The Roller Coaster Ride aka The Stock Market

I used to really love roller coasters when I was younger. I worked at Great America when I was a teenager and really loved going on the coasters there. Over time as I got older I started to enjoy them less and less. I’d get off them and not have a real good sense of balance for a couple of hours. So I’ve stopped riding them.

The way the stock market is acting these days reminds me of being on a roller coaster again. I was going to say it looked like things had sort of settled down but along came today and a drop of 419 points. They don’t seem to be all that settled.

The headline stocks plunge on worries of global slow down. Of course the fact that the market is going down reinforces that impression. You have to wonder at what point does it become a self fulfilling prophecy. The market goes down because of worries of a slow down and then the market goes down again because the market went down the day before and so on and so on.

The funny thing is that the “analysts” try to make out there is some sort of logical reason for all this happening. The debt in Greece, concern about Italy, concern about France. concern about the number of people filling for unemployment. Or is the real reason that Wall Street and other markets have woken up to the fact that the recession is still on for a great number of people.

Analysts also keep telling the small investor, the average guy on the street to remain calm and not move out of the market. You just need to ride it out. After all there really aren’t many places to put your money besides the stock market.

They need to start telling this to some of the larger players. Last week the markets in Europe went down based on a rumor that a big bank in France might be in trouble. Not on the fact it was in trouble but the rumor that it might be. When this can cause the market to tank, it shows all logic and reason has gone out the window. The markets are sort of like a manic depressive/bi-polar person that’s off their medication. Wild mood swings. Big rallies. Big drops. Near hysteria in the financial markets.

I think we have to be really happy tomorrow is Friday. Perhaps over the weekend the markets can get a refill on their prescriptions.

Bernanke Blues

What seemed like a lock a few weeks ago that is Ben Bernanke being confirmed for a second term as chairman of the Federal Reserve now doesn’t seem all that certain.

There was a story about this in the Post on Sunday.

The headline says it all: Political push-back stalls stock market rally on Wall Street

The anger by average Americans has been stocked once again by the huge bonuses that banks will be paying to their employees. This was further reinforced but one of the most tone deaf appearance by bank executives since the big three blew to Washington asking for money. Essentially they said the bonuses were fine. Their tone of we didn’t do anything wrong was a far cry from the last appearance when they needed tax payers money and were contrite . They admitted that they just might have contributed to the economic situation. How quickly things change once the banks are back on their feet because of taxpayers money. The reason they paid the money back so quickly was so they would not be beholden to the public. Once the money was paid back things went back to they way they were before Wall Street help to cause the worst economic crisis since the great depression.

Since the public can’t get to the Wall Street, they can get to the politicians and put pressure on them to do something. And politicians looking around to find someone to blame (excusing themselves of course) have found the perfect scapegoat in Ben Bernanke. So there are questions now being raised by both Republicans and Democrats as to whether Bernake is the right person to be running the Fed right now.

I think the problem started when Time named Bernake it’s man of the year. It put Bernake front and center as the face of what had happened. And then shortly after that we had bonus mania from Wall Street.

Now other political voices are trying to calm the waters. A statement released by Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and Republican member Judd Gregg (N.H.) stated:

“In the last few days there have been a flurry of media reports on Chairman Bernanke’s confirmation prospects, highlighting a very vocal opposition,” the statement said. “Chairman Bernanke has done an excellent job responding to one of the most significant financial crises our country has ever encountered.”

One aspect of the story is the reaction of people on Wall Street:

“The president is coming out every other day with a new plan -- now he’s going to bully banks,” said Neil Hennessy, who runs an investment firm that bears his name and who thinks a period of slower but steady growth is ahead.

“The only thing that could ruin it is Washington,” Hennessy said. “And a big part of it is we’re getting no clarity out of our Senate, our Congress or our president. Businesses like myself, why would I hire anybody? Because I don’t know what it’s going to cost me anymore, in health care, or whatever.”

And another:

“The markets are wondering, ‘Who’s on first?’ “ said Mark Coffelt, president and chief investment officer of Empiric Funds. “All of the sudden, these guys are out and Volcker’s in. . . . Everyone is scratching their heads and saying, ‘What are these guys doing?’ It’s a pretty ugly picture.”

And this:

“It only took two days after the special election” for the White House to announce a new proposal, said Sean J. Ryan, a banking analyst for Wisco Research. “God knows what we’re in for between now and November.”

Notice something missing. Somehow this is all some else’s fault. Not Wall Street. Not the financial markets. Those meddling politicians. Mixed signals. Nothing absolutely nothing that Wall Street did. My oh my why should anyone be pissed off about millions of dollars in bonuses being paid out when millions of people are out of work. The same arrogant posture from Wall Street of “we know best” is back in full force.

Maybe people wouldn’t be so angry and demand action from their elected representatives if Wall Street and the financial community weren’t completely tone deaf. Guess some things never really change.

Thoughts Economic, What We Own

So now we, as taxpayers, own two car companies. Along with parts of some banks and maybe an insurance company or two.

It looks like we won’t be owning Hummer. I know personally I’m crushed by that. All kidding aside according to the article:

GM said the Hummer transaction was set to close by the third quarter of this year and should secure more than 3,000 jobs in manufacturing, engineering and at Hummer dealerships around the United States.

Anything that can save jobs and dealerships is a very good thing. I think communities are going to get an eye opening when all these dealerships start closing (2,600 will be closed by the end of 2010). They’ll see just how much they contribute to the community with all the things they sponsor. Some places may not be able to cover that. Now a large part of this is sponsoring youth sports teams. Most notably baseball but there is a place for that. In some cases there will be leagues that won’t be able to survive without the support of dealerships.

It will be interesting to see how GM comes out of this. It will also be interesting to see what happens to all the people that will be laid off because of this. This is going to be tricky for Obama. He’ll need to show that the federal government can help people out. If not the Dems will suffer come elections next year. But then again a year is a very long time and a great deal can happen.

There are signs through fits and starts that the economy is starting to get better. The market is up. People are spending a little more. Housing looks like it might have bottomed out. Again small fits and starts to getting things a little better. The problem is that the unemployment rate is just about the last thing to get better. And if it keeps going up what will that do to people’s confidence and at what point does this become a vicious unending circle.

That’s why GM emerging quickly from bankruptcy would be a good thing. After all Chrysler got the final go ahead to emerge from in just 31 days. Hopefully GM will be just as quick. The sooner it’s done the sooner GM can get back in the black and pay us back.

Credit Card Legislation Passes

The Senate today passed legislation on credit cards.

Finally maybe the consumer will get some relief from all of the crap put out by the credit card companies. You still got the line from them and the American Banker's Association that this will make it harder on consumers.

There was also this comment:

Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, an industry group, said most interest rate changes are a result of actions by consumers. "A small number of Americans have seen an increase in their interest rate due to the increase in riskiness in the economy," he said.

All I can say to this is what of load of crap. My actions had nothing to do with the increase in my rates. This was done solely so Bank of America could make more money.

This bozo then added this:

Any changes in terms over the next months, he said, will not be based on the credit card legislation. "Increases in interest rates and fees aren't premeditated," he said. "They are the result of market forces and contract terms."

Yeah right. They have nine months to implement the new rules which don't allow rates to be raised by whim. I'm sure no one's interest rate will be raised during this time. I guess I have to ask is how dumb do they think we really are.

And to get an idea of just how bi-partisan this is the Senate bill passed 90-5. You can read about it here.

The smartest thing for people to start to do is join a credit union. They have very reasonable rates on cards. I was able to join the NIH Credit Union because I'm an alumni of GW. I'm looking into possibly refinancing with them. And I'm also looking into getting a credit card. One where the interest rate would never go up and there are no fees on balance transfers.

I hope tomorrow to get some more information on the loan. I'm not entirely sure if this will work but at the very least I plan on getting the credit card.

Stress Tests

So the banks are in fairly good shape:

The stress tests showed that despite a deepening recession, the government will require only two of the nation's 19 major banks to raise new capital totaling $9.5 billion, far less than what many analysts had projected. The government also is requiring 10 of the largest banks to increase their capital reserves by raising $74.6 billion in common equity, which can be generated by the sale of common stock.

Not that this comes as that much of a surprise. It seems a little creative accounting was done but in general things are better than they were in the fall.

Of course I personally find it amusing that the bank that needs to increase its common equity the most is (drum roll) Bank of America. There's a shock. It needs 33.9 billion more dollars. No wonder they increased credit card rates.

There are still many questions about how well the banks are doing. If the economy continues to get worse especially in the area of employment, the banks might be sound and ready and able to loan money but there might not be any takers. Then what happens to the banks. Has any thought been given to that scenario?

It is important that the banks are in good shape or at least seem to be in good shape. If there really are they can start repaying the money they owe the tax payers. The sooner the better.

Credit Card Relief

Last week the house passed legislation to rein in the practices of the credit card companies.

This should have been done a long time ago. Consumers have been complaining about these practices for years but, as long as the Republicans had anything to say about it, this legislation went no where. But now even Republicans are on board. It passed by an overwhelming 357-70 vote.

There was the usual reaction from the banking industry:

Edward Yingling, president and CEO of the American Bankers Association, said the group "strongly believes that any additional legislative efforts should strive to achieve the right balance between enhancing consumer protection, and ensuring that credit remains available to consumers and small businesses at a reasonable cost."

"We continue to believe that more work needs to be done to achieve that balance," he said.

Once again raising rates at a whim to whatever the card company wants to is the idea of achieving a "balance" between the consumer and the card company. I don't think so. The actions taken would restrict the ability of the card companies from doing that.

I'm still pissed at Bank of America for what they did. I will say that the one card I canceled from them is just about paid off. The other one I'll keep because I've had it for so long and the credit limit is so high. But I'm starting to look into getting a card from the credit union I joined a couple of weeks ago. Once I have that the only reason I'll use the Bank of America card is in an emergency.

I think I can best sum up my feelings about Bank of America this was: the only way I'd ever do business with them ever is if someone had a gun to my head and threatened to shoot.

Credit Cards

Bank of America spokeswoman Betty Riess says the bank looks at factors including "an individual's performance with us as well as external credit risk indicators" in deciding whether to raise rates. Consumers could see higher rates if they pay late or go over their credit limit twice in 12 months, she notes.

That's a statement from Bank of America on why your interest rate might be raised on your credit card. Small problem is that on the two accounts I have with Bank of America I've never been later EVER.

This comment about legislation under consideration in the House:

The American Bankers Association trade group, which represents the biggest credit card issuers, said it is concerned the House bill could reduce the availability of consumer credit and make it more expensive.

Let see raising rates by 50 to 100 percent or more isn't going to make things more expensive for consumers. You can read more about this from the Washington Post and USA Today. But of course it's not that they're raising rates across the board they use the wonderful euphemism of "reassess credit card risk." If that were indeed the case, then in some cases wouldn't people's rates be going down. But you don't hear about that at all.

The rates consumers pay on credit cards are tied to their risk, issuers say. If issuers can't raise rates on the consumers who become riskier, they'll have to pass along the costs to everyone, they say.

Adam Levitin, a law professor at Georgetown University, believes these arguments are "pure scare tactics."

"If bank rates go up after these regulations, it will not be because of the regulations, but because the banks see it as an opportunity to raise prices," Levitin says.

As far as I can see, they are passing the rates on to everyone. There is no reason to believe that all of a sudden this many people are at risk. The Banks see this as an opportunity to recoup their losses from all the bad loans they made.

The legislation going through Congress is way over due.

Bank of America Ad

Last Thursday in the Post, Bank of America had a full page ad on the back of the front section. The headline said:

How do we intend to lead the lending industry? By example. The ad was directed toward the housing market. It said in part:

following responsible home lending practices to the forefront on four industry. To help customers make clear and informed decisions, so they can choose the home loan that’s right for them. In addition, through the U.S. Treasury Department’s Making Home Affordable, we’re actively working to bring relief to homeowners who’ve lost equity in their homes, are unable to refinance because of decreasing home values, or are having difficulty making their mortgages payments.

The price for this is the reassessing of the interest rates (that’s the term Bank of America uses “reassessing”) they are charging credit card holders. I still maintain one of the reasons for this “reassessing” what normal people call raising the interest rate is to be ahead of any Congressional regulation on the subject. It’s also a nice way to make a whole lot of money.

You notice there was no full page add saying to credit card customers if you are a customer in good standing, have always paid you bill on time and never gone over your limit our reward to you is to increase your rate by at least 50%. In a couple of reports I saw on the news the rate increase was even higher than that. There should be some sort of protection for consumers from this especially in difficult economic times. There is no logical reason except to make money that Bank of America would raise rates like this. Hopefully there will be hearing in Congress on this and some much needed daylight will be shed on this practice.

I for one don’t plan to stop talking about it anytime soon.

The Real Reason My Rate Went Up

The real reason the rate on my credit cards went up so much was not because of the economy but because of legislation that is before Congress. At the end of March a Senate Committee passed:

By a 12-11 vote, the Senate Banking Committee narrowly approved a bill aimed at cleaning up unfair and deceptive practices by credit card companies criticized for surprising customers with fees and unilaterally changing terms.

Unilaterally changing terms. That sounds familiar some how doesn't it.

Here's a excerpt from a column by Allan Sloan in the Post:

Fix credit card rules. Some banks can change the interest rate on credit card balances for pretty much any reason, including if a borrower misses one payment, even if it's for something like a utility bill. So instead of being on the hook for, say, 12 percent interest (which is bad enough), borrowers may suddenly find themselves paying an obscene 29.9 percent. Regulators are trying to deal with aspects of this problem, but Congress could eliminate it overnight through legislation.

The banks' policies are disclosed in the all-but-unreadable notices they send their credit card customers. That makes it legal. But it's wrong. It's especially wrong now, when so many people are struggling to pay their bills and are likely to fall into the missed-payment, higher-rate trap that would make their lives even more difficult.

The "reason" from Bank of America for raising the rate was the economy. Well raising the rate is not going to improve things for people; it will only make it worse. But then again hiking the rate of the credit card and introducing all sorts of fees is a great way for a bank to make up let's say bad investments.

But the banks are going to get some extra time to implement the new policies. Read about it here.

From this article comes one of the more ridiculous things said about this issue:

The American Bankers Association trade group, which represents the biggest credit card companies, have warned that more rules could make it more difficult to price a customer's risk level and therefore reduce the availability of credit.

"We still believe it is an open question whether any further legislation is necessary," said Ken Clayton, senior vice president for card policy at the ABA.

Wow there's a surprise the lobbying group for banks opposing legislation to regulate their industry. I think the legislation proposed by Congress is more than reasonable. It's about time banks begin to realize they don't get to call all the shots.

Bank of America Stupidity

I got one of those periodic statements from my credit card company. You know the ones that say there's been a change in the condition of the account. As it said at the bottom of the envelope:

Important Customer Notices and Other Changes to Your Bank of America Credit Card Account

I have to say I don't always read these things as closely as I should. But I did open this one. Actually I have two because I have two accounts with Bank of America. Inside it said that they were raising my interest rate. They were raising it 50%. That's right 50%.

I think to myself we've given this Bank billions of dollars. We've been screwed by them once and now their customers are getting screwed again.

The one account I won't cancel because the credit limit is incredibly high and I've also have it since 1994. Two very good reason not to cancel the account.

The other one I have through AAA. It was canceled as fast as I could get through to an operator. So I ask why exactly the rate is being raised. Oh it's the economy. I said back that seems to be rather counter intuitive to me. Let's make it harder for people to pay back they money they owe.

I had sizable tax returns. I was going to divide them up between the two accounts. But now it's going to the AAA account. The goal is to pay it off as quickly as possible. I also think I'm going to be writing to Bank of America (I don't expect any sort of response but it will make me feel better). But I'll also be writing to AAA saying they should partner with another bank in issuing a credit card in its name.

I must say I have to scratch my head at this one. How does this help Bank of America? Just another example of how banks are totally out of touch with what is going on.

More on AIG

What to say about AIG?

Here’s a thought what an incredible tin ear these people have. I wrote about this in an earlier post. Stepping back from the issue just a little I have to ask the question did no one in this company realize what the public reaction once the news of the bonuses got out. Seems to me they didn’t. Are they so arrogant and obtuse? I guess the answer is yes.

Company after company on Wall Street and the banks that got us into this mess just don’t get it. The landscape has changed. It seems to me that what they think will happen is this: the government will rescue them by spending billions if not trillions of dollars to right the mess they help to make. Then these firms believe business will return to the way it was before this mess. They expect they will still be getting 7 figure bonuses. Over and over again we get this well we must pay bonuses to keep people. Guess what in the current economic climate you don’t. If you insist on doing this you do so at your own peril.

What these guys really don’t seem to get about the bonus issue is how much it endangers their future survival. I’d like to see anyone try and come before Congress and ask for more money for AIG. I don’t think it is going to happen.

There's a great article from the Post by Steven Pearlstein. He talks about Wall Street's refusal to learn. And this goes beyond AIG. He talks about the chairman of Wells Fargo Richard Kovacevich. Essentially Kovacevich complained about:

how unfair it is that the government forced his bank to take $25 billion in bailout money last year when it could have easily raised private capital -- and then compounded that outrage by changing the terms of the deal and forcing Wells to cut its dividend. Kovacevich said it was "asinine" for the Treasury to order his and other big banks to undergo a special "stress test," explaining that well-run banks like Wells were routinely doing their own stress tests.

Kovacevich apparently believes that because his bank is still relatively healthy, he and his shareholders shouldn't have to assume the same costs and burdens as banks that aren't, particularly when those costs and burdens are imposed by incompetent government officials. That's the way it works in America.

Except, of course, when it doesn't. The reality is that, if the government had not stepped in to take over Fannie, Freddie and AIG; had not recapitalized Citigroup and Bank of America; had not provided the guarantees to allow for the orderly sale of Merrill Lynch and Bear Stearns; had not become the buyer of last resort for commercial paper and home mortgages, then the entire financial system would have melted down by now and taken Well Fargo and its arrogant chairman with it. Rather than bellyaching about how un-American it all is, Kovacevich ought to be thanking the government and asking what more he could do to help.

So now what to do. Well we can continue to be angry which we will. We can blame people. There's a great deal of that to go around. The Republicans want to blame Treasury Secretary Timothy Geithner. They say he should have know about the bonuses and stopped them. Well I think many people should have known. That would include Congress and the Republicans in. It seems the a notice was filed with SEC last year like in May stating when the bonuses would be paid. There was a provision in the stimulus bill that would have prevented such bonuses from being paid but the provision was dropped from the final law. I say enough of the blame game.

What needs to be figured out is how to make sure it never happens again. That means there needs to be regulations to prevent this in the future. Regulations that Republicans in the past wanted no part of. President Obama rightly pointed this out. Some of the people hottest under the collar are the same people who opposed regulations or oversight that would have prevented such things from happening.

I also have a different perspective on the guy who's running AIG, Edward M. Liddy. Talk about a thankless job. Read about his testimony by following this link. Could he have done more to stop this? Perhaps. I'm not sure. But he has taken the unusual step of asking people who received the bonuses to give them back. That to me is a first step.

I listened to Liddy's testimony on a feed and the highlights shown on the news. AIG has been able to reduce the derivatives portfolio by $1.1 trillion. But there's still a long way to go. He thinks mistakes have been made. He said he would never have set up a bonus system like this. He felt it had to be honored for the company to get ride of the remaining $1.6 trillion in toxic assets.

At the end of the day I have a suspicion that this is the right guy to do that job. All you have to do is look what he did. He came out of retirement to head AIG and try and fix this mess. He's taking no salary. Also, no bonus as far as I can tell. He appeared on the Hill to face hours of tough questioning. I have to think he was thinking why the hell did I agree to do this. But he did. Maybe he's made some mistakes but he stepped up to the plate. When his country called on him to help, he said yes I'll help. I'm beginning to think we need more people like Edward M. Liddy, flaws and all, to step up to the plate and say yes I'll help.

The Arrogance of AIG

AIG is continuing to give out bonuses to employees. After receiving billions upon billions of dollars of tax payers money. After being a major player in the financial melt down and the near collapse of this country this company is still going to give out bonuses.

BS Rationale
The rationale for paying the bonuses is that these are contracts and they might get sued. Futher AIG:

In a letter to Geithner yesterday, Liddy agreed to restructure some of the payments. But Liddy said he had “grave concerns” about the impact on the firm’s ability to retain talented staff “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

"I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," Liddy wrote.

Wow just like everyone else that works at a company. Like when a company no longer contributes to 401(k) or suspends raises or increases health care premiums. In other words, the employees at AIG are going to treated just like most other employees who work for a living.

AIG officials say that some of the upcoming bonuses are relatively modest once they are divided among employees. About 4,700 people in the company’s global insurance units are receiving $600 million in retention pay. In addition, about $121 million in corporate bonuses will go to more than 6,400 people, for an average payout of about $19,000, according to AIG.

Modest by what standard. $19,000 is a great deal of money to say the millions of people who don’t have a job or make minimum wage.

The majority of the money is going to the people in the financial products division. You know the guys who came up with financial derivative that caused this crisis in the first place.

It seems not a great deal can be done since the bonuses have already been given out. However, New York Attorney General Andrew Cumo is trying to take action. He's demanding:

-- A list of each bonus recipient's job and performance in the job.

-- A list of those who negotiated the bonuses.

-- An immediate status report on whether the bonuses have been paid.

I'd go a step further. Since the American taxpayer is now the owner of AIG, the name of each person who received a bonus should be made public.

One further sign of AIG's arrogance is there complete inability to see how people would react to bonuses being given out. Do you think there's going to be any support for helping AIG when it comes cup in hand the next time it asks the government for money?

Maybe it's time to let AIG fail.

Thoughts Economic

I thought it was interesting to read about Federal Reserve Chairman Ben Bernanke speech last week. Here's the article in the Post.

He said:

that to help prevent future crises, firms considered "too big to fail" should receive close supervision from regulators.

Bernanke said that system-wide oversight, something known as "macroprudential regulation" is required, and that the Fed could be the home for that, or it could be another agency.

In macroprudential regulation, a government agency, or agencies, monitors an entire economy to look for possible bubbles and attempts to deflate them, rather than focusing tightly on individual sectors or firms.

I'm surprised it has taken this long for someone to address this question. I think a further question has to asked and that is why allow these institutions to get this big in the first place. It seems to me there has to be some sort of oversight by the government that takes into consideration the size of a financial institution. This is especially true when the institution gets big by buying up other banks or financial firms.

It will be interesting to see what the Obama administration does about this.

2political

That's the name of the new site for my political podcasts with Arthur. The site is exactly up and running yet but it will be shortly.

You can go here and listen to the first podcast under our new name.

The main focus of the cast is the economy. Specifically we focus on to the economic stimulus, which President Obama signed into law on Tuesday. We talk about some of the implications, and I also presents my ideas for helping ordinary homeowners which I outlined in an earlier post. That leads to a talk of banks, the financial markets and the salaries people are paid. Despite it all, we end on a positive note.

Hope you enjoy.

Thoughts Economic

Well so the stimulus package passed or will be passing shortly. Now the government has to figure out what to do with the second half of the bailout money. Yet still there is no plan to help people out with their mortgages. Until this problem is solved the economy is going to be in crisis. I was watching Anderson Cooper 360 last night and Suzy Orman was on and she was saying the exact thing. She talked about the need to help people who are already in their homes and having problems paying their mortgages.

I think these people need to have help immediately. But I have few additional ideas on helping people out.

If someone owns a home the single largest expense is their mortgage payment. With so many people loosing their jobs how are they going to be able to make their payments. Instead of waiting until these people go into default or start having problems help them out now.

I think if you are unemployed you should get a housing allowance. This would be a one time thing to help us get through these difficult times. This housing allowance would be given to the person who was unemployed. The person would not have to own a home. They could be renters. (It’s interesting that there’s been essential no coverage on the rental market. It would be interesting to know what’s going on there.) The allowance would be say $1,000. Now for some people that’s not going to pay the entire mortgage but it would be a help. Also the allowance would be paid to people after they got a job. Just because you get a job doesn’t mean your back on your feet financially. That takes some time. So the unemployed person would get the allowance for an additional three months after they find a job.

Now as to the housing market in general or more precisely to mortgage holders. Most of the talk about helping people out with their mortgages is helping people who are in trouble. That’s too late. If the premise is the consumer is the big driving force in the economy, then it is important to make the consumer feel like they can spend some money. The way to free up some money is to reduce a person’s mortgage payment.

So here’s my idea. You offer any mortgage holder a mortgage loan of up to $250,000 at 4% interest. This would be for three years. There would be an additional year for the interest rate to return to the original rate of the original loan.

What would this do? Free up money is what it would do. In my case I would have an additional $200 a month to spend or save or pay down my debt. The best results is that people would spend the money. Or they might decided to pay down their debt. That’s not the optimal result you’d want. But the faster people get out of debt the sooner they will feel they can spend some additional money.

The question of course is how would it work. Here’s what I had in mind. You wouldn’t be taking out a new loan. The government would come along and assume what ever percent of the loan is above 4% interest. So here’s how my idea would look.

Let’s say you take out the maximum of $250,000. Let’s say your current mortgage rate is 6%. For simplicity’s sake I’m going to base the payment on a 30 year mortgage. Currently the loan at this interest rate your payment would be $1,498.88 a month (according to a mortgage calculator I found on the web). Now under the new plan your interest rate would drop to 4%. Your monthly payment would be 1,193.54. The difference is $305.34. That’s how much extra money the home owner would have each month. That’s also the amount of money that the government would pay each month to the bank holding your mortgage. In year four the loan rate would cycle up to 6% interest. In each quarter of year 4 the interest rate would go up .5%. I think this would help soften the blow of having to go back to the original mortgage payment.

Is this the best bang for the buck? I’m not sure. But let’s do some supposing. Let’s say everyone takes out the maximum loan (this of course would not be the case). It means for each loan the government would be paying to banks that $305.34 each month. Let’s round it and say $300 a month. That means over the course of the year the government would be paying $3,600. That’s $10,800 paid out in the course of the three years. Again for simplicity sake I’m going to leave out year 4.

How far would a billion dollars go under this scenario? Taking the above figures a billion dollars over the course of 3 years would take care of 92,592 mortgages. 100 billion dollars would be 9,259,200.

Here are a few more calculations. I tried to find out the number of households in the United States. I googled and got this site. These numbers are from 2005. I’m going to use this number for the total number of households in the US. 111,090,617. I’m going to do some rounding and say the number is 111,000,000. According to this site 66.9% are owner-occupied housing units. That means there is a potential of 74,259,000 mortgage holders. Now some of these people probably own their homes out right. So again for ease (math’s not my best subject) let’s round to 74,000,000.

Next I’m going to take the total number of mortgage holders and see how much my plan would cost the government if everyone of them participated in the plan. Drum roll please the total would be $799,200,000,000. That would be the cost to the government but that is also the amount of money that would be freed up for Americans to spend.

Would this solve the problems that we are having? I don’t know. What I do know is at least under my plan everyday Americans would be getting help which so far they have not gotten at all from any proposed plan.

Thoughts Economic

I guess the latest show down on the stimulus bill will be taking place a little later today. I think it is important that it pass. Something needs to be done.

I've been doing some thinking about it. The Republicans say there's too much spending and not enough tax cuts. Everything I read about the bill, it seems fairly balanced between the two.

Here's the problem I have with the push for more tax cuts. I don't think it is enough money. As whole it is a huge amount of money but per person is where it matters the most. The cut in taxes that the Republican propose, as far as I've been able to tell, are not going to put huge amounts of money in people's hands. Look at it this way say the idea is to give everyone $1,000. Now with a lump sum most people are thinking wow I've got $1,000. I can pay off some bills and get that new washer that I need (which by the way I do need a new washer).

But if you go the tax route the $1,000 might come to each person by a reduction in their taxes of say $20 a week. Yes, over the course of the year, you'll get the $1,000 but you don't have it in hand all at the same time. No one is going to go wow over 52 weeks I'll have a $1,000.

That's always been my problem with a tax cut. Also the more money people make the more they are going to get back. Rich people are not the people you need spending money. They are certainly an important part of getting the economy back on track but it is every day people that you need spending. The extra $20 a week means people might use it to help pay for groceries. The extra $1,000 in hand means they might buy the washing machine. And right now we need people buying more washing machines.

Tin Ear

That's all I can say about the people in big finance these days. They have a tin ear. They seem to have no idea how angry people are about the bail out and the money we are having to pony up for it.

Citibank decided it would buy a corporate jet. After a huge out cry the next day they decided to cancel the order. This from the story:

The jet quickly became a lightning rod of criticism. A White House spokesman said President Obama does not believe "that's the best use of money" by companies receiving taxpayer assistance.

I can't see how they would not get the idea that people would be pissed off about this.

Further proof of the tin ear or complete arrogance on the part of Wall Street is what happened at Merrill Lynch.

. . . reports surfaced that billions of dollars were paid to Merrill executives in late December.

Those bonuses were paid as Merrill was about to report a $15 billion fourth-quarter loss, and while Bank of America was seeking more federal funds to help it absorb the mounting losses at the New York-based investment bank.

Attorney General Andrew Cuomo's investigation will center on trying to determine why the timetable for paying the bonuses was moved up to December from its normal period in January; who knew about the bonuses; and how Merrill could justify spending billions of dollars on bonuses knowing it was on the brink of reporting a multibillion-dollar loss for the quarter, a person familiar with the probe told The Associated Press. The person spoke on condition of anonymity because the investigation is ongoing.

The usual refrain is that people have to be paid these high bonus or else companies won't be able to retain these "high caliber" people. Further these are such high quality people they can't be easily replaced.

My reaction that in today's market is to say where exactly are these people going to go and get a job. I'd say to them you're going to get a 10% pay cut and maybe just maybe you'll keep your job. Also aren't these the same "high caliber" people that helped to get us into all the problems in the first place. Maybe the fear of unemployment might straighten up these guy.

It seems this culture of entitlement on Wall Street was allowed to continue when the bail out started under Bush. It's rather obvious that the Obama administration has a different view on this. All I can say is it's about time.

Worker Sit In

Here's an interesting story out of Chicago. It was in the Post and made two of the national news casts tonight.

It's seems Republic Windows and Doors went bankrupt last week. It fired all of its workers with just a few days notice. It seems the company is not going to be paying them any of the vacation pay they are due.

The main creditor to Republic Windows and Doors is Bank of America which got bailout money. The workers are saying since Bank of America got bailed out they should too. All sorts of people are weighing in on this. From the President Elect:

"The workers who are asking for the benefits and payments that they have earned, I think they're absolutely right and understand that what's happening to them is reflective of what's happening across this economy," Obama said.

To the Illinois Governor:

Gov. Rod Blagojevich ordered all state agencies Monday to stop doing business with Bank of America (BAC) to try to pressure the bank into helping laid-off workers staging a sit-in at their shuttered factory.

"We hope that this kind of leverage and pressure will encourage Bank of America to do the right thing for this business," Blagojevich said from outside the plant. "Take some of that federal tax money that they've received and invest it by providing the necessary credit to this company so these workers can keep their jobs."

The company is blaming the Bank of America saying in part:

the company can't pay its 300 employees because its creditor, Charlotte, N.C.-based Bank of America, won't let them. Crain's Chicago Business reported that Republic Windows' monthly sales had fallen to $2.9 million from $4 million during the past month. In a memo to the union, obtained by the business journal, Republic CEO Rich Gillman said the company had "no choice but to shut our doors."

I'm not sure how this will play out or who is exactly right on this. But I have a feeling this will not be the last of these types of protests we'll be seeing..

Thoughts Economic

The economy, for lack of a better term. continues to tank:

In all, 10.3 million were reported unemployed in November, sending the nation's unemployment rate to 6.7 percent, the highest level in 15 years.

But here's an even more frightening number or way to look at the employment picture:

"For whatever reason, the focus has been on unemployment instead of this broader measure," said Christine Owens, a worker right's advocate and executive director of the National Employment Law Project. Underemployment "is a much more accurate measure of what the economy is really like for people."

You can read more about this depressing news in the Post.

The under employed number percentage is at 12.5%.

Then of course there is the problem in the auto industry. I don't see how you can let the big 3 go bankrupt. The impact on the economy would be too great. It would not only have an impact on the car companies but all those companies that supply parts to them. Some of them in all likelihood would go bankrupt as well.

That's why when people say that the foreign auto companies that have plants in this country wouldn't feel the effect of the big three going are just wrong. If the companies that supply the parts go under, the Toyota or Honda plant aren't going to have anything to build the cars with. They'd be forced to shut down as well.

What I do find interesting is the skepticism that Congress is greeting the request. After all they just handed over to the banking industry 700 billion dollars. The auto companies are asking for just about 5% of that. I know the reason Congress wants more details is they thing the big three will be back soon with hat in hand. (In a short aside the Washington Times has this incredible headline yesterday. I did a double take when I read it. It was something to the effect of the big three grovel for aid. It's not often you see grovel in a headline.)

Of course the fact the first time the big three were down here, they simply thought Congress would say sure here's some money. It showed an incredible tin ear to what was going on. There are legitimate questions to be asked. If we give this money will the culture in Detroit change at all? Will they actually build cars people want to buy? In earlier testimony they blamed the melt down in the economy for all their problems. That was certainly part of it but they seemed unable to admit that they had something to do with the problem too.

What to do about this?

Here are a few thoughts. Extend unemployment benefits. But do more than that for people unemployed. Treasury is now interested in actually helping individuals with mortgages or those attempting to get one. Why not take some of the $350 billion left in the bail out and renegotiate the mortgages of those people who are unemployed.

Move the rate down to say 4.5%. This wouldn't be for the entire life of the loan. It would be for 5 or 10 years. After that the loan rate would go back to what the original rate was or the market rate currently is. But here's what's important the rate would be which ever was lower of those two.

As to the auto industry, they need the money. But here's an idea why not have the government take over paying for the health and pensions. Again not for forever but for a certain period of time in which the big three would reorganize and renegotiate their contracts with the labor unions.

Any way those are my thoughts economic.

Treasury Might Actual Do Something for the Rest of Us

Billions and billions of dollars later the Treasury Department is thinking about maybe doing something for people who don't work for banks. The story in the Post talks about:

The Treasury Department is strongly considering a plan to intervene directly in the mortgage industry to dramatically force down rates and stimulate the moribund housing market, according to sources familiar with the proposal.

The idea would be to use Freddie and Fannie to offer mortgages to home buyers at the very low 4.5% interest rate. It would be hoped that people would jump at these rates and enter the housing market. On the news tonight they said there are something like 4.6 million houses on the market. If and when or until these houses start selling, housing prices will continue to decline. But I guess the question is why would people rush in right now. Wouldn't waiting mean prices would go even lower?

The other area that has to be address is what to do with those people close to going into default on their loans. The Fed announced a program last week to help address that problem:

The Fed was pleasantly surprised that 30-year fixed mortgage rates fell by as much as three-quarters of a percentage point in anticipation of their program. Homeowners rushed to refinance. Cheaper monthly payments may bolster consumer spending, the most important component of U.S. economic activity.

It seems to me that this area needs to be furthered explored. Why not try and apply the same rates to refinancing as to buying a home? Why not make banks pursue this route if they are to receive any bailout money? If you could drop people's mortgages by a percentage points that would be a huge savings to people. It means more people would be able to stay in their homes. It would mean more money available for consumers to spend.

Instead banks that are getting bailout money are using it to buy other banks. Chevy Chase Bank the bank I have my mortgage with is being bought by Capitol One.

The deal is another sign of how the financial crisis is fueling consolidation in the banking industry. Capital One, which would pay $520 million in cash and stock, has received a $3.56 billion investment from the Treasury Department as part of the government's effort to stabilize the banking industry.

Glad to know where at least part of my tax dollars are going. However, I do have to say I'm not exactly sure how this helps free up the credit market and start banks lending to people. Maybe I'm missing something.