It may be illegal for states to print money for commerce, but local communities have no such restriction from the federal government. And in some communities, local currencies have been successful, at least in gaining the support of some retailers and consumers.

There’s no law of nature that says that an economy functions best when the broadest number of people use one currency exclusively. Currency is just a placeholder that creates efficiency. Without it, we’d have to barter for products and services. Without currency, a tailor would need to trade his services whenever he wanted to buy food for his family. In a free market, theoretically, anything could be used as a currency. The government or quasi-government organizations help by establishing a currency as a standard, so there is faith in its consistency.

Not everyone is satisfied with this solution, however.

A community may start its own currency for a few reasons:

• Local currencies can help keep more funds invested in the community instead of helping national or global companies profit. When you buy a light bulb at Home Depot, part of that profit goes to the headquarters, and eventually shareholders, including global investors. When you buy a light bulb at a local hardware store whose owners live within the community, more of that profit stays in town — but not all unless the light bulb supplier and manufacturer is also in town.
• When companies pay a part of their employees’ salaries in local currency, or when a consumer participates in a community marketplace by selling their items or services while taking payment in the local currency, the profit stays in the community.
• A town or city bonded together by a unique currency builds the sense of community and encourages businesses to work together, not just for the greater economic benefit of the town, but to ensure that all consumers and retailers engaging in economic activity using the currency remain good citizens and fair businesses.
• Local currencies present an alternative choice for people who believe the federal government cannot be trusted with the responsibility of ensuring economic stability through monetary policy. A community-based financial system can help people in the community feel better about threats of inflation or devaluation.
• With local currency in hand, a customer will peruse the directory of merchants accepting the currency and make purchasing decisions based on this list, effectively ignoring companies whose profits benefit those outside the community.

In Philadelphia, the “equal dollar” is a local currency that has flourished for over a decade. Philadelphians can earn equal dollars by volunteering in the community or by selling items. There is a $10 (USD) membership fee and a =$50 (equal dollars) sign-up bonus for individuals; merchants can join for a $25 (USD) fee and receive a =$125 (equal dollars) bonus. It’s unclear how many merchants accept equal dollars, but those who do often require the bulk of the transaction to be in U.S. dollars.

This system isn’t too far removed from certain gift cards. Replace the idea of the community with a mall, and you’ll recognize the paradigm. One of my local indoor malls is owned by a national mall company. They offer gift cards that can be used in any store within any of this company’s branded malls. This is a currency as reliable as the U.S. dollar (as the value is denominated in dollars, not a separate currency of its own), but just like a local currency that ties its spending to the community, the gift cards tie spending to stores that pay rent for space in the mall properties.

Philadelphia is not the only community that has created its own currency to increase local solidarity. You can find local currencies in the Berkshire region of Massachusetts, Seattle, Portland, and Traverse City, Michigan.

I’d be concerned about counterfeit currency. Official government currency like the U.S. dollar is though to counterfeit effectively due to a large number of security measures, but it seems to me that this technology is not readily available to whatever printing services are used by communities that offer their own currency. Of course, since the U.S. dollar is incredibly popular, more counterfeiters aim at overcoming the security measures. Thus, popular currencies may be subject to fraud more than a community currency, but the concern still exists.

Would you use a local currency to replace some or all of your U.S. dollar use in your community?

Images_of_Money

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As many Presidents of the United States have done, President Obama avoided confrontation with Congress by appointing an individual to direct a government organization while lawmakers were on recess. Yesterday, the President appointed former Ohio attorney general Richard Cordray to the long-delayed position of director of the Consumer Financial Protection Bureau (CFPB). Now that this department has a director, it can move forward in enacting regulations — not just suggestions — for non-bank financial entities.

Lately, the CFPB has been working on simplifying customer agreements for financial accounts. A great example is this redesigned credit card agreements. The new design highlights the important terms of the agreement, describes financial terms in plain language, and helps consumers increase awareness of their obligations and rights. The bureau is currently working on a similar resigned agreement for mortgage contracts.

Without a director, none of these recommendations would be required to be enacted by financial firms. Some banks have already taken steps to improve communication, but banks are also regulated by the Federal Reserve. The Fed issued some regulations as part of the Credit CARD Act of 2009, but the regulations do not extend to non-bank financial firms.

The CFPB may face legal challenges from industry groups who insist that the bureau can have no power to issue regulations.

Who is Richard Cordray?

When Richard Cordray was the attorney general in Ohio, and when he was Ohio’s treasurer before assuming the role of attorney general, I would receive marketing emails from him every couple of months. He championed pro-consumer causes and worked to ensure the public had a better understanding of predatory financial arrangements. His emails were directed at the press to help raise issues in the media. For example, he campaigned for closing loopholes that allows payday lenders to practice predatory tactics and he warned consumers of scams related to the Cash for Clunkers program. Cordray lost in his campaign to be re-elected attorney general in Ohio.

Cordray wasn’t without enemies in the banking industry. He filed a lawsuit against Bank of America and its executives in 2009 on behalf of Ohio’s state pension funds related to the acquisition of Merrill Lynch.

Cordray is also a five-time champion on Jeopardy.

In general, judging by his past actions, Cordray appears to be comfortable with a position strongly in opposition with Wall Street interests, which is a change in direction for Washington politicians for as long as I’ve been an adult. Clinton, Bush II, and Obama have all, despite occasional moments of pro-consumer rhetoric, appointed Wall Street insiders to major financial roles in government and pseudo-government agencies.

There is some validity to that philosophy, after all, Wall Street executives have the connections and relationships with other Wall Street executives, and these connections are necessary for the government to operate efficiently with one of the largest driving forces of the American and global economy. The government, however, can’t be expected to issue effective regulations if it needs to stay on Wall Street’s “good side,” however.

It’s a tough balance to manage, and it’s one of the many reasons why I avoid politics.

Photo: Richard Cordray

The original version of this article, The Consumer Financial Protection Bureau’s Director, Richard Cordray, is copyrighted by Consumerism Commentary.

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This is a guest article by Emily Guy Birken, author of The SAHMambulust. In this article, Emily explains and reviews the 3/50 Project, a movement designed to boost local economies.

The presents have been given out, the wrapping paper has been cleaned up, and Black Friday, Cyber Monday, and Small Business Saturday from American Express are just distant memories. Now may not be when most people are thinking about shopping, but it’s the perfect opportunity to commit to really help small businesses in your area for 2012. And what do small businesses need more than anything else? Loyal customers.

This is the basis of The 3/50 Project, spearheaded by Cinda Baxter, a retail consultant, professional speaker, and former retail business owner. Back in 2009, after hearing several reports about how patronizing local brick-and-mortar stores could help the economy, Cinda wrote about the achievability of economic recovery if we all simply commit to being good customers to independent retailers.

From that blog post, a movement was born.

The idea is very simple. Pick three local, independently owned businesses in your area — businesses that you would be sad to see shut their doors — and plan on spending $50 total per month among those three businesses. That’s it. The movement does not ask you to spend more than you already do. Just plan on $50 of your monthly expenditures going toward local businesses.

It is important to note that sometimes you will end up spending a little more money by purchasing locally rather than at the neighborhood box store or online. However, paying above bargain-basement prices means that you are also helping your local economy — a fairly easy trade-off in most budgets.

What’s exciting about making this commitment is the fact that it could contribute to our financial recovery. According to the statistics provided by The 3/50 Project website, every $100 spent in local brick-and-mortars results in “$68 return[ed] to the community through taxes, payroll, and other expenditures. If you spend that in a national chain, only $43 stays [local]. Spend it online, and nothing comes home.” Imagine the boom to the economy if everyone simply chose to spend some of their money locally.

The 3/50 Project is specific in how it defines an independent business. Though a franchised store may have a local owner, it is not one of the local businesses that The 3/50 Project is aiming to help. As a franchisee, the owner of a fast food restaurant, for example, can benefit from national ad campaigns, preferred vendor lists and large-scale price negotiations. This project is looking to help the independents who are relying on their own unique brand, pay their own expenses for marketing, rent and other operating costs, and operate from a storefront, rather than their home, a kiosk, or the internet. The full description of what constitutes an independent retailer is available here.

Deciding to try The 3/50 Project in your community does not mean that you have to give up your Starbucks coffee or your cheap groceries at Wal-Mart. There is room for national chains, internet shopping, and local stores in your commitment. This is an opportunity to be mindful about your spending, which should always be a goal of responsible personal finance. Why not help your local economy while you’re making savvy spending decisions?

Photo: Calgary Reviews
3/50 Project

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As every fourth graders knows, the United States Constitution begins, “We the people…” In the years following adoption of the Constitution, there have been movements to include more classes or types of human beings into that “people” represented by the federal government. The basic rights guaranteed by the core philosophy of the government once applied to a narrow definition of people, but as education levels across all demographics have risen among all socioeconomic subcultures, more people demand to have a voice, or feel that they are represented, in federal government.

The government has always listened most closely to those with money, and as money spread to groups other than white men with a certain heritage, more people gained access to representation. The framers of the Constitution may feel like they represented all colonists in the United States (but certainly not the displaced natives), but they were wealthier and more educated than the rest of their communities. As overall wealth and education increased, rights were extended to black Americans and women, but only when pressured by grassroots initiatives; never have the wealthy in power made any move to share that power unless pressured — significantly pressured, over a long period of time.

Today, the wealthiest still wield the most power in government. While corporations, as of yet, cannot run for office, those who run the corporations can direct profits to initiatives that ensure their interests are well-represented at the expense of just about everyone else in the country, including the middle class. Just like the threat of a terrorist attack (or previously, the Cold War) is used as a reason to increase defense spending for the benefit of corporations connected to the military, the threat of an economic collapse is used to help persuade the public that corporations deserve every break they can get. These threats may very well be real, but the result is that what matters most to policy makers are the concerns of a small, wealthy group of Americans.

You may not agree with any of the above. I don’t intend to take a political approach to anything on Consumerism Commentary, but this is the context that is needed to understand what is going on with the Occupy Wall Street protests which, while they have spread beyond New York, are relatively under-reported or ignored by the press.

The reason for the under-reporting, according to the protesters, is that the media, even the more liberal news media in New York like WNYC and National Public Radio, is financially supported by Wall Street firms. They claim that both the Democratic Party and the Republican Party have the same corporations pulling the strings.

If there’s anything that can be learned from the Tea Party’s slow ascent from counterculture to the mainstream, it’s that the media won’t grant much attention to a movement until it reaches a critical mass and takes an extreme position. If the Occupy Wall Street movement wants more people to be aware of the issue that only the rich are represented by government, they will need to push the issue much harder, find ways to get on television, and convince the public that they are much more than lone groups of harmless rebels with cardboard signs. The Tea Party protesters weren’t taken seriously at first, either, but they transformed their scattered movements into relative cohesion after they managed to gain more publicity through actions and voices that could simply not be ignored any longer.

It has never been a secret that money buys political power. I don’t see any way for that to change, even if Occupy Wall Street successfully increases awareness of the issue throughout the country. Regardless, the protests will need to crescendo in order to get anyone outside the movement to pay attention for more than a minute.

Should government represent all citizens equally regardless of financial condition? Does focusing representation on the wealthy “trickle down” (an economic policy championed by a Republican) to lower classes by virtue of boosting the economy through the “rising tide” analogy (which is attributed to a Democrat)? Is there any difference in the economic ideologies between today’s Democrats and Republicans when they are all funded by major corporations?

Photo: david_shankbone

The original version of this article, Occupy Wall Street Protests: Money is Power, is copyrighted by Consumerism Commentary.

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Update: The Buffett Rule, if implemented, could help pay for the American Jobs Act.

As long as the public holds the general impression that economy isn’t favorable, and that’s certainly the case, for example, when unemployment is high or after a stock market crash, political leaders will propose stimulus plans to help move the country in a more favorable direction. The focus of the 2011 stimulus package is jobs, with unemployment a lagging factor in today’s economy. President Obama has pitched his 2011 stimulus plan with a total cost of $447 billion and is looking for Congress to quickly sign off on the plan to boost the economy.

There are politics at work here, of course, with an election looming next year and one political party eager to blame the other for the inevitable fact that the economy won’t look great by the time citizens in the United States head to the polls.

There is no stimulus check for American citizens this time, but here is what is included in the $447 billion 2011 stimulus package called the “American Jobs Act.”

• Cut the payroll tax in half. Today, employees pay 4.2% on the first $106,800 of wages, an already-reduced rate from the normal 6.2%. The 2011 stimulus proposal would reduce the payroll tax to 3.1%. The proposal would also reduce the payroll tax rate paid by businesses to 3.1% on the first $5 million paid in wages.
• Payroll tax exemptions for new hires and raises. Any new hire will be exempt from payroll taxes, both from the employee and the business side. The same is true for any employee who receives a raise; they will be continue to be taxed on their old salary.
• Tax credit for business that hire the unemployed. If a business hires an individual who has been unemployed for over six months, the business will be able to claim a tax credit of $4,000.
• Deductions for companies that invest in infrastructure. Companies that spend capital on equipment and plants will be able to deduct certain expenses from their taxes.
• Creation of an infrastructure bank. After a round of federal funding, a new facility will be able to offer loans to help fund local infrastructure improvement projects. Once the infrastructure bank is operational, it should pay for itself through interest collection on the loans.
• Transportation improvement projects. In addition to the infrastructure bank, the 2011 stimulus plan includes immediate funding for highways, mass ground transportation, and aviation.
• Modernize schools. Part of the stimulus package will include spending to repair, rebuild, or outfit 35,000 public schools.
• Fix vacant property. The federal government will dedicate funds for fixing up properties, residential or businesses, that have been foreclosed or abandoned.
• Extend unemployment benefits. Although employee benefits have already been extended to 99 weeks, the stimulus proposal would extend benefits even further. For unemployed individuals who choose to build their skills through job training, the plan would extend benefits as well as provide a stipend.
• Fund teachers and first responders. Obama would send $35 billion in federal money to local communities to help hire and keep public school teachers and emergency personnel.
• Offer more home refinances. The President has already proposed extending mortgage refinancing at today’s low rates to more homeowners.

How to pay for the 2011 stimulus

The total cost of the tax cuts in the 2011 stimulus package is $254 billion and the total cost of the spending measures is $194 billion. To pay for the tax cuts and spending, Obama’s plan for the most part is to raise taxes on individuals with incomes over $200,000 (or $250,000 for couples filing jointly). These are the adjusted gross income values, which are often much lower than gross revenue from a job or a business. For business owners, adjusted gross income is the resulting number after business expenses are deducted; for all individuals, adjusted gross income is the resulting income after most retirement contributions are removed from the number.

Much of the following is part of the Buffett Rule proposed by President Obama on September 19, 2011.

• Cap itemized deductions at a rate of 28%, not affecting anyone other than those in the top two income tax brackets. For every $100 in deductions, the most any America would be able to receive back is $28. Those who use major charitable donations to reduce taxable income, for example, could see a significantly higher tax bill.
• Tax carried interest at ordinary income rates. Hedge fund managers and others in the financial industry have benefited from the long-term capital gains rate of 15%. When a compensation is paid out of investment returns, it can qualify as carried interest. The stimulus plan would combined carried interest with ordinary income and the total would be subject to the tax bracket calculation, with a rate as high as 39.6%.
• Repeal oil subsidies. The oil industry has benefited from help from the government at a time when the industry seemed to be successful regardless of the subsidies. Paying for the stimulus plan could be assisted by removing these subsidies and allowing the industry to flourish on its own.

Obama’s proposal for the 2011 stimulus package has little chance of being approved by the Congress in its current form. There will likely be competing priorities between Republicans and Democrats to be settled first, and competing bills between the House of Representatives and the Senate in need of a compromise. As the situation changes, this article will contain the latest details.

What do you think about the 2011 stimulus package in its current form? Will it help to push the economy in the right direction? Is it completely unnecessary?

The original version of this article, 2011 Stimulus Package: American Jobs Act, is copyrighted by Consumerism Commentary.

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Imagine you’re shopping for a new high-definition television. You’re looking around the store for the television with the best picture from a brand you trust. You pick the one you like, not the least expensive model but not the most expensive, either. You take it home, plug it in, and all the television can display is an image that’s been painted on. You open a panel in the bank, and where you expected to see electronics, there’s only crumpled-up newspapers. You were sold a dud, and didn’t know it until you had taken the “television” home. Furthermore, there’s no return policy.

No one should allow a company to sell a product whose components are drastically different than what’s advertised, particularly if the opportunity to evaluate the components doesn’t rise until after the product is sold. This is similar to the reason the Federal Housing Finance Agency is suing Bank of America, JP Morgan Chase, Goldman Sachs, Deutsche Bank, and other banks. The products were mortgage-backed securities. Banks sold these securities to investors as if they were low-risk investments. For a while, there wasn’t a problem. Eventually, the banks had trouble finding qualified borrowers to bundle into securities and extended loans to riskier home buyers.

Selling the mortgages as securities meant that every investment would be somewhat diversified across a wide selection of mortgages, and this diversification should have kept risk low, but the banks — and most likely the investors, as well — continued these transactions because everyone was profiting.

The banks were complicit in making the mortgages appear better by falsifying borrower income statements. Perhaps other parties were aware that the securities were riskier than advertised, but no company, not the investors nor the companies providing insurance for these investments, stepped in to bring attention to the risk. Every company was making too much money to stop and consider the downstream effects.

The FHFA is making the allegations and will file a suit in federal court within the next few days, according to the New York Times and the Wall Street Journal. The banking industry’s position is that a downturn in the economy caused the loss of value on mortgage-backed securities, not that mortgages offered to people who couldn’t afford them caused the downturn in the economy. Now the industry is concerned that a suit in which banks are required to buy back the investments would put the economy back on this ice.

For many years, the government (and the real estate industry and the banking industry) promoted home ownership in the United States. Owning a home became the new definition of the “American Dream.” Owning your own property is the only way to be free, and this philosophy stemmed from feudalism in England. Those who owned land ruled over others. It’s not quite the same in the United States; homeowners are still subject to their local governments, but the feeling of freedom that accompanies home ownership has persisted. Land ownership in feudalism was for the aristocracy, and unlike feudal times when there was little socioeconomic mobility, the promise of America meant that anyone could be a land owner — anyone could be in the upper class.

This drive to live a better life and increase social status led to the market finding ways for more people to afford to be homeowners, from the proliferation and expectation of bank-financed purchases through mortgages to creative ways for increasing supply like condominiums, home ownership without land. The business of home ownership is profitable, so there was no need to slow down. With incentives from the government and a stigma attached to renting, potential homeowners would do anything to qualify for mortgages so they could buy a home quickly rather than saving money first, and potential lenders would do anything to find more borrowers, bundle the mortgages into securities somewhat masking the risk, and sell them to investors.

Now society is paying the price. The economy crashed after the housing bubble became uncontrollable. Homeowners lost their homes. Investors in the mortgage-backed securities and the banks that sold them are jockeying for who will be held responsible. Should the banks be required to buy back the mortgage-backed securities?

Photo: taberandrew
New York Times

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We know about TARP, the program that used taxpayer money to lend to the biggest Wall Street banks tin an effort to prevent the collapse of the financial industry. The Federal Reserve loaned more money to Wall Street, however, in secret. The details are only coming out now thanks to the Freedom of Information Act and an act of Congress.

Besides TARP, banks received $1.2 trillion in federal loans, the details of which have been sorted through by Bloomberg. The programs include the Term Auction Facility, Commercial Paper Funding Facility, Primary Dealer Credit Facility, Term Securities Lending Facility (TSLF), Single-Tranche Open Market Operations, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and Discount Window.

• The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility gave loans to banks so they could meet withdrawal demands of customers invested in money market mutual funds.
• The Commercial Paper Funding Facility helped companies sell short-term bonds (with maturities less tan 270 days) to find their operations.
• The Discount Window allowed for more loans to banks to meet consumers’ withdrawal demands at a low borrowing rate.
• The Primary Dealer Credit Facility allowed brokerages to qualify for TARP-type loans, which were originally intended for banks, not brokerages.
• The Single-Tranche Open Market Operations created an auction for banks, using mortgage-backed assets as collateral.
• The Term Auction Facility was another set of loans for banks who feared the negative market reaction to using the Discount Window, loans of last resort.
• The Term Securities Lending Facility allowed banks to swap toxic assets for U.S. Treasuries.

The loans were not limited to American companies. In one of the most interesting cases, a German commercial property lender received $28.8 billion, double the amount the bank received from its own country, amounting to $21 million per employee. Like most companies taking advantage of these Federal Reserve lending facilities, this company did not make the details of the borrowing known until the program itself became public.

What kind of precedent does this set for future recessions? First, Federal Reserve lending comes at a cost to taxpayers. In some cases, government money has been exchanged for share ownership, and there’s a potential for the public to profit when that company recovers. It’s a risky investment for public money, and the public has very little influence in how their tax revenues are invested and spent. Keeping the $1.2 trillion in loans hidden from view might have been the only way the plan would have survived, with public opinion turning away from assisting Wall Street with more bailouts. Nevertheless, many economists believe these loans were necessary to prevent the destruction of the global financial industry.

Thanks primarily to the internet and the abundance of informational sources, you would think transparency is greater and that organizations would have a difficult time keeping major programs secret. While many people were aware of the existence of these programs, they weren’t nearly in the public eye as much as TARP was, and the extent of these programs and the affected companies were for the most part unknown until recently.

It’s worthwhile to note that $1.2 trillion is the peak amount of the loans. As some institutions paid back earlier loans, the proceeds were then available for new loans. The “same dollar” could have been used in several loans to several different companies at different times.

Bloomberg, Bloomberg

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The Federal Reserve Bank of New York released their quarterly evaluation of the credit markets, and they are reporting some good news for consumers. Total consumer debt dropped $50 billion since last quarter, ending at $11.4 trillion on June 30. Mortgage balances and home equity credit balances declined, contributing to the overall decrease. Debt not related to real estate stands at $2.28 trillion, 9.5 percent below the peak in 2008.

Consumers are still reducing their debt as they have been since the start of the recession and credit crunch, but this process has slowed down a little. The volume of credit card accounts has increased, and so has the number of credit inquiries. For those who have credit cards, the issuers have increased available credit limits. These are signs that consumers are seeking more credit now and issuers are somewhat willing to comply.

Delinquencies have decreased this quarter. 90 percent of outstanding loans are current, the highest level since 2008.

With some signs that the credit market is thawing, a broader economic improvement might be around the corner. With access to credit, a willingness to use that credit, and a general impression among the public that the future will be brighter, the economy could improve. The biggest effect that might have is the willingness among businesses to hire more employees, increased salaries, and perhaps even a recovery in the real estate market.

Federal Reserve Bank of New York

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Democrats and Republicans in Congress, not to mention the President, are battling over what to do about the debt ceiling, an arbitrary limit of government borrowing set by Congress. The government borrows money from investors in order to pay its expenses, like salaries and Social Security, and if the government is unable to borrow, eventually money will run out. That’s a consequence of spending more than you earn, a basic personal finance concept that doesn’t translate well to building what was one point, though still may be, the most powerful national or sovereign economy in the world.

The government has approached the debt ceiling before, and every time, Congress has acted to raise the debt ceiling. Today, politicians are more divided than ever, and it’s looking like a firm deal is not going to happen right away. The most likely outcome is that Congress will delay the issue with a temporary extension of the debt ceiling, moving any action to the future — and closer to the next presidential election when more citizens are ready to engage in political fights. There’s a very slim possibility that the stale mate will continue past August 2, which is when, according to the Treasury Department, the obligations require more than the government has, and some tough choices will need to be made.

If this does happen, President Obama will need to make some tough decisions about who does not get paid. The most likely option will be to furlough parts of the federal government, so military salaries and Social Security payments would not be interrupted.

Rating agencies like Standard & Poor’s will likely downgrade the official AAA rating for the United States’s debt. Even if a temporary solution raises the debt ceiling, this is still a possibility. Many investors would not lend money to the government if its credit rating slips, and interest rates may rise to compensate willing investors for the perceived risk in the system. These interest rates could affect everything from mortgage interest rates to credit cards, making the cost of borrowing higher throughout the economy. However, Japan’s rating was lowered in 2002, and the country suffered no ill effects, so it remains to be seen if rating agencies’ opinions matter as much as people believe. Even S&P has indicated the effects of a downgrade would be minimal.

I think the BBC, whose audience may not be familiar with the intricacies of the U.S. Constitution, sums up the situation interestingly:

Why can’t the Obama administration borrow more? Because it is not in their power. All government borrowing has to be approved, under the US Constitution, by Congress… Perversely, Congress also sets the government’s spending commitments and tax-raising powers. This puts the Obama administration in the impossible position of being required to spend more than it earns, while also being prevented from borrowing the difference.

Another possible consequence is the further reduction of the value of a U.S. dollar compared to other currencies around the world. The dollar’s value has been falling for years, so it may difficult to say if a continued fall is the result of a government default, but it certainly can’t help. If the dollar continues to fall, the typical reaction would be to put money into hard assets like real property.

Over the past few years, people and businesses who could qualify as borrowers have had the benefit of very low interest rates. If interest rates do increase, it would come at a bad time. The country is still trying to claw its way out of a recession, and high interest rates are bad for businesses trying to expand. The good news is only some businesses are trying to expand; most are saving their cash as is evidenced by the reluctance to hire more than the bare minimum of employees.

If the consequences of a ratings downgrade are not as dire as the media portrays, as opined by experts, the issue shouldn’t really be receiving all the attention it has. It does bring to light the issue of spending more than the government can afford, but it’s more of a political issue than an economic issue. Means that our representatives are using the debate on the debt ceiling to distract from the bigger economic problems we are facing, like unemployment, a lack of business growth, a substandard education system, endless spending on wars, and ineffective regulation of the financial industry.

Photo: o palsson
Kiplinger, New York Times, BBC, Bloomberg, NPR

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Larry Summers, former economic adviser to Barack Obama and Treasury secretary under Bill Clinton’s presidency, shared his thoughts on the economy through opinion pieces in the Financial Times and Washington Post. His concern is the possibility that the United States is heading for a “lost decade” similar to Japan’s lost decade in the 1990s. This country has already experienced five years of economic growth under 1 percent annually, and that’s half way to a decade. Summers argues that while changes in policies helped prevent total economic disaster in 2008 and 2009, the economy needs more stimulation right now to prevent the history of one side of the globe from repeating on this side.

He is calling for more infrastructure spending right now. The country’s infrastructure is quickly becoming obsolete, and a stimulus package that focuses on infrastructure maintenance and replacement at a time when financing is cheap would increase the level of employment and grow the economy. When the major stimulus package was developed, it was designed to focus on “shovel-ready projects,” the same type of infrastructure improvement that Summers is calling for now. Obama warned of a lost decade in 2009, when trying to sell Congress and the American public on the first stimulus package. What happened to that first stimulus? I know that stimulus funds supported local road and bridge improvement projects near me — some of which were started years ago and are still far from completion.

It must not have been big enough or agile enough. While the stimulus most likely helped to prevent a larger economic problem, we’re still heading towards a lost decade.

Larry Summers offers these suggestions for moving forward and sparking the economy.

This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies [austerity measures, inflation protection[, no matter how apparently appealing or effective in normal times, will be futile at best…

Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.

Politicians are going to have a tough job convincing the country that more taxpayer money should go to stimulating the economy, the government should continue spending, and more federal debt is acceptable even at these low interest rates. Yet, if the economy struggles for another five years, global investors will lose interest in investing in the United States, and the country could find it difficult to survive economically against other nations’ economies.

Japan also introduced economic stimulus policies to try to recover from that country’s Lost Decade starting in 1991, but that country’s economy still hasn’t found its way. The economy in that region of the world is being fueled by other nations, where labor and parts are cheaper. When we look at Japan, China, Taiwan, and Korea, we may be looking to our own future, regardless of any new stimulus programs. This just might be a new reality, where economic growth comes from emerging nations.

Financial Times, Washington Post, Wall Street Journal

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While the Federal Reserve was publicly providing money to member banks at interest rates of up to 0.5% during the financial meltdown of 2008, a different, less public program bailed out Credit Suisse, Goldman Sachs, and Royal Bank of Scotland with short-term loans with an interest rate of only 0.01%. Those banks received the bulk of the help from this program, but Morgan Stanley, Citigroup, Bank of America, and BNP Paribas in France also received billions of dollars. If consumers like you and me wanted to borrow money for 28 days, we might have to turn to payday lenders or shady techniques, where the price of borrowing expressed in APR could be 500%, 1,000%, or even more. These banks borrowed at least $30 billion practically for free, and had the opportunity to use that cash as leverage to increase earnings during the economy’s toughest market in the recent recession.

The details of this “single-tranche open-market operation” (ST OMO) do not include exact amounts, and members of Congress did not even know the details of this program until now, despite oversight responsibilities. These transactions were kept mostly secret because releasing information about this type of bailout at the time could have had a disastrous effect on the reputations of these institutions, doing more harm than good in a time of crisis.

The Federal Reserve adopted a technique usually used for controlling the money supply and affecting interest rates, and turned it into a facility for extending loans to the banks without the loans being a part of the Troubled Asset Relief Program (TARP) or bailout. Bloomberg explains how this special type of lending worked.

Under ST OMO, cash changed hands through repos, or repurchase agreements, which the central bank has used to move money in and out of the banking system for at least 60 years. In a repo, the dealer sells securities to the Fed and agrees to buy them back for a higher price after a set period of time…

When the central bank increases the money supply — by paying cash for securities in repos — interest rates tend to fall. When it drains cash from the system by selling securities in reverse repos, rates can climb. Using repos to provide emergency cash, a step the Fed announced on March 7, 2008, was a departure from that process…

It’s possible this plan helped save these banks from collapse, but was it necessary? And given the secretive nature of the program, would have there been any damage if the details were made public at the time, as was done for other aspects of the Wall Street bailout? What did these banks do with a practically free loan?

Photo: sachab
Bloomberg

The original version of this article, Federal Reserve’s Secret Bailout Helped Banks Profit During Crisis, is copyrighted by Consumerism Commentary.

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Last night, HBO premiered Too Big to Fail, a movie based on Andrew Ross Sorkin’s book, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves, based on the events of the financial meltdown of 2008 starring Bear Stearns, Lehman Brothers, Goldman Sachs, AIG, The Federal Reserve Bank of New York, and the Department of the Treasury. The dramatization focused on the events surrounding just a few days; the aftermath of the decisions by the men leading these companies — all men, by the way — and the “Main Street” side of the collapse comprise the real story, and this was reduced to off-handed remarks and the film’s text-based epilogue prior to the closing credits.

The film portrayed Hank Paulson, then Treasury Secretary, Timothy Geithner, then head of the New York Federal Reserve, and Ben Bernanke, Fed Chairman, as the mostly-good guys, trying desperately save the world from financial collapse, and the CEOs of the major financial corporations as the somewhat-bad guys, holding off on saving the world, but ultimately giving in. The film showed the chief of the Securities Exchange Commission, ordered by the government to step in to force the hand of the corporations, uncomfortable with the role the government was playing in forcing — or strongly encouraging — deals and moves.

If you’ve been a bit confused about how the world came to the brisk of total financial collapse at this time, the characters in the movie do a good job of succinctly explaining the series of events that brought the financial system to this point. When Paulson is asked why no regulation prevented these problems, he exhibits the only appearance of greed in the movie by offering the excuse that they were making too much money.

Almost every line of the movie touches on financial terms, so this might not be a film that holds the interest of the typical audience. There is drama and tension, so it works, but having some understanding of finance helps get through the plot. Like Titanic, the audience knows the ending, and it is the set of events that bring the film to its eventual conclusion that makes it interesting.

Catch Too Big to Fail on HBO. It may not provide new major insights into the financial collapse, but the actors’ performances make this film work. If you have seen the film, share your thoughts.

The original version of this article, HBO’s Too Big to Fail, is copyrighted by Consumerism Commentary.

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The Department of Justice filed an anti-trust lawsuit against H&R Block. This second-largest income tax preparation service intended to acquire the company that owns third-largest income tax preparation service, TaxACT. Based on the number of customers who used these companies’ services to self-file 2010 tax returns, the combined company would still be a distant second to Intuit’s TurboTax. The new combined tax-filing service would be run by TaxACT’s management team, which is surprising considering H&R Block’s At Home product has more customers and is a more recognized brand.

According to the government agency, the proposed merger would result in too much consolidation in the marketplace, decreasing choices for consumers and increasing prices. Consumers’ interests are better served in a competitive marketplace, and the Department of Justice has the job of stepping in when a merger or acquisition would result in unfair competition. For a while, the DOJ has been quiet, allowing companies to consolidate, deferring to market forces. The DOJ didn’t act when AT&T planned to acquire T-Mobile, a deal that would create a duopoly among mobile phone service providers. The government also didn’t have a problem with Comcast’s purchase of NBC Universal, which put the full stream of television, from production to broadcast to delivery, in the hands of one company.

H&R Block responded to the government’s suit with claims that the merger would increase options for tax-filing customers.

CNN, H&R Block

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Financial experts tell families to “spend less than they earn” and “don’t pay interest to borrow money.” The government does the opposite, running a budget deficit and paying billions of taxpayer dollars every year in interest payments. There is no question that deficit spending by the federal government is a problem. Or is there?

There’s a popular analogy that likens the government to a household. Deficit spending, where a budget calls for spending more than it has available, is a sure way to increase debt. For a household, debt can be most dangerous, resulting in financial disaster in the worst case. Although the analogy can be nice and neat, it’s not very accurate. Here’s what Philip Greenspun had to say recently about how the government’s deficit would look if we were talking about a household rather than the single most important part of the economy right now:

Let’s start with federal spending. The FY 2011 federal budget is approximately $3.82 trillion… We have a family that is spending $38,200 per year. The family’s income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.

There’s a good point in here. If the goal of lawmakers right now is to cut the deficit, tackling the smaller numbers is just noise without overall effect, like the household canceling the cable subscription, while the larger expenditures go mostly untouched. Great job: you canceled the dollar-a-day cable service but are ignoring Johnny’s $1,000-a-day compulsion (Fabergé egg collecting, naturally).

Never mind the details; it comes down to whether the government really is like a household. Here’s why it’s not at all akin to a family spending more than it earns.

• The government can at any time, at its discretion, increase revenue. It’s not popular, but raising taxes is an option. Households cannot similarly decree that their income increase. People can take certain actions to increase their income, like obtaining more education or training, but these often require even more expenditures. Income-earners can get second or third jobs to help make ends meet, and the farther that goes, it will be emotionally, mentally and emotionally straining on a family.

  Households are not nearly as flexible on the revenue side as the government. Thanks goes to interim podcast producer Bryan J Busch for the reminder about this point.

• The government can at any time, at its discretion, devalue its debt. Monetary policy comes into play. The Federal Reserve, working alongside the government, purchases government securities, increasing the money supply for banks and consumers. With more money available in the economy, people (but mostly businesses) can afford to pay more, and prices increase, effectively decreasing the purchasing power of a dollar. This is a great position for people who owe money to be in, because the real value of what they owe decreases.

  Households, on the other hand, have no control over the money supply and therefore cannot manipulate the real value of their debt.

• Deficit spending helps spur the economy. Throughout the twentieth century, the government was more frequently in a budget deficit than in a budget surplus. The ability for the government to spend freely helped this country become the rich economic powerhouse it is today. With the federal government taking up the slack by investing in the economy during periods in which businesses were gun-shy, the country continued prospering — particularly the middle class. Periods of deficit spending were followed by periods of surplus, but for the most part, deficit spending is linked to this country’s growth.

I’m not intending to defend the concept of deficit spending. Over time, it will cause problems. Interest on debt is one of the largest national expenses, and having to continually pay for expenses already incurred is not a “wise” expense. Even through the devaluation of currency, it’s unlikely this problem will ever be tackled. Unlike a household, though, government can keep postponing the consequences. The best a household can do would be to declare bankruptcy. Other nations have taken this approach to have an opportunity to restructure their debt, but it’s unlikely for this tactic to be used the United States in the near future — unless Donald Trump is elected President; he has some experience with bankruptcies.

The original version of this article, The Budget Deficit and Debt: Is the Government Like a Household?, is copyrighted by Consumerism Commentary.

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In May 2009, the Financial Crisis Inquiry Commission was created to determine the primary factors that drove the economy to collapse, sparking the Great Recession. Their reports will be released in just a few hours to the public. The committee consists of members from both sides of the political aisle, and opinions within the report are divided by party lines.

The New York Times got its hand on the report’s conclusions and reports that the blame touches everyone. At the end of his administration, Bill Clinton shielded derivatives from regulation, and that helped to get this particular financial free-for-all started. The commission concluded that Fannie Mae, Freddie Mac, and the government’s promotion of home ownership starting in 2001 was not a major factor, though some members of the commission disagree in a separate statement.

More blame is laid upon Alan Greenspan, who as Chairman of the Federal Reserve, didn’t curtail the housing bubble and pushed for further deregulation. For the regulation that was still within the government’s powers, the Securities and Exchange Commission is cited for being ineffective.

Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of incompetence. It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps… At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

The Bush administration is criticized in the report for not having a consistent response to the crisis. For example, Lehman Brothers was allowed to collapse while Bear Stearns was bailed out. Uncertainty helped to create panic within the financial industry. Credit-rating agencies were no help, either.

The report’s main conclusion is the financial collapse was avoidable.

New York Times
Financial Crisis Inquiry Commission

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The concept of frugality has permeated mainstream personal finance in the past few years. That’s understandable, given the state of the economy. For many who have been personally affected, following the loss of income or a job, this frugality is a forced approach. People are looking for ways to save money because they have less of it to spend. Those of us who have been fans of the concept of frugality have been proud that the rest of the country is starting to jump on the bandwagon, re-affirming our outlook on personal finance.

Businesses are experiencing a forced frugality as well, particularly those whose business models rely on access to credit, a resource that all but vanished for some businesses during the credit crunch. As CNN Money pointed out recently, business aren’t hiring because they’ve learned how to survive on less. The employment numbers aren’t improving significantly, and unemployment forces more people to live on less, just like those businesses.

The economy won’t improve until businesses begin hiring and the public sentiment about the economy improves. It’s a feedback loop.

The primary tenets of frugality work well within an individual’s personal finance philosophy, but once the concept becomes a movement that spreads to a greater population and businesses, the economy can’t move. Here are some of the aspects of frugality that improve your own personal finance, but when practiced by the business world, keep the economy from growing at the pace we would like.

• Building up your emergency fund. Businesses like to call this their cash reserves. One of the first steps to creating a solid financial foundation for your family is fully funding a savings account to a level that could cover, for example, six months’ worth of expenses. This keeps cash liquid to help pay for necessary items during an unforeseen loss of income. If a company were to take the same approach, it would mean they’re not increasing return for shareholders by either investing in their business or by returning the cash to investors in the form of dividends.
• Spend less than you earn. This tenet is so basic that anyone who doesn’t follow this rule will, given enough time, eventually find themselves without a home or any other assets. Most of the time, the results are less drastic. Credit card balances increase and families become buried among high-interest debt. Many businesses rely on leverage for growth, and without access to credit and without a desire to over-extend, they can’t compete in the marketplace as well as they could otherwise.

There are other aspects of frugality that don’t particularly have a negative effect when adopted by businesses en masse. For example, smart shopping — finding the best discounts and the best value, not necessarily the cheapest option — benefits the economy overall, because vendors who provide the most efficient solutions will receive the most business.

On a personal level, let’s keep frugality alive as long as possible. The sooner businesses are willing to take on a little more risk, however, the sooner employment will improve, people will feel they have more money to spend, and the economy will start growing.

The original version of this article, Frugality is Bad For the Economy, is copyrighted by Consumerism Commentary.

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Robert Zoellick, president of the World Bank, is concerned about the future of our global monetary system. Once upon a time, every dollar in the United States needed to be backed by gold and silver because these metals were said to have intrinsic value. If the world is losing faith in the U.S. dollar as a reserve currency, would it be a good move to move back to gold, the standard for much of monetary history?

There isn’t enough gold in the world to cover the money supply. After Zoellick’s remarks, the trading price of gold shot past $1,400 per ounce as traders speculated what could happen if the gold standard returns. Demand would skyrocket, supply wouldn’t change, and the price would soar. Anyone owning physical gold, which would suddenly become necessary for governments who need to hold reserves, would be able to sell at an incredibly high price.

I’m not running out to buy gold. A return to the gold standard is highly unlikely. The United Nations and the G20 have been tossing around the idea of using a basket of currencies or a new international currency to stabilize the world’s financial system, and if anything changes, that seems more likely than going back to an abandoned monetary policy.

Are you buying gold with the hope that the value will continue increasing?

The original version of this article, A Return to the Gold Standard, is copyrighted by Consumerism Commentary.

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I wouldn’t gamble more money than I could afford to lose. I also wouldn’t spend my own money in order to win an election, but I’m not, and nor will I ever care to be, a politician. Even those living outside of California have heard, the former CEO of eBay, Meg Whitman, spent more than $160 million of her own money, more than 10% of her reported net worth, to ultimately lose the election for governor of that state.

Had she won the election, her investment might not have been a waste from at least one political point of view. Avoiding the obvious political debates played out ad nauseam elsewhere, would you gamble 10% of your net worth? A complete loss might be an acceptable risk if you believe you have a good chance to be on the winning side of the investment.

People who want to be politicians should be driven by the possibility of making a positive difference in the world — or country, state, or town. Two of Whitman’s goals were to create jobs and improve public schools. With $160 million to spend, someone could take great strides with both of these goals by investing in businesses and supporting the secondary education system directly. It’s easy to argue that Whitman hoped that by spending the money to win the election, she’d be in a better position to have a greater effect than she could with just her own money.

It’s interesting to note that the most expensive self-financed race in history didn’t win — an example that defies the general rule that the political victor is the opponent who spends the most money.

The original version of this article, The Worst Investment California Has Seen, is copyrighted by Consumerism Commentary.

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The Troubled Asset Relief Program (TARP), created and enacted by President George W. Bush’s administration in 2008 with strong support from Republicans, has been deemed a success for taxpayers by President Obama’s administration on the date of its so-called ending, despite being criticized by opponents both liberal and conservative. Only $386 billion of the original $700 billion authorized by the TARP was distributed to help the economy. The second $750 billion authorized was never touched.

The money that has been repaid by bailed-out companies has been profitable for taxpayers thus far, but most organizations are predicting an overall loss of $30 billion, though some opinions put that figure around $90 billion. Even though the program has become wildly unpopular and is seen as a symbol of Democrat overspending, economists agree that enacting the TARP was a better option than the alternative — not doing anything to prop up AIG and GM. We’ve experienced an national jobless rate of over 10%, and some people are mad as hell, but with a collapse of the financial and automotive industries, that number could have been 15% or 20%.

Not every program within the TARP has been as successful, however. The Home Affordable Modification Program (HAMP) has not attracted lenders to participate. There has been money available to help homeowners who, whether because of unemployment, overextension or shady lending practices, can’t afford their mortgages. Without lenders agreeing to participate, the money destined for “Main Street” rather than “Wall Street” never made it into anyone’s hands.

History may look upon the TARP as a failed economic program, but that will be a result of politics, not economics. Public perception becomes reality.

The original version of this article, TARP Bailout: It’s a Success and Failure, is copyrighted by Consumerism Commentary.

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AIG, the giant global insurance company bailed out by taxpayers during the heat of a financial crisis, still owes the United States government over $100 billion. Part of the bail-out agreement involved the government receiving preferred shares in the company, becoming a significant owner.

According to the news today, the company wants to start paying back this remaining balance next year. At the same time, the government will reduce its ownership in the country. Preferred shares will be converted to common shares which can then be sold on the open market, a process that will apparently increase the government’s stake in the company for a short time.

AIG has been paying back the government for some time already, selling off non-core businesses and other assets to raise the cash.

If the price per share of AIG common stock increases throughout the year, the government could make a profit on the investment in the company. If you’re going to buy shares of AIG, it might be a good idea to get in now before the government starts looking for buyers. I don’t own any AIG stock right now, but I might buy some soon.

Source: CNBC

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Until I heard of Basel III yesterday, I didn’t know there was a Basel I or a Basel II. The three Basel accords exist to give banking systems around the world a framework in which they can operate successfully, and the latest of these accords introduces new requirements for managing risk.

For the most part, the banking industry around the world would like to prevent a new collapse like the recent meltdown that affected the entire world. Through the Basel accords, governments will be encouraged to adopt the standards set forth and codify them into law. This is a long process; Basel II, published initially in June 2004, is still not recognized withing local regulation across the globe.

Don’t worry about the banks, however. They have sufficiently lobbied the committee developing Basel III. Banks will be able to implement new requirements over time, phasing in any changes that might result in lower net profits. For example, banks must keep a cash reserve to offset risky investments. Today, banks need to have only 2% of their balance sheet reserved, but with Basel III, this requirement of Tier 1 capital would increase to 4.5% in 2013 and finally 6% in 2019. In addition, banks will need to hold onto an addition 2.5% in a rainy-day fund that will help keep the bank alive in barren years.

Banks that are too big to fail — noted in Basel III as “systemically important banks” — may have stricter regulations, as well.

Basel III will change the way derivatives are traded. While there may not be much difference from an investor’s point of view, derivatives will most likely require a clearinghouse. You should be able to easily locate a price for a derivative, just like you can for a stock that is traded on an exchange like the NYSE.

There be no way to know if Basel III and other regulations are successful. Another financial meltdown and accompanying recession is likely to happen some time in the future. Either regulations will become lax and allow the banking system to fail or the collapse will occur in some other form that governments have yet to prepare for.

New bank rules to curb risk, CNNMoney, September 12, 2010
Global banking rules aim to balance safety, growth, Greg Keller, AP, September 12, 2010

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President Obama proposed yesterday spending more than $50 billion over the next six years to modernize the transportation infrastructure in the United States. He is calling for renovations to or creation of 150,000 miles of roads, 4,000 miles of rail, and 150 miles of airport runways. The $50 billion would be an up-front cost, paid by closing tax breaks for oil and gas companies, and would comprise the bulk of the cost.

The American Recovery and Reinvestment Act of 2009 (the 2009 economic stimulus) designated $105 billion for infrastructure improvements last year, and coincidentally, the $7 billion spent from 1936 to 1939 by the Works Progress Administration mostly on similar projects would be the same as spending $105 billion in 2009 thanks to the effects of inflation. We would assume that the results of the ARRA should mirror the results of the WPA.

The WPA provided jobs, crucial infrastructure upgrades, and even major cultural advances, even though critics say some of the money was wasted. The positive effects also took some time to be realized, though it had a relatively immediate effect on jobs. In a tough political climate, Obama wants to speed the process and provide more jobs by infusing more capital into infrastructure projects.

The proposal may be a moot point as a law to authorize the spending might never be passed by Congress. But if it does, and it survives similar to the president’s proposed form, it carries some interesting ideas. First, an infrastructure investment bank would be created to determine which projects receive funding, supposedly based on return on investment, not political connections. Investment in smarter roads and high-speed rail lines would allow the United States to become competitive with other developed and developing nations around the world who have already seen these technological advances.

On a practical level, improving roads seems to be an endless project. Not far from where I live, US Route 1 in the New Brunswick area has been in a constant state of construction. The Route 1 intersection with Route 130 in North Brunswick was finished to remove traffic lights a few years ago, and besides planned intersection upgrades throughout the Route 1 corridor, the past year traffic has been slower due to a project to widen the highway as it passes near Rutgers University.

The original version of this article, Obama’s Proposed Investment in American Infrastructure, is copyrighted by Consumerism Commentary.

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Updated: The media are calling the new Wall Street Reform Law, recently signed by President Obama, the most significant reform of the financial industry since the Great Depression. It looks to tighten the reins on a industry that helped cause the recent recession by requiring the Federal Reserve to create and enforce regulations on the financial industry. The law, whose formal name is the Restoring American Financial Stability Act of 2010 (H.R.4173), is designed to protect consumers, corporations, and the economy as a whole.

Here are the major provisions contained within the law.

The Consumer Financial Protection Bureau will exist inside the Federal Reserve. This organization will advise the Federal Reserve on issues such as changes to credit card statements and contracts, in order to help consumers understand the terms of their agreements. The result should be that credit cards and other financial products become more simplified. In addition, as more states take out payday lenders, I expect this agency to do the same on a federal level.

Enhanced free credit products will now be available. While consumers can currently obtain three annual free credit reports, one from each reporting agency, the government will now require these companies to offer free credit scores as well. While this is a positive move, I expect the availability of these scores will encourage companies to develop a new secret formula for making lending decisions.

The agency will likely limit credit card interchange fees to what is reasonable based on the cost of providing the service. As Smithee mentioned in May, swipe fees make a lot of money for certain companies involved with every use of a credit or debit card, and there is a general thought that these fees are currently uncompetitive.

Borrowers will need to document their income before qualifying for loans. Call them liar loans, no-documentation loans, or alt-a loans, these mortgages offer higher rates to individuals who for whatever reason can’t support their income with proper documentation like tax returns or pay stubs. It will be more difficult for certain consumers to obtain financing with this law in place.

Financial regulators will have a larger role in looking for systemic risk with banks and other financial institutions that are too big too fail. Large financial companies will have the same opportunity as large banks to unwind slowly in a controlled crash. The FDIC’s role will expand beyond pure banking institutions. Large institutions may also be forced to split into several smaller companies to better manage risk to the entire financial system.

The Government Accountability Office will be able to audit the Federal Reserve two years after the Fed takes emergency actions. I assume this two year buffer will allow the effect of the Fed’s actions to echo throughout the markets without immediate interruption.

Executive compensation will be regulated, in all publicly-traded companies, not just in the financial industry. There is not a lot of teeth to this regulation, as it provides for shareholders to have a non-binding advisory role. The problem with this is major shareholders are often executives, board members, and institutional funds that are usually willing to advise the company to spend the money. In addition, the shareholders’ decisions can be ignored by the company.

The bigger part of this part of the law is the encouragement for industries to self-regulate executive pay. I don’t expect much will change in executive compensation as a result of this law; in fact, it might encourage more corporations to become or remain privately-owned companies.

What do you think of the new financial regulation? Does it go too far or not far enough? Will it save or kill the financial industry? Will the new law be enforced?

Read the text of H.R.4173.

The original version of this article, New Financial Regulations in the Wall Street Reform Law, is copyrighted by Consumerism Commentary.

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Last Thursday, the Senate failed to pass a bill that would again extend unemployment benefits. Rather than continue haggling between Democrats and Republicans for another round of changes to the bill, the Senators will likely drop the issue.

The bill also contained an extension to the homebuyer tax credit, a benefit that officially ends on June 30, 2010 for homes purchased by May 31.

This is the beginning of the end for economic stimulus from the government. Meanwhile, the Obama administration at the G-20 summit is warning other countries not to end their own stimulus plans too quickly, an approach we might not be able to take ourselves.

The original version of this article, Unemployment Benefits and Homebuyer Credit Not Extended, is copyrighted by Consumerism Commentary.

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In December of last year, the House of Representatives passed a bill designed to reform the financial industry, introducing more consumer protection and more regulation of Wall Street firms and other financial businesses. The Senate also tackled the controversial topic of financial reform, passing its own version of the bill yesterday.

Though not an attractive acronym, the Restoring American Financial Stability Act of 2010 (S. 3217) has a number of goals. Several hundred amendments have been introduced and passed since the bill was introduced to the Senate on April 15, so some of these details may have changed. The full text of the bill in its current form is not yet available, but I will update this article throughout the remaining process as more details become available, culminating with the President signing a compromise bill into law.

Here are some of the highlights of the bill recently passed by the Senate.

Establish new regulatory bodies and rearrange responsibilities

A Financial Stability Oversight Council will identify systemic risks to financial stability of the United States, promote market discipline, and respond to financial threats. An Office of Financial Research will support the oversight council from within the Department of the Treasury. The Federal Reserve Board will now have the power to oversee non-bank financial companies and bank holding companies, a significant increase of scope.

The FDIC will be able to be appointed as a receiver for any financial company in default or in risk of default, not just banks. This will provide a way for large banks to be orderly dismantled before they damage the economy in significant terms. There would theoretically be no more “too big to fail” banks. The FDIC will also take on some functions of the Office of Thrift Supervision (OTS), which will be abolished.

Regulation of other financial products

Hedge funds will be required to register, insurance companies will receive a new oversight body (the Office of National Insurance), and there will be new regulations for reinsurance contracts. Credit card banks and industrial loan corporations will no longer qualify for FDIC insurance. The SEC and CFTC will receive new power to regulate derivative financial products including security-based swaps.

Rating agencies will face new regulation to ensure accountability and transparency and a new organization will be created to protect investors.

Risk management

Financial companies sold mortgage-backed securities as a way to pass the risk of default onto another party, but they weren’t sold as risky investments. The bill seeks to ensure companies require the securitizer to retain risk when asset-backed securities are created, packaged, and sold.

Consumer protection

The Federal Reserve will contain a Bureau of Consumer Financial Protection, and three other organizations will be created: the Office of Fair Lending and Equal Opportunity, the Office of Financial Literacy, and the Consumer Advisory Board.

The government will issue grants and other assistance to ensure low income families will have access to establish accounts in FDIC insured banking institutions, and at those banks, will have access to accounts with “reasonable terms.”

While the summary above doesn’t hit on every aspect contained within the bill in its current form, the summary does target the potentially biggest changes to the financial industry and the more significant consumer protections. A few lawmakers who voted against the bill believe the changes to the industry do not go far enough to ensure a stable financial system, while others believe the industry needs no additional regulation.

Now that similar bills have passed both the Senate and the House of Representatives, a small team of Democrats and Republicans will meet to work out differences between the two versions. Before long, a final bill will be presented to the President and will undoubtedly be signed into law.

What’s your take on the proposed law to further regulate Wall Street? Is it necessary to ensure consumer protection or a roadblock on the way to profit?

Photo: David Paul Ohmer

The original version of this article, Wall Street Reform Bill Passes Senate, is copyrighted by Consumerism Commentary.

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Update: According to news reports, GM paid back one loan in order to qualify for a new government loan at a lower rate. This basically negates my original opinion regarding the loan repayment announcement. Read further at your own risk.

Ever since General Motors announced that it paid back its $6.7 billion government loan, a number of people have pointed out that the company isn’t telling the full story. GM simply shifted the money it received through the TARP bailout and directed those funds back to the government. While there is truth to this matter of accounting, it doesn’t really matter.

First, the idea that the TARP bailout funds no longer need to be used for other purposes like balance sheet padding, capital expenditures, or operating expenses show that the company is in at least a slightly better position than it was when it received the loan. If the cash it has is better suited repaying a loan and reducing future interest expenses, then don’t leave it sitting in a bank account.

Second, there’s no reason TARP funds can’t be commingled. This is easily illustrated on a smaller scale, in your own bank account.

On Monday, you receive a gift of $100 from your friend and deposit it into your account. On Wednesday, you get paid for some work you performed and deposit $100 into your account. On Friday, you have $200 in your account and you can finally buy a $100 cell phone without danger of brining your bank account down to zero. Did you buy the phone with gift money or your income? It doesn’t really matter. Both sources helped you reach the point where the purchase was possible.

Now add a loan into the mix. On Tuesday of that same week, before you got paid for your work, you borrowed $100 from a friend. Rather than buying a phone on Friday, you repaid that friend $100 plus interest. Did you use the gift or income to pay back the loan? Once again, it doesn’t really matter. Once the funds are commingled, a dollar is a dollar.

It’s right to criticize GM. The company was too big and didn’t adapt to changing consumer needs. They should have been allowed to fail, and would have if it weren’t for the belief a GM failure would have significant repercussions throughout the global economy, already in a weakened state.

It does look bad if a company appears to use TARP funds to pay off a government loan, particularly when the CEO boasts about it publicly, but it’s not a major issue. GM is in a better position now, and although this loan is only a small portion of the funds received from the government, this is at least a move in the right direction.

The original version of this article, GM Used Bailout Funds to Repay Loan: Mostly Irrelevant, is copyrighted by Consumerism Commentary.

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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?

The original version of this article, The Volcker Rule: Obama Proposes New Banking Regulations, is copyrighted by Consumerism Commentary.

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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

The original version of this article, Basics of the Financial Crisis Responsibility Fee (Bank Tax), is copyrighted by Consumerism Commentary.

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(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?

The original version of this article, New Stimulus Plan: The Fiscal Menace or The Economy Strikes Back?, is copyrighted by Consumerism Commentary.

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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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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.

The original version of this article, Obama’s New Job Boosting Ideas, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Initial TARP Recipients are 57% Repaid, is copyrighted by Consumerism Commentary.

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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

The original version of this article, GMAC Asking for a Third Bailout From Taxpayers, is copyrighted by Consumerism Commentary.

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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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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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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.

The original version of this article, 10 Percent of U.S. Post Offices Under Evaluation, 700 to Be Closed, is copyrighted by Consumerism Commentary.

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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

The original version of this article, New Consumer Financial Regulation, is copyrighted by Consumerism Commentary.

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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?

The original version of this article, President Obama Proposes Executive Pay Legislation, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, 10 Banks Allowed to Repay TARP Bailout Money, is copyrighted by Consumerism Commentary.

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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, men 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.

Unlike their male garment counterparts, 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.

Photo: williamnyk
MSN Money

The original version of this article, Tracking the Economy By Looking at Underwear, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Insurance Companies Now Qualify for TARP Bailout Money, is copyrighted by Consumerism Commentary.

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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.

The original version of this article, Credit Cards and Guns in National Parks, is copyrighted by Consumerism Commentary.

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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.)

The original version of this article, $400 Stimulus Payment Dumbness Update, is copyrighted by Consumerism Commentary.

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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 original version of this article, Which are Reliable Indicators of a Strong Economy?, is copyrighted by Consumerism Commentary.

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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 original version of this article, How to Prepare for Inflation and Higher Prices, is copyrighted by Consumerism Commentary.

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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 original version of this article, 8 (or More) Ways to Benefit From the ARRA, is copyrighted by Consumerism Commentary.

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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 original version of this article, Oversight and Regulation: Too Much or Too Little?, is copyrighted by Consumerism Commentary.

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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 original version of this article, You Be the CEO: Should Bailed-Out Banks Cut Limousine Usage?, is copyrighted by Consumerism Commentary.

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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 original version of this article, $250,000 Tax Rates and You, is copyrighted by Consumerism Commentary.

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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 original version of this article, The $400 Stimulus Payments Could’ve Been Dumber, is copyrighted by Consumerism Commentary.

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