October 2, 2022

Archives for September 2009

FDIC Considers Borrowing From Treasury As Banking Failures Increase

FDIC May Request Treasury Loan As Losses Grow

The FDIC always takes pride in noting that it is self funding and covers failed bank losses by assessments on FDIC insured member financial institutions.

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 8,195 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.

How much longer the FDIC can continue to fund itself based on fee assessments is questionable.  For the second quarter of 2009, the banking industry as a whole lost $3.7 billion dollars and second quarter FDIC assessments totaled $9.1 billion.

FDIC Insurance Fund Nearly Depleted

The FDIC did borrow money from the Treasury during the last banking crisis in the early 1990’s and later paid the money back.  The escalating number of costly bank failures over the last two years has reduced the FDIC Deposit Insurance Fund (DIF) to only $10.4 billion which  covers potential losses on almost $5 trillion dollars in FDIC insured deposits.  In addition, the number of banks on the FDIC Problem Bank List continues to expand.

The Problem Bank List grew to to 416 institutions from 305 last quarter.  The total assets at Problem Banks increased to $299.8 billion from $220 billion last quarter.  This is the largest number of problem banks since June 30, 1994.  The number of FDIC  insured institutions declined to 8,195 from 8,247 last quarter.

Earlier this year the FDIC’s line of credit at the Treasury was increased to $100 billion and up to $500 billion with the consent of both the Federal Reserve and the Treasury.  With a nearly depleted  DIF fund and the prospect of hundreds of additional banking failures, the FDIC may have no choice but to borrow from the Treasury as noted in the Wall Street Journal.

WASHINGTON –– Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday her agency may tap its $500 billion credit line with the U.S. Treasury to replenish its deposit insurance fund, though she appeared cautious about doing so.

“We are carefully considering all options” including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.

Ms. Bair has already warned banks that they may face an assessment increase to bolster the fund. Friday, she said there are also other little-known options available to the agency, including requiring banks to prepay assessments. The FDIC board of directors will meet at the end of this month to consider how to replenish the fund, she said.

Ms. Bair appeared cautious about resorting to the Treasury credit line, saying there are different views on when it should be used. She said some believe it should be reserved for emergencies only, rather than for covering losses that are already known.

Surging loan defaults show no sign of leveling off which in turn puts more banks at risk of failing.  The FDIC will need a Treasury bailout – the only question is will $500 billion be enough?

Noncurrent Loan Growth

Noncurrent Loan Growth

Feds Finally Move To Restrict Excessive Bank Compensation And Risk

Bailout Funds Go To Bank Bonuses

Banks that lost billions of dollars on speculative  investments and poor loans have routinely been awarding thousands of employees massive bonus payments.  Ironically, the only reason many of these banks are still in business and able to pay bonuses is due to the fact that they were bailed out by the taxpayers via the TARP program.

It is difficult to understand the lack of sensitivity exhibited by the bank’s compensation committees considering the populist outrage and criticism by politicians from both parties.  Consider Bankers Reaped Lavish Bonuses During Bailouts:

Nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008, according to a report released Thursday by Andrew M. Cuomo, the New York attorney general.

All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion.

Some compensation experts questioned whether the bonuses should have been paid at all while the banks were receiving government aid.

“There are some real ethical questions given the bailouts and the precariousness of so many of these financial institutions,” said Jesse M. Brill, an outspoken pay critic who is the chairman of CompensationStandards.com, a research firm in California. “It’s troublesome that the old ways are so ingrained that it is very hard for them to shed them.”

Private firms that risk private capital on high risk leveraged investments should be free to compensate themselves as they see fit.  Banks, on the other hand, have been playing a “heads I win, tails you lose” game, risking depositor money (guaranteed against loss by the FDIC), suffering no consequences for bad decisions and collecting lavish bonuses for horrendous results.  The issue of why banks are allowed to risk taxpayer money on speculative activities was recently raised by former Federal Reserve Chairman Paul Volcker – Volcker Seeks Bank Limits.

In his speech, Volcker urged limits on the activities of banks that are considered “too big to fail,” going beyond what other officials in the Obama administration have advocated.

“I do not think it reasonable that public money –taxpayer money — be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization,” Volcker said.

“Extensive participation in the impersonal, transaction- oriented capital market does not seem to me an intrinsic part of commercial banking,” Volcker said. “Substantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks.”

“I want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community,” he said.

Paul Volcker was probably not the only one wondering why banks are operating outside traditional banking areas and risking taxpayer funds.  Volcker’s speech seemed to hint that regulators were belatedly preparing to restrict both bonus payments and unwarranted risk taking by the banking industry.  Following up on Volcker’s comments, the Federal Reserve today  proposed dramatic restrictions on both bonuses and risky investment activity by financial institutions.

Wall Street Journal – Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk.

The U.S.’s largest banks, about 25 in number, would get especially close scrutiny. The central bank intends to compare these banks as a group to see if any practices stand out as unusually dangerous to their firms.

The Fed itself believes it has the legal authority to take such action through its existing supervisory powers, which are designed to oversee a bank’s soundness.

Pay is now seen as a factor that could make a firm, and more broadly the financial system as a whole, vulnerable to collapse. The financial crisis turned up many examples of how pay can give employees incentives to take risks. One example: loan officers who churned out thousands of low-quality loans in order to claim annual bonuses for themselves.

In a Wednesday speech, Former Fed Chairman Paul A. Volcker noted that one of the causes of the financial crisis “was the ultimately explosive combination of compensation practices that provided enormous incentives to take risks” just as new financial innovations “seemed to offer assurance — falsely, as it has turned out — that those risks had been diffused.”

The policies would apply to banks regulated by the Fed, not savings-and-loans or state banks that are overseen by the Federal Deposit Insurance Corp.

Will Fed Proposals Prevent The Next Banking Crisis?

If the Fed believed it had the legal authority to restrict undue risky activity at financial institutions, the obvious questions is why were these rules not implemented before the banking system imploded?  Regulators constantly reacting to disasters after they occur does not instill a strong sense of confidence that new regulations will prevent the next crisis.

Greenspan Revisionist Babble

Debt Is The Greenspan Legacy

Alan Greenspan, former Federal Reserve Chairman, today expressed his concern about the level of the US national debt.

Sept. 16 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said he’s worried that lawmakers will hamper U.S. central bank efforts to rein in its monetary stimulus, and that inflation might “swamp” the bond market.

The former Fed chief, who counts Deutsche Bank among his clients, also warned that the U.S. must rein in its “very dangerous” level of debt, citing the threat of increased issuance of Treasuries undermining the dollar.

Greenspan said one threat to Treasuries is the “very dangerous” level of U.S. national debt. “We’ve got to confront that issue immediately,” he said.

Mr Greenspan’s sudden concern about the buildup of the US national debt seem to imply that this situation occurred after his long tenure (1987 – 2006) as Federal Reserve Chairman.  The facts speak otherwise.  During the Greenspan era of easy money and easy credit, the US national debt had already spiraled out of control, increasing from approximately $1 trillion to $9 trillion.

Did Mr Greenspan not notice what was happening during his two decade reign at the Federal Reserve?  Mr Greenspan’s  current concerns about the explosion of US debt seem to be a disingenuous attempt at historical revisionism to obfuscate his central role in the creation of the greatest debt bubble in history.   For Mr Greenspan to suggest that he had nothing to do with fostering the current “very dangerous” level of US  national debt is like trying to argue that Hitler had nothing to do with World War II.

federal-debt-dollars

Mr Greenspan also commented on the potential risk of inflation:

“It’s the politics in the United States that worries me, whether the Congress will basically feel comfortable” with the Fed withdrawing its stimulus, Greenspan said in a broadcast to Tokyo clients of Deutsche Bank Securities Inc. today. He later said that “if inflation rears its head, it will swamp long-term markets,” referring to bonds.

Greenspan, speaking via videoconference from Washington, indicated that successor Ben S. Bernanke and his fellow Fed policy makers have until next year before inflation will present a danger.

Based on Greenspan’s past poor record of not recognizing the inherent dangers of overleverage, it is highly likely that he is now missing the big picture again.  We are now experiencing a post bubble credit collapse of epic proportions.  The deleveraging process that we are now witnessing will not unwind 20 years of reckless credit expansion in one year.   If Greenspan fears inflation, it’s a good bet that the real danger is the continuation of a deepening deflation.

Commenting on the need for a systemic risk regulator, Mr Greenspan noted that “I’m not in favor of a systemic-risk regulator because I don’t think it’s feasible.  I think we have to recognize that there are limits to what we can do.”  No argument with that statement Mr Greenspan.

K-Ratio Indicates Gold Stocks Still Cheap

K-Ratio Predicts Higher Gold Stock Prices

Based on the recent large rally in the gold stocks, it is time to sell and take profits?  The K-Ratio, a time tested method for timing the purchase and sale of gold stocks is telling us to stay long gold.

The K-Ratio is computed by dividing the value of Barron’s Gold Mining Index (GMI) by the Handy and Harmon price of gold.  The index reflects the relative value of the price of gold stocks to the price of the underlying metal.  When the ratio of the price of gold stocks to the price of gold is low, it is a bullish signal.  Conversely, if the price ratio of the gold stocks relative to the metal is excessive, it is usually a good signal to sell the gold stocks.

The K-Ratio works best at extremes.  The rule of thumb based on past history tells us that a K-Ratio at 1.20 or lower indicates that gold is cheap compared to the price of bullion.  A K-Ratio reading of 1.90 or higher is extremely bearish and indicates extreme overvaluation of the gold stocks.

Bullish On Gold Stocks

When last reviewed on April 24, 2009, the K-Ratio was at .90 and flashing a major buy signal.  Since that time, the Gold Bugs Index (^HUI)  has advanced by 39%.  What should be of extreme interest to gold stock investors at this point is that, despite the large gains in the gold stocks, the K-Ratio has increased only modestly and presently stands at 1.15,  still in solidly bullish territory.  (K-Ratio = Barron’s Gold Mining Index of 1159.20 divided by the Handy & Harmon Gold Price of $1008.25).

Since 1975, readings at or below 1.15 on the K-Ratio have resulted in gold stock gains 90% of the time over the next 12 months with the average gain a very profitable 40%.

There are no absolutes in investing and gold stocks are likely to fluctuate, but based on the time tested K-Ratio, it is way too early to be taking profits in the gold stocks.

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Disclosures: Long GOLD, KGC, GG

UPDATE:  FEBRUARY 14, 2010
The K-Ratio is still flashing bullish at 1.03.   As is typical when the bullion price retreats, the gold stocks react in a more volatile manner,  resulting in greater price declines in the gold stocks than in the price of the bullion.   From the recent high in late 2009, the price of gold bullion has retreated by 11%, while the price of major gold stocks such as Goldcorp (GG) and Randgold (GOLD) are down by 20%.   Accumulation of gold shares still seems warranted based on technical and fundamental factors.

Can The Unemployed Afford A Mortgage Payment?

Government Determined To Keep Unwilling Homeowners In Homes

The FDIC announced a new initiative to reduce foreclosures on home mortgage loans held by failed banks that were acquired by another institution.   This new FDIC program goes far beyond previous government mortgage assistance programs such as the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

Whereas the HARP and HAMP programs require income verification and attempt to lower a monthly mortgage payment to a level that is reasonable in relationship to a homeowner’s income, the new FDIC forbearance plan will attempt to help homeowners who are currently unemployed.

FDIC Encourages Forbearance To Unemployed

As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”

The recommendation to loss-share partners applies where unemployment, or underemployment, is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months. The monthly payment during this period should be established based on an affordable payment – given the borrower’s circumstances – and it should allow for reasonable living expenses after payment of mortgage-related expenses.

FDIC Plan Likely To Help Few Homeowners

The objectives of the FDIC’s forbearance plan are well intentioned.  Allowing an out of work homeowner time to find a new job may prevent an unnecessary foreclosure and eliminate the need for a costly foreclosure by the bank.  From a practical standpoint, the FDIC plan may ultimately benefit very few homeowners for the following reasons:

  • The program is only available to those homeowners who have mortgages with failed banks that were acquired by another institution under a loss-share agreement with the FDIC.
  • Under the forbearance agreement, the bank will accept only a portion of the regular mortgage payment.  The FDIC is asking for only a 6 month forbearance.  Given the prospects of a “jobless economic recovery” and the difficulty in finding new employment, the FDIC appears wildly optimistic about a quick change in fortune for an unemployed homeowner.   Banks do not want to foreclose, but very few banks now offer a forbearance plan to the unemployed since they do not expect them to quickly find a new job.
  • The mortgage foreclosure prevention plans currently in effect have had dismal success rates and these programs are limited to candidates who have income.  The HARP program, expected to help millions of homeowners had at the end of July approved only 60,000 refinances.   The government loan modification program (for those not qualified under HARP) has been plagued by very high re default rates ranging from 17% to 45%.
  • The FDIC recommends that the lender establish an “affordable payment” for six months, allowing for reasonable living expenses.  Many homeowners with jobs are struggling to make their mortgage payments.  Many states pay only a fraction of previous earnings in unemployment benefits.   Unless the homeowner has put aside some savings, unemployment compensation will usually cover only basic needs, leaving nothing for a mortgage payment.  It is likely that any payment (other than zero) will be too high for unemployed homeowners.
  • Recent statistics on the “cure rate” for delinquent mortgages show a stunning decline.  The cure rate is the percentage of borrowers who are able to catch up and bring a delinquent mortgage current again.  As of July, the cure rate for prime mortgage loans plummeted to 6.6% from an average of 45% during  2000 to 2006.  Some of the delinquent borrowers had lost their jobs but many were still employed.  This is a sea change in attitudes towards home ownership.   Many of those financially able to catch up apparently saw no benefit in doing so; either the burden of home ownership outweighed the benefits or there was no perceived benefit in continuing to make payments on a home with large negative equity.   Many homeowners may view foreclosure as the best “program” for getting back on their feet since they could potentially enjoy years of “rent free” housing before the bank ultimately forecloses.

Trapped Homeowners Want Out

Heavy Load

Heavy Load

Courtesy: laprogressive

Many Americans are apparently rethinking the “dream” of home ownership and acting accordingly by relieving themselves of the costly burden of mortgage payments, taxes and maintenance on what has become a depreciating asset.

While the government says “yes we can”, impoverished homeowners are saying “no we can’t”.  Perhaps this is why the massive government initiatives to prevent foreclosures are failing.   Trapped homeowners are doing what’s best for them and walking away, while the government vainly attempts to impose home ownership on those who now reject it.

Census Bureau Report Portrays Destruction Of The American Dream

It Already Is A Depression For Many

The latest report from the Census Bureau on income, poverty and health insurance coverage portrays a darkening economic picture for millions of Americans.  Incomes and living standards fell without regard to geography, race or work profession.  For many, the Census report only confirms the destruction of the “American Dream” of economic advancement.

  • For 2008 real median household income declined 3.6% to $50,303.
  • The official poverty rate in 2008 increased to 13.2% from 12.5% the previous year and is the highest since 1997.   There are now 39.8  million people in poverty.  The government definition of poverty for a family of four is an income below $22,025.
  • The number of people without health insurance increased from 45.7 million to 46.3 million.  The number of people with private health insurance decreased slightly to 201 million.
  • Incomes declined across all racial groups.
  • Incomes declined in every geographic region except the Northeast where incomes remained unchanged.
  • Income inequality was unchanged in 2008 from the prior year, indicating that no income class was spared from a decline in income.

While the government is rolling out the press releases congratulating itself on an economic recovery, many Americans remain in an economic nightmare of unemployment, poverty and hopelessness.   The latest stats from the Census Bureau provide little reason for optimism since without income growth there will be no economic recovery. The latest report on the number of homeowners in foreclosure signals no recovery to date in incomes or jobs.

U.S. Foreclosure Filings Top 300,000 for Sixth Straight Month

Sept. 10 (Bloomberg) — Foreclosure filings in the U.S. exceeded 300,000 for the sixth straight month as job losses that boosted the unemployment rate to a 26-year high left many homeowners unable to keep up with their mortgage payments.

A total of 358,471 properties received a default or auction notice or were seized last month, according to data provider RealtyTrac Inc. That’s up 18 percent from a year earlier…. One in 357 households received a filing.

Foreclosures rose from a year earlier as companies cut payrolls by 216,000 workers last month…

“The foreclosure numbers are largely unemployment related,” Davis, a former Federal Reserve Board economist, said in an interview. “As long as 15 million Americans are unemployed, record foreclosures will continue.”

With the real world unemployment rate approaching 20%, the government’s loan modification schemes merely delay inevitable foreclosure for many homeowners – without income any monthly payment is too high.  Nor is unemployment the only cause of foreclosures.  For those who still have jobs but are barely getting by, a decrease in income can easily lead to mortgage default.

We Need Income – Not More Debt

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While the divorced from reality politicians in Washington decide on what new deficit financed spending program they should enact next, they are missing the big picture.  Our future long term national prosperity will be based on promoting free enterprise job creation – something that does not appear to be on the agenda in Washington.

Artificial Mortgage Rates Drop To 4.75%

Fed Manipulation Of Mortgage Rates Continues

Mortgage rates continue their downward trend with the perfect borrower now able to obtain a rate of 4.75% with a two point buy-down on a 30 year fixed rate mortgage.  As expected, with mortgage rates now back in the 4% range, mortgage applications have increased.   The latest stats from the The Mortgage Bankers Association show large increases in mortgage activity, with refinances accounting for almost 60% of total mortgage applications.

The Market Composite Index, a measure of mortgage loan application volume, increased 17.0 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 15.8 percent compared with the previous week and 64.5 percent compared with the same week one year earlier.

While fluctuations in mortgage rates are historically based on many factors, the biggest factor affecting mortgage rates today are the manipulations by the Federal Reserve.   With the mortgage market dominated by the government, it is difficult to determine where rates would be in a free market but indications are that rates would be much higher.  For example, non agency lenders who do not sell mortgage loans to the government agencies but portfolio them instead, are currently quoting 30 year fixed rates at around 6 to 6.5% depending on credit and loan to value (obviously, the non agency lenders are not doing much conforming loan business).

Fed Price Fixing Efforts With Mortgages Will Fail

So what’s the problem with having low mortgage rates?  The  government manipulations in the mortgage market allow homeowners to refinance and buy at low rates.   If mortgage rates drop low enough, perhaps the government will succeed in its objective of re-inflating housing prices.  There just might be a few problems with the government’s manic quest to keep mortgage rates low.

  • How long will investors continue to buy securities backed by mortgages on which payments are guaranteed by the government?  Perhaps forever, but perceptions of the value of a “government guarantee” may diminish as the financial condition of the US Government continues to erode.  At some point, rational buyers will give little credence to the guarantee of a government that needs to borrow 40% of its year outlays while running multi trillion dollar yearly deficits.
  • How long can the Federal Reserve continue to purchase mortgage backed securities and treasury debt with printed money?  It may not seem to be causing a problem in this country (yet) but some of the USA’s largest foreign creditors are getting very nervous – See China Alarmed By US Money Printing.

Banks Load Up On Mortgages

Theoretically, the Federal Reserve can buy every mortgage backed security in existence but at what point does the bond market react with higher rates based on the risk that the Fed is going to monetize debt on a colossal scale?  Fed purchases of mortgage backed securities are fast approaching the announced goal of $1.25 trillion.

Courtesy wsj

Courtesy wsj

As it turns out, the Fed has a willing and able partner in the purchase of mortgage backed securities.  With the banking industry facing massive losses on defaulting mortgages, how is this for irony? – Banks Load Up On Mortgages.

As of June 30, the roughly 8,500 federally insured banks and thrifts were holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier, according to a Wall Street Journal analysis of bank financial disclosures. It is the largest amount that banks have reported holding since at least 1994.

Banks, sometimes with the blessing of federal regulators, have been loading up on Ginnie securities for one main reason: They make their balance sheets look healthier. Since the securities are guaranteed by the government, federal banking regulators have deemed them risk-free, meaning that adding them to a bank’s investment portfolio, or replacing assets deemed riskier, lowers the overall risk of the portfolio in the eyes of regulators.

Some banks have used government cash infusions under the Troubled Asset Relief Program to buy Ginnie Mae bonds.

Holding Ginnie bonds help banks look better because federal bank-capital guidelines give the Ginnie securities a “risk weighting” of 0%. That means banks don’t have to hold any cash in reserve to protect against losses.

At the same time that the banks are choking on defaulted mortgages and reluctant to lend, they are purchasing vast quantities of government guaranteed mortgages to shore up their capital ratios, sometimes using TARP funds.

The Great Unwind

The Fed fostered the bubble in the housing market with easy money, leaving us with collapsed housing prices and oceans of defaulted mortgage debt.  The Fed is now inviting a similar disaster in the mortgage market, again with super easy monetary policies.

The massive purchases by the Fed and the banks of mortgage backed securities is artificially inflating the prices of mortgage backed securities, consequently curtailing purchases by private investors.  This leaves the Fed and the banks as the only (irrational) buyers.

At some point mortgage rates will rise regardless of the Fed’s manipulations.  The taxpayers will be stuck with massive losses on the Fed’s mortgage backed securities as yields climb and prices plunge.  Banks, as always, will be heavily invested in the wrong asset at the wrong time.  Due to the magic of FASB accounting rules, the banks won’t have to take losses if they do not sell their mortgage backed securities; but neither will they be able to increase lending with capital frozen in underwater mortgages.

The government’s obsession with housing has resulted in the misallocation of untold trillions of dollars.   Meanwhile, urgent human and infrastructure needs of the country are left unfunded.   With the mortgage markets now completely dominated by the government, we can look forward to a continuation of the same failed policies.

Loan Sharks “Salvation” For Many At 2,437% Interest Rates

Loan Sharks: The New Subprime Lenders With A Twist – They Expect To Get Repaid – And Why A Loan At 2,437% Interest Makes Sense

For every loser, there is a winner.  Since the demise of the subprime lending industry, loan sharks have been reaping profits by lending to the same foolish crowd that used to be the target of subprime lenders.

In this country, the new subprime lenders are called payday lenders, who operate legally.  In Britain, the new subprime lenders simply call themselves, well, loan sharks and operate without the courtesy of government sanction.  The Wall Street Journal had an interesting article on loan sharking in the UK that should have been titled – “Why The Foolish Can’t Be Protected From Themselves”.

In a recent report, the U.K. think tank New Local Government Network said it expects the number of people with debts to loan sharks to jump to more than 200,000 in Britain this year, from an estimated 165,000 in 2006. A confluence of indebtedness, poverty and the diminished availability of regulated subprime credit are creating the conditions in which many are borrowing “from nefarious sources,” the report says.

But perhaps no country in the world was more addicted to debt than the U.K. By the end of 2008, the average British household had a debt-to-income ratio of 180% compared with 140% for the average U.S. family, according to the Organization for Economic Cooperation and Development.

That is coming back to haunt the U.K. The number of individual insolvencies rose by almost 30% year-to-year to 33,073 in England and Wales in the second quarter of 2009, the highest level since records began in 1960.

New Lending Lessons For British Borrowers

Apparently, over leveraged U.K. borrowers took every nickel they could from lenders foolish enough to lend to them, oblivious to rate or terms.  The actions of these borrowers could almost be viewed as rational since the money they borrowed and spent that they couldn’t pay back is now being absolved in bankruptcy courts with little repercussions from now defunct lenders.   U.K. borrowers who now have to deal with unlicensed loan sharks are shocked to learn that the loan sharks actually expect to be paid back – or else.

Some consumers are going to loan sharks to fund purchases for items including new televisions, overseas vacations or expensive clothing.

In mid-2007, Donna Ockerby, a 45-year-old auxiliary nurse in Manchester in northern England, turned to a local loan shark after her hours were cut at work. She borrowed £700 from Johnny “Boy” Kiely to help pay for a wedding dress.

Mr. Kiely, who charged interest rates of up to 2,437%, was jailed earlier this summer for five years for offenses including blackmail and illegal money lending. Ms. Ockerby now lives in a one-bedroom apartment on government benefits. She was moved out of her childhood home by police to protect her. Ms. Ockerby, who says she is on antidepressants, says the decisions to borrow from a loan shark ruined her life.

I’m sorry Ms. Ockerby but you are a financial idiot who deserved to pay the market rate of 2,437% interest.  Did you ever hear of “if you can’t afford it don’t buy it”?  What was the problem with buying or renting a used wedding dress for a fraction of the cost?  Johnny “Boy” Kiely risked his capital, is now in jail and out his £700.  Johnny “Boy” did not ruin your life – you did.

Extended Unemployment Benefits Make Little Sense

Do Extended Benefits Reduce Job Seeker’s Motivation?

Excluding the depression of the 1930’s we are fast approaching a new official high in unemployment.  During the depths of the last worst recession of 1981, unemployment exceeded 10% vs 9.4% today.  If we include marginally attached and involuntarily part time workers in the unemployment numbers, the current unemployment rate exceeds 16%.

In response to the high level of unemployment and the difficulty of obtaining employment, Congress has enacted legislation that allows the unemployed in 24 states to collect up to 79 weeks of unemployment benefits.   The other states allow unemployment benefits  from 46 to 72 weeks.  In more normal economic times, the limit on unemployment benefits was usually up to 26 weeks.

Washington legislators are now proposing another extension of benefits for up to another 13 weeks that would cost up to $70 billion.  The additional extension of benefits was prompted by the fact that up to 1.5 million unemployed Americans would soon be losing their unemployment checks as they reach the current payment limits.

In addition, the duration of unemployment has reached new highs not seen since record keeping began.

Duration of Unemployment

Given the unprecedented level of unemployment, the duration of unemployment and well reasoned arguments on why unemployment will continue to increase, the entire concept of unemployment benefits should be reconsidered.

Should Unemployment Benefits Be “Free”?  –  Some Alternatives

  • Is the constant extension of unemployment benefits reducing the motivation of the unemployed to seek new employment?   In the past year I have tried to hire unemployed people for an entry level position in which the starting pay was comparable to or slightly above the level of unemployment benefits the job seeker was currently receiving.  In almost every instance, the job seeker declined the job offer, preferring instead to postpone employment until benefits ran out.  I have also heard this same story from other people.  To maintain unemployment benefits, many states require that a benefit recipient contact a certain number of employers per week to seek work – how many of the unemployed merely go through the routine of seeking employment to maintain benefit payments?
  • Should the economy weaken further and job losses continue, does it make sense for Congress to constantly extend costly unemployment benefits with zero obligation from the recipient?  Bill Clinton reformed welfare by requiring benefit recipients to work.  Why not do the same with the unemployed who are receiving benefits?   Many charities, local governments, hospitals and companies  could employ additional manpower in a variety of productive endeavors.   The unemployment benefits would still be paid by the government, but the benefits would have to be earned.  From a self worth perspective, getting engaged back into the real world would benefit the unemployed as well – sure beats watching television all day.
  • Instead of spending hundreds of billions on unemployment benefits and getting nothing in return, the government could establish job training programs or put the unemployed to work on infrastructure projects that the country sorely needs.  This was done in the 1930’s with the Works Progress Administration (WPA) and the country still benefits to this day from the roads, bridges, dams and buildings that were constructed.   The preferred way to do this would be for government bureaucrats to get out of the way and contract projects to private industry.  Paying people to do nothing accomplishes nothing.

Ideally, the economy recovers and private industry rehires many of the unemployed.  Realistically, the country may face continued massive job losses or at best a slow recovery where the unemployment rate remains in the 10% plus range for an extended period of time.   Maintaining an army of paid and unemployed workers to sit idle makes no sense.

More on this topic

When The Laid-Off Are Better Off

Would it surprise you to learn that survivors can suffer just as much, if not more, than colleagues who get laid off?  “How much better off the laid-off were was stunning and shocking to us,” says Sarah Moore, a University of Puget Sound industrial psychology professor who is one of the book’s four authors. “So much of the literature talks about how dreadful unemployment is.”