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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Aug 29 2008

The Difference Between Republicans and Democrats

Published by under Election,Thoughts

Last night’s acceptance speech by Barack Obama as the Democratic Party nominee for president of the United States was excellent. Senator Obama did what he needed to do — define himself and counter Senator McCain’s claims that he’s elitist and out of touch with Americans. The Democrats have done quite well for themselves this week and it was good to see Bill Clinton come out unabashedly in favor and in support of Senator Obama. If anyone is out of touch with the state of America and Americans it’s Senator McCain and the Republicans.

Consider that Senator McCain and the Republicans have been chanting the tired old mantra of “Drill Here! Drill Now!” for several weeks — knowing full well that drilling “here” and drilling “now” will do absolutely nothing to lower energy costs here in the United States in the near or mid-term future. It’s all a matter of producing a platitude that resonates with the fears of Americans rather than their aspirations. The Republicans are way off the mark and out of touch with Americans these days and it represents a dramatic difference in perspective. Paul Krugman in his latest op-ed piece in the New York Times notes

Democrats say and, as far as I can tell, really believe that working Americans are getting a raw deal; Republicans, despite occasional attempts to sound sympathetic, basically believe that people have nothing to complain about.

(Krugman, Paul, “Feeling No Pain“, The New York Times, August 29, 2008 )

As Krugman outlines in his opinion piece the census of 2007 shows that Americans are worried about the direction this country is taking. And that was in 2007 — before the financial crisis really tightened its grip on the economy and made it’s impact known. Median incomes for American families fell between 2000 and 2007, poverty was up, health insurance down. And even with all these indicators pointing to significant problems the Bush administration puts its head in the sand and proclaims that the economy is “basically sound” and there are no problems. At least no problems that tax cuts for businesses and the rich won’t cure.

On the health care side we are facing a looming crisis. Health care costs are increasing faster than the rate of inflation in the United States on a year-over-year basis. Employers, facing an economic downturn, are looking to cut costs whereever they can to stay profitable. That means cutting the health care benefits of workers or pushing more of the costs of health insurance onto workers who are seeing the power of their paycheck decline already due to the skyrocketing costs of gas, food, and electricity. As these individuals face declining health care the Republicans can only repeat their tired old mantra of “tax cuts for businesses will cure the economic ills.” Many Americans don’t even have health care insurance.

visiting the emergency room in a medical crisis is no substitute for regular care. Furthermore, while a hospital will treat you whether or not you can pay, it will also bill you — and the bill won’t be waived unless you’re destitute. As a result, uninsured working Americans avoid visiting emergency rooms if at all possible, because they’re terrified by the potential cost: medical expenses are one of the prime causes of personal bankruptcy.

(Krugman, Paul, “Feeling No Pain“, The New York Times, August 29, 2008 )

As for health care coverage, President Bush and Senator McCain seem to think that the emergency room at the hospital is “affordable” health care. In fact President Bush stated so last year: “I mean, people have access to health care in America. After all, you just go to an emergency room.” (Bush, George W., HealthCareTalk.net,July 10, 2007).

It’s hard to sympathize with the plight of people when you don’t even connect with their problems. And therein lies the Republican’s dilemma. How can they relate to voters when they don’t even recognize their problems. The disconnect is so bad that former McCain economic advisor, the former senator Phil Gramm, described America as a “nation of whiners.” (“Dr. Phil Gramm knows what ails America“, LA Times, July 11, 2008) How out of touch can you be?

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Jul 30 2008

The Savings and Loan Crisis All Over Again?

Published by under Rants

I have to wonder whether the Fed’s current plan to prop up Fannie Mae and Freddie Mac is the Savings and Loan crisis from the 1980’s coming back for a reprise. Here we are with both Fannie Mae and Freddie Mac suffering huge loses. So huge that the Federal Reserve (along with both the Bush administration and Congress) wringing their hands over how to help the two mortgage giants remain alive so that their collapse will not trigger a financial system meltdown. But it’s not just Fannie Mae and Freddie Mac that the government is bailing out, there are other financial institutions that the government is offering to prop up and save at the cost of the tax payers. An interesting article on MSN Money by Bill Fleckenstein does an excellent job of summarizing how there seems to be very little outcry from the public at large for the government’s bailing out of these financial institutions which have pretty much brought our economy to a grinding halt. How did this happen? Pretty easily. While banks, typically, are supposed to be tightly regulated, a whole bunch of unregulated financial players entered the scene in the late 90s in early part of this decade. These players were not of a concern to Alan Greenspan, then chairman of the Federal Reserve Board. In his opinion, “the market would enforce disciplened risk-taking” (Krugman, Paul, “Another Temporary Fix“, The New York Times, July 28, 2008 ) As Paul Krugman notes in his op-ed in the New York Times:

Far from being disciplined in their risk-taking, lenders went wild. Concerns about the ability of borrowers to repay were waved aside; so were questions about whether soaring house prices made sense.

Lenders ignored the warning signs because they were part of a system built around the principle of heads I win, tails someone else loses. Mortgage originators didn’t worry about the solvency of borrowers, because they quickly sold off the loans they made, generally to investors who had no idea what they were buying. Throughout the financial industry, executives received huge bonuses when they seemed to be earning big profits, but didn’t have to give the money back when those profits turned into even bigger losses

(Krugman, Paul “Another Temporary Fix“, The New York Times, July 28, 2008 )

Well, those losses are now coming out more and more. Every day when we think that we’ve seen the worst and we’ve turned a corner we get another round of announcements by the financial institutions. Just last night, after the market closed, Merrill-Lynch announced another $6 billion (that’s a ‘b’, yes) in write-downs — i.e. losses that they’ll just have to take) Citigroup is indicating that it may announce another $8 billion in write-downs and two more banks have been taken over by the FDIC. How did all this happen? It’s quite complicated but James Grant of the Wall Street Journal does a good effort in trying to explain some of it in his article “Why no outrage?”

Why is there no outrage from the public that our government is doing all it can to bail out these financial institutions and very little to help the average homeowner? Perhaps because, as John McCain believes, the government feels that the homeowners got themselves into this mess as if the institutions bear no blame? That would be typical of this administration and this Congress. I’m not sure myself as to why there isn’t more of a public outcry. I’m of the opinion that these Wall Street institutions should bear more of their pain rather than put it onto the average tax payer. To me this sounds alot like the old Savings and Loan Crisis from the mid to late 80s. During the time period from 1986 to 1995 about 50% of all federally insured Savings and Loans were wiped out by…you guessed it…unsound real estate lending (Savings and Loan Crisis“, Wikipedia, July 21, 2008, http://en.wikipedia.org/wiki/Saving_and_Loans_Scandal) — sound familiar? And who got to foot the bill in the end? The taxpayer — to the tune of approximately $160 billion dollars and severe budget deficits and an economic recession in the early 90s. (Savings and Loan Crisis“, Wikipedia, July 21, 2008, http://en.wikipedia.org/wiki/Saving_and_Loans_Scandal) And the outlook from this mess doesn’t look any better. Thanks Wall Street.

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