If President Obama is able to enact the new plan for banks called “The Volcker Rule,” the era of banks too big to fail should be over. Obama has been speaking with former head of the Federal Reserve, Paul Volcker, who is advising the President to adopt a plan different than those suggested by Treasury Secretary Timothy Geithner.

Although the Volcker Rule has parallels with the defunct Glass-Steagall Act that created a wall between commercial banks and investment banking firms, it doesn’t go that far. The repeal of the Glass-Steagall Act allowed banks and investment banks to merge, like J. P. Morgan & Co. and Chase Manhattan Bank in 2000. If the Glass-Steagall Act were fully brought back JPMorgan Chase would be required to separate its businesses again.

Under the Volcker Rule, banks would still be allowed to offer investment services to customers, but they wouldn’t be permitted to invest customers’ FDIC insured deposits for the company’s financial benefit. This plan would effectively reduce the risk that banks assume. The administration also intends to limit mergers and acquisitions in the financial industry, but the details have not been determined yet.

Is the Volcker Rule a good move? What can the government do right now to protect consumers and Is regulation necessary?

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The Volcker Rule: Obama Proposes New Banking Regulations

Yesterday, President Obama put forth a proposal to recover a projected shortfall in TARP repayments. When the TARP was created, the EESA statute specified that the president would need a plan before 2013 to avoid shortfalls that would add to the deficit. Instead of 2013, we got one this week. Is it a good plan? Here’s what you need to know:

All huge banks are affected, no small banks are

Working on the assumption that the nation’s biggest banks either directly or indirectly benefited from the rescue program (or “bailout”), the new fee will be applied to “the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms”. That’s extra-syllable speak for “try to prevent banks from making the greedy risky bets that created this mess.”

The fee will not apply to small or community banks. (For more on why you might consider a community bank, take a look at the “Move Your Money” meme.)

It will not apply to FDIC deposits

In other words, the money that you put in the bank is irrelevant to this proposal.

The fee will be 15 basis points per year

If you’re unfamiliar with “basis points”, that just means 0.15%. So, here’s the formula for how much one of the enormous banks would be taxed:

Amount owed per year = 0.15% * assets held by the bank – Tier 1 capital – FDIC-assessed deposits

So if a bank has $1 trillion in assets, $100 billion in Tier 1 capital, $500 billion in FDIC deposits, then the amount subject to the tax is $400 billion, meaning the bank will owe $600 million per year.

Can this be improved?

From what I’ve seen of signs held by Tea Party protesters, Obama’s message of “we want our money back” should be quite appealing (even though as of yet, nobody’s taxes have been raised, but this proposal is intended to prevent a larger deficit). Given how long it’s taken to come to light, I’d like to think this proposal has been very carefully crafted.

Still, I’m not sure if I agree with the “indirectly benefited” part of the argument, assessing the fee on every ridiculously-big bank, regardless of whether they accepted TARP funds.

Removing time machines from the equation, do you have any tweaks to this proposal, or an entirely different idea for covering a projected shortfall? (Fair warning: if you say “cut back on government waste and spending”, I hope you can provide specific examples of things you want to cut, and an educated guess on how much it would save.)

The President to Wall Street: “We Want Our Money Back, and We’re Going to Get It”, from the WhiteHouse.gov blog

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Basics of the Financial Crisis Responsibility Fee (Bank Tax)

(Or perhaps Episode IV: Obama’s New Hope.)

In a few weeks the Senate will be debating another stimulus plan. This one is billed as a jobs creation package with a $154 billion price tag. It’s an extension of the American Recovery and Reinvestment Act of 2009, and its purpose is to increase public funding for some of the “greatest hits” from last year’s economy stimulus.

The new bill in its current form, after passing the House of Representatives last month, calls for new funding of $50 billion to be used for infrastructure, $50 billion for state aid, $2 billion for green technology, $2 billion for improving water quality, $1 billion for police officers, and under $1 billion for other items such as Amtrak rail improvement, airport projects, and living assistance for the poor.

It’s going to be difficult getting this bill through Congress after the chaos surrounding the health care bill. The Democrats may have missed their opportunity to get additional stimulus passed without significant concessions to Republicans.

Here is my prediction: If the economy doesn’t recover soon, the stimulus will be judged a failure. Democrats will blame the failure on the inability of the Congress to pass a strong enough stimulus bill and Republicans will instead blame the idea of a stimulus based on government intervention in the market. If, on the other hand, the economy does recover, Democrats will give the credit to the stimulus and Republicans will praise the economic cycles or the free market. Both sides will support their position with data from polls, surveys, economic studies, and think tanks, none of which are ever as independent as they say they are.

What is your opinion about another economic stimulus? Is more cash injection needed to jump-start the economy? Is it more important to stop adding to the federal deficit? And if more stimulus is needed, is $154 billion enough to make a difference?

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New Stimulus Plan: The Fiscal Menace or The Economy Strikes Back?

In a continuation of my favorite story of the year, the IRS announced a few days ago that they are ramping up a new investigative unit to find more offshore tax cheats, with an emphasis on those that are using dummy corporations with multiple layers to hide their wealth. They’ve named it the “Global High Wealth Industry Group”.

With new offices in various countries, it appears the IRS is also acknowledging that high finance is a global game for many people. And my government isn’t alone. According to Reuters, “tax authorities in Japan, Germany and the UK have also created similar units.”

From IRS Commissioner Shulman in a recent speech:

At least initially, we will be looking at individuals with tens of millions of dollars of assets or income. Going forward, we will take a unified look at the entire web of business entities controlled by a high wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance and the integrity of our tax system.

Shulman acknowledged that there are plenty of valid reasons to have complicated overseas business entities, but we’ve all seen enough TV dramas to know that if you’re going to hide the money you owe, that’s how you go about it.

I imagine a lot of people are going to be losing sleep over this new tactic, but there’s an easy way to resume a good night’s sleep: stop cheating. And if you’ve been cheating without realizing it (“it was all that crooked accountant’s fault!”) then not to worry, you still make more than ten million dollars a year, and you can afford to pay what you owe.

IRS hires “hundreds” for new wealth unit, Kim Dixon, Reuters, 11 Dec 2009

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Hundreds Hired at the IRS to Find Cheaters

President Obama gave a “major speech” today (out of curiosity, can anyone tell what makes a speech major?) outlining several new proposals for boosting job creation and ensuring job stability. More than 90% of all economic indicators point to a recovery already in progress, but unemployment, even though it went down in a dramatic way for the first time last month, is still painfully high. And understandably, this is the single most important economic indicator for most people.

So, to help spur growth, the White House is hoping to implement the following ideas.

Small Business Tax Cuts

Small businesses (usually defined as those with less than 250 employees) would be encouraged to resume hiring with a new tax incentive for each new employee added to the roster.

Obama also proposed a temporary suspension of Capital Gains taxes for small business investment “along with an extension of write-offs to encourage small businesses to expand in the coming year”.

Because small businesses are still having trouble getting the loans they need, the White House is proposing to waive fees for, and increase the guarantees for, SBA-backed loans.

Infrastructure

The text of Obama’s speech was especially vague on this point, only saying that there were more than enough qualified infrastructure plans bid on for dollars from the original stimulus plan, and that they’d like to revisit some of them. These include improvements to “roads, bridges, water systems, Superfund sites, broadband networks, and clean energy projects”.

Reuters adds:

A senior administration official said around $50 billion of fresh money would be earmarked for spending on roads, bridges and other transportation infrastructure, and the money would be spent over the course of a year.

Energy Efficiency

Obama asked for Congress to “consider a new program to provide incentives for consumers who retrofit their homes to become more energy efficient, which we know creates jobs, saves money for families, and reduces the pollution that threatens our environment”, as well as expand certain proven Recovery Act programs in the same arena.

Seniors, Veterans, Public Service Jobs

From the Wall Street Journal:

The White House wants to provide additional $250 payments to senior and veterans and act on measures that could help local governments keep teachers and police officers employed.

Continued Unemployment Help

Also from the Wall Street Journal:

Mr. Obama said he also wants to extend fiscal stimulus programs that would provide unemployment insurance for out-of-work Americans and help laid-off workers keep their health insurance.

There are some numbers missing, and how will this be paid for?

Nobody knows that, yet. Obama did say that they were looking into making use of the “leftover” funds from the TARP program, which is being paid back more quickly than expected and has a cost estimate much lower than it was earlier this year. But the TARP program is apparently very well-written, and can only be used to rescue banks, or pay down the deficit. Administration officials are currently challenging this notion.

Full speech on CBSnews.com.

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Obama’s New Job Boosting Ideas

With the news that Bank of America hurried up a sale of securities in order to pay back their TARP loan, the story of the many billions loaned to the “big banks” has reached an interesting turning point: they’re now more than half paid back, 57% to be precise. Here’s the breakdown of the $165 billion loaned to the country’s biggest banks.

This is not to say that the entire TARP program has been more than half repaid. For some reason, the first Reuters story I found listed only the “initial recipients”. If memory serves, these are the companies that needed immediate help in order to stave off an immediate collapse of the entire economy. That’s the story I heard, anyway. I certainly wasn’t there when Henry Paulson got down on his knees and begged Nancy Pelosi not to block the TARP program.

But a bit more research found a well-reputed (according to Google’s algorithms, anyway) site with a breakdown of all recipients, amounts repaid and even revenue generated through the program.

If I add up the amount repaid ($72,316,490,000), add in Bank of America ($45,000,000,000) and the revenue generated ($14,687,071,318, which should logically go toward paying down the debt, one hopes), and subtract that subtotal ($132,003,561,318) from the original amount actually loaned out ($491,950,683,115), I calculate that the TARP loans are still 73.17% unpaid.

This means that at the next “Tea Party”, they should spend roughly 27% of the time celebrating instead of protesting. But that might depend on whether the sponsoring organization is linked to the GOP, a PAC, a corporation, or who-knows-what-else.

But enough of my snark. Nobody is in favor of taxpayer dollars being loaned to private corporations, except of course the corporations that borrowed them, and because I’m an optimist, I’m glad to see the train keep rolling forward instead of backward. Hopefully this latest Bank of America news will prod even more recipients to make plans for repayment.

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Initial TARP Recipients are 57% Repaid

Through today, GMAC has received government bailout funds totaling $12.5 billion. The company is asking the Obama administration for $5.6 billion more. One might say that in a true democracy, GMAC would need to ask permission from each taxpayer whose funds would go towards shoring up the company’s balance sheet, a move that would make GMAC appear more stable on paper. But we have a representative democracy, where Congress makes decisions that occasionally reflect the will of the members’ constituents.

GMAC might receive their third bailout. Industry analysts agree that the failure of GMAC would have a devastating ripple effect throughout the rest of the economy. If GMAC fails, so would the companies who depend on GMAC to offer loans to customers, General Motors and Chrysler. The failure of these companies in turn would result in the failures of suppliers and dealers. The government has already pumped so much taxpayer money into these companies that their failure would signal a broader failure of the entire bailout process. Also, GMAC’s total bailout is still less than the financial injections Citigroup and Bank of America have received.

In personal finance, an additional bailout for a failing company would be similar to throwing good money after bad. For example, if one makes a poor purchasing decision while buying a car, costly repairs might be necessary. Rather than cutting the losses and getting rid of the car, one might continue putting money into the black hole, and after time, the money that you spent on the purchase and repairs could have purchased a nicer car that ran without problems.

There is no guarantee that another bailout will save GMAC in the long run.

GMAC is the parent company of Ally Bank, formerly known as GMAC Bank, an online bank that has drawn in more customers with a savvy advertising campaign and high interest rates. The American Bankers Association forced the FDIC to request Ally Bank to lower its rates because other banks couldn’t compete with Ally’s new strength acquired with the help of taxpayers.

If GMAC were to fail, Ally Bank depositors should be safe as long as they have stayed within FDIC’s coverage limits.

I think it may be time to start allowing companies like GMAC, those who require funding from taxpayers to improve their balance sheets and who have little prospect for paying taxpayers back, to fail. There are signs the economy is recovering. Maybe it is time to let the market and capitalism work itself out. Those companies who remained conservative will survive and those who chased bad loans and complex derivatives without sufficiently considering risk will step aside.

Do you think GMAC should receive another bailout?

Photo credit: jim.greenhill
3rd Rescue Considered for GMAC, Eric Dash, New York Times, October 28, 2009

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GMAC Asking for a Third Bailout From Taxpayers

The executives of these companies had to see this coming. When a company is “too big to fail,” it becomes a public institution in senses of the phrase but the most literal. And for a number of banks and other financial companies in the past year, the public has become a partial owner thanks to infusion of cash from the government bailouts.

A company has a responsibility to do what is in the best interest of its stakeholders. For these bailed-out companies, taxpayers hold more of that stake than ever before. Those who own shares of stock in these companies want nothing more than the companies to be self-sustaining and profitable, but taxpayers, all who have lent money to the companies to help prop up their balance sheets and create liquidity, just want these loans paid back regardless of profit.

The government officially represents the taxpayers, not the shareholders, but you can be sure the government wants to see these companies profit, too. The Obama administration’s “pay czar,” Ken Feinberg, is going to determine the compensation for the highest 25 paid individuals in each of the companies that have not yet repaid government funds. The new compensation plans would reduce total pay by an average of 50% per individual and would reduce the cash portion of pay by an average of 90%.

This could benefit both taxpayers and shareholders in the short term:

• Pay reductions create an incentive for companies to pay back the taxpayers and become fully private.
• Lowering pay lowers companies’ expenses so they can report bigger profits in their quarterly an annual financial statements.

The challenge with government-mandated compensation restriction is that executives and boards of directors believe that bailed-out companies will be less appealing to the best and brightest talent. Corporate leaders who find they can only earn $40 million at Company A but could earn $80 million or more by moving to a company not partially controlled by the public might defect for greener pastures.

That sounds like a solid threat, but it’s not likely on a large scale. There are enough talented and qualified senior-level executives out there who would be happy to take the reins of a company partially owned by the government. At least, that is what Ken Feinberg is hoping.

It’s unlikely taxpayers will see bailed-out companies repay all of the money that they received. The government’s job right now is to get back as much of those funds as possible while still, to a point, preventing the companies from failing.

Photo credit: epicharmus
Wall Street Pay Cuts Stoke Debate About Washington’s Reach, Julianna Goldman, Ian Katz and Robert Schmidt, Bloomberg, October 22, 2009

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Pay Czar Ordering Bailed Out Companies to Reduce Pay

Since the middle of the twentieth century, the U.S. dollar has been the currency that has dominated the world. Governments have held dollars in reserve, and borrowed dollars when necessary, because this currency can buy just about anything, anywhere. In particular, dollars can easily buy oil, a commodity currently necessary for the progress of developed societies.

Countries have attempted to reduce their dependence on the dollar. Iraq began pricing its oil in euros rather than dollars in November 2000. It wasn’t long after that the United States invaded the country and took control of oil production, adjusting the pricing back to the dollar. Iran announced it plans to hold its reserve currency in euro, and this might prove to be more successful.

There might be a coalition of countries ready to move away from using the dollar as their reserve currency. I’m not usually drawn into conspiracy theories, but I think, considering the state of the economy in the United States, the strength of the dollar, and the country’s massive governmental debt, there is a strong possibility that several decades in the future the United States will not be the economic superpower it once was.

Here are some details reported by the Independent, but since denied by governments:

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars… [This] augurs an extraordinary transition from dollar markets within nine years…

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil -– yet again turning the region’s conflicts into a battle for great power supremacy.

Amplifying the importance of the currencies used for trading oil is the idea that at some point in the future — and there have been many disagreements about when dating back to the 1970s — the earth will no longer provide new sources of oil. Supply will eventually begin to shrink and unless major reforms in energy gain momentum, competition for the commodity and its price will increase.

Prepare for the dollar’s demise

Let’s assume this is true for a moment. If the dollar continues to decline, what are options for individuals who would like their wealth to grow over the course of the next thirty years or more?

Ignore the problem. It is possible that despite these obstacles, the dollar may end up victorious. It would take a lot of political might, and I expect more wars, for this to happen. What would a war with China look like?

There is also a reasonable argument that most of us, confined to little exposure to the world outside of our own country, will continue to build wealth in dollars. The external value of a dollar to other currencies could be irrelevant. I do think that as societies continue to progress, globalization continues and it is more difficult to exist in isolation.

Buy gold. Gold has for a long time been considered “real” currency compared to money issued by governments. In the earlier days of the United States, the government issued paper currency backed by gold reserves, so you could theoretically trade in your dollars for gold. Gold may be used as an interim reserve currency while the world loses confidence in the dollar and governments make other plans.

Gold has already shot up in price compared to the dollar and it probably will continue to do so.

Buy euros. If governments are looking to the euro as the basis for their reserves, perhaps you should as well. One option may be to keep a portion of your savings in CDs denominated in euros. Everbank offers this service but I have not yet tried these products.

Invest in China. Another article from The Independent suggests that for most of the next decade, China’s economy will grow 10 percent a year while the United States’ will grow only 2 percent a year. If true, this might be a good time to invest in China. If you want to take this bet, Vanguard’s best option is their Emerging Markets Stock Index Fund (VEIEX) with an expense ratio of 0.39%. Four of the top ten holdings in this fund are based in China making China the fund’s biggest representative. Over the past year, the China-based holdings increased to account for 18.4% of the entire portfolio from 12.4%.

And since buying the fund in dollars pits the strength of that currency against the others, you’ll benefit from both the dollar’s decline and other currencies’ success.

This is probably one of the riskiest bets of the century, but it may pay off.

Much ado about nothing

Saudi Arabia has denied that there have been “secret meetings” as cited above. The United States might quickly recover from the recession and other countries might relent with a stronger dollar. Recent studies suggest the United States will still be the primary global economic superpower in 2020.

What do you think? Is this the time to start thinking about how you might prepare for an economy decades in the future in which the United States is not the most primary economic superpower in the world? And how do you prepare for this?

The Demise of the Dollar, Robert Fisk, The Independent, October 5, 2009

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How to Prepare for the Demise of the Dollar

The U.S. Postal Service has not been a thriving business for a while, and the recession has worsened its condition. In order to save $7 billion, the government is evaluating about 3,200 offices out of the total of 32,741, and 700 of these are currently marked for closure.

Personally, I am a fan of the U.S. Postal Service. I’ve found their services to be less expensive than other shipping options and just as reliable. The biggest drawback I have experienced is when visiting the facilities. The lines are often too long and the hours are inconvenient. Post office employees, those that I have seen, often seem disgruntled, frustrated and overworked. There are never enough works available to assist customers, and from what I understand, my experiences are not unique.

The U.S. Postal Service is disadvantaged against the capital available for their competitors like UPS and FedEx. They have no competition for the millions of people who first began communicating my phone rather than letter, and later, by email and text messaging. There are many people, possibly even a majority, who would be happy to see the U.S. Postal Service disappear.

People living in the areas served by the 700 offices slated for closing might be the first to experience life without USPS. If not, they will have to travel farther to the post office, make use of more expensive mailing options, and possibly receive mail less often. But the complete disappearance of the U.S. Postal Service would have a devastating effect. Households receive mail every day. Much of it is unwanted marketing, but it’s unlikely that will stop. Without the Postal Services, other companies will have to fill the void with standard daily mail delivery. And the great pricing that the U.S. Postal Service offers customers for this mail — and the even better pricing offered for bulk mail and non-profit organizations (and religious organizations) — would disappear as well.

If the website is available, you should be able to download the list of the 700 stations to be closed here. More information is available at the Postal Regulatory Commission’s website.

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10 Percent of U.S. Post Offices Under Evaluation, 700 to Be Closed

The White House is proposing a realignment of the financial regulation that failed to prevent the latest recession, but will the proposals help protect consumers? There is a long way to go between the President’s proposal and the enactment of a law, but here are the highlights as the plan stands today.

The Financial Services Oversight Council, run by the Treasury, will “help fill gaps in regulation, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities.” They will have the power to gather information from any financial firm to identify risks. The Council will be composed of one leader from each of the federal financial regulators.

Not only banks will be regulated. Any company whose size allows its instability to threaten the stability of the economy will be within the scope of the increased regulation.

There will be no more federal thrifts.

Hedge funds and other private pools of capital will be required to registers with the SEC.

The government will create the Consumer Financial Protection Agency (CFPA). This agency stands to be one of the strongest in terms of ability to create and enforce regulations throughout the financial industry. The organization will focus on transparency, simplicity, fairness, accountability, and access.

Along with the elimination of federal thrifts, the Office of Thrift Supervision (OTS) will also disappear or be incorporated into other regulatory agencies. Interestingly, this is the one regulator bankers like. In the current environment, financial companies can often shop around for their favorite regulator, and the OTS has often been chosen thanks to their hands-off approach. OTS was the supervisor of choice for the failed companies IndyMac, Countrywide, Washington Mutual, and AIG. Other regulators were not immune, however.

Just like the FDIC helps banks fail in an organized manner rather than allowing the failure to spur chaos, the new regulatory system would do the same for all other large financial companies.

Penelope Wang from CNN explains how these regulations might affect consumers.

• Consumers will have access to “plain-vanilla” mortgages with simple terms and pricing. In my opinion, these are almost guaranteed to be more expensive thanks to the simplicity premium.
• Brokers will not be encouraged to “suggest” customers choose unaffordable mortgages.
• Some overdraft loan changes will require customers to opt in to overdraft protection.
• Regulators would enforce fair lending laws so more low-income families would have access to financial services.

New Foundation, New Stability, Jesse Lee, The White House, June 17, 2009
How Obama’s Financial Watchdog Could Protect You, Penelope Wang, CNN, June 17, 2009

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New Consumer Financial Regulation

Yesterday, the White House announced new plans for letting investors have a say in executive compensation. With this proposal, shareholders of all public companies will be able to vote on the pay levels of the companies’ highest paid senior management. This sounds like a better plan than allowing the government to set absolute compensation limits, but while the shareholders would have a vote, they would have no power to enforce the results of the vote. The companies can decide to ignore the shareholders’ wishes, effectively saying, “Thanks for the suggestion; we will get back to you on that. Don’t call us, we’ll call you.”

Additionally, the executive branch named Kenneth Feinberg as “pay czar.” Feinberg will oversee major expenses for companies that received money from the Troubled Asset Relief Program (TARP).

Will the new legislation giving shareholders votes on executive compensation, if passed by Congress, have any effect?

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President Obama Proposes Executive Pay Legislation

Ten banks have now been approved by the government to being repaying taxpayers for a portion of the more than $700 billion the industry has received from the Troubled Asset Relief Program (TARP) in total. The stated purpose of the TARP was to provide banks with the capital to boost their balance sheets and ease the tightening in lending, boosting the financial industry from its slump.

TARP funds have become a liability, though, at least in terms of public relations. A number of insurance companies were approved for an offshoot of the TARP, but many of these companies ended up refusing the extra capital and government involvement, a thorn in the side of executives who have seen their compensation regulated.

Now companies cannot leave the TARP program fast enough. According to the Wall Street Journal, these are banks that are satisfied with the benefits they received from the government so far and are now eager to repay taxpayers a total of $68 billion:

• American Express
• Bank of New York Mellon
• BB&T Corporation
• Capital One Financial
• Goldman Sachs
• JPMorgan Chase
• Morgan Stanley
• Northern Trust
• State Street Corporation
• US Bancorp

By accpeting the repayments, the government is giving up almost $2 billion in annual interest payments that would have come from these banks. The move, however, may be a sign that the financial industry is rebounding.

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10 Banks Allowed to Repay TARP Bailout Money

According to Alan Greenspan, this is of the first types of spending that consumers give up when a recession is felt personally. When men come to the point at which they need to save more money than usual and decide to cut bank their spending, underwear is at the top of the list of possible reductions. Because underwear is invisible to the public, man apparently have no shame in letting the fabric deteriorate more than they would when a flush bank account would allow them to replace tattered undergarments when necessary.

Furthermore, an increase in underwear purchases could signal the beginning of a recovery. If this is true, it’s bad news for the economy in the next few years. Underwear industry experts are predicting no growth in sales until 2013.

I have not noticed any decline in my own undergarment purchases. My overall spending on clothing has remained strong as I have been replacing some of the clothing I’ve owned for ten years or more, some of which no longer fits anyway. My underwear doesn’t necessarily last as long before I replace the old clothing with something new.

Purchases of women’s underwear does not correlate to the recession. Any time is a good time for buying lingerie.

Have you reduced your clothing purchases, particularly underwear, to save money this past year?

If you can’t answer this question because you don’t know how much you spend on clothing, consider tracking your expenses for a period of time. You might find you have some opportunities to save money across your entire budget.

How your undies track the recession, Michael Brush, MSN Money, May 27, 2009
Photo credit: williamnyk

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Tracking the Economy By Looking at Underwear

Even though they are not bank holding companies as originally required for the original qualifications for receiving bailout money from the public, six insurance companies will now have the option of receiving this money.

Among others, Allstate, Ameriprise Financial, Hartford Financial Services, Lincoln National Group, Principal Financial, and Prudential applied earlier for inclusin in the Troubled Asset Relief Program. These six companies have now been approved for a chance to shore up their balance sheets with a piece of the $135 billion remaining for bailout.

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Insurance Companies Now Qualify for TARP Bailout Money

While the Senate is working hard to put together their version of the Credit Cardholders’ Bill of Rights some Senators are taking the opportunity of a sure-to-pass bill to tag on unrelated amendments. One example is Senator Tom Coburn’s amendment, S.AMDT.1068, whose stated purpose is “to protect innocent Americans from violent crime in national parks and refuges.” Interestingly, the way innocent Americans are protected according to this amendment is by allowing firearms in National Parks.

The amendment passed with a 67-29 vote earlier this week.

It might be worthwhile to debate whether the statutes restricting weapons from National Parks violate Second Amendment rights, but this doesn’t seem to be the appropriate place. Amendments to a bill should be related to that bill. With this amendment, a congressman on behalf of his or her constituents might vote for the complete bill package while objecting to this amendment or any others.

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Credit Cards and Guns in National Parks

A few weeks ago I wrote a short piece explaining that while even if you think the “Making Work Pay” tax credit of $400 is a bad idea, at least we’re saving money this time by not sending out two letters and a check to every household in America. In short: the stimulus process could’ve been dumber.

In the comments of that article, Laura said:

Yes but now the government will have to reprint and mail out the employee withholding schedules that small employers use to figure up those weekly paychecks. This is why it will take a few months to see that $13. It goes both ways.

I wasn’t sure if Laura was correct about that. I work for a small company, so I figured I’d wait and see.

This morning, my co-workers and I saw our Federal Withholding decrease for the first time as a result of the “Making Work Pay” tax credit. My personal take-home pay is $33 more (we get paid twice a month).

So I asked our Accounting department about the process, and I got this in reply:

It’s actually a change in the Withholding Table. The Table is downloaded from the IRS electronically and then based on your W4 elections and pay scale, the amount will automatically adjust.

Granted, there are probably some companies who don’t do everything electronically, and as a result might need a paper form to be sent, but in our case, and I suspect most other companies, this process didn’t cost anything.

So, in short: the stimulus process could’ve been even yet still dumber.

(More about the Tax Credit from the IRS.)

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$400 Stimulus Payment Dumbness Update

One of the fun things about living in an Information Age is that we not only have near-instant access to financial data, but also a multitude of data sources to look at. It seems there’s a new report every day with updated economic news and forecasts.

We’d like your input about the economic indicators that mean the most to you. Press “Yay” in the following list for statistics that you think are serious reflections of a strong economy, and “Boo” for those you think are unimportant noise.

If you don’t know a term, or you’re just looking for a recent update, look here for a convenient list of many economic indicators. Or you could just ignore any terms that seem meaningless. That’s another benefit of living in an information age.

As always, if I’ve forgotten an important option, add it yourself, or leave a comment on this entry.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Which are Reliable Indicators of a Strong Economy?

Yesterday, the Federal Reserve purchased $7.5 billion of debt in the form of Treasuries from the government, and plans to continue buying debt for a long time to finance the government’s spending. As the government continues selling this debt, the money supply increases. In total, the Treasury may add $3 to $4 trillion dollars to the economy.

This inflation will eventually lead to higher prices and the devaluation of the dollar. While inflation isn’t a worry when the economy is slow and consumers aren’t buying goods, it is likely that prices will start to rise when confidence in the market returns.

Currently, those high-yield savings accounts won’t do much to protect investors against rising prices. The banks will be slow to raise their interest rates when the economy returns. Investors may want to take a look at their portfolios to add a hedge against inflation.

Usually, gold is considered one of the best options and the best way to add gold to your portfolio is through an exchange-traded fund like SPDR Gold Shares. Even though the value of money was once based on gold, there’s nothing inherently stable about the price of gold. Gold doesn’t have intrinsic value — nothing has intrinsic value. Value is only assigned to something when people want it. And there’s no reason that people need gold.

Nevertheless, people turn to gold when they’re concerned about the value of paper money, so that makes it a good hedge against inflation.

Treasury Inflation Protected Securities (TIPS) are bonds tied to changes in the Consumer Price Index (CPI), the government’s measurement of the rise in prices. TIPS will decrease in value if we experience deflation, but you are guaranteed to get out at least what you invest. You can buy TIPS directly from the government via TreasuryDirect.

There’s a problem with TIPS, however. The CPI figure that drives the value of the bond may not reflect the real price increases experienced by consumers. It’s likely you will still lose the purchasing power of your money while it is invested in TIPS.

Another option for hedging inflation is investing in commodities, particularly oil. If you invest in oil through an ETF, like Energy Select Sector SPDR, you reduce your exposure to any one company and mitigate some risk. Oil is suggested for hedging against inflation while the economy is low because as the economy recovers, demand for energy will increase.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

How to Prepare for Inflation and Higher Prices

Our financial crisis is being combated on many sides, with a seemingly endless series of opportunities for people facing serious hardships. I thought it would be helpful to summarize all the options created as a result of the American Recovery and Reinvestment Act of 2009 and give you just the facts that you need in order to consider pursuing one or more of them.

1. Mortgage Refinancing and Modification

You may be having trouble making mortgage payments (either your rate went up significantly, or your income decreased, or maybe both), or you’ve been paying your mortgage on time but your home value has decreased, so you can’t take advantage of lower interest rates. Help is available for both groups.

Visit MakingHomeAffordable.gov, and find out if you are eligible.

Also worth pointing out on that site is the special Beware of Scams page. The idea of losing your home is one of the more frightening ones I can think of. People may not always make sound decisions.

Earlier coverage of this from Consumerism Commentary

2. Tax Reduction for 95% of Working Americans

You don’t have to take any action to benefit from this. You’ll either notice your regular paycheck increasing, or you won’t.

Earlier coverage of this from Consumerism Commentary

3. $250 for SSI or Social Security Recipients

There’s a one-time payment of $250 that should be made by the end of May 2009 for people on Social Security, a veteran with a pension, or people with disabilities. You don’t have to do anything special to receive this, either. More information at Social Security Online.

4. Tax Credits for Making Energy Efficiency Improvements

The Low Impact Living blog has a great summary of the different ways you can save in 2009 by making specific “green” improvements. I’m seriously considering a few of these.

5. Over $15 Billion for Medicaid

I don’t know much about Medicaid, except that many people rely on it, and if you were worried that you wouldn’t be covered, there’s a good chance you will be, now. Read the Press Release at the White House.

6. Tax Credits for Buying a House

There was a tax credit for buying a house last year, and there’s a tax credit for this year. They have different rules and Flexo did a great job explaining both, and how to act on either one.

7. Tax Deduction for Buying a Car

Trucks are included, too. If your income isn’t too high (taxable income of $125,000 / year or $250k for couples filing jointly), you can deduct the sales tax on a new vehicle. Read more (especially the first comment) at the Sound Money Matters blog.

8. More Money for Students

An additional $17.1 billion in Pell Grants means an increase of a maximum Pell award from $4,850 to $5,350. There’s also an additional $200 million for work study programs. Quite a lot more information at the U.S. Department of Education Web site.

More details about this, additional credits and 529 plans can be found at the Online Education Blog.

Summary

Whether you think the ARRA is a good idea or not, it’d be foolish not to take advantage of the opportunities that make sense for you and/or your family. Mostly, though, I hope the growth of our various tent cities slows down really soon.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

8 (or More) Ways to Benefit From the ARRA

Many economists are citing the lack of regulation of the financial markets as one of the primary causes of the recent economic collapse. Alan Greenspan, once a believer in deregulation, blames the crisis on the financial industry’s inability to monitor itself. A pattern of financial deregulation over the past two and a half decades paved the way for financial companies to experience sky-high profits. This is good for the economy in the short-term, but it resulted in economic bubbles that damaged the economy outside of the finance industry, eventually bringing down the biggest banks and brokerages.

In 1999, Congress repealed the Glass-Steagall Act, which was originally passed amidst the stock market crash of 1929 to separate banking businesses from brokerage businesses, but the breakdown of this regulation began in 1980 with the Depository Institutions Deregulation and Monetary Control Act. The law was repealed to allow banks to better compete with brokerages when selling products that may not be clearly defined as “bank products” or “brokerage products” and to allow American financial companies to better compete with international financial institutions that were not bound to such regulations.

Regulatory bodies, like the FDIC, OTS, and SEC still remain, however. Even with no oversight of complex financial derivatives like collateralized debt obligations, credit-default swaps, and the hedge funds that invest in them, regulators should have warned us better of the impending financial collapse. Is this a failure of regulators, proving oversight just gets in the way of business? Perhaps, as some politicians argue, too much regulation has tied the financial industry’s hands, leaving them unable to make the decisions that needed to be made in order to prevent a financial crisis.

Was it the excessive government involvement in the economy, with Freddie Mac and Fannie Mae as the examples, that spurred this recession or the lack of effective oversight allowing financial institutions to place risky bets without cash collateral?

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

Oversight and Regulation: Too Much or Too Little?

As the government continues to bail out the banking industry and taxpayers continue to increase their stake in these companies, how far should the banks go to cut back spending on the excesses that have grown over the past several decades? The local New York City NBC news program aired a feature on the use of town car limousines by Bank of America, JP Morgan Chase, Morgan Stanley, and Goldman Sachs. Despite billions of dollars from taxpayers, bankers continue to travel extravagantly when more frugal options are available.

The media love this topic. Exposing the continued excesses of troubled companies destined for bankruptcy or in search of taxpayer assistance riles up people’s emotions. That’s the perfect formula for great ratings. The concept is simple: the reporter stands outside the corporate offices, counts the limousines waiting outside to take bankers to lunch meetings with clients or home at the end of the long day. They try to interview the bankers who refuse to talk to the cameras. (Corporations generally tell employees not to talk to reporters under any circumstances, to allow the marketing department — “public communications” — to control the public message.

The marketing departments aren’t doing a very good job. The court of public opinion is important here, as stock prices in the financial industry are tanking. Yes, the banks should do whatever they can to cut back on all these little expenses like limos and parties that add up over time. Yes, they should not use bailout funds to make poorly researched major acquisitions. Just like typical personal financial advice for managing a family’s money, corporations that are now somewhat accountable to the public should focus on both the repetitive small expenses (see the ECRD Factor) and the more expensive decisions (like buying a used car rather than a new car). But most importantly, the industry should be communicating that they understand that the gift of taxpayer funding means they have a new stakeholder, a new boss who cares about how their money is spent. Marketing departments should be ensuring the public sees the extent that the companies are utilizing the funds responsibly.

Brokerages that accepted bailout funds have rationalized the continuation of high salaries and bonuses for their best performers by citing the need to keep top talent. Yes, this does mean that the executives are fine with the concept of “wealth redistribution” when it works in their favor. In these cases, taxpayers are funding the compensation for investment managers and stock brokers whose salaries continue to soar while their companies’ profits sink.

Executives of some banks that received money in the form of bailout have stated they don’t like the terms attached to the funds. Two banks, Northern Trust and US Bank, will return the funds they received through the Troubled Asset Relief Program (TARP) to the government, as fast as possible, so they do not need to answer to the public. This is an interesting concept; in most cases, the TARP funds were in the form of loans to banks, which were intended to be returned to the government with interest anyway. Of course they are returning the bailout funds as soon as possible. That was the plan from the beginning.

Banks who don’t agree to reducing expenses and answering to the public should return the funds in entirety immediately, not over time as quickly as possible.

Put yourself in the shoes of the top executive in a bank that was facing bankruptcy when it asked for an accepted billions of taxpayer dollars. You are the CEO. Assuming you haven’t been fired for nearly driving your company into the ground, what financial decisions would you make to fix your struggling enterprise while maintaining a favorable public opinion?

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

You Be the CEO: Should Bailed-Out Banks Cut Limousine Usage?

We’re still waiting to hear the official proposal, but you’re bound to hear a lot of talk this week in the mainstream media about the U.S. budget, deficit, and the plan to let the “Bush tax cuts” expire. Reporters are going to use the phrase “people earning more than $250,000 a year” with respect to tax rates increasing.

You probably heard this phrase a lot during the campaign in 2008. It was misleading then, too.

To put things in perspective, from bloomberg.com:

Obama has proposed allowing the top two tax rates of 33 percent and 35 percent to revert to what they were during the Clinton administration, or 36 percent and 39.6 percent, respectively.

In other words, tax rates may go up between 2 and 4 percent for the country’s higher earners. So, who does this affect? It’s not “people earning more than $250,000 a year.”

The answer is: people with a taxable income of more than $250,000 a year. Taxable income is your adjusted gross income minus your exemptions and either itemized deductions or the standard deduction. And if you’re earning that much every year, you’re probably itemizing.

Is this a good plan? I can’t say. I do know that when the middle class does well, everybody else does well, too. I think we’ve proved under Reagan and George W. Bush that giving tax breaks to just the wealthy people doesn’t stimulate the economy like it’s supposed to, but if you’ve got statistics that prove otherwise, please tell me in the comments.

But more importantly, I wanted you to know that the “250,000″ number that you’re going to hear will affect a lot fewer people than the mainstream media would have you believe. There’s a definite difference between income and taxable income.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

$250,000 Tax Rates and You

The American Recovery and Reinvestment Act of 2009 includes, along with all the spending, the biggest middle-class tax cut in American history. Ignoring all the stuff about housing and small businesses and car sales, this will mean a yearly saving of $400 for individuals, or $800 for couples.

It’s not a lot of money. People who are better at math than me have calculated it’s about $13 a week that people otherwise wouldn’t have had. That amount means more to some people than it does to others. We’ve certainly seen in the comments at Consumerism Commentary how people who have to, can stretch dollars quite far.

It’s a small consolation, however, to realize that this “biggest middle-class tax cut in American history” is being enacted more wisely than the tax cuts we’ve seen since 2001. Namely, it’s happening at the paycheck level. The IRS is just going to start withholding less for the people who receive the tax cut, instead of sending out $400 stimulus checks.

We’re going to be saving a lot on paper and postage, not to mention the fact that we won’t be sending out an additional letter before the check, explaining that the check is on its way.

I did say it was a small consolation.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

The $400 Stimulus Payments Could’ve Been Dumber

Just a quick update this morning to point out something I think has been under-reported:

President Barack Obama should be signing into law the American Recovery and Reinvestment Act today, which means that States (and Commonwealths) requested federal stimulus money have forty-five days to start spending some of that money on public works and improvements.

No matter where in America you live, your Governor’s 45 days starts now, or decisions will end up being made by the State Legislature.

The Consumerism Commentary Podcast is in full swing with new episodes every Sunday. Listen and subscribe now!

2009 Stimulus Bill: Day One