Monday, December 01, 2008

Important Notice Of Change In Terms

The Eye of the Artist, c. 1898
Victor Dubreuil, born in New York to French emigre parents
The administration of President Grant, who's on the 5 dollar bill along with the mysterious pyramid we stuck on our money, is remembered for its financial corruption.
In mountain light, all sounds
return to silence.
All that remains, the temple
---Ch'ang Chien
Unexpectedly you find it, welling upwards in the empty tree.
---Rainer Maria Rilke
The meadows were a-drinking at their leisure; the frogs sat meditating, all Sabbath thoughts, summing up their week, with one eye out on the golden sun, and one toe upon a reed, eyeing the wondrous universe in which they act their part; the fishes swam more staid and soberly, as maidens go to church,
---Henry David Thoreau
There is only one rule of economics for me, and that is I pay my bills on time. I prefer to pay for anything at the moment I buy it, but that isn't always possible so I get bills. My wife and I argue about some things, but we seem to agree about politics and money. We don't borrow. There's a car payment and we have a second mortgage for environmental improvements to the house---which already are saving us money on energy costs. Ilona probably is going to college shortly, so we may need someone to make us a loan then. Otherwise we have lived within our means for 27 years---despite rocky times.
I've been broke and down and out in my day. I've had everything I own in my car, with nowhere to go. I've sat on a curb in New York City, without a job, and wept. I've been grateful for government programs. I support them gladly through taxes, now that I have some money. I celebrate economic simplicity in my life, which principles I probably learned through some hardship and a sound upbringing. I learned only the basics of how a capitalist market is supposed to work in theory, in the single required course on the matter in college. Quite frankly, I haven't been able to see that the market---take gasoline for instance---actually works that way. But then maybe, for the last 10 years, the market hasn't really been working at all.
That seems to be the contention of a growing number of economic writers, at least those I can understand---or bear to slog through. Paul Krugman writes well for us uneducated masses, and seems to write from an economic perspective rather than directly to it. He's off into political and foreign policy issues quite often, considering implications and results of Wall Street decisions. He doesn't think much about the smalltown banks and credit unions, I guess, where I've done my saving and investment. I do not "play" the market, and find the term "player" loathsome in this regard. But Krugman's view from Princeton of Wall Street has had some peripheral value to me in this last decade. I think he's a good teacher.
Now Paul Krugman is stepping up to the plate in the clutch. Talking heads I hear on the radio (we don't watch much TV anymore) seem to enjoy all the attention they're getting in this global crisis. They're analyzing the day-to-day ups and downs, but during the last week Krugman has shifted gears and put his cards on the table. He knows with President-elect Obama choosing his team, now is the time to make some influence felt. His regular New York Times column clearly doesn't provide the space he needed to stretch out his thoughts. He wrote his article on November 20th, and sent it to the New York Review Of Books which publishes bi-weekly. The new issue is out and I'm going to buy a copy today.
It's online for free, but that's all the more reason to get some money to them. The whole issue this time is fascinating. Paul Krugman's article starts like this~~~
Volume 55, Number 20 · December 18, 2008
What to Do
By Paul Krugman
What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.
The first task is the harder of the two, but it must be done, and soon. Hardly a day goes by without news of some further disaster wreaked by the freezing up of credit. As I was writing this, for example, reports were coming in of the collapse of letters of credit, the key financing method for world trade. Suddenly, buyers of imports, especially in developing countries, can't carry through on their deals, and ships are standing idle: the Baltic Dry Index, a widely used measure of shipping costs, has fallen 89 percent this year.
What lies behind the credit squeeze is the combination of reduced trust in and decimated capital at financial institutions. People and institutions, including the financial institutions, don't want to deal with anyone unless they have substantial capital to back up their promises, yet the crisis has depleted capital across the board.
The obvious solution is to put in more capital. In fact, that's a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock - stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country's GDP - the equivalent of about $600 billion for the United States today - in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets.
A financial rescue along similar lines is now underway in the United States and other advanced economies, although it was late in coming, thanks in part to the ideological tilt of the Bush administration. At first, after the fall of Lehman Brothers, the Treasury Department proposed buying up $700 billion in troubled assets from banks and other financial institutions. Yet it was never clear how this was supposed to help the situation. (If the Treasury paid market value, it would do little to help the banks' capital position, while if it paid above-market value it would stand accused of throwing taxpayers' money away.) Never mind: after dithering for three weeks, the United States followed the lead already set, first by Britain and then by continental European countries, and turned the plan into a recapitalization scheme. where his suggestions and explanation continue. His column today takes a look at the tremendous debt the US is incurring with all this, and how much do we have to worry about that.
Undoubtedly you've heard things like This is only the beginning. Not only will more cash be needed by the banks, big and small, but the next crunch may be in your mailbox today. There was a time I wouldn't go near credit cards. Cash and checks were good enough for me. But about 30 years ago they began to harden the sell. Various premiums began to show up, at stores, at the pump, wherever I looked. I began to think I'd take the premium, never use the card, and who'd be the wiser? I started to have a pocket full of cards, I thought that was a bad sign, so I limited myself to 2 major ones. Around that time I met a psychologist who was going to another one himself to get therapy for his credit card addiction. He had been made to sit there during a session and cut up all his credit cards, except one, and throw them away. His debt in interest was mounting every month because he couldn't pay them off. Another guy I knew, with even more impressive credentials, had to work 7 years to pay off all the interest...which eventually was more than the principal.
Last week I got a notice in the mail about interest rates on my Mastercard, which is sponsored by my union at work. I have this particular one, which is handled by a bank in California, and our Visa card, from an East Coast bank, because they pay me an interest rate on all the purchases I make with them. It's not a lot, but I don't have to pay them anything for the cards except the total every month. This I do religiously, no matter what. I'm glad I have that habit because, as everyone is finding out, the interest rates on accounts that are held over into the next month and beyond are in the double digits. The notice announces this Mastercard is doubling its annual percentage rate to 25% immediately. With the notice comes a little translation pamphlet, which is only slightly less dense than the original announcement. Welcome to the next phase.
What is going on? Those who have a special interest in business and markets may read the columns of Joe Nocera, also in the New York Times. Last week he outlined the credit card crisis...or rather he once again published remarks from an anonymous banking tipster he knows. Why is this banker anonymous? Because he says things critical of his own bank. At the top of his column from Tuesday is a link to another message this guy sent to Joe last month. I suggest you read that too, and some of the hundreds of comments that came in---including a response from Anonymous Banker as well. Here's the new column~~~
The New York Times
November 25, 2008, 9:00 am
The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle
By Joe Nocera
Today, we are bailing out the banks because of their greedy and deceptive lending practices in the mortgage industry. But this is just the tip of the iceberg. More is coming, I’m sorry to say. Layoffs are being announced nationwide in the tens of thousands. As people begin to lose their jobs, they will not be able to pay their credit card bills either. And the banks will be back for more handouts.
I received a catalog today from Casual Living and in big bold print on the front page, it said “BUY NOW, PAY NOTHING”. Then in significantly smaller print underneath, it said, (until April). That mantra has been sung throughout the credit markets over the last 10 years. The banks waive a carrot in front of the consumer and reel them in and encourage them to go deeper and deeper into debt. They do this by prescreening customers through credit reporting agencies, mailing offers to apply, and to transfer balances at teaser rates or zero percent financing. They base it on credit score and not on capacity to repay. A good credit score does not equate to the ability to repay debt.
Over my career, I have seen thousands of consumers that have credit card lines in excess of their annual salaries. Some are sinking under their burden. Some have been fiscally responsible and have minimal amounts outstanding. My 21-year-old daughter, who’s in college, gets pre-approved offers all the time. She has no ability to repay debt, yet the offers flow in just the same. We all know how these lines are accumulated. The banks, in their infinite stupidity, keep upping credit lines because the customer pays the minimum payments on time. My daughter’s credit line started at $1,000 and has been increased over the last two years to $4,400. She has no increased earnings to support this. But the banks do it without asking. And without being asked. The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back. Shame on them.
As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages. Then we ask for “household income” — as if other parties in the household could be held responsible for that debt. They cannot. And since we don’t ask for any proof of income, the customer can throw out any number they think will work for them. Then we ask if they rent or own and how much they pay. If their name is not on the mortgage, they can state zero. If they pay $1,000 in rent, they can say $500. (Years ago we asked for a copy of the lease to verify this number.) And finally, we don’t ask how much of a credit line the consumer is looking for. The banker can’t even put that amount into the system. There isn’t any place on the application for that information. We simply put unverified information into a mindless computer and the computer gets the person’s credit score and grants them the biggest line that score and income (ha!) qualifies for.
I recently had a client apply for a credit card. She is a homemaker, with no personal income. The house she lives in is in her husband’s name. She would have asked for a $3,000 credit line, just to pay miscellaneous expenses and to establish some credit on her own. So the computer is told that her household income is $150,000; her mortgage/rent payment is zero. The fact is that her husband’s mortgage payment is $7,000 a month (which he got with a no income verification loan). She had a good credit score, but limited credit since she has only lived in this country for the last three years. The system gave her an approval for a $26,000 line of credit!
This has got to stop. People are going to be learning hard lessons over the next years. It would help, though, if the banks could change their behavior now, before things get any worse. Tomorrow is already too late.
In 2003, Congress passed the Fair and Accurate Credit Transactions Act of 2003. This law was implemented through regulations issued by the Federal Trade Commission in consultation with the federal banking and credit union agencies. It requires all credit card and insurance solicitations to include a disclosure for “prescreened offers.” We are all familiar with them. They are the dozens of credit card offers that are sent, unsolicited, to consumers, usually by mail. The law allows the consumer to opt out of receiving prescreened offers by calling an 800-number.
I think Congress did this backwards. Perhaps it could amend the law. The regulation should have required the consumer to opt in, if they so desire, instead of opting out. That would mean that no one would get an unsolicited credit card offer. If a consumer needs a credit card he or she could be given an option to call an 800-number to opt in. Or the consumer could go to their local bank and apply for a credit card in person. Or the consumer could go online and apply for a credit card. The consumer can also view all the best credit cards, nationally, at is an invaluable tool for consumers.
Some other benefits: (1) It would halt the message being sent that credit is free and perhaps limit irresponsible accumulation of credit lines. (2) It would force the banks to become more competitive in their rates. The consumer is going to need a break and they will need it soon. And credit card rates, which are quite often above 22 percent, is piracy. (3) Eliminating mass mailings would save a lot of trees.
I’ve been reviewing many of the banks annual reports over the last month and there is no question that the default rates are on the rise. If Congress doesn’t act today, the bankers will have their hats in their hand before we know it, and doing another a tap dance before the Senate Banking Committee, and asking to be bailed out once again with our tax dollars. Sad, but true.