Financial News and Views
for the Rest of US
November 30, 2009
Where the Banks Went Wrong: The Depositor
Ever notice that the banks no longer have depositors – they have customers. Now that may not seem like a big distinction but it represents a huge philosophical shift in the way banks approach the people and companies that have accounts with them. It signals that the obligations banks have to depositors and the value those deposits have to the banks have undergone a major adjustment.
As most people are aware, the traditional concept of a bank is one where an individual would place money with a bank, which would, in turn, take a portion of the funds and lend it to individuals and companies in the local community. It was a pretty straight forward agreement in that the bank would pay the depositor a rate of interest based upon the earnings capability the bank could achieve (the earnings it could make by lending the deposit in the community).
From a financial standpoint that deposit represented a loan of funds by the depositor to the bank, which recorded the deposit as a liability on its balance sheet. When the bank re-loaned the funds in the community the loan appeared on the financial statement as an asset. Without deposits the bank couldn’t lend and would have no earnings. Depositors were the lifeblood of the banking system.
When deregulation of the banking system began in earnest in the late 1960s, which happened to coincide with the privatizing of a federal agency called the Federal National Mortgage Association (FNMA or Fanny Mae) into a government sponsored enterprise or GSE (as a way of moving its expense out of the federal budget to make the deficit look better (see: www.tim-holland.com/Economy/Fannie_Freddie.htm), both FNMA and the banks explored (during the financial crisis of the early 1970s and again during the Savings and Loan crisis) a more aggressive way to free up funds to the banks (provide them with more liquidity). What this entailed was the expanded ability of the banks to sell mortgage loans to FNMA. The result was that the value of deposits on the bank’s books could be doubled, tripled and even quadrupled to the banks benefit.
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October 16, 2009
Caveat Emptor
There is no question that the cause of much of the current financial difficulties the country is experiencing can be laid firmly at the feet of both the dumb, vain, gullible consumer and the slick salespeople who managed to talk them into buying too much of what they didn’t need. Yes, there was fraud and dishonesty all around but it is believed that much of it wouldn’t have worked if the buyers themselves didn’t think they were the ones putting something over on the seller, a concept the sellers themselves were most adept at encouraging. However, as with most things in life, it is never quite as simple as it seems.
Caveat emptor. Latin isn’t taught in public schools anymore (some say English isn’t either, given the number of twelfth graders unable to read at a sixth grade level) and it has been disappearing from the private school curriculum at an alarming rate. So permit me to translate the hallmark legal phrase of business: Let the buyer beware. That’s right, the person doing the buying has the ultimate responsibility in the sales transaction – it’s called the word NO.
Words are important and those who use them well tend to make good salespeople and those who understand them well tend to make good consumers.
If caveat emptor doesn’t resonate then try the American version: If it sounds too good to be true then it probably is.
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August 25, 2009
Charlotte Brontë and the Man of Business
Almost daily one sees, hears and reads of the abuses and exploitations perpetrated by the residents of the financial community. The authors of these critical reports express outrage while their readers and listeners, who believe themselves to be the objects of the exploitation, are angered by the described callousness and selfishness of the financial manipulator. But why are the actions of the money seekers deemed to be such a surprise? Is all this something new we have not come in contact with before?
In 1849, Charlotte Brontë’s second novel, Shirley, was published. Set against an industrial backdrop in Yorkshire, England during 1811 and 1812, it was here that the fear and outrage of knitting craftsmen over the introduction of machinery designed to mass produce “stockings” at prices that would undercut the then weaving “cottage” industry, boiled over into violence. The mill owners were accused of lining their own pockets at the expense of the mill workers, who could no longer make a decent living. And so the “Luddite” movement raged through Yorkshire in an attempt to confront the businessman who would place his own personal wealth interest above the well-being of his workers and community.
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August 7, 2009
Is the Recession Over?
The predictions seem to be flying fast and furious on the cable news shows. Everyone is looking for an expert to comment on the end of the great recession and the experts seem to be more than happy to oblige, perhaps in the hope of being recognized as the person who got it right. But what does it mean that a recession has ended? How are we supposed to react?
The end of a recession simply means that the economy “seems” to have stabilized. For over a year now the country, followed by most of the rest of the world, has been very much like an overly aggressive mountain climber who followed an unexplored route to the top, slipped, fell and dragged the rest of the hiking party down with him.
The end of the recession means that the lead mountain climber has stopped falling but the result of that original slip (all those other climbers attached to the lead) are still coming down. Many of the climbers won’t make it (small and regional banks that have failed and companies that have gone bankrupt) but they are still tied into the climbing system and have to be dealt with (the unemployed, lost and reduced suppliers, corporate supply infrastructure). There are also a good many climbers that are severely injured and will not survive their wounds (increasing unemployment further down the road).
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July 28, 2009
Why Tax Cuts Won’t Work
The concept of reducing taxes always seems to be a good idea, after all, paying taxes, as some people have suggested, is not really our patriotic duty. Taxes are always a burden; it’s just a question as to whether the burden is reasonable and a benefit to society as a whole.
Generally, it is always best to reduce taxes when times are difficult but that only makes sense if you have raised taxes when times were good to provide a cushion during lean times so that essential community services are not placed in jeopardy when they are needed the most.
One of the lessons we, hopefully, learn from the current recession is that critical community services should be supported by reliable tax revenue (expecting to pay for the education of a state’s children with lottery winnings is not what anyone should call a reliable revenue source). There is no question that all revenue collections by governments will be reduced by a recession but some income sources are more vulnerable than others.
Currently, there is a good deal of noise being made about using an individual tax cut as a tool for stimulating the economy. The argument is being made that consumers need to start spending again in order to invigorate the economy and get corporations hiring. Sorry, but I don’t think that’s going to happen this time.
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July 9, 2009
Reregulating Financial Services – An Approach
The time has finally come to get down to the business of getting the financial services sector under control. Everyone, except the large financial service companies themselves, agrees, to some extent, that the current business model is the problem. The difficulty is how to go forward without hamstringing the industry but yet eliminating the abuses that have created the current meltdown in the world economy.
Pressure is being applied from everywhere with recommendations from leaving everything alone (since the system is righting itself and the worst has been avoided) to going back to the rules and regulations of the 1930’s. The extremes, as usual, are both wrong but where are we to find the correct balance?
The first step, which may be the biggest one, is to agree on where things went wrong. One should not assume that the problem started with unregulated hedge funds, out of control mortgage lending and “me first” chief executives, no, those are symptoms of a much larger problem that needs to be addressed: the fundamental makeup of the financial services system and the redefining of the relationships that should exist among all parties.
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June 10, 2009
What Kind of Recession is It?
There has been much talk about the type of recession we are in, even though it hasn’t been completely defined as yet, so I though it would be a good time to demystify some of the commentary that seems to be confusing to many people. News articles, be they of the hardcopy type or the cable news version, always make assumptions that readers or viewers understand the topic or they wouldn’t be reading or watching the subject matter. Having received a number of questions asking me to explain what is going on I thought I would give it a shot.
There are four types of recessions that are continually referred to when doing a analysis: V, W, U, and L. There may be a few others but since these are the most common let’s start here.
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November 2, 2009
FDIC Warns Against "Money Mules"
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