They’re back and ready to do it again. The same credit rating agencies, Standard & Poor’s, Moody’s, and Fitch, which did such a fine job of rating the risk of mortgage backed securities now have a monopoly on rating collateral being used in the Fed’s commercial paper lending program and Term Asset-Backed Securities Loan Facility. The Fed has determined that it will only accept collateral that has been appraised by the one of the “major” (read big three) rating agencies. This leaves out seven rating agencies that have recently been recognized by the SEC.
The banks and their managers have been raked over the coals for bad business decisions based on the ratings that the big three provided but I haven’t heard of rating agency executives being held to account for their disastrous risk assessments. I also haven’t heard of any justification why the leaders of our most critical financial regulatory bodies now believe in the assessments from the very people who drove the economy over a cliff.
Fool me once, shame on you. Fool me twice, shame on me…
Showing posts with label Opinion: Economy. Show all posts
Showing posts with label Opinion: Economy. Show all posts
Friday, May 1, 2009
Thursday, March 26, 2009
Big Bonuses – Big Deal…
Lately there has been much wailing and gnashing of teeth over the bonuses paid at AIG. Big deal. Have we forgotten about the $3.6 billion in bonuses that Merrill Lynch paid out just hours before the deal to be bought by Bank of America was to close? AIG’s bonuses are less than 5% of Merrill’s. $165 million now days is chump change. Let’s get back to working on fixing the problem.
Distasteful as it is the bonuses were legal. If we don’t like the laws then our elected legislators should thoughtfully change them. If they don’t, we can change the legislators.
We are now working on laws to allow the government to take over failing financial institutions (not just banks). This is reactive. Laws are needed to prevent companies becoming so big that they pose a systemic risk to our financial system in the first place. Financial instruments like derivatives and others need to be regulated like securities, which also need better regulation or more competent enforcement of existing laws. If companies then fail, existing bankruptcy laws can apply.
Existing credit card company practices make it exceptionally difficult for people in credit trouble to get out. The credit card industry needs reforms to protect consumers. Here are some ideas. All terms and conditions must be printed on 8 ½ by 11 inch paper in 10 point font so people can actually read them. It should not be legal to charge interest on money that is no longer owed as rolling two month average daily balance calculations do. Conditions that will cause an interest rate change should be explicitly listed. Sufficient advanced notice of an interest rate change must be given. Interest rates should not be allowed to become usurious. The grace period to pay must allow sufficient time for payment.
People must also assume responsibility for their credit cards use. If people don’t have money to pay for something up front they certainly won’t have money to pay for it at 30% interest. We need to stop financing our lifestyles and live within our means.
Distasteful as it is the bonuses were legal. If we don’t like the laws then our elected legislators should thoughtfully change them. If they don’t, we can change the legislators.
We are now working on laws to allow the government to take over failing financial institutions (not just banks). This is reactive. Laws are needed to prevent companies becoming so big that they pose a systemic risk to our financial system in the first place. Financial instruments like derivatives and others need to be regulated like securities, which also need better regulation or more competent enforcement of existing laws. If companies then fail, existing bankruptcy laws can apply.
Existing credit card company practices make it exceptionally difficult for people in credit trouble to get out. The credit card industry needs reforms to protect consumers. Here are some ideas. All terms and conditions must be printed on 8 ½ by 11 inch paper in 10 point font so people can actually read them. It should not be legal to charge interest on money that is no longer owed as rolling two month average daily balance calculations do. Conditions that will cause an interest rate change should be explicitly listed. Sufficient advanced notice of an interest rate change must be given. Interest rates should not be allowed to become usurious. The grace period to pay must allow sufficient time for payment.
People must also assume responsibility for their credit cards use. If people don’t have money to pay for something up front they certainly won’t have money to pay for it at 30% interest. We need to stop financing our lifestyles and live within our means.
Thursday, March 5, 2009
The Great Reset
Perhaps it is time to consider how much lemonade we can make from the enormous lemon that is our current economy. As bad as things are there are opportunities to emerge wiser and with a more sensible, sustainable future.
What have we learned? We learned that home values cannot go up indefinitely and that bubbles do burst. We learned that we cannot borrow indefinitely to finance profligate life styles. We learned that financial instruments can be made so complex that risk cannot be assessed. We learned that the financial geniuses who created and rated these instruments didn’t understand what they were doing. We learned that companies who offer credit cannot be counted on to have our best financial interests in mind. We learned that companies can be too big to fail. We learned that regulation and oversight is needed and that regulatory agencies cannot be lapdogs of those they are supposed to oversee. We learned what future energy costs look like when demand threatens to outstrip supply. We learned how quickly global demand collapses when interlinked economies suffer from poor policies.
As a country we tend to have a short memory and do not apply the lessons we’ve learned. We will emerge wiser and stronger IF: If we take responsibility for our finances and do not borrow more than we can afford; If we honestly assess what represents affordability in our own situation and ask for help as needed from someone who represents our interests; If we shun credit offered at usurious interest rates and do not finance day to day living; If we insist on regulation that protects people’s interests and that our regulatory agencies be held accountable for proper enforcement; If we invent and adopt technologies to reduce our energy consumption and create alternative energy sources; If we invest in and restructure our educational system so that the U.S. will create these breakthroughs and benefit from them economically and environmentally as they are deployed throughout the world.
If we have learned to live within our means economically and environmentally then we will emerge stronger and more secure as we will be significantly less dependent on other countries to supply our energy and finance our debt.
What have we learned? We learned that home values cannot go up indefinitely and that bubbles do burst. We learned that we cannot borrow indefinitely to finance profligate life styles. We learned that financial instruments can be made so complex that risk cannot be assessed. We learned that the financial geniuses who created and rated these instruments didn’t understand what they were doing. We learned that companies who offer credit cannot be counted on to have our best financial interests in mind. We learned that companies can be too big to fail. We learned that regulation and oversight is needed and that regulatory agencies cannot be lapdogs of those they are supposed to oversee. We learned what future energy costs look like when demand threatens to outstrip supply. We learned how quickly global demand collapses when interlinked economies suffer from poor policies.
As a country we tend to have a short memory and do not apply the lessons we’ve learned. We will emerge wiser and stronger IF: If we take responsibility for our finances and do not borrow more than we can afford; If we honestly assess what represents affordability in our own situation and ask for help as needed from someone who represents our interests; If we shun credit offered at usurious interest rates and do not finance day to day living; If we insist on regulation that protects people’s interests and that our regulatory agencies be held accountable for proper enforcement; If we invent and adopt technologies to reduce our energy consumption and create alternative energy sources; If we invest in and restructure our educational system so that the U.S. will create these breakthroughs and benefit from them economically and environmentally as they are deployed throughout the world.
If we have learned to live within our means economically and environmentally then we will emerge stronger and more secure as we will be significantly less dependent on other countries to supply our energy and finance our debt.
Saturday, February 28, 2009
Who Needs Stimulus
If the economy is 80% dependent on household spending what if the government gave the money to people instead of the very banks that drove the world economy into the dirt.
About two trillion dollars ($2,000,000,000,000) have been committed to saving the economy. The March 2008 Current Population Survey shows there are about 116.5 million households. If two trillion dollars were distributed among households that would amount to $17,167 per household. For the wealthy this amounts to less than a few weeks pay but for many it represents nearly a year’s income.
What would people do with that money? Would they pay down debt (particularly credit cards) and so increase their monthly cash flow and decrease the risk of future financial difficulties? Would they spend it and create jobs? Would they save it and recapitalize banks? Distributing money to households would be efficient and not require additional bureaucracy. Of course this is simplistic and can’t happen.
Instead of propping up failed banks, whose leaders’ compensation was clearly misaligned with their business acumen, what if the government would allow CREDITWORTHY people and businesses to borrow directly from the U.S. Treasury at affordable rates? Let banks then decide if they want to engage in responsible lending or let them go bust as they cling to worthless CDOs and other failed assets of their own making.
Instead of creating impossibly complex instruments whose risk is impossible to determine, what if that energy were channeled into creating and financing new business models where risks and returns are quantifiable and advance objectives in our common interest? What if, like Tom Friedman proposes, a business was created to upgrade a home’s energy efficiency at no cost to the owner? The business would make the investment and be repaid by splitting the energy savings with the home owner. The banks, the business, the providers of the energy saving materials and appliances, the homeowner, and the environment all win and the demand creates incentives to invent more energy saving technologies which when commercialized create even more employment.
About two trillion dollars ($2,000,000,000,000) have been committed to saving the economy. The March 2008 Current Population Survey shows there are about 116.5 million households. If two trillion dollars were distributed among households that would amount to $17,167 per household. For the wealthy this amounts to less than a few weeks pay but for many it represents nearly a year’s income.
What would people do with that money? Would they pay down debt (particularly credit cards) and so increase their monthly cash flow and decrease the risk of future financial difficulties? Would they spend it and create jobs? Would they save it and recapitalize banks? Distributing money to households would be efficient and not require additional bureaucracy. Of course this is simplistic and can’t happen.
Instead of propping up failed banks, whose leaders’ compensation was clearly misaligned with their business acumen, what if the government would allow CREDITWORTHY people and businesses to borrow directly from the U.S. Treasury at affordable rates? Let banks then decide if they want to engage in responsible lending or let them go bust as they cling to worthless CDOs and other failed assets of their own making.
Instead of creating impossibly complex instruments whose risk is impossible to determine, what if that energy were channeled into creating and financing new business models where risks and returns are quantifiable and advance objectives in our common interest? What if, like Tom Friedman proposes, a business was created to upgrade a home’s energy efficiency at no cost to the owner? The business would make the investment and be repaid by splitting the energy savings with the home owner. The banks, the business, the providers of the energy saving materials and appliances, the homeowner, and the environment all win and the demand creates incentives to invent more energy saving technologies which when commercialized create even more employment.
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