Congress

Federal Reserve Super Low Rate Policy Crushes Savers And The Elderly

November 24, 2009 by admin 5 Comments

Fed Sees Solution In Zero Rates

The Federal Reserve recently vowed to keep interest rates “exceptionally low” for the foreseeable future in an attempt to revive the economy. Since mid 2006 the Fed has brought the Fed Funds Rate down from 5% to virtually zero in an attempt to reduce the debt service burden on over leveraged borrowers.

A world of ultra low interest rates may continue for much longer than many expect.

Fed To Keep Rates Low (WSJ) – Fed officials voted unanimously to maintain their target for the key federal-funds interest rate — at which banks lend to each other overnight — near zero and said they expect to keep it there for an “extended period,” which suggested increases are at least several months off.

While consumers are spending, the Fed noted they were “constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.” Meanwhile, “businesses are still cutting back on fixed investment and staffing, though at a slower pace.”

A low interest rate policy has worked in the past to stimulate the economy and the Fed is applying the same prescription to the current economic downturn. At this point, it is too early to tell if the same policies of super low rates and easy money will work as it has in the past. Japan stands out as the premier example of a post bubble economy still failing to recover despite twenty years of super easy fiscal and monetary policies. The Fed prescription of attempting to revive an overly indebted economy with more lending may very well produce the same results as in Japan – slow economic growth, lower incomes and crushing public debt burdens.

Individuals who were prudent enough to save and avoid debt are now left to wonder if they will ever see a return on their savings. Short term CD’s are below 1%, money market funds pay a ridiculously low rate barely above zero and short term treasuries have a negative yield. Those who are retired and depend on interest income for living expenses must now deplete their savings or take on more risk by investing in higher yielding bond funds subject to substantial market fluctuations.

The Fed’s low interest rate policy effectively represents a massive wealth transfer from savers to debtors. FDIC insured deposits of bank savings and CDs currently total $4.8 trillion and there is approximately $5 trillion in money market funds for a total of $10 trillion that is earning at best 1% compared to 5% in 2006. The drop in interest rates from 5% to 1% represents an annual income loss to savers of $400 billion dollars per year.

Congress and the Fed have attempted to bailout out every imprudent debtor with super low interest rates – homeowners who borrowed too much, bankers who lent foolishly, and hundreds of poorly run, over indebted companies from GM to AIG. Someone always pays in the end and in this case, the victims are the savers.

More On This Topic

Near-Zero Rates Are Hurting The Economy

Filed Under: Bailout, Banking Industry, Congress, Deleveraging, Federal Reserve, Interest Rates Tagged With: elderly savers subsidize reckless borrowers, savers pay for Fed's low rate policy

Dear Congress – Thanks For Doubling My Credit Card Interest Rate

August 26, 2009 by admin Leave a Comment

Congress Takes Bow For Credit Card Act of 2009

The Credit Card Act of 2009 was intended to curb certain practices of the credit card industry that were deemed abusive to consumers. With a great deal of public fanfare, Congress passed legislation that provided the following benefits to credit card holders:

Credit card bills would be mailed at least 21 days before the payment due date
Customers would be given a 45 day advance notice of contract changes
An increase of the interest rate could be rejected by consumers who would then be required to cancel their card and pay off any existing balance within 5 years, possibly with a much higher minimum monthly payment
Payments would have to be applied to that portion of debt with the highest interest rate
Interest rates could not be raised on existing balances unless the borrower was more than 60 days delinquent
Prohibited “universal default” provisions and double cycle billing
Better disclosure of fees, card rules and interest costs

Senator Dodd of Connecticut, Chairman of the Senate Banking Committee, stated that “The new rules of the road established by the Credit Card Act will shield credit cardholders from widespread abusive practices”. Whether or not the Senator (who faced an ethics probe relating to the special low rate mortgage he received from Countrywide) actually succeeded in providing any real benefits to credit card holders remains questionable.

Credit Card Industry Response To Credit Card “Protection” Act

The credit card industry is not based on philanthropy – they seek profits and have been exceptionally proficient in doing so historically. Faced with huge losses from defaulting customers and the prospect of legislated profit limitations, the credit card industry reacted to these threats with the following changes:

Reduced or eliminated fixed rate credit cards; when interest rates increase, card rates will increase commensurately
Instituted annual fees, higher balance transfer fees, international transaction fees, higher cash advance fees, reduced award programs, slashed credit limits, canceled over $500 billion dollars in credit lines, summarily closed accounts deemed risky, raised monthly minimum payments and imposed strict standards for new credit cards
Increased interest rates by as much as 10 percentage points or more across the board, regardless of credit or payment history. Unable to adequately assess risk or price accordingly, every credit card holder was assumed to be a potential default and charged accordingly – See Capital One Can’t Identify Their Low Risk Customers.

I have heard countless cases of people telling me that their card rates have been raised to 20% to 28% for purchases and cash advances. Personally speaking, virtually every credit card I have has had the interest rate increased substantially, with Capital One taking first prize by going from 8% to 17.9% on purchase balances.

Ironically, my General Motors credit card has actually dropped the interest rate from 14.15% in 2006 to a “low” 9.9% currently. I assume that the low rate from General Motors has something to do with the fact that GM has an unlimited credit line with the US Treasury and does not have to worry about silly things like making a profit.

Why The Credit Card Companies Are The Biggest Winners Under The Credit Card Act Of 2009

What was supposed to be a major consumer protection act has turned into a future profit bonanza for the credit card companies. Many credit card customers may go under financially but the credit card companies will do just fine, judging by the price performance of their shares and their actions taken cited above. The credit card industry has adjusted their business model to the new reality and will prosper.

While the S&P 500 has increased by 52% since March of this year, the stocks of credit card companies have performed dramatically better. Since March 2009 the stocks of companies such as American Express and Capital One have tripled in value even as write-offs of credit card debt hover in the 10% range and new restrictions on credit card companies become law.

“I Am From The Government And I Am Here To Help”

After bailing out the banking industry, our government (perhaps inadvertently) managed to provide even more help to the credit card industry. Thanks for trying to help Congress – I feel much better now that I am paying 18% instead of 8%.

COF

AXP

Disclosures: None

Filed Under: American Express, Capital One, Congress, Credit Cards, Interest Rates, Regulatory Reform Tagged With: congress give bonanza to credit card companies, Credit Card Act of 2009 victory for credit card industry

Super Clunkers – How Congress Can Double US Vehicle Sales

August 14, 2009 by admin 5 Comments

Clash for Clunkers Increases Car Sales

The much maligned Cash For Clunkers program has three remarkable features that differentiate it from the other wide assortment of endless government stimulus/bailout programs.

1. The Cash For Clunkers program, at an initial $1 billion cost, is relatively “small” compared to the trillions of dollars that have been deployed for other stimulus and bailout measures. The concept of the Cash For Clunkers program did not originate in Congress but rather was the brainchild of Jack Hidary, an entrepreneur who noticed the success of similar programs in Texas and Turkey. Mr Hidary’s lobbying efforts ultimately resulted in the Clunkers program approval by Congress.

2. The Clunkers program is the only stimulus/bailout program enacted that allows participation without regard to income or financial need status. A Clunkers applicant does not need to be unemployed, facing foreclosure, financially inept or destitute.

After seeing trillions of taxpayer dollars spent to bail out banks and homeowners for making stupid financial decisions, it is almost refreshing to see a program that helps those who probably don’t really need any help. A purchaser of a new $30,000 car who can obtain financing or pay for the car in cash is probably still employed and doing quite well.

It would be interesting to see the income and credit stats on new car buyers under the Clunkers program but my guess is that many of the new car buyers are frugal, financially responsible individuals who had driven the same car for many years and would have purchased another vehicle soon anyways. The Clunkers handout merely pulled forward future car sales – but that was the intention of the program.

3. Without debating the merits of the Clunkers program, from a strict Keynesian economic theory standpoint, the program was a resounding success based on the multiplier effect.

Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.

In the Clunkers case, assuming increased unit sales of 250,000 at a cost of $30,000 each, sales revenue of $7.5 billion was generated based on a $1 billion government cost. Compared to other government stimulus, the Clunker program can only be viewed as a resounding success.

Clunkers Encore

Under the theory that government programs never die but only get larger I would expect that the government will expand the Clunkers program to the point of absurdity. The original program has already been extended and doubled to $2 billion.

Lobbyists for the car industry should have an easy time convincing Congress to expand the program based on its “success” in generating sales. Let’s not forget, of course, that the government and the UAW now own General Motors.

How Congress Can Double Car Sales

If Congress really wants to get creative about stimulating car sales and lending, they may start by looking at the average age of US vehicles currently on the road.

According to USA Today, the automotive consultants R.L.Polk calculate the median age of cars in the US in 2007 at 9.2 years and the median age for trucks and SUV’s was 7.1 years. Over 41% of all cars in 2007 were over 11 years old. There are 235 million passenger vehicles in the US, including 135 million autos and 100 million SUV’s and trucks.

For the sake of saving the environment from old polluting cars and stimulating the economy, Congress, by legislative fiat, could prohibit the possession or use of any vehicle over 10 years old. The mandatory new vehicle replacements could be phased in gradually over 5 years, and would effectively force the purchase of at least an additional 60 to 70 million vehicles. Vehicle sales for the next five years would easily double from the 2009 estimate of 11.5 million units.

The government’s investment in GM would be worth a fortune, and the States’ budget problems would disappear with the flood of sales and property tax levies on all those new vehicles. Government guaranteed easy financing would be provided to all, regardless of income or credit. Cash rebates on traded in vehicles would be increased to offset the new vehicle’s cost.

Result for the US economy – large GDP increases as $2.5 trillion dollars in new car sales jolts the economy back to life. Unemployment drops to low single digits as the multiplier effect of booming car sales ripple across the economy. How does the Government finance the cost of this “Super Clunkers” program? Not a problem – the Treasury Secretary is already requesting a large increase in the national debt limit.

What politician would not vote for this plan?

Disclosures: No Positions

Filed Under: Bailout, Cash For Clunkers Phase II, Congress, GM, Government spending, Stimulus Plan Tagged With: Cash For Clunkers II, How to double US car sales, Super Clunkers

Will Mortgage Rates Soar As Fed Programs Wind Down?

July 21, 2009 by admin Leave a Comment

Fed Support No Longer Unlimited

There seems to be near unanimous agreement at all levels of government that a recovery in housing prices is essential for economic stabilization and future growth. The Federal Reserve has supported this effort by driving short term interest rates to near zero and initiating a program to purchase as much as $1.75 trillion in mortgage debt and treasuries. As of mid year, the Fed had purchased over a half trillion dollars of mortgage-backed securities and housing agency debt in an attempt to keep mortgage rates low.

How much longer will unlimited Fed support for the housing market continue and will mortgage rates increase when Fed support is withdrawn? The Federal Reserve has indicated that the credit markets have stabilized. The Federal Reserve’s balance sheet has been shrinking for weeks and is now below the $2 trillion level reached in March. With financial Armageddon apparently no longer an immediate threat, the Fed also seems to be responding to political pressure to reduce various emergency lending programs.

In response to pointed warnings from foreign creditors about monetizing US debt, Chairman Bernanke said:

WSJ – “We absolutely will not monetize the debt,” Mr. Bernanke says, using economist-speak that means he won’t let the Fed become the government’s source of cash for deficits. Fed-fueled deficits would be inflationary. Mr. Bernanke says, “we will not abandon price stability.”

In addition, the Fed faces a full assault on its authority from Ron Paul who is attempting to introduce legislation to audit the Fed. Many other members of Congress have also been critical of the cost and secrecy of Federal Reserve programs and bailouts.

WSJ – As Mr. Bernanke heads to Capitol Hill today for two days of testimony on the economy, the central bank is fending off attacks on many fronts from critics who want to rein in its power and autonomy.

Rallying one charge is Ron Paul, an iconoclastic Texas Republican who wants to abolish the central bank entirely.

Still, Mr. Paul has persuaded nearly two-thirds of the House to co-sponsor a bill requiring far-reaching congressional audits of the Fed. Audits would show “that it’s the Fed that has caused all the mischief” in the U.S. economy, Mr. Paul says.

Mr. Bernanke will face a tough audience in his semiannual report to Congress Tuesday and Wednesday. The Fed “went too far in bailing out companies and exposing taxpayers” to the costs, says Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee. “They utterly failed the American people as a bank regulator.”

Outlook For Mortgage Rates

With the credit markets stabilized and the Fed under political pressure to reduce its multi trillion dollar financial commitments, how will mortgage rates respond as the Fed reduces its programs to keep rates low? Two top rated bond managers at Pimco and American Beacon Advisors have similar opinions.

July 20 (Bloomberg) — Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt last month and added to cash and equivalent securities.

Gross cut the $161 billion Total Return Fund’s investment in mortgage bonds to 54 percent of assets, the lowest in almost two years, from 61 percent in May, according to a report on Pimco’s Web site. Gross trimmed holdings of government-related bonds to 24 percent of assets, the least since February, from 25 percent.

Gross has been selling mortgage-backed securities over the past few months after loading up on them last summer in the midst of the financial crisis, which started with the collapse of the U.S. property market in 2007.

AMERICAN BEACON ADVISORS’ BOND MAVENS, Kirk Brown and Patrick Sporl, have done an admirable job of flying their respective fixed-income funds, AB Treasury Inflation Protected and AB Intermediate Bond, through the credit-market turbulence of the past two years.

He thinks that stagflation — the dreaded combination of a stagnant economy and inflation — is more of a possibility now than at any time since the 1970s.

AB Intermediate Bond, meanwhile, is underweight mortgage-backed securities and overweight corporates.

A reduction of the Fed’s massive intervention in the mortgage market is certain to result in higher mortgage rates, but will not be the disaster that some fear. The real disaster has already occurred based on the Fed’s past policy of ultra low interest rates to increase lending and inflate housing prices.

Disclosures: No positions

Filed Under: Bernanke, Congress, Federal Reserve, Housing, Mortgages Tagged With: FED power facing criticism, mortgage rates to increase

Regulatory Reform Implies Cause and Solution To Financial Meltdown The Same

June 22, 2009 by admin Leave a Comment

The Federal Reserve failed miserably in preventing the meltdown of the American financial system. Worse yet, the Fed’s loose credit and monetary policies and failure to properly regulate the financial system was arguably one of the biggest causes of the financial meltdown. Now, based on the Fed’s sterling record of failure, Washington’s answer is to give absolute power to the Fed – what are these nitwits in Washington thinking?

Back in the U.S.S.A. – Peter Schiff

Harry Browne, the former Libertarian Party candidate for president, used to say: “the government is great at breaking your leg, handing you a crutch, and saying ‘You see, without me you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed this week by the Obama Administration.

In seeking to undo the damage inflicted over the past decade by misguided government policies, the new regulatory regime would ensure that the problems underlying our financial system will only get worse.

The underlying problem is that the excessive risk taking which brought about the crisis was not market-driven, but a direct consequence of government interference with risk-inhibiting market forces. Rather than learning from its mistakes and allowing market forces to once again control risks and efficiently allocate resources, the government is merely repeating its mistakes on a grander scale – thereby sowing the seeds for an even greater crisis in the future.

Obama proposes to entrust the critical job of “systemic risk regulator” to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA.

Given the Federal Reserve’s disastrous monetary policy over the past decade, any attempt to expand the Fed’s role should be vigorously opposed. Through decades of short-sighted interest rate decisions, the Fed has proven time and again that it is only able to close the barn door after the entire herd has escaped. If setting interest rates had been left to the free market, none of the excesses we have seen in the credit market would have been remotely possible.

The perverse result will be that our government and the Fed gain more power as a direct result of their own incompetence.

With the transition now fully under way, I propose we end the pretense and rename our country: “The United Socialist States of America.” In fact, given all the czars already in Washington, we might as well go with the Russian theme completely: appoint a Politburo, move into dilapidated housing blocks, and parade our missiles in the streets. On the bright side, there’s always the borscht.

Courtesy: The Liberty Voice

Washington constantly employs the same failed tactics to a problem and expects different results and only those outside of Washington understand the implications of such thinking. Instead of expanding Federal Reserve powers, serious thought should be given to severely restricting the Fed’s ability to destroy what’s left of the American free enterprise system.

More on this topic:

What The Fed Chairman Said At The Onset Of The Credit Bubble

Filed Under: Congress, Federal Reserve, Regulatory Reform Tagged With: congress: cause and solution to financial crisis same, Fed's grab for absolute power

America’s Triple A Credit Rating – At The Precipice?

May 13, 2009 by admin Leave a Comment

Black Swan Events Becoming Routine

Our Nation has avoided the decline into the abyss that many have been predicting during the economic crisis. At the cost of approximately $13 trillion in government bailouts and guarantees the system has been held together but at a very high cost that future generations will bear through higher taxes or a much lower standard of living.

Our “prosperity through debt financed spending” philosophy has deeply indebted every sector of the economy. Our leaders implore us to borrow and spend. The US budget deficit is projected to hit $2 trillion dollar this year and continue indefinitely.

What we cannot borrow, we can simply print in unlimited amounts, imperiously oblivious to the serious risks and consequences of such financial folly. Logical minds reject these unsound theories and realize that every nation has financial limitations, whether we like it or not. The risk of default by the United States, once considered unthinkable, is now a topic of debate by serious minds. Consider the following from The Financial Times.

America’s Triple A Rating Is At Risk

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the Peoples Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case.

For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

Our Nation’s future is being risked by a ruling class that continues to refuse to tell us what we need to be told – I thought we were promised that it was time for a change?

More on this topic

Alarm Sounded on Social Security – The financial health of the Social Security system has eroded more sharply in the past year than at any time since the mid-1990s, according to a government forecast that ratchets up pressure on the Obama administration and Congress to stabilize the retirement system that keeps many older Americans out of poverty.

Filed Under: Congress, Government spending, printing money, Sovereign Default Tagged With: US Debt Default the next black swan

Sanity Returns to Mortgage Lending – After Trillions In Losses

May 12, 2009 by admin Leave a Comment

Liar Loans To Become Illegal

Case Closed on Liar Loans

New legislation passed by the House will outlaw “stated income” mortgage loans (commonly called liar loans).

WASHINGTON — The House voted Thursday to outlaw “liar loans,” ballooning mortgage payments and other bank practices that lawmakers say preyed on consumers who couldn’t afford their homes.

The proposal, by North Carolina Democratic Reps Brad Miller and Melvin Watt, is one of several that Democrats are pushing to tighten controls on an industry that critics say undermined the economy by underwriting risky loans, then passing them off to investors.

The bill passed 300-114, with many Republicans contending it would limit consumers’ options and restrict credit.

Democrats said it would ban only the most egregious lending practices and wouldn’t keep most people from getting a mortgage they can afford.

Under the bill, banks offering other than traditional fixed-rate mortgages would have to verify a person’s credit history and income and make a “reasonable and good faith determination” that a loan can be repaid. This provision is aimed at eliminating high-risk credit lines that became known as “liar loans” because they required little or no documentation.

Banks also would have to make sure the loan provides a “net tangible benefit” for the consumer.

What Congress is saying is that banks should not lend in a situation where the borrower cannot provide proof of income or has a poor credit history. Inadequate income and poor credit have always been two factors that imply high risk of loan default. In other words, the banks need legislative action to outlaw practices that they should never have engaged in to begin with.

Niche Lending Gone Astray

Lending to borrowers who cannot provide proof of income and have poor credit has been going on for decades, first by small private “hard equity” lenders and later by (the now defunct) sub prime mortgage lenders such as Countrywide (now part of Bank of America). Typically, such loans were made at high rates and at low loan to values, reflecting the very high risk of loan default. Lenders knew the risk and priced accordingly – borrowers knew that not paying back the loan would likely mean the loss of their home which was the collateral for the loan.

Various situations made this type of lending sensible on occasion for both borrowers and lenders. For example, a homeowner facing a sudden financial emergency could borrow against his home and hope that his situation would improve. Borrowers who for various legitimate reasons could not verify income, were allowed access to credit. Small business owners wanting to expand or open a new business could access risk capital that would otherwise not be available.

Unfortunately, Wall Street and the Banking Industry combined forces to turn a small segment of the mortgage industry into a colossal part of their lending operations – greed overrode sound lending and the sowed the seeds for the biggest housing and banking bust in US history. The legislation to outlaw liar loans should have happened five years earlier if regulators had been doing their jobs properly.

Some Thoughts on the New Legislation

It is not clear if the legislation outlaws stated income loans only by lending institutions regulated by state or federal agencies. If private lenders wish to risk their capital without regard to income or credit criteria they should be allowed to do so with informed borrowers.

Banking institutions whose deposits are protected by the FDIC and whose losses are ultimately paid for by the taxpayer should not be allowed to engage in unsound, high risk lending practices. The very nature of lending without regard to credit or income implies a very high risk loan that should not be backed up by taxpayer funds.

The requirement that there be a “net tangible benefit” to the borrower when engaging in a mortgage transaction is also another sound rule meant to eliminate abuses. In the past, there were situations in which a borrower could pay closing costs that far exceeded any benefit of cash out or payment reduction. Does it really make sense to charge a borrower $15,000 in closing costs while the borrower walks away with maybe $5,000 cash and a higher monthly payment? This type of law is not a restriction on free enterprise – it merely protects the foolish or desperate borrower and prevents some of the egregious lending abuses that have occurred in the past.

Had it not been for the outrageously reckless lending policies engaged in by the banking industry, this new law would not have been necessary. Although I believe that less government regulation is usually better, this is one case where it should be welcomed. Since the lending industry could not properly institute sound lending policies, it is only appropriate that the government establish guidelines.

A Law That Should Have Never Been Necessary

Consider the message that the House is sending to the banking industry – loans should not be made to borrowers who cannot afford the loan payment! The fact that Congress had to pass this type of legislation is an indictment of the banking industry’s judgment and conduct and a reminder of how ongoing absurd situations can be viewed as normal – until the house of cards collapses.

Filed Under: Banking Industry, Congress, Corruption, Mortgages Tagged With: Banking industry excesses checked by congress, Goodbye liar loans, No income - no loan

Frugality The New Lifestyle For Many

April 29, 2009 by admin Leave a Comment

Hard Times Bring Back Thrift

Without the aid of easy credit, matching income with expenses has required cutbacks in consumer expenditures and forced price reductions and layoffs by businesses. Frugality has become the new mantra for many as we can see from the following examples.

Dumped Pets Pay The Price Of Recession –

From fancy cars to foreign holidays, Britons have had to relinquish all sorts of luxuries as the credit crunch takes hold. To this list we can now add pets: 57% more animals were abandoned last year than in 2007, according to figures from the Royal Society for the Prevention of Cruelty to Animals (RSPCA).

The number of abandoned cats rose by half; dogs by nearly a third. Horses, farm animals and exotic pets were also being left to fend for themselves.

Tim Wass, chief officer of the RSPCA inspectorate, said the cause was “everything to do with the economics about owning a pet”, from paying for food to veterinary bills.

In Glum Times, Repair Shops Hum

Economic fears are driving a resurgence for repairmen. When it comes to autos, computers and all kinds of appliances, consumers are more likely to repair what they have, rather than buying a new replacement.

Appliance-repair businesses, too, have seen an uptick in business in recent months, says Michael Donovan … even though the appliances he works on are not very expensive to buy new.

He and other business owners are surprised by the repair work people authorize these days. “Much to my amazement, people are spending $60 on repairing a vacuum that they bought for $100 new,” he said, adding that limiting new purchases is “definitely a factor on everyone’s mind.” Mr. Donovan has even seen a rise in repairs of small home items, such as electric razors.

Cars, however, are the most visible signs of the new frugality, with new-vehicle sales down sharply. Opting to keep cars running, consumers are extending the lives of their vehicles to nearly 10 years on average from eight just two years ago, says the Automotive Services Association, a trade group for repair businesses.

Starbucks Sales Down

Like many retailers in this difficult environment, Starbucks experienced further declines in comparable store sales in both its US and International stores during the quarter. Consolidated comparable store sales declined by 9% for the first quarter of fiscal 2009, with comparable store sales declines of 10% in the US and 3% in International for the period. Management believes that the negative comparable store sales are in large part a result of the ongoing global economic crisis and its effects on consumers’ discretionary spending…

Expect to see continued poor sales at Starbucks as consumers realize that one upscale beverage per work day can amount to over $800 per year.

Falling sales caused by frugality are forcing businesses to cut costs and slash prices in an attempt to stimulate sales.

Yankees Slash Prices to Fill Costly Seats

Acknowledging their prices were too steep even by Yankees standards, the 26-time world champions announced a plan to fill thousands of empty high-priced seats by reducing prices and giving away much of the unsold inventory.

The Yankees cut season-ticket prices on some of their premium seats by as much as 50% — to $1,250 from $2,500 for some seats and to $650 from $1,000 on others. Customers who purchased such season tickets will receive their choice of a refund or a credit.

Mr. Steinbrenner said the team reviewed its pricing “in light of the economy,” and stated the changes were for the 2009 season only.

Whether or not Mr. Steinbrenner’s optimism is warranted remains to be seen. I would expect further price cuts in the future as incomes remain weak and demand for premium priced services diminishes further.

Newcomers Challenge Office-Supply Stalwarts

In the grinding recession, companies are finding ways to save even on the cost of the lowly office pen. And that has created an opening for discounters to steal business from the office-supply industry’s big three.

The result: a wave of price-competition that is benefiting lower-cost vendors and encouraging companies to switch suppliers.

Count Me In for Women’s Economic Independence, a New York group that promotes women entrepreneurs, switched its business to Sam’s Club after a review of its Staples invoices. “It turns out we’ll be saving more than $7,000 on an annual basis,”said Nell Merlino, president and chief executive.

Franchise Sales Pull Back During the Recession

Annual applications from franchisers who want to do business in Maryland are down significantly so far this year, says Dale Cantone, an assistant attorney general for the state. First-quarter franchise-registration applications in Maryland fell 16% from a year earlier to 367.

Other states report similar falloffs. For instance, California’s filings from Jan. 1 through its April 20 deadline fell nearly 20% from a year earlier to 769. New York’s first-quarter registrations dropped 22% to 348 — the lowest number in five years.

The fall off in franchise sales is being blamed on a lack of financing. Hopefully, the real reason is a more rational allocation of capital by lenders. Does the average American city really need more fast food outlets, real estate firms or home decorators?

Forced Frugality

Have American consumers rejected the notion of credit fueled economic prosperity or is something else at work? The reason for the new found frugality correlates to the fundamental economics of adjusting spending to income levels. Lower income levels, the threat of unemployment, lack of savings and the destruction of stock and real estate values have created a fundamental shift in consumer behavior that is not likely to change in the near future.

Salary Cuts: Ugly, But It Could Be Worse

A growing number of employers are resorting to salary cuts as the recession drags on. This month alone, A.H. Belo Corp., publisher of the Dallas Morning News, and the Atlanta Symphony Orchestra have announced pay reductions of as much as 15%.

At some companies, the cuts affect only executive and senior management levels, but many others are adopting an across-the-board approach or tiered salary reductions. Some companies are imposing permanent cuts, and some are promising to return employees to their full pay — eventually.

A January survey by global outplacement firm Challenger, Gray & Christmas found that of 100 human-resource professionals surveyed, 27.2% reported that their companies have imposed a salary freeze or cut.

Until the current recession, the practice of imposing pay cuts has been “very rare,” says John Challenger, chief executive officer of Challenger, Gray & Christmas, despite recent calls for capping executive salaries and bonuses.

Organizations in dire straits may have no choice but to slash salaries across the board. After being unable to make payroll in mid-March, South Carolina’s Charleston Symphony Orchestra cut the wages of all its staff and employees by 11.4%. Musicians in the orchestra also took a 11.4% hit in the form of unpaid time off.

Entrepreneurs Cut Own Pay To Stay Alive

A number of small-business owners have stopped paying themselves as they struggle to keep their companies afloat.

It’s impossible to know just how many owners are affected. But in a sign of the breadth of the trend, 30% of 727 small-business owners and managers surveyed by American Express Co.’s small-business services division said recently that they were no longer taking a salary. That’s a troubling sign for small businesses, which have created a significant share of the new U.S. jobs in recent years.

It’s not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession.

“The situation overall is more dire,” says Jerry Silberman, chief executive of Corporate Turnaround, a debt-restructuring company in Paramus, N.J. Historically, he says, nearly half of his clients weren’t taking a salary when they come through his door. Now, it’s close to two-thirds. And if they do take a salary, it’s often not enough to cover expenses.

The prevalence of pay cuts, something rarely seen before, tells us that this economic downturn is different. The unanswered questions are how much worse does it get and how long will it last? Those businesses carrying heavy debts have the lowest chances of surviving as the downside of leverage shows its destructive capacity.

Newly Thrifty Americans Are Slashing Spending More Than The Numbers Show

How much have Americans cut back?
On the face of it, not much. The official data from the Bureau of Economic Analysis say that in February personal spending was down 0.4%, or $40 billion, from the year before. Certainly any drop is bad news, since consumer spending rarely decreases–but $40 billion out of total spending of $10 trillion doesn’t seem like enough to wreak economic havoc.

A closer look, however, shows that Americans have tightened their belts more sharply than the numbers report. The reason? Official figures for personal spending include a lot of categories, such as Medicare outlays, that are not under the control of households.

After removing these spending categories from the data, let’s call what’s left “pocketbook” spending–the money that consumers actually lay out at retailers and other businesses. By this measure, Americans have cut consumption by $200 billion, or 3.1%, over the past year. This explains why the downturn has hit Main Street hard.

For those American consumers concerned with their financial future, harsh realities are setting in. The massive structural imbalances caused by decades of stagnant income growth and huge increases in debt levels will not be cured quickly. Household balance sheets will eventually improve but it will be a slow and painful process for many. The Age of Frugality is here for the foreseeable future.

Not All Are Suffering

After reviewing the gloomy news above, let’s end on a positive note. Many Americans are financially secure, by dint of personal effort or privileged positions. Here are two examples of those in the later category.

CCAGW Opposes Congressional Pay Raise

(Washington, D.C.) – The Council for Citizens Against Government Waste (CCAGW) today urged lawmakers to make their first order of business when they reconvene in the nation’s capitol in January to introduce legislation to freeze congressional salaries at current rates. All Members of Congress are slated to get an automatic pay raise in January, 2009 unless they vote to block it. Each rank and file member of Congress is poised to see another $4,700 in his or her paycheck over the next year, an increase of 2.8 percent over their current $169,300 annual salary.

“Members of Congress don’t deserve one additional dime of taxpayer money in 2009,” said CCAGW President Tom Schatz. “While thousands of Americans are facing layoffs and downsizing, Congress should be mortified to accept a raise. They failed to pass most of their appropriations bills, the deficit is on pace to reach an unprecedented $1 trillion, and the national debt stands at $10 trillion. In addition, this Congress has been ethically challenged, plagued with corruption allegations, convictions, and sex scandals.”

The list of monetary benefits (beyond salary) that goes along with being a member of Congress is too long to list, but suffice it to say that most members of Congress will continue to live the “American Dream”.

Money For Nothing-Paul Krugman

On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, (C) who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.

All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

Few could argue with Mr. Krugman’s well penned article but will anything change? With their high powered Washington connections, my bet is that the boys at Citigroup, AIG, Bank of America, et al will continue to do just fine.

More On This Topic

Recession Has Changed Lifestyles

A Reality Check For Economic Optimism

Disclosure

Financial interests in companies mentioned – None

Filed Under: Banking Industry, Congress, Corruption, Deleveraging Tagged With: mandatory frugality for many, no hard times for Congress, pay cuts for America

It’s Time To Give Every Member Of Congress A Bonus

April 8, 2009 by admin 2 Comments

Gone Fishing

Market Investing Made Simple

Many people probably suspect that Congress causes more harm than good and now we have the proof. Forbes Magazine has uncovered what appears to be a foolproof method for timing stock purchases based on the Congressional work schedule. The method is simple to use and relies on the elegance of intuitive reasoning.

Eric Singer, a 56-year-old fund manager with past stints at Smith Barney and PaineWebber, has something he calls the Congressional Effect Fund. The $2 million mutual fund invests in Treasury bills when Congress is in session and in the S&P 500 the rest of the time.

How does this theory work over the longer term? Singer whips out a study he did of stock performance in the 44 years ended last December. Over the course of the 7,244 days that Congress was in session the S&P was up an average annual 0.3%, dividends excluded. Over the 3,821 days that legislators were home, stocks averaged 16.1% in annual returns.

Give Congress A Bonus And A Long Vacation

The variance in stock returns for Congress in session/out of session time periods is too extreme to ascribe to random chance. Since Congress has had their chance and things have only gotten worse, why not give every member of Congress a large bonus if they promise to go fishing for the next six years? At a 16% annual return, six years is about what’s needed for the market to recoup its 50% drop since early 2008.

This experiment certainly couldn’t make matters any worse than they are now. My guess is that with Congress out of the way, the markets and the economy would recover in a lot less than 6 years.

Filed Under: Congress, Economy Tagged With: give congress a bonus