Tag: Credit

Is It Bush’s Fault?

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown”with roots in the housing sector he so ardently championed.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

There are those who blame everybody remotely connected to the government for the meltdown, especially Barney Franks.  Some of the blame is deserved but the crux of the blame should fall on the person at the wheel when it all came to call.

New Rules For Credit Companies

The Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration approved the regulation, which prohibits banks from certain practices like applying interest payments in ways that maximize penalties, and forces lenders to be more transparent about their billing practices.

The regulations mark an end to double-cycle billing, which averages out the balance from two previous bills. That means that consumers who carry a balance will no longer get hit with retroactive interest on their previous month’s bill. And credit card companies will no longer be able to raise the interest rates on pre-existing credit card balances unless a payment is over 30 days late.

Consumers will also be given a reasonable amount of time to make payments, and payments will be applied to higher-rate balances first, to reduce interest penalties and fees.

Credit card statements will clearly list the time of day that a payment is due, and any changes to accounts will be in bold or listed separately.

And, finally, no more universal defaults – a policy that allowed credit card issuers to increase the interest rate on one card if a customer missed a payment on another card.

But does this do to stop the uncontrolled spending by the card holders?

A Dinosaur Returns

From an Article in the NY Times written by Eric Dash.

Today, with the financial crisis worsening, the layaway sign has crept back into consumption culture. Discount retailers like Kmart and Sears are aggressively promoting layaway as a smart and exciting way to buy. No less a tastemaker than Oprah Winfrey has suggested that a new frugality might herald the return of the installment plan. “Remember layaway?” she prodded on her talk show this fall. “That is where we are heading.”

Perhaps. But never underestimate the cravings of the American consumer and the convenience of the credit card. Fifty years ago, the financial industry was transformed by a thin piece of plastic. It was an innovation that lifted the American economy — and the world’s, too. By making it easier to obtain credit — sometimes recklessly easy — the credit card empowered people to buy their dreams.

Still, the economic upheaval now under way raises the question: will the current crisis leave a lasting impression on the credit card? Consumers, having watched their home values, their retirement plans and in many cases even their jobs evaporate, are plucking more slowly from their wallets. Banks, already crippled by billions of dollars in mortgage-related losses and fearful that bad credit card debt will balloon, are tightening standards and raising interest rates. And the federal government is considering tough new regulations that the industry says will end up restricting credit further.

If they do, the impact on the American economy could be profound. Debt-fueled consumer spending accounts for as much as 70 percent of gross domestic product.

Do not look now but the ghosts of Christmas’ past is coming to call.  Layaway?

Almost sounds like a novel idea: “Pay first. Buy later.”

Credit: A Disaster In Waiting

There is an even larger crisis looming on the horizon.  You think the credit situation is bad now…..just remember it can always get worse.

“Credit” is the exchange of goods received in the present for goods paid back in the future. A person is said to have “credit” if he is able to receive goods today and can pay back later, plus interest. (A “credit” entry in bookkeeping has a different (and opposite!) meaning from that used in economics. You indicate a bookkeeping credit when you sell goods and receive cash.) Banks extend credit to borrowers, which means they enable borrowers to get goods at present and repay in the future. But in real effect, the banks being only intermediaries, the ultimate credit is extended by the depositors of the banks.

Money is a type of credit, since with the buyer obtains goods in the present and the seller does not get immediate goods but tickets for goods he will get in the future. Money is essentially transferable credit.

Banking is normally done with “fractional reserves.” Reserves are stocks of money. They are fractional because only a fraction of deposits is kept by a bank, the rest being loaned out. Banks can therefore expand the money supply beyond the base of cash. You put $100 in the bank, and if the reserve ratio is 10%, the bank only keeps $10 in its vault, and loans out the other $90. It figures that it is unlikely for all depositors to come in and demand all their money at once. Central banks typically set reserve requirements for a country’s banks.

This $90 loaned out gets deposited in some bank. That bank in turn keeps $9 and loans out the other $81. This goes on and on until out of the original $100, we now have $1000 of deposits created from all that lending if none of the extra money is held as cash. This is not a problem so long as 1) depositors are informed of the policy (hence it is not fraud), 2) they money loaned is eventually repaid; 3) there is little or no inflation of the cash base.

Unfortunately, conditions #2 and #3 have not been the case. Central banks have expanded the monetary base, which the banks then expand many times more through loans. Also, during recessions, many borrowers cannot repay their loans. Then many banks fail, since depositors are not able to get their cash back. The solution is not to eliminate fractional reserves (though some banks may do this and advertise themselves as extra-safe) but to eliminate conditions (2) and (3) by switching from coercive central banking to free banking (to be explained in a later post).

Now the beast is exposed.  The assumption that the money borrowed will be repaid is the problem.  Debt is NOT being repaid and the banks do not have the funds to meet demands from depositors.  The subprime problem broke a tenet of banking–lend to responsible borrowers.  The easy credit in the card market also breaks this tenet.  The lenders working from a position of greed have brought the markets to the point of breaking and yet the government is rewarding them for their ill advised actions.

A special thanks to Dr. Fred E. Foldvary for his ideas and writings that are part of this post.

Yes, Irene that is the name of that tune.

Look Out Main Street!

The government is coming to help.

The Federal Reserve and Treasury Department on Tuesday unveiled a plan to pump $800 billion into the struggling U.S. economy in an attempt to jumpstart lending by banks to consumers and small businesses.

The government hopes that these initiatives will enable more money to flow to consumers in the form of loans than has occurred so far in previous bailout plans.

One program will make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.

Where is all this money coming from?

The programs from the Federal Reserve and the New York Fed are more than Congress approved in October for a bailout of the nation’s banks and Wall Street firms. The Fed said the money will come from an increase in its reserves — in essence, it is creating new money.

The idea is that by making money available for investors who are interested in buying loans bundled together into securities, it will be easier and more profitable for banks to loan money to consumers and small businesses.

Before the current credit crisis, lenders got the money they needed to extend credit by selling the loans they had already made. But the Treasury Department said the issuance of those securities essentially came to a halt in October.

Read my front page post and my post on demand–I do not think this is the action that will be needed they are just making easy credit easier to obtain.  Wait!  Is that not what put us in this spot today?  Does anyone else see the stupidity in this?

The American “Inner” Addict

The American nation has become a nation of junkies.  And more and more join the ranks everyday.  It is not crack or heroin or pills or anything like that, but they are addicted and they are not finding a cure.

On 24 Oct 08 I wrote about the American addiction to oil….and that the oil companies are doing all possible to keep their customers addicted.  Take a good honest look at the economy.  The United States Of America are no longer a manufacturing country, it has become a nation of consumers.  We as a people are not creating anything but debt.

And yes I said ADDICTS.  In the 50’s the oil companies created the beginnings of our addiction to oil.  They created the idea that the US was a car owning society.  But wait it did not end there.  In the 80’s credit companies helped create the credit crunch that we are now facing.  They created the illusion of the “American Dream”–of owning a house a big car and unlimited purchasing power.

So you do not believe it?  Just turn on your tube and listen to the ads–you are a complete zero if you do not have this card or that or that you somehow impede the follow of commerce if you pay in cash.  Madison Ave. has used its marketing prowess to create an atmosphere of failure if one does not have a card to whip out in public.

For years credit companies have been targeting low income, minorities and the uneducated for “quick” credit.  This does two things, increases consumerism and creates a whole new group of indentured servants.  And these people will work a lifetime to keep what they have and to pay the credit companies.  Making the payees beholden to the credit companies forever.

Thus the uneducated, low income and minorities are nothing more than indentured servants, indentured to the credit companies to pay off the loans and debts.  Do not like the term?  Then try wage slaves.

My question now is, how will the massive bailout help eliminate this growing problem?  So far it does not address this, it does seem to want to help free up more credit so that more people can be added to the addiction.  The American people are strung out on oil and credit and the corporations are the pushers that we all dispise.

If you like being an indentured servant then by all means just bury your head in the sand and ignore your addiction.  But remember that America is NO longer a world producer, we are a world consumer–and consumption is addictive.

The sad part is, like another addiction, credit and oil will not have much success in breaking the habits of generations.  And YOU, the consumer owe your soul to the company store–YOU ARE AN INDENTURED SERVANT of the credit companies.

Is This Good For The Country?

What has the economic crisis cost the American people?

“For every dollar the banks earned during the industry’s most prosperous years,” the Times noted, “they have now wiped out $1.06.”

Commenting in measured terms on the collapse of what amounts to a gigantic Ponzi scheme perpetrated by the most powerful financial firms, Richard Sylla, an economist and financial historian at the Stern School of Business at New York University, said, “The losses now are showing that in some sense the profits reported in earlier years were not real, because they were taking too much risk then.”

This was a reference to the proliferation of exotic and opaque speculative financial instruments—collateralized debt obligations, structured investment vehicles, credit default swaps—that were devised by the wizards of Wall Street to generate super profits based on a mountain of debt backed by virtually no real value. On the basis of these paper values, they rewarded themselves with salaries and bonuses in the tens and hundreds of millions of dollars.

Now, standing in the midst of the ruins of their own firms and the onset of an economic catastrophe for millions of working people in the US and around the world, these very same bankers are declaring that they have no intention any time soon of using the billions in taxpayer money handed them by the government to resume lending and unfreeze the credit markets—the ostensible purpose of the bailout measures whose estimated cost to the American people has risen to $2.25 trillion.

The Crisis, Whose Fault Is It?

I have been mulling over this subject for a couple of weeks.  Reading as much as I could to see just what went wrong.  May I see a show of hands of those who still do not know what the whole thing is about?

The question has been asked, whose fault is the crisis?  And the fingers began pointing as soon as the problem was known.  And no one was safe for the accusations Some blame Clinton as his policies, others blame all Dems, some say it was the policies of the conservatives and then there are those that lay the problem at the feet of old GW.

So who or what is to blame?

Let me try and explain it as best I can as as best as I understand it.  How about fiscal policy?  Expansionary fiscal policy to be exact.  This is when the Federal government decreases taxes and increases spending.  The purpose is to stimulate the economy and push it in the direction of growth.  Deficits occur during a recession because of the use of expansionary fiscal policy.  Now, does any of this sound a bit familiar?

When a government is in deficit it will borrow (remember that word) money from loanable fund markets (credit).  When it does that increases the demand for money in the economy.  When the government does borrow money it crowds out or takes funds from the private sector.  Thus the private sector must compete for fewer and fewer funds.

The credit markets have tanked.  Could the deficit have helped cause our current prioblem?  If there is less money available would the market not constrict?  Does that sound familiar?

Now to help this situation the president needs to ask Paulson and Bernanke for their resignations.  Why?  They were stomping out individual fires while the market was blazing out of control.  They threw money at the markets that should have been ignored and focused on the commerical paper market.  Instead they let Paulson convince everyone that the banks and the hedge funds were the problem and the solution.  All talk about saving Main Street, but they offered the bailout to Wall Street.  They should have attacked the commercial paper market, that is where Main Street is, not on Wall Street or in the board rooms of banks.

This crisis is far from over and as long as Paulson is in place to help his brothers on Wall Street it will last longer than most anticipate.

I realize that I will never be nominated for the Nobel Prize for Economics, but hopefully my readers will have a better grasp on the crisis and what is happening..

Economic Ideas From Readers

I the past several days I have been getting emails from readers that have ideas for the economy.  Thought I would post a couple that I found interesting.

From a reader in Colorado:

If worse becomes worser why not try these?

1–freeze wages

2–freeze prices

3–tax speculation

4–control CEO compensation

This was an interesting one by Anonymous:

Take the money from the bailout send it to taxpyer to pay off their debt.  Funds to spent only on elimination of debt.  Debt has to be at least 1 year old.  This would be better than giving it to theives to guard it in good faith.

Credit: Truth Not Spoken

First of all we need to establish one thing—credit is fictitious capital or wealth, if you will. Simply put the sale of a commodity consists of —the exchange of the commodity for the commodity of money. The seller may accept a promise of payment in the future which then becomes—the seller is the creditor and the buyer the debtor.

Credit for too long has been accepted in lieu of cash or money. The growth of the use of credit has created an unstable element within the economy. This involves an unstable chain of interdependences since each agent depends on payment by their debtors so they may pay their creditors. Once a kink forms in this chain it begins to amplify exponentially. The economic crisis the US is facing now is just such a situation. It all began with the foreclosures and mushroomed from there.

Each of the credit crises precipitates the wholesale destruction of weaker capitals which in turn will force the government to react to save the weaker capital. Just read or listen to the economic news of the day, this is happening as I write. AS it stands today there are NO natural recovery mechanism for the problems, the government MUST react and react quickly.

Now the problem is, as I see it, have arisen because of accumulation, insufficient competition and excessive greed by Wall Street speculators. Unfortunately, they cannot be managed away by Fed intervention, no matter how progressive or populist they may be. Why? First of all, to solve this problem there will have to be an attack on domestic programs, basically attacking the middle class or most notably the working class.

The economic crises of today are because of the addiction to living above ones means or on credit. Also, since income and such are stagnant the working class is forced to maintain their lifestyle through the use of credit.