Archive for the 'Economy' Category

Dec 29 2008

An open letter to President-Elect Barack Obama

Dear President-Elect Obama,

As you are now working hard to build your new administration cabinet and team I would ask that you reflect on the fact that the hopes of millions of Americans are focused on you and your call for change in Washington D.C. The past eight years have been extremely rough on the country as a whole. We are now involved in two wars, we have watched our civil liberties erode, we have seen a government which has been mishandled and mislead, and we have now watched our value and our fortunes disappear in a puff of smoke in front of us. Many Americans have lost their retirement savings and many have lost their homes. In turn, we watch as the our government throws billions of dollars to banks who are one of the root causes of the current economic morass as well as to automobile manufacturers who have largely ignored the market conditions and refused, at every turn, to change their business models to meet the demands of the new century.

Many Americans are facing the possibility that this will be their last Christmas or Hanukkah or Kwanzaa in their homes. The new year brings with it the reality that Wells Fargo, Fannie Mae and Countrywide will allow their holiday moratoriums on foreclosure proceedings to expire and they will move forward in foreclosing on houses. Many Americans are facing the possibility that this may be the final few weeks of work for them as their employers downsize, factories close, or businesses shutter completely due to the economic downturn now facing the country. Many Americans are wondering what will become of them, their families, and their futures.

We have witnessed how the country has been led down a path of carefree spending as though the piper need never be paid, how our leaders in the White House and in Congress have resolutely refused to acknowledge that the energy infrastructure of yesteryear is inadequate and harmful for the world of tomorrow, and how our stature in the world has diminished greatly because we have failed to lead.

The world we face today is dramatically different that that faced by President Clinton in 1993 when he entered office and by President Bush when he entered office in 2001. We need leadership now in the same way that President Roosevelt led in 1932 and 1936. We truly need a new “New Deal” — one where we, as Americans, can build a better America not just for ourselves but for our children, and for generations to come. We are not asking for handouts without being willing to roll up our sleeves and get our hands dirty. We are not asking for giveaways without a willingness to break a sweat on our brows. We are not asking for you to solve our problems without our input. We are simply asking for you to set a good example and to lead thoughtfully and responsibly.

What do we mean by a good example? Be frugal in what you do — show America that you feel her pain. Show Americans that you understand their plight. Do not be execessive in what you spend but buy what you need. Show Americans that you are saving money, that you are investing in America — in the right places — green energy projects, schools, infrastructure for the 21st century. Help us build a new economy out of the ashes of the old one so that when historians look back they will say that this was the turning point when America became a better place — a beacon, once again, for the world to see, to learn from, and to follow.

Thank You,
Ido Dubrawsky

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Dec 22 2008

And what did you do with that money?

A recent op-ed by Frank Rich of the New York Times made me do a little digging this morning into just where our taxpayer money being used to bailout institutions like Morgan Stanley, Citigroup, and Goldman Sachs (to name a few) is going. Unfortunately the picture is not looking too good at the moment.

It seems that along with throwing $700 billion of taxpayer money (Treasury Secretary Henry Paulson asked for the other half of the $700 billion to be released back on Friday, December 19th after originally indicating that he would leave it available for the incoming administration) at these institutions the government (that would be both the current administration and Congress) has failed to conduct the appropriate oversight necessary to ensure that this money was not being used to pay for bonuses and other compensation. The Government Accountability Office (GAO) recently released a report, GAO-09-161 detailing a lack of specific, enforceable methods of ensuring that the money given to banks is used according to the original intent of the Toxic Asset Relief Program (TARP). Specificially, the GAO report notes

We spoke with representatives of the eight large institutions that initially received funds under CPP [Capital Purchase Program — clarification added, ID], and they told us that their institutions intended to use the funds in a manner consistent with the goals of CPP. Generally, the institutions stated that CPP capital would not be viewed any differently from their other capital—that is, the additional capital would be used to strengthen their capital bases, make business investments and acquisitions, and lend to individuals and businesses. With the exception of two institutions, institution officials noted that money is fungible and that they did not intend to track or report CPP capital separately.

(Government Accountablility Office, TROUBLED ASSET RELIEF PROGRAM Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, December 2008, p. 25)

By the way, the definition of the word “fungible” is interchangeable (see dictionary.com). As amazing as it may seem the indications are that the money which the U.S. taxpayer has given these institutions to help right themselves after nearly collapsing last September/October can well be used to pay bonuses to managers and executives. How is this possible? Weren’t we assured that this would not happen?

As originally written the bailout bill would have provided for limitations to the compensation given to Wall Street executives who took money from the Troubled Asset Relief Program (TARP) and provided a framework for reviewing and penalizing those institutions that broke the rules in the program. It seems, however, that as the bailout bill was winding its way through the White House a small, one-sentence change was made to the wording in the bill by the Bush administration. According to the Washington Post

The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

(Paley, Amit R., “Executive Pay Limits May Prove Toothless,” The Washington Post, December 15, 2008 )

Now it appears that this little change has provided a huge loophole. Barely a month after the TARP was put in place Treasury Secretary Paulson indicated that the Treasure would not be using the TARP money to buy the toxic assets off the balance sheets of the banks but rather would invest the money in the banks directly. This about face has left the issue of oversight as to how the money is used in a bit of a limbo. As the GAO report notes

it is unclear whether Treasury plans to leverage bank regulators, which in the case of the largest institutions have bank examiners on site, to conduct any oversight or monitoring related to CPP requirements. However, unless Treasury does additional monitoring and regular reporting, Treasury’s ability to help ensure an appropriate level of accountability and transparency will be limited.(emphasis added)

(Government Accountablility Office, TROUBLED ASSET RELIEF PROGRAM Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, December 2008, pp. 25-26)

Without transparency there will be no way to know how these banks are using this money and whether it is being used appropriately or not. As the GAO report notes the initial eight institutions that took the CPP money intended to use the funds in “a manner consistent with the goals of CPP” (Government Accountablility Office, TROUBLED ASSET RELIEF PROGRAM Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, December 2008, pp. 25). In other words, at this point we are taking them at their word that they’re doing the right thing. However, when asked many of these institutions remain quiet about the specifics of where the money is going (Herman, Charles, Dan Arnall, Lauren Pearle, Zunaira Zaki, “Morgan Stanley Is One Bank That Cites a Loan From TARP Money,” ABC News, December 17 2008 ). It appears that the American taxpayer could well be taken to the cleaners once again. Paul Krugman of the New York Times had it write…it is truly a “Madoff Economy.”

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Dec 12 2008

There's just something wrong with this statement

Published by under Economy,Thoughts

Majority Leader Harry Reid, D-Nev., called the bill’s collapse “a loss for the country,” adding: “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”

(“Auto industry bailout plan dies in the Senate,” MSNBC, http://www.msnbc.msn.com/id/28166218, December 12, 2008 )

Am I wrong to wonder why Harry Reid — a Democrat and one of the more liberal ones at that — is dreading having to look at Wall Street today? Ok…I understand what he really means — he knows that Wall Street will take a dive today (500, 600, 700 points?) because of the failure of the Senate to pass the Auto Industry bailout bill. But what about the people on Main Street? I would think that as a Senator (well, as a legislator in general) he should be more concerned about having to look people out on Main Street in the eye rather than worry about how far Wall Street is going to plunge.

I for one am not particularly in favor of the auto bailout — the “Big 3” got themselves into this mess and now they want a handout to get out. I understand that if GM and Chrysler collapse (or, more likely, go into Chapter 11 bankruptcy) then the impact on the economy will be severe and, who knows, may well set us up for another Depression similar to the one of the 1930s. But I also realize we cannot continue to prop up these companies if they won’t make drastic reforms to become more competitive in the global marketplace.

I see the role of the government in this situation as providing a “soft cushion” to an otherwise hard landing. The government should help facilitate either the merger GM and Chrysler with another company or they should provide some assistance in an effort that will result in these two automakers (and possibly Ford as well) becoming smaller, more agile and producing higher quality vehicles at lower cost. This assistance should be done with the idea that, in the long run, this will help Main Street America and that is good for Wall Street.

If the Big 3 want to survive this mess they’re going to have to do some major restructuring internally. We’re not talking about a surgical cut here or there but rather some amputations and they will need to start with executive management and go all the way down. On the flip side, the UAW needs to also make concessions. Their choice is simple — stick to the negotiated contract terms and not yield at all or make concessions that will help the companies weather this storm. I realize that Republicans tend to claim that UAW members make $73 per hour but there’s more to this story than just a number. Well, yes that is the bottom number, however, a good breakdown of that number shows that there’s more to it than that:

  • $40 per hour is cash (wages/overtime/vacation pay)
  • $15 per hour is health insurance/pension related
  • $15 per hour is retiree benefits and represents fixed costs

So in reality the UAW workers are making $55 per hour (compared to the average $45 per hour of the non-unionized workers at the Japanese auto plants) (Leonhardt, David, “$73 an hour: adding it up“, The New York Times, December 9, 2008 ). The UAW fought hard to get the wages and benefits that it has in this current contract. What the UAW now needs to realize is that they must make concessions soon if they want to see Ford, GM, and Chrysler survive this economic crisis (in one form or another) — otherwise they might all be left holding the paper of their contract while standing outside of the shuttered plants.

Both sides must come to an agreement on deep, long-lasting and substantive changes if they are to survive. But Harry Reid should be more concerned about seeing the impact on Main Street rather than on Wall Street by the failure of the Senate to help provide soft landing to these companies.

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