved that this idea is no longer true if it ever really was.

Americans and other high-faluting nations have been loading up on credit for years to bolster the appearance of bettering the Joneses next door. The contracting market cut into that fantasy for many credit afficianados. Now the contracting job market, which in reality has been imploding in the United States for some time is hampering the ability of Americans to cope with lifestyle choices.

If that prospect wasn’t enough, now Americans risk losing the ability to use their precious credit cards because contracting credit markets threaten to limit access of credit cards to many participants. The entire economy of the United States seems to be facing a reality check where fiscal relevance is concerned.

credit is good for America

credit is good for America

The media has suddenly cooked up the idea that inflation has been increasing more rapidly than pay increases, which goes against what the U.S. government has preached for decades. A modest 3 percent raise in pay was supposed to cover the national inflation rate. The reality from the 80’s to 2006 shows a ten percent yearly-averaged inflation rate. Using these humble and easily accessible figures, no fool would admit that wages have kept pace, even if those wages were not stagnant. The term stagnant is relative, depending on how you want to justify the term.

The cold reality that we all know is that we have supported our lifestyle dreams on credit. We lost the incentive to save, which we have lost anyway due to the monster of inflation. Saving a few dollars now with a regular inflation loss means a dollar saved is a dollar lost, just a little slower over time. The endless printing of American greenbacks combined with a burgeoning national debt has ensured that a dollar saved ten years ago is worth zero today. Any interest gained on that dollar is worth very little unless you were able to invest that dollar to somehow create more. When viewed in reality, inflation is really a hungry bear. The working man has been royally and cruelly worked over, even though the government has denied the reality all along.

semantics in wealth perception

semantics in wealth perception

Since the mortgage debacle and the contracting real estate market has hit the economy (not pointing fingers today), Americans have embraced the last source of easy money to keep up their lifestyle or to avoid the reality of bankruptcy from relentless spending.

Americans aren’t ones to be told no when it comes to lifestyle. According to bean counters, credit card debt is growing much faster than the economy as Americans use credit cards with interest rates as high as 30% as a substitute for income. Last year, use of credit card increased around 7% each quarter. That is a 28% increase in an attempt to sustain economic lifestyle. Last May reported an increase of credit card use of 7%. If that were to continue for 12 months, the humble increase is a mere 84%. Obviously, this economic miracle is not sustainable.

A big crush is coming, but not just because you can’t pay your credit card bill. Banks are “securitizing” everything including your beautiful credit card debt to be sold off to eager desperate investors, at least bankers hope. Citigroup alone lost $176 million through securitized bonds for credit cards in the last quarter. Sweet. Delinquency rates devalue the securitized bonds, forcing a writedown in value.

Since banks can’t sell of all that glorious credit card debt, banks are going to make customers pay more for the privilege of easy money resulting in less easy money and a contracting credit market over time because creative money creation is not working to the advantage of wiley bankers.

Where America will turn next is anyone’s guess. Barring black market prices for selling off children as collateral, Americans may be faced with the joys of living within their means. The good news behind all of this drama is not the perceived pain. Contraction of any marketplace is a mixed blessing. Billions will be lost and millions of Americans will see hard times, but in the end everyone is a winner because, at least in theory, the marketplace achieves a value balance. America has needed a long-awaited correction that politicians are deathly afraid of. Market contraction means that prices and everything that is assigned a dollar value decreases in relative cost. The exception to that blessing is the specter of devaluation or the possibility of hyperinflation due to stagflation. That however, is another story. ~ E. Manning

August 7, 2008

A Solution for Credit Card Theft and Risk

Hacking and identity theft has made the big time news once again. A worldwide ring of 11 people that compromised 41 million credit and debit cards have been exposed. The time was that when you received a credit or debit card, you were pretty much married to it. You used the card until the time that it expired and sometimes groused when they sent you a brand new one. After all, sameness is a comfort to many people. That desire for sameness inspires customers to frequent traditional retailers that may not be up to snuff on data security, creating fear when data is compromised, an event that is almost a daily fact of life.

Most of the time, thieves focus on regional or national store chains where people shop that have a few extra dollars to spare. Those are exactly the kind of people that thieves are looking for, which reduces their changes of opposition when making a charge. Allegedly, these hacks didn’t use traditional attacks via the internet, but compromised wireless networks at physical locations by finding security leaks. The conspirators tapped into the retailers’ networks for processing credit cards and intercepted customers’ PINs along with debit and credit numbers that were stored there.

What can an honest citizen do to protect personal interests? There seems to be a constant merry-go-round of compromise where personal information is concerned from the big three credit agencies to the smallest retailer. The sameness that used to reassure big spenders is the same predictability that is being used against them. Access to the world economy via a credit card has become expected and risky. The solution?

Don’t allow banks to attach debit credit cards to any long-term personal bank account. That convenience is dangerous and unnecessary, even though the bank will ply your confidence with all manner of security safeguards and policies with the hope of creating bank fees and holding your money.

The idea of having a traditional credit card may seem to be a wonderful tool, but the sameness of the credit card information itself can easily compromise personal security and identity, resulting in loss or at least, a large degree of hassle. Furthermore, when you make an error in judgment, you risk losing a healthy penalty to the issuing institution, thus making the banking community richer at your expense.

If you must have credit card access to the world economy, one solution remains that is considerably more secure than traditional methods. Get a debit card that is sold at a variety of drug stores and grocery outlets. Immediately, you limit your losses with allegedly the same guarantees as a regular Visa or Mastercard. You limit your expenses to a modest monthly charge without bank chargebacks and penalties. On some cards, deposits charges are waved as a reward for certain behaviors, for example, direct deposit of your paycheck or cashing checks at a certain retailer.

However, the strength behind using a debit card that you purchase at a store is simple disposability. Regardless of what the expiration date is on the card, simply limit the period of time that you use the debit card to just a few months. Drain the cash you have put on the card and get a new one. You are protected from long-term vulnerabilities to the system that is designed more for the convenience of the system than the consumer. What is involved is simply a different way of thinking using disposable cash-based credit. Cash is best, but if you can’t deal with cash, protect your name without risking your large accounts and wealth. Bankers will still get wealthy, but much less so and you will protect yourself from risk.

~ E. Manning

May 5, 2008

New Credit Proposals Rattle Bankers

The Federal Reserve has been setting new baselines all year and last week was no exception. With new power and influence, the Federal Reserve is proposing a new set of credit lending rules that are rattling bankers from coast to coast.

Fed Chairman Ben Bernanke wants to put predictability back into banking costs where credit cards are concerned. The Federal Reserve is setting a new baseline for fairness in banking practices in issuing late fees, unfair interest rates, allocation of payments using balances with different rates, excessive fees, unfair computing of balances and deceptive practices. According to the Federal Reserve: (more…)

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