Article 43

 

Sunday, May 10, 2009

Why the Government’s Attempt to Instill False Confidence Will Backfire

By George Washington
George Washington’s Blog
May 8, 2009

The government is doing its best to try to “restore confidence” in the economy. Indeed, Obama’s top economics advisors believe they can fool people into believing that everything is fine, and then the economy will recover.

And for that reason, defenders of the status quo think that it is important for everyone to keep quiet about how severe the crisis really is.

Are they right?

No.

As economist Irving Fisher pointed out (as RECOUNTED BY economist Steve Keen):

Hobbled by this naive belief in equilibrium, the economics profession was as unprepared for todays crisis as it had been for the Great Depression. Now that the crisis is well and truly with us, all conventional ғneoclassical economists can offer is the hope that the crisis can be overcome by a good, strong dose of confidence.

From [Irving] FisherԒs point of view, such a belief is futile. In an economy with an excessive level of debt and low inflation, he argued that confidence was irrelevantand in fact dangerously misleading, as he knew from painful personal experience.

In short, happy talk and fake CONFIDENCE-BUILDING exercises don’t work.

Indeed, trying to instill false confidence will actually backfire on Geithner, Summers and the boys and make the crisis worse.

Why?

Because psychologists say that - UNTIL government and business leaders prove they can behave responsibly, and until the perpetrators of financial fraud are held accountable - real trust will not be restored and the economy will not recover.

Trying to put a happy face on a grim situation, continuing to do things which are transparent attempts to instill false confidence, and leaving in power the people who caused the crisis reinforces the market’s convictions that (1) government and business leaders are behaving irresponsibly instead of addressing the fundamental problems and (2) there is no accountability.

So people’s trust declines still further, thus substantially delaying any chance of a sustainable economic recovery. In other words, by trying too hard to instill confidence, the powers-that-be actually undermine it and exacerbate the financial crisis.

Keeping quiet about how bad things are won’t help. As the leading independent economists and financial experts all agree, the three things that will help are:

1. Honestly addressing the causes of the crisis;

2. Honestly addressing the necessary - if bitter - medicine needed to get out of the crisis; and

3. Holding responsible those who caused the crisis.

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Posted by Elvis on 05/10/09 •
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The Next Depression Part 31 - Credit Card Catastrophe

credit-card.jpg

This story makes me sick.  It’s not like the poor banks are innocent victims. They’re CO-CONSPIRATORS in the screwing of the American middle class, and the destruction of the American economy. 

Have you seen their INTEREST RATES lately?

Three months ago my highest credit card interest rate was 10%.  Today my lowest is 12%.  It’s not like I missed a payment or anything.

With interest rates over 20%, how many of us can afford to pay our credit card bills?

Banks, big business, and govenment - all need to be cut down to size.

Ready for a revolution yet?

---

Rising Credit Card Losses Are Next Challenge for Banks

By Eric Dash and Andrew Martin
NY Times
May 10, 2009

It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.

The unemployment rate has long mirrored banks loss rates on card balances. But Eddie Ward, 32 and jobless, may be one more reason that rule of thumb no longer holds. For many lenders, losses are now outpacing layoffs.

Mr. Ward lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked if he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”

In the meantime, he said, “Im just doing what I can.”

Even if Mr. Ward can pay off his debts, experts predict that tens of thousands of Americans will not be able to, leaving a gaping hole at ailing banks still trying to recover from the housing bust.

The bank stress test, released last Thursday, found that the nations 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst-case” economic situation.

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express, Citigroup, and J.P. Morgan Chase, one-fifth of the credit card balances are expected to go bad over the next 20 months, according to stress test results. At Bank of America and Wells Fargo, about a quarter of card loans are expected to sour.

Even the government’s grim projections may vastly understate the size of the banks credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could exceed $141.5 billion by 2010 if the regulators loss rate was applied to their entire credit card business. It could reach $180 billion for the entire credit card industry.

Regulators only published losses on credit cards held on bank balance sheets in the official stress test results. The $82.4 billion figure did not reflect another element included in their analysis: tens of billions of dollars losses tied to credit card loans that the banks packaged into bonds and held their off-balance sheets.

What is more, the peak unemployment level that regulators used to drive their loss estimates was not much worse than what current rates are on track to reach. That suggests the test results could reflect actual losses, rather than the worst-case scenario that regulators projected.

And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy lost 539,000 jobs. The unemployment rate and the rate of credit-card charge offs, bank lingo for uncollectible balances, are traditionally closely aligned because consumers that lose their jobs are more likely to miss their payments.

Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.

Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.

“We will blow right through it,” said Inderpreet Batra, a partner at Oliver Wyman, a consultancy specializing in financial services.

After writing-off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the so-called CREDIT CARDHOLDERS BILL OF RIGHTS after the measure passed in the House with a strong bipartisan vote of 357 to 70.

President Obama over the weekend pressed lawmakers to sign the credit-card reforms into law by Memorial Day, and he plans to push the cause again at a meeting this week in Albuquerque, N.M.

The legislation would curb the ability of card issuers to raise interest rates retroactively on consumers and reduce hidden fees and penalties.

For the banks, the economics of the credit-card business are increasingly troubling. As the recession has dragged on, existing cardholders have sharply reduced spending. New customers with strong credit rates are increasingly hard to find.

And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Economy dot com’s analysis of government data.

Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. Lenders are also eliminating teaser rates and ratcheting up interest rates and penalties for existing borrowers. With the sweeping regulatory changes and relatively few signs that the economy stabilizing, the amount of credit available to consumers will continue to shrink.

Meredith A. Whitney, a prominent banking analyst, expects credit card lenders will cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.

Within the card industry, all eyes are focused on a significant increase in unemployment. Capital One, for example, had a charge-off rate of 9.5 percent in its domestic card business for the first quarter. We expect further increases in the U.S. card charge-off rate through 2009 as the economy continues to weaken,Ӕ Gary Perlin, the companys finance chief, said on a conference call with investors in late April.

At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken historic correlation with unemployment and showed no sign so far of letting up.

American Express, whose first quarter credit card charge-off rate of 8.5 percent tracks roughly with current unemployment levels, said it expects higher losses in the coming months.

Cindy Schneider, a 53-year-old from Connecticut, is a long way from being confident about her finances.

She is not making any money from her job as a realtor and cannot find work elsewhere. Her husbands pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.

When her credit card company recently raised her interest rates, saying she was three days late with a payment, she transferred the balance to another card with a lower rate.

“We are borrowing from Peter to pay Paul,” she said.

SOURCE

Posted by Elvis on 05/10/09 •
Section Dying America • Section Next Recession, Next Depression
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Why Entrepreneurs Aren’t So Optimistic About The Economy

By Kevin Kelly
Newsweek
May 7, 2009

Don’t tell me that the economy is getting better, or has even hit rock bottom. My faith in an imminent recovery deserted me on May 5, when one of our customers, Salyer American Foods, based in Monterey, Calif., suddenly fell into receivership. There had been little to no indication that the company was so close to financial ruin. As it turns out, the company’s lenders say Salyer owes them over $34 million, a debt equal to almost half its sales. A company attorney told local media that tight credit markets and the economic recession had pushed Salyer over the edge. If the receiver doesn’t find some way to revive the company’s fortunes, our bag manufacturing company stands to lose nearly $1.5 million in revenue, about 2 percent of our $60 million in sales.

On the same day my customer fell into receivership, Fed chairman Ben Bernanke told a congressional committee that he believed the economy was in the process of bottoming out and “would turn up later this year.” He’s not alone in his optimism. Over the past two weeks or so, it has become a cottage industry among economists and the media to spot the first “green shoots” of a recovery. Certainly shoots there may be. The stock market has rebounded smartly over the past two months, as has consumer confidence. Pending home sales have ticked up, while unemployment claims are easing. And many economists insist a manufacturing revival is in the wings because inventories have fallen so low that restocking must begin soon.

But I haven’t found many small-business owners ready to jump on the recovery bandwagon, and for good reason. We’re still experiencing the “bottoming out” phase and worry that another bottom remains below this one. Call us pessimists, but we’re not sure the green shoots aren’t just weeds.

Who can blame us? Take the experience of a friend of mine, who runs a $6 million company that provides promotional material to businesses. His sales are down 20 percent compared with last year. Over dinner last week, he said he certainly wasn’t shedding customers at the same pace he had been in the fall, but customers were still defecting. “I can’t see any reason why they’d come back soon,” he said. So he’s getting ready for a second round of layoffs and plans to end spending on marketing until things look more promising.

He’s not alone among my friends and colleagues in his sense that bad times may be here to stay. One friend just decided to abandon her two-year-old Web-based gift boutique thanks to declining sales. She has another friend whose promising e-business startup had its venture funding yanked when it failed to meet sales goals. “Two years ago they’d have been given time to work things out,” she says. Instead they recently closed. Another friend of mine works for a commercial real-estate company that’s instituting 10 percent wage cuts beginning in mid-May. “It’s better than people losing their jobs,” he said to me, “but I don’t expect to be getting the money back any time soon.” Given the growing worries about commercial real estate, he’s probably right.

Even some companies that are supposed to be recession-resistant remain worried. I know the general manager of a small candy company, who says his sales haven’t stopped sliding despite the belief that people supposedly eat more comfort food during bad economic times. He has cut back a shift and won’t be rehiring soon. Representatives for a small local bank have told me that they haven’t seen an uptick in business lending, and that they don’t have businesses looking for money other than those they wouldn’t lend to in the first place. And a long-time machine supplier of mine has had a completed bag-making machine on its floor since late 2008, when the customer decided not to go through with the purchase. Despite a steep discount, the company can’t find a buyer.

Based on my company’s experience, I don’t necessarily see a positive side to low inventories. Over the past several months, we’ve seen lead times on orders fall at least 30 percent. Where our customers used to give us three to four weeks to fill an order, now they give us as little as two. Shorter lead times have followed the trend toward smaller orders. Where companies would once order 3 million bags and hold them on their floors for several weeks, now they’re asking for only 1.5 million and reordering at the last possible moment. In most cases, it’s not that their sales are falling, just that they’re slashing order sizes and reducing lead times in order to avoid tying up capital in inventory. Since they’re entering smaller orders more often, we’re less likely to hold inventory as well. In my corner of the manufacturing sector, the revival that economists have been pointing to seems a long way off.

Now, I know businesspeople can be notoriously wrongheaded when it comes to spotting trends. Aren’t the Big Three automakers at least partly responsible for their own demise because of their failure to anticipate the need for more fuel-efficient cars? I know I’ve almost blown the opportunity to capitalize on growth in the past by being too conservative about buying new equipment. In fact, I’ve angered customers by stretching out lead times rather than investing, because I’ve been worried that the sales growth isn’t sustainable. Talk about a self-fulfilling prophecy. Even right now, when I can see that a judicious equipment purchase could propel our company forward, I worry about taking on more debt and hold back, even with one supplier offering terms that would give us a machine for a year without any payments.

Then I have a day like May 5. I read the Fed chairman’s testimony and feel a bit upbeat, only to get surprised by the collapse of Salyer. Certainly, as my brother points out, it is unlikely we’ll lose the entire sales volume even if our troubled customer disappears, because other customers will step in to fill the gap, and they’ll buy product from us too. But is it insane to hold off on optimism when you’re not sure whether another customer could bite the dust? Perhaps waiting to make any big investments makes sense until we’re completely sure recovery is on its way. Of course, if I wait, and lots of other businesspeople like me wait, what will become of those green shoots that may be dotting the landscape?

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Posted by Elvis on 05/10/09 •
Section General Reading
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