Custom House tower, Boston, Massachusetts
Ilargi: The US is getting its own cash for clunkers version going, the sort of program tried and tested in European countries, in which a government ostensibly wants to get old cars off the road for pollution-related reasons, but which also is a great way to boost automobile production and sales. It will undoubtedly lift US sales quite a bit; how could it not at $4500 per vehicle from the federal government, and various extra's from different states thrown in?
Chrysler has announced it will match the $4500, and other carmakers will feel obliged to follow suit. Of course there'll be all sorts of restrictions, selected vehicles only etc etc, but the purchase of a new car looks more attractive. There may be second-hand ones eligible as well. Some dealers will sell so many cars they will go through their inventories in no time. Which will push production higher, perhaps even re-open the odd plant. It all sounds great, doesn't it? Just what a downtrodden economy needs. A million talking heads will seek to assure you that it's yet another sign of a robust recovery.
But there are a few things wrong with this picture. There are too many people already who can't afford to buy a new car even with all the subsidies. While the not-yet-so-poor, the people who can still meet mortgage payments and who still hold jobs, can now go out and buy on the cheap courtesy of the government, 99% of the 10%-20% (take your pick of U3 or U6) who are un- or underemployed, the very ones who need help more than anyone, are locked out of the cash for clunkers deals. Sure, there may be a scattered few jobs added as sales pick up. But it will all be temporary. While the unemployment numbers will not, as everyone from the president to Tim Geithner to Ben Bernanke now admits.
The government cannot forever keep using your tax money to buy a car for your neighbor. Just as it can't indefinitely keep the housing market alive through Fannie Mae and Freddie Mac, two perversely semi-private firms that today are beyond reorganization since, in Tim Geithner's words: “We cannot credibly think of that right now, because they are the entire mortgage market in the country.” Yes, that's scary, as I've often said. $5-6 trillion in loans, and who knows how much in securities. The "worst" loss numbers for Fannie and Freddie I read are $100 billion. Not even close.
So is handing over taxpayer money to people who could mostly afford a new car anyway, and who can still get a loan for one (not a trivial detail), the best way to use that money? How much of it do you think is being spent to do the right thing, to help the most needy, and how much is spent on securing votes from the more affluent? How many "representatives of the people" will play the cash for clunkers program as a personal victory in their constituencies, as a sign that voting for them means voting for the (wo)man who can get things done?
The weakest point in our democratic systems lies in the fact that the weakest people are underrepresented. Democracy works only until the people figure out that they can vote themselves an ever greater piece of the pie. And "the people" in this sense means, deceptively simply, the majority that is vocal, organized, and in the prime of their lives, who are neither too destitute nor too young or old, too sick, or stuck in one part or another of the judicial system.
Children can't vote, neither -most often- can prisoners, the sick have other priorities, and the elderly are much too unlikely to change their allegiances for give a politician reason to focus on them. Hence, the majority of public perks handed out, all of which come from the deep general coffers of society, go to what one might call the middle class. Through donations and "friendly circles", the rich always make sure they're taken care of first. But there are not enough rich people to win elections. To get enough votes, therefore, politicians will take care of the "relatively affluent". Those who have the means to buy cars. Those who purchase homes. If they get in trouble, or say they do, they are the ones who get the subsidies. Not the people who need them most.
It is often said that the true quality of a democratic society can be determined by how it takes care of its weakest elements. The relevance of that statement generally remains largely hidden when economies are doing well, when are growing. It is truly tested only in times of hardship. But the cards are stacked against the weakest elements. When the vocal majority demands to have its interests, i.e. the maintenance of the lifestyle it has become used to, be taken care of, or else they'll vote for someone else, the weakest must necessarily get weaker.
Until you wind up with so many that are so weak, they start speaking up, out of despair, and find they have become the majority. It's what you call a political crisis. And it's inevitable when growth stops in a democracy, unless you catch the fall before it happens. Blindly believing that growth will resume can only make it worse. You have to prepare for that not happening, or, as a society, you'll be caught blindsided. If a society doesn't provide a bare minimum in food and shelter, it must of necessity implode. That's not socialism, it's preventing mayhem.
PS: I got news tonight that a dear friend of old passed on yesterday in Holland, far away far far too young. I'm thinking of you, sweet Noor, and the kids.
Detroit’s Schools Are Going Bankrupt, Too
‘Am I optimistic that they can avoid it . . . ? I am not.” That’s what retired judge Ray Graves said this week when asked whether the Detroit public schools, which he is advising, would be forced into bankruptcy. Facing violence, a shrinking student body, and graduating just one out of every four students who enter the ninth grade on time, the city’s schools have been stumbling for years. Now they face a seemingly insurmountable deficit and are expected to file for bankruptcy protection at about the time that students should be settling down in a new school year.
As embarrassing as such a filing would be, it also may be the only thing that can force the kinds of changes Detroit schools need—as the financial turmoil is just the latest manifestation of a system in terminal decline. Detroit is like many urban school districts—large, unwieldy and bureaucratic, with a powerful union that makes the system unable to adapt to changing circumstances and that until very recently had an indulgent political class that insulated it from reform.
That insulation came in two forms. The first was neglect. Mayor Kwame Kilpatrick spent several years distracted by a scandal stemming from his affair with a staffer. He resigned last year, pleaded guilty to obstruction of justice, and was sentenced to four months in jail. Had he been an effective mayor, he might have also been a powerful advocate for students. The other insulating force was a conscious decision to wall off Detroit from charter schools. In 1993, Michigan’s legislature made it difficult to create new charters in Detroit by declaring that only community colleges could authorize charters for primary and secondary schools in “First-Class Districts”—defined as those with more than 100,000 students.
Detroit was the only First-Class District. In 2003 the state, under pressure from the Detroit Federation of Teachers, turned down a gift of $200 million from philanthropist Robert Thompson that would have established 15 charter schools in the city. Those charters are needed today. The net result has been a school system that’s been coming apart as the teachers union has dug in its heels. In 2006, the union illegally went on strike, killing a plan to force teachers to take a pay cut to balance the system’s books.
In June, seven students were wounded in a shooting near Cody Ninth Grade Academy just two weeks after 16-year-old Tenecia Walter was shot in the chest shortly after leaving class at Denby High School. Earlier this year a gunfight broke out in Detroit’s Central High School and last year a student was shot and killed walking home from Henry Ford High School. All of this has forced school officials to step up security measures, including increasing the number of police patrols.
Meanwhile, only 16.2% of the city’s 11th graders scored proficient in math this year on the state’s standardized Merit Examination, compared to 49.3% statewide. Detroit reading and science scores are just as bleak. And this in schools that spend $1,700 more per student than the state average. The school system also has been rocked by corruption. A few years ago, an audit revealed that Detroit’s school system misused more than $46 million on insurance and other contracts and was forced to sue venders to get some of its money back. Two of the system’s employees were recently indicted for allegedly embezzling $400,000 from the school system over the past couple of years.
To clean up the mess, the state took control of the district earlier this year and brought in Robert Bobb as an “emergency financial manager.” In June, to stem pay-check fraud he required that employees pick up their paychecks in person. Paychecks for 257 suspected “ghost” employees—people who had improperly been getting checks—went unclaimed. Mr. Bobb has been energetic in tackling problems. At the outset, he faced a $306 million shortfall in a $1.3 billion budget. He responded by closing 29 schools, laying off 2,500 employees, and cutting 80% from the budget of the department that draws up the district’s curriculum. He plans to overhaul 40 schools and has hired private companies to run 17 of the district’s 22 high schools. He also tapped Mr. Graves, a bankruptcy expert, for advice.
The Detroit Board of Education has gone along with many of these changes. But it is now seeking a court injunction to block private companies from running district high schools. The board says Mr. Bobb exceeded his authority in hiring the companies. But a court fight will only bog things down at a time when the district still faces a $260 million deficit. This is why Mr. Graves and others see little alternative to declaring bankruptcy, and why doing so would likely be a net benefit. It would allow the city to tear up union contracts, cut some of its debt, and forge a political consensus for lasting reforms. No one will want to repeat the bankruptcy experience any time soon.
What the city needs is a multitude of charter schools and other school-choice provisions that would give students a means to escape. It also needs to break free of collective-bargaining agreements. Collective bargaining for government employees is not a constitutional right; it is a special privilege, and one that has been abused. Michigan’s education laws could be amended to allow school districts to suspend collective-bargaining agreements when that district fails to meet minimal academic standards, is pushed to the brink of bankruptcy, or when the union goes out on an illegal strike.
Over the past seven years, Detroit schools have lost 60,000 students. Its system is now, according to the state’s attorney general, so small that it no longer qualifies as a First-Class District. That gives the state legislature and Democratic Gov. Jennifer Granholm an opportunity to do what they needed to do all along: Treat Detroit like other school districts in the state and hold local officials accountable when the schools fail to perform. Walling off Detroit from the rest of the state may have some appeal and was once the politically easy thing to do, but it’s only given Michigan a larger mess to clean up.
Budget deal puts California in hole for next year
aCalifornia may be about to crawl out of a fiscal crevasse now that the Legislature has adopted a $23 billion deficit-reduction plan, but the state is headed toward another deep hole even if the economy recovers, finance experts say. The budget deal Gov. Arnold Schwarzenegger plans to sign Tuesday relies on roughly $8 billion in accounting maneuvers and questionable new revenue that experts say will result in what the governor vowed never to do: kick the problem down the road.
"Next year's budget will start with a very large shortfall even if there's a good recovery," said Steve Levy, a senior economist at the Center for the Continuing Study of the California Economy in Palo Alto. And, Levy cautioned, the state's finances will face additional challenges when federal economic stimulus funds run out. The plan lawmakers approved Friday also includes more than $15 billion in spending cuts largely to education and health and welfare services. But among the accounting tricks and revenue the deal relies on are the following:
- $1.7 billion: Require taxpayers who make quarterly estimated payments to pay more in the first six months. The state's fiscal year begins July 1 so the change would lower revenues in the first half of the next fiscal year.
- $600 million: Increase income tax withholdings from paychecks. This would allow the state to grab more tax revenue earlier but would result in lower revenue later due to higher tax refunds or less taxes owed.
- $900 million: Shift state workers' June 30 pay date to July 1 so the cost is passed to the next fiscal year.
- $1 billion: Sell a portion of the State Compensation Insurance Fund's workers compensation insurance portfolio. State Insurance Commissioner Steve Poizner has threatened to file a lawsuit over this plan.
- $1.9 billion: Take revenue from counties' property tax collections under the provisions of Proposition 1A that voters approved in 2004, but the state must repay counties with interest within three years.
- $1.3 billion: Take local redevelopment agencies' funds in exchange for extending the number of years the agencies could collect a portion of property taxes in their region. Cities and counties have threatened to sue the state over this plan.
"Dogs bite people, celebrities get arrested and Sacramento politicians fiddle with the books," said Jack Pitney Jr., a political science professor at Claremont McKenna College. Pitney said there is little guarantee that the Golden State will be out of the woods any time soon. "One certainty in all of this is that California's problems are far from over," he said. Jean Ross, executive director of California Budget Project, a progressive think tank in Sacramento, called the deficit deal a "mixed bag," adding, "It certainly means we are likely to have problems in the future."
Some legislative leaders who helped broker the deal also admit it's far from ideal. Senate Republican leader Dennis Hollingsworth of Murrieta (Riverside County), one of the main negotiators of the budget, wrote in a memo to his caucus last week that the agreement has "some ugly gimmicks." State Senate President Pro Tem Darrell Steinberg, D-Sacramento, said their options were limited because the leaders were trying to craft a plan that avoids new taxes without destroying the state's social safety net. "I don't like the idea of kicking the can down the alley, but doing a little of that is better than kicking a lot of people out on the street," he said.
Schwarzenegger and legislators were under immense pressure in the past weeks to eliminate the deficit as California began issuing interest-laden IOUs to pay contractors and others owed money to avoid completely running out of cash. To worsen matters, the state's credit rating plunged amid warnings that further delay in a deficit solution could exacerbate California's teetering economy by bringing state-funded transportation and other infrastructure projects to a halt, leaving thousands jobless.
The state's financial problems began 18 months ago when revenue began steadily dropping as the U.S. economy faltered. Within the past year, lawmakers have had to deal with about $60 billion in revenue losses projected through June 2010. When Schwarzenegger spoke Friday about the deficit plan the Legislature passed, he acknowledged the economic uncertainty. The package "saves our state from financial ruin and from drowning in the fiscal abyss," Schwarzenegger said, adding that it's difficult to gauge when the state's struggling economy will improve. "We don't know how much longer our revenues will drop. We don't also know if we may not be back in the next six months to make further cuts," he said.
Experts say another problem with the plan is that it includes a $1.2 billion cut to prison spending but doesn't specify how that will be achieved. A significant chunk of the proposed prison cuts - $400 million - stem from Schwarzenegger's previous line-item veto from the February budget package to eliminate a $42 billion deficit, but the earlier prison cuts were never implemented. Schwarzenegger and legislative leaders last week promised they will tackle how to reduce prison spending when lawmakers return from their summer recess next month.t
Lobbyists had say during California budget talks
For weeks, legislative leaders and Gov. Arnold Schwarzenegger negotiated California's budget solution behind closed doors. They had plenty of outside help. Throughout the process, lobbyists waited in Capitol hallways and by their telephones to discuss provisions they wanted – or didn't want – in the budget agreement. During breaks from talks, Democrats e-mailed and called teachers union officials to determine how best to craft a $9.8 billion future repayment to schools. Republicans spoke with business leaders about proposals to squelch taxes and help companies in California.
Even during the wee hours Friday morning, as the Legislature slogged through a final budget vote, lobbyists worked lawmakers in Capitol corridors. In the end, Democrats succeeded in obtaining the repayment to schools, while Republicans were able to eliminate tax-hike and tax-enforcement proposals that businesses targeted. Through it all, state leaders helped core constituencies – and key campaign donors. "The unwritten rule of Sacramento is that legislators keep in mind not only their voter constituents but their cash constituents, and they need to deliver results if they want to continue to see cash contributions flow," said Derek Cressman, Western states regional director for Common Cause, a nonprofit watchdog group.
Republican leaders and Schwarzenegger made clear from the start that they opposed any taxes to bridge the state's deficit. They said May's failed special election was a mandate from voters, though their stance also helped businesses who support their party. They refused to consider Democratic attempts to increase the sales tax on cigarettes by an additional $1.50 per pack and impose a new tax on oil extraction – two measures opposed by businesses who are reliable GOP donors.
In the 2007-08 campaign cycle, Chevron Corp. gave $247,000 to the California Republican Party, while Altria gave $100,000. Altria owns the largest U.S. tobacco company, Philip Morris USA. Chevron this year gave Schwarzenegger's special election committee $500,000. And Philip Morris provided the governor's committee with $350,000. Democrats believed the taxes were reasonable because polls show voters support "sin taxes" such as those on cigarettes. They also argued that the oil extraction tax was palatable because costs would not be passed on to drivers – a point Schwarzenegger's own office made when the governor sought the same tax in November.
Democrats initially wanted taxes to avoid deep cuts in social service programs such as welfare-to-work, Medi-Cal and Healthy Families medical insurance for children. Schwarzenegger, however, said in May he would not sign a budget with any tax hikes. He suffered criticism for signing $12 billion in taxes in February and felt the May vote was a rebuke of such policies. "The governor always leads by what's best for California, not by what special interests would like him to do," said Schwarzenegger spokesman Aaron McLear. "Keep in mind, creating a good business climate creates jobs and improves our state's economy."
While Democrats quickly gave up on the idea of new taxes, they sought other proposals that they said would generate more dollars through stricter tax enforcement. They wanted to force online retailers such as Amazon and Overstock.com to collect sales tax on California purchases, as other states, including New York, have tried. Schwarzenegger rejected that idea. Democrats also sought a number of tax enforcement laws, most of which Republicans rejected. In a major revenue proposal, they wanted to raise $1.7 billion by forcing businesses to withhold 3 percent of payments to independent contractors – a way to capture tax dollars that Democrats believed are not being fully paid. That plan died as well. Senate Republican leader Dennis Hollingsworth, R-Murrieta, touted blocking that plan as one of his victories in a memo to colleagues.
Cash-Strapped California's IOUs: Just the Latest Sub for Dollars
To creditors of the state of California who got paid in IOUs instead of money, take it from historians -- things could be worse. You could be getting clamshells. Or chunks of plywood. During the Great Depression, hundreds of communities as strapped for cash as California is today circulated their own temporary currencies. An estimated $1 billion in this scrip was issued by towns and counties, not to mention corporations, school boards, newspapers and a few wealthy individuals.
Most promissory notes looked like paper currency, but scrip was also printed on leather, metal, fish-skin parchment and, in Tenino, Wash., on slabs of two-ply Sitka Spruce. In Hood River, Ore., Hal's Tire Service printed $1 bills on scraps of old tires, briefly giving the rubber check a good name. Today, collectors treasure remnants of those desperate times: a green-and-gold "sauerkraut note" from Minneapolis; a warrant, beautifully printed with an engraving of a clipper ship, from Cape May County, N.J. Some imagine filling out their collection with Schwarzenegger scrip, circa 2009.
"Every piece tells a story," says Neil Shafer, author of the "Standard Catalog of Depression Scrip of the United States," published in 1984. "It represents a piece of social history." Since California ran out of cash early this month, it has issued more than 194,000 IOUs, with a total value of $1.03 billion. They are redeemable in U.S. dollars on Oct. 2, or sooner if the state comes up with the money. The legislature on Friday approved a plan to close a $24 billion budget gap, but officials say it could still take a few weeks to analyze the state's cash situation and resume giving creditors checks instead of promises.
California IOUs differ from Depression-era scrip in a key respect: They are made out to individual creditors for specific amounts. Scrip in the 1930s was designed to circulate like currency and usually issued in standard denominations: 25 cents, $1, $5. Issuance exploded in early 1933, as banks in city after city suspended operations in the face of runs on their teller windows, severely restricting the amount of money in circulation.
On March 6, President Franklin D. Roosevelt shut down nearly all transactions in a "bank holiday," even as he prodded the Federal Reserve to hurry up and print more currency. Some banks reopened within days, but others remained shut for weeks. People and businesses ran out of cash. Some turned to barter. The New York Daily News, which was sponsoring a boxing match at Madison Square Garden, offered a ticket in exchange for any item worth 50 cents. Fans brought in spark plugs and nightgowns, frankfurters and jigsaw puzzles, New Testaments and noodles and golf knickers, says Mr. Shafer, who chronicled the era in his book.
But barter goes only so far. Makeshift currencies soon were popping up everywhere. Each note of the funny money was supposed to be backed by the assets of the issuer. For the most part, the system worked: When the crisis passed, holders of scrip were able to redeem it for legal tender. There were a few flops and scams. In Chicago, a hustler printed up official-looking notes bearing his name: Caslow Recovery Certificates. They turned out to be worthless. In Portland, Ore., scrip issued by Multnomah County got entangled in a legal dispute, leaving holders high and dry.
In Minneapolis, a group of jobless residents pledged to provide handmade goods, such as clothing or canned vegetables, to a central commissary. Then they printed their own currency, emblazoned with the line "Organized Unemployed," to facilitate trade. The experiment ended badly when too many members contributed nothing but sauerkraut to the commissary. "You can't buy and sell sauerkraut among yourselves for very long," says Loren Gatch, a political scientist at the University of Central Oklahoma.
Detroit had a more robust scrip economy. By early March of 1933, the city had been short of legal tender for so long that workers were fainting from hunger at their desks, according to Smithsonian Magazine. So the city printed millions of dollars of scrip, in denominations as high as $100. Unlike the pecked-out-on-a-typewriter look of some notes, Detroit's were beautifully designed and professionally printed, on the theory, says Mr. Gatch, that "if the bills looked good, people would be more likely to take them."
A newspaper in Northern California called the Pacific Grove Tribune took a different tack. It issued what it called "anti-hoarding" scrip, printed on sheets about 17 inches by 7 inches, so cumbersome that creditors who got them had an incentive to put them back in circulation quickly. The Tribune also urged each person who spent a note to first sign the back. The idea was that the growing list of signatures would be a boost to morale -- proof that, even in tough times, business was being transacted.
Historians say few scrip notes were counterfeited, in part because many didn't circulate long enough to get a racket up and running. There were a few attempts, though. In the late 1930s, two brothers from Superior, Wis., were charged with counterfeiting a local scrip. Their defense: It wasn't real money to begin with, so how could faking it be illegal? The judge didn't buy it. They were convicted.
Such stories make Depression scrip more than just old paper, collectors say. Each is a window onto the past. Collectors prowl garage sales, flea markets and numismatic conventions in search of surviving scrip. "I love the thrill of the hunt," says Jamie Yakes, a sales manager in South Brunswick, N.J. Even amid the Depression, some collectors saw the appeal of handmade IOUs, and a couple of communities catered to that by issuing novelty scrip.
The Crescent City, Calif., Chamber of Commerce issued hand-lettered clamshells, each redeemable for 10 cents when the Chamber got some money. Officials rightly guessed that most folks would hang onto them as souvenirs. Though a few issuers saved stashes of their scrip, and it now can be bought cheaply at online auction sites, many other issuers destroyed the notes after they were redeemed. With those bills, the few that survive can fetch hundreds of dollars.
Rod Charlton II, who runs a Web site called DepressionScrip.com, says there is no bigger thrill than finding an unusual note online. "I can't sleep at night because I want to get hold of it so bad," he says. "It's that kind of obsession." California's IOUs lack the flair of much Depression-era scrip; they are basic, pale-green government-issue checks, except they bear the telltale label "Registered Warrant." Still, collectors say they would make good souvenirs of today's financial crisis.
The trick will be getting hold of one. California plans to destroy the IOUs after they are redeemed. And state officials say they expect a high redemption rate. "The people who got them probably aren't sitting around thinking, 'I'm going to save this for posterity,' " says Mr. Gatch, the political scientist. "They're more likely thinking, 'How the hell am I going to cash this?' "
British economic collapse rivals Great Depression
The collapse in Britain's economy now rivals the worst days of the Great Depression, it has emerged. Economic output shrank by 5.6pc in the 12 months to the middle of the year, according to official figures which shattered hopes that the recovery has already begun. The Office for National Statistics said that Britain's gross domestic product (GDP) contracted by 0.8pc in the second quarter, following the unprecedented 2.4pc fall in the first three months of the year. Economists had expected GDP – the broadest measure of the country's economic performance – to shrink by 0.3pc.
According to calculations by Martin Weale of the National Institute for Economic and Social Research the profile of the current recession is now almost identical to the decline in Britain's output between 1929 and 1931. The 5.6pc contraction over the past year almost matches the 5.8pc fall in the year preceding the second quarter of 1931, during which Credit Anstalt in Austria collapsed, triggering a second wave of economic seizure across Europe. The recession is far deeper and more severe than those of the early 1980s and 1990s, Mr Weale added.
"Gordon Brown is now competing with Ramsay MacDonald – not a comparison he would much like," he said. "It looks as if we are pretty much tracking the 1930s, "The financial crisis has been much bigger [than in the 1930s], the period of boom beforehand was more marked; and so you might think it's thanks to the policies [from the Bank of England and Government] that we'll end up with something slightly less bad but along similar lines."
Markets nevertheless took the disappointing news in their stride, with the FTSE 100 rising for a tenth straight day by 16.81 points to 4576.61. Indeed, the 10.9pc increase in those sessions is the biggest uninterrupted increase since the index was set up in 1985. The Treasury forecast in the Budget earlier this year that the economy would shrink by 3.5pc this year, but most independent forecasters, including the International Monetary Fund and OECD, expect a far more severe contraction. The ONS figures also cast doubt on whether the economy will start to grow again before the end of the year.
Michael Saunders, UK economist at Citigroup, said although he expects growth to return in the third quarter, the recovery will feel subdued. "As well as a deep recession, we expect a slow recovery, held back by high private debts and (with inadequate bank capital) poor credit availability," he said, adding that it would take until 2013 for the economy to reach the pre-recession peaks of 2008. He added: "It will be many years before the UK returns to a well-balanced and sustainable mix of low unemployment, low fiscal deficit and low public debts, decent economic growth and low inflation."
The GDP decline also casts doubt on whether the Treasury will achieve its borrowing targets for the year – even though the £175bn of debt forecast for this fiscal year is already set to be a post-war record deficit. The Budget assumed, when drawing up these borrowing figures that the economy would shrink by 3.75pc, at worst. A bigger fall would push the deficit up further, as it would imply lower tax revenues and bigger comparative public spending totals.
Liam Byrne, Chief Secretary to the Treasury, insisted that growth would return by the end of the year. "We are not out of the woods by any stretch of the imagination, but what today's figures show is that the pace of the downturn is easing," he said.
This is how we let the credit crunch happen, Ma'am ...
A group of eminent economists has written to the Queen explaining why no one foresaw the timing, extent and severity of the recession. The three-page missive, which blames "a failure of the collective imagination of many bright people", was sent after the Queen asked, during a visit to the London School of Economics, why no one had predicted the credit crunch. Signed by LSE professor Tim Besley, a member of the Bank of England monetary policy committee, and the eminent historian of government Peter Hennessy, the letter, a copy of which has been obtained by the Observer, tells of the "psychology of denial" that gripped the financial and political world in the run-up to the crisis.
The content was discussed at a seminar at the British Academy in June that was attended by economic heavyweights including Treasury permanent secretary Nick MacPherson, Goldman Sachs chief economist Jim O'Neill and Observer economics columnist William Keegan. The letter explains that as low interest rates made borrowing cheap, the "feelgood factor" masked how out-of-kilter the world economy had become beneath the surface, with some countries, such as the United States, running up enormous debts by borrowing from others, including China and the oil-rich Middle Eastern states, that were sitting on vast piles of cash.
Despite these yawning imbalances, they say, "financial wizards" managed to convince themselves and the world's politicians that they had found clever ways to spread risk throughout financial markets - whereas "it is difficult to recall a greater example of wishful thinking combined with hubris". "Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well," they say. "The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction."
That meant when the reckoning came it was extreme, starting in summer 2007 and culminating in the near-collapse of the entire world financial system after the bankruptcy of Lehman Brothers last autumn. "In summary, Your Majesty," they conclude, "the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."
Besley stressed that the experts had not been in "finger-wagging mode" and had agreed that the causes of the credit crunch were extremely complex. "There was a very complicated, interconnected set of issues, rather than one particular person or one particular institution." Other experts at the seminar last month included Paul Tucker, deputy governor of the Bank of England, Vernon Bogdanor, the constitutional expert from Oxford University, and HSBC's chief economist, Stephen King.
A spokesman for Buckingham Palace said the Queen has displayed a particular interest in the causes of the recession, summoning Bank of England governor Mervyn King to a private audience earlier this year to explain what he was doing to tackle it. Official figures published on Friday revealed that Britain's economy has now been contracting for 15 months, and the recession is deeper than any since the 1930s, outside of wartime.
Robin Jackson, chief executive and secretary of the British Academy, said: "The global recession is a huge development, and it is reasonable to ask to what extent it could have been foreseen. What's more, we can't say 'never again' if we don't fully understand what occurred. The academy forum was an opportunity to get an exceptional range of experts, participants and commentators in one room, sifting fact from fiction and shedding light on what had gone on. We hope Her Majesty - and indeed others - will find our letter informative."
The academy plans to hold a second seminar later in the year to ask how best to prevent another such crisis occurring. Besley denied that economics as a profession had been discredited by the scale of the crisis, but admitted that unconventional ideas - about how herd psychology and bouts of irrationality can grip financial markets, for example - had sometimes received "less play" during the boom years. He said the academy hopes to provide a forum for airing economic differences: "What we need is a forum where people can come together on a very open basis, to provide challenges and have a debate."
Professor Luis Garicano, to whom the Queen directed her question when she visited the LSE in November last year, said: "She seemed very interested, and she asked me: 'How come nobody could foresee it?' I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from society's perspective."
Taking stock of the newly destitute
Destitute : without resources, in great need of food, shelter, etc; devoid of (Concise Oxford Dictionary)
How bad is it out there? As bad as it gets, if Simon Community Northern Ireland has an accurate picture. When Carol O’Brien of Simon’s Northern Ireland branch used the word “destitution” at a Simon Communities of Ireland (SCI) event this week, she was well aware of its potency. It was a word that harked back to another era, the era of poverty described in Angela’s Ashes by the late Frank McCourt, she noted, but she was struck by how often it had cropped up in conversation with colleagues and others in the past 12 to 18 months: “Destitution, unfortunately, is coming and creeping through society in an insidious way,” she said.
So have we come to this? “It’s not a word we’d be using regularly here in Simon Communities Ireland,” says Patrick Burke, chief executive of the island-wide Simon federation. “We are more inclined to use the term ‘poverty’ or ‘consistent poverty’ which is the Government’s approved poverty measure, developed by the ESRI. As far as we are aware, there is not a great difference in the situations of people contacting the Simon service north or south of the Border.”
Over at the St Vincent de Paul Society they were equally wary. “It’s such a loaded word,” says John Mark McCafferty, head of social justice and policy at the society. “Destitution is in the eye of the beholder. If someone feels destitute, they are. But because it’s such a loaded word, we’d be reluctant to label people as destitute. Would that be how I would describe myself [if I was a client of Vincent de Paul] – or I am I having a little bit of a rough patch?”
The over-arching feeling, however, is that quietly but surely, many people are edging in that direction. “There hasn’t been a huge increase in the obviously destitute,” says a successful Dublin 4 businessman with a long-standing involvement in various charities. “But there certainly has been an increase in the secretly destitute . . . There is the secret destitution of people living in hell, in houses they can’t pay for; people who have set up lifestyles they can’t sustain, who are facing ruin, who have absolutely nothing and nowhere to turn . . . It’s more a destitution of hope, of prospects. It’s not the begging in the streets kind . . . This is new.”
SCI agrees. “There are those people whose homelessness or risk of homelessness is hidden – they are staying with friends and relatives, sofa-surfing, borrowing to pay rent or mortgage, not in contact with services and supports. When they can no longer stay with friends or relatives or borrow more money for rent etc, they will turn to homeless services,” said Patrick Burke. “It can take some time before people define and classify themselves as homeless due to reluctance and/or lack of knowledge about where to turn for support.
Therefore, the impact of the current economic situation will not result in an immediate marked increase in the numbers of people who are homeless but will be slower and must be monitored over the longer term.”
A social welfare official says firmly: “It’s bad out there. Really bad. People may not be in danger of starving but there are plenty who have seen a really drastic change in their circumstances. Their homes are threatened, their cars have been repossessed, their furniture has been repossessed. For seven or eight years up to a year ago, people lived in a culture of no-tomorrow, of plastic money, of lending institutions firing money around willy-nilly and now reality is beginning to bite.
“And I can tell you, it’s causing untold stress, hardship and disharmony . . . Two or three years ago, these people were concerned with where they’d go on their fourth or fifth holiday, now they’re concerned about the next bill coming through the door. Look at the increase in unemployment numbers and people claiming social welfare benefits – that has a snowball effect inside the home, believe me.”
He notes that many self-employed in particular have emerged with no welfare safety net. “Quite a lot of the people affected would be self-employed and the class of insurance they contribute towards provides no form of unemployment or sickness benefit. The only thing their insurance entitles them to is the old age pension. Therefore, all they’re left with is assistance – about €204 for a single person, another €160-€170 if there’s a spouse and a couple of children. That’s a fair comedown from what that type of person was probably earning in the boom years.
I’ve heard of tradesmen working on building sites who were taking home €3,000 a week . . . You’re looking at people like that or professionals like solicitors who specialised in conveyancing, earning a lot of money and living up to every penny of it [who] now have been laid off now with virtually nothing.” What many don’t realise, says Wicklow county councillor Irene Winters, is that even for employees who have contributed pay-related social insurance for many years, non-means-tested benefit is finite.
After 12 months, any further unemployment assistance depends on a rigorous means test, one that many people stranded with unsaleable assets bought in the good times will have difficulty passing. A small savings pot, a second unsaleable home, a spouse who is earning above the prescribed amount may disqualify an applicant. A couple in their mid-40s who had worked hard since their teens, each running a small business, had bought an old house and were slowly doing it up, but failed to sell their first home before the slump. Now they can’t sell either.
Both businesses have come to a stand-still, but for welfare purposes they are regarded as asset-rich so are entitled to no benefits. They are currently surviving on hand-outs from family members and the Vincent de Paul, as well as food parcels left on the doorstep by concerned friends. Another man who lost his job last year has only now realised that he is a month away from losing his allowances. His revised mortgage payment schedule with the bank was made on the flawed understanding that his €800 a month benefit would continue. He has no idea what lies ahead.
“If he and his wife were in private rented accommodation, they would qualify for rent allowance – which would be paid to the big developer who owns the house and which would make him wealthier. The Government seems to have all the money in the world for them,” says Winters. “Most people who haven’t engaged with the system before and don’t know how to maximise benefits have no idea what they’re heading into. They are asked to produce bank statements and they produce them – only to find that no help is forthcoming until they’ve made themselves completely broke.
This is what is coming down the line for many, many people . . . They’re on their way to destitution and they don’t even know it yet. People who lost their jobs in the past year may still be eking out their savings; maybe a family member is still working [and the] banks haven’t come the heavy yet, but that’s only a limited time frame as part of the bailout deal. Now the year is nearly up and there seems to be no Government plan for what is going to happen next year. Many of these people will not be eligible for State benefit under current rules; they can’t pay their mortgages, have no jobs to go to, no place to emigrate to and can’t sell their house or assets. There will be people with no money to pay for their children’s school books.”
The ending of the school books grants scheme for low income families not designated disadvantaged is only one of the concerns challenging the SVP. Others include the abolition of the Christmas bonus, reductions in rent supplements for social welfare tenants, the suspension of the community supports scheme for older people, all coming on top of the various cuts and charges recommended in the McCarthy report, such as welfare rate cuts, reductions in child income supports and increased charges for school transport, prescriptions and home helps.
But the system doesn’t seem to care, says a woman who rang the Department of Social Welfare to report someone who was working while claiming benefits. She told the official that the person had been pictured in his place of work and named the newspaper. The official’s response was to ask for the person’s PPS number and registered employer’s number. “No PPS, no case. That was the response,” she says. “How do they think the average citizen is going to come by that information?”
There is “a fair bit of abuse” of the system, agrees the social welfare official, “but what can you expect when you hear a distressed small farmer in Cork talking about suffering a 50 per cent drop in income [due to cuts in the Reps scheme] from a Minister who has taken only a 10 per cent cut in his own? If politicians wanted to show true leadership, they would take a 30-35 per cent cut. But that’s not what we’re seeing and it’s that sort of thing that will make the abuses even worse. For one thing, you’re going to have a much bigger black economy than ever before.
“All government support seems to have gone in so many areas of deprivation,” says the Dublin 4 businessman, “and it’s made worse by seeing people who are blatantly getting away with it . . . The developers are still living in their mighty houses and none have been thrown out even though they owe fortunes, but the people who’ve fallen a few months behind in their mortgages are being threatened with eviction.
“Yet the Government can still find money for the horse racing and greyhound industry – over €600 million in nine years in grant aid. And where does it go? Byzantine, the horse that finished second last in the Irish Derby – beaten by 52 lengths – still got €15,000 in prize money. That, remember, is taxpayers’ money, being handed over to owners who are already very wealthy. Yet they’re cutting back on special-needs schools.”
Eliot Spitzer: "The Federal Reserve Is A Ponzi Scheme"
White House eases stimulus lobbyist restrictions
In a significant change, the Obama administration will now allow lobbyists to meet and have telephonic discussions with government officials regarding economic recovery projects. The lifting of the ban comes after K Street has cried foul for months and has challenged the White House on its restrictions. In March, President Obama announced that government officials would not be allowed to consider the views of lobbyists regarding specific stimulus projects unless the requests are put in writing. The materials also had to be posted on an agency’s website within three business days of receipt. Lobbyists have said that the policy was one more example of the administration's disdain for their industry.
Now, the just-revised rules will allow government personnel to accept meetings and calls from federally registered lobbyists on the implementation of stimulus projects. The head of the Office of Management and Budget, Peter Orszag, issued a new guidance late Friday regarding the administration's communications with registered lobbyists about economic recovery funds. Lobbyists can make their cases -- and agency officials can listen to them -- at "widely attended gatherings." Government officials have to ask whether the person they are talking to at such events is a federally registered lobbyist speaking on behalf of a client.
Agency officials are required to promptly disclose on the Internet all oral and written communications with lobbyists concerning policy or projects funded under the recovery act. They also have to disclose any written communications with lobbyists regarding pending applications for competitive funding. The one caveat, however, is that lobbyists can talk to agency representatives only about logistical issues or general questions regarding stimulus grants. Agency officials have to document any discussion with a lobbyist that veers toward advocacy of stimulus policy or a particular project.
Government officials are still banned from talking to lobbyists representing companies that have already applied for grants and are awaiting a competitive decision. In those cases, agency officials are allowed to accept "oral communication" only if the matter is purely logistical. Citizens for Responsibility and Ethics in Washington (CREW), the American Civil Liberties Union (ACLU), and the American League of Lobbyists (ALL) joined forces to advocate that the White House revise its rules. ALL informed its members Saturday morning of the changes.
"Essentially, you will be able to once again meet and have telephonic conversations with personnel in charge of the projects and be able to provide your subject matter expertise to them to help them make the best "merit based" decisions possible for the stimulus projects," Dave Wenhold, the president of ALL, wrote in an e-mail message to members. "Getting us back to the table and ensuring that we are treated equally has been the main goal for ALL. We are also thankful to our partners in this effort, especially the Citizens for Responsible Ethics in Washington (CREW) and the American Civil Liberties Union (ACLU). Between the main three groups and others, we made a diverse and strong coalition that advocated for these revisions."
'Mistake' on Fannie Mae, Freddie Mac to Shape Future
Fannie Mae and Freddie Mac grew to the point where they posed “enormous risk” to the financial system, an error that will shape how policy makers restructure the companies, Treasury Secretary Timothy Geithner said. “It would have been good had we figured out a way to avoid that out earlier,” Geithner told the House Financial Services Committee today. “That mistake should underpin much of what we do in thinking about how to create a more stable system.”
Fannie Mae and Freddie Mac’s size, accounting for almost half of the $12 trillion in U.S. residential home-loan debt, still pose a threat to the economy and should be supervised by a new council of regulators charged with overseeing systemic risk, Federal Deposit Insurance Corp. Chairman Sheila Bair said. “Certainly as they are functioning now, as they’ve functioned before, I believe they are quite profoundly systemic,” Bair said at the same hearing. “They were a source of systemic risk building over the years as we know now.”
The Obama administration has yet to figure out what to do with Fannie Mae and Freddie Mac, which regulators seized in September as the mortgage-finance companies’ losses threatened to further disrupt the housing market. Geithner reiterated that a restructuring is being put off until next year because of the companies’ size and as officials tackle other economic issues. “We cannot credibly think of that right now, because they are the entire mortgage market in the country,” Geithner said. “But that time will come and it will come relatively quickly.”
Bair said, “the long-term future of those two entities is somewhat unclear.” Fannie Mae and Freddie Mac, which own or guarantee about $5.4 trillion of U.S. residential home-loan debt, accounted for almost 73 percent of mortgage origination in the first quarter, Federal Housing Finance Agency Director James Lockhart said in a June 18 speech. Geithner said the companies played a “central role” in the housing crisis. The companies have received $84.9 billion in capital investments from a $400 billion lifeline pledged by the Treasury to keep them solvent. Geithner said he has no “realistic estimate” of how much it will ultimately cost taxpayers for the rescue of Fannie Mae and Freddie Mac, or other corporations.
“I don’t believe we’re in a position today, even this month, or even this year to give you a realistic estimate yet of those losses,” Geithner said. Representative Spencer Bachus, an Alabama Republican, said he isn’t anticipating repayment. “The biggest loss of all, the $85 billion that we’ve extended to Freddie and Fannie, I see no prospect of getting that money back,” Bachus said during the hearing.
The publicly traded companies were chartered by Congress to provide a backstop for home-loan financing. They fulfill that mission by buying mortgages from lenders, freeing up cash at banks to make new loans. The companies profit on the difference between their cost of borrowing and the yield on the debt, as well as from fees to guarantee and package loans as securities. “As a government, we’re going to have to figure out their future,” Geithner said. “What they are today is not going to be their future. It’s not in their future.”
Ilargi: I forget who it was that said there's more empty properties in the US than total properties in the UK and Israel combined. It provides an idea though.
U.S. Home Vacancies Hit 18.7 Million on Bank Seizures
More than 18.7 million homes stood empty in the U.S. during the second quarter as the steepest recession in 50 years sapped demand for real estate and banks seized properties from delinquent borrowers. The number of vacant properties, including foreclosures, residences for sale and vacation homes, was little changed from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. The quarterly homeownership rate was 67.3 percent, seasonally adjusted.
More than 14 percent of homes were vacant in the period, the Census said. Home values dropped 33 percent since 2006, according to the S&P/Case-Shiller index, and the unemployment rate in June rose to the highest in almost 26 years. Tumbling home prices and rising job losses have thwarted government efforts to reverse the housing decline at the heart of the longest U.S. recession since the 1930s. “Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending,” Federal Reserve Chairman Ben S. Bernanke told the House of Representative’s Committee on Banking, Housing, and Urban Affairs on July 21.
The percentage of all U.S. homes empty and for sale, known as the vacancy rate, fell to 2.5 percent in the quarter. It hit a high of 2.9 percent in the first and fourth quarters of 2008, the Census Bureau said. The vacancy rate fell slightly as the number of homes on the market declined because they were sold or because their owners gave up trying to market them. The inventory of homes on the market averaged 3.8 million in each of 2009’s first six months, according to data from the National Association of Realtors. Last year, the monthly average was 4.2 million. The vacancy rate was the lowest in the U.S. northeast region, at 2 percent, and the highest in the south, at 2.7 percent, according to the report.
There were 130.8 million homes in the U.S. in the second quarter, the Census Bureau said. In addition to the 1.9 million empty properties for sale, the report counted 4.4 million vacant homes for rent and 4.6 million seasonal properties that are only used for part of the year. Foreclosures are included in a part of the report that includes vacation homes intended for year-round use and homes that are unoccupied because they are under renovation or tied up in legal proceedings. There were 7.8 million such properties empty in the second quarter, up from 7.7 million a year earlier, the report said. Foreclosures could also be counted as vacant homes for sale or rent, or as owner-occupied properties if lenders have not yet evicted previous owners, the federal agency said.
Companies have shed about 6.5 million jobs since the recession began in December 2007, cutting demand for homes and eroding the consumer spending that makes up about 70 percent of the world’s largest economy.
One in every eight U.S. households with a mortgage is now late on their payments or already in foreclosure, according to Jay Brinkmann, chief economist for the Washington-based Mortgage Bankers Association. The U.S. delinquency rate rose to a seasonally adjusted 9.12 percent in the first quarter and the share of loans entering the foreclosure process rose to 1.37 percent, the bankers’ group said in a May 28 report. The total inventory of homes in foreclosure, old and new, was 3.85 percent. All three figures were the highest in records going back to 1972.
U.S. foreclosure filings -- notices of default, auction or bank seizure -- rose to a record in 2009’s first half, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data. More than 1.5 million properties, one in every 84 U.S. households, received a foreclosure filing, RealtyTrac said in a July 16 report. That was a 15 percent increase from a year earlier. U.S. banks in the first quarter held $29.7 billion of property acquired through foreclosure, including repossessed homes and condominium projects gone bust, according to the Federal Deposit Insurance Corp. in Washington. That’s almost double the $15.7 billion of property a year earlier.
Bill Shows Earmarks Are Alive and Well
A House panel approved a big Pentagon spending bill this week that included nearly 150 items tucked in by lawmakers on behalf of companies and other entities whose employees donated to their campaigns. The Democratic Congress and President Barack Obama swept into power on a promise to reform the process of lawmakers trying to dictate in detail how funds are spent, known as "earmarks." When Mr. Obama signed a spending bill for the current fiscal year in March, he said the earmark-laden legislation should be an "end to the old way of doing business, and the beginning of a new era of responsibility and accountability."
But as lawmakers work their way through spending bills for the next fiscal year, which begins Oct. 1, earmarks appear alive and well -- including those written for companies, foundations, and universities whose employees and political-action committees gave money to the campaigns of congressmen doing the earmarking. The $636.3 billion 2010 defense-spending bill passed Wednesday by the House Appropriations Committee includes more than 1,100 earmarks, totaling more than $2.7 billion.
Members of the Defense Appropriations Subcommittee -- the 18 members of Congress who wrote the bill -- secured a total of 148 earmarks worth $461 million for entities whose employees have given $822,765 in campaign donations to those lawmakers since 2007. The data were compiled by the nonpartisan Taxpayers for Common Sense, which analyzed nearly 400 earmarks. The bill is still subject to a full House vote. The Senate will then vote on its version of the appropriation legislation and the two bills will then be reconciled. Most of the earmarks passed by the House Appropriations Committee tend to remain in the bill that the president signs into law.
Thomas Gavin, a spokesman for the Office of Management and Budget, said earmarks are down 25% and that the White House will continue to work with Congress to control earmarks. Mr. Gavin said the administration "knew from the start that changing the old ways of Washington would not happen overnight." It isn't illegal for employees of companies seeking earmarks to donate to lawmakers who try to secure funding in legislation. But it is controversial. The Justice Department has pursued corruption cases based on the link between campaign donations and official acts by lawmakers, including earmark requests. Some of the resulting scandals -- centered mainly around Republican lawmakers -- helped Democrats take control of Congress in 2006.
After that election, Democrats worked to make the earmarking process more transparent, requiring members to post requests for directed-federal spending on their Web sites before debate on the bill begins. But that hasn't eliminated earmarks. The defense appropriations panel, chaired by Rep. John Murtha (D., Pa.), writes the Defense Department's budget, which disburses millions of dollars to private defense contractors. Mr. Murtha, whose earmarks total about $77 million, secured earmarks for 15 entities whose employees gave to his campaigns. Virginia-based Argon ST Inc.'s employees and political-action committee donated $46,600 to Mr. Murtha's campaigns since 2007. The company is slated to get $8 million for upgrades to torpedo-decoy technology.
Matthew Mazonkey, a spokesman for Mr. Murtha, said the congressman is "proud to secure funding for businesses and organizations in our district that are delivering quality products and services to the Defense Department." A spokesman for Argon didn't return calls seeking comment. Rep. Jerry Lewis of California, the top-ranking Republican on the appropriations committee, secured $11 million in two earmarks for Environmental Systems Research Institute Inc. of Redlands, Calif. The founders of the company, Jack Dangermond and his wife Laura, donated $13,800 to Mr. Lewis's campaigns since 2007. A spokesman for Mr. Lewis said the congressman doesn't solicit funds from the Dangermonds and is proud of the work ESRI does. An ESRI spokesman didn't return calls for comment.
Lennar Signals Fleeting Builder Rally as Buyers Flee
Townhouses and loft-style condominiums overlook manicured green lawns, flower-lined footpaths and gurgling stone fountains at the Central Park West development in Irvine, California. Just a short walk away there’s a basketball court, a junior Olympic pool and a park. People are the only thing missing. While construction of the 43-acre real estate project by Lennar Corp., the third- biggest U.S. homebuilder, is almost finished, a message at the information center says some homes in the development are expected to start selling early next year.
The largest homebuilders are mothballing communities across the U.S., signaling they have little confidence that a market rebound is imminent. Builder shares have rallied 76 percent from the lows in November. They may fall more than 20 percent in the next four months unless home prices and property writedowns stabilize, said Anna Torma, a former Merrill Lynch & Co. analyst who tracks the industry at Soleil Securities Corp. in New York. “Until we see job losses abate and foreclosures begin to decline, rather than increase as we expect, there is unlikely to be a catalyst for the builders,” Torma said. “It’s going to continue to be a challenging environment.”
The Standard & Poor’s index of home construction companies rose less than 1 percent today, after falling earlier as much 3.2 percent. Lennar fell 1.3 percent to $11.11 in New York Stock Exchange composite trading and Centex Corp. rose 5 cents to $9.43. Centex, the Dallas-based homebuilder being bought by Pulte Homes Inc. for $1.3 billion, stopped construction last year at its Morningside development in Fort Pierce, Florida. It has sold 135 homes starting at $185,000 and won’t start building in the project until demand recovers, said David Webster, a company spokesman.
Toll Brothers Inc., the largest U.S. luxury homebuilder, has 33 projects on hold. Hovnanian Enterprises Inc., New Jersey’s largest builder, stopped development on 12 initiatives in the second quarter. The Red Bank, New Jersey-based company had 76 shelved developments at the end of April, according to a regulatory filing. Of Hovnanian’s 9,799 mothballed lots, more than 6,100 are in California. More than 18.7 million homes stood empty in the U.S. during the second quarter as the steepest recession in 50 years sapped demand for real estate and banks seized properties from delinquent borrowers.
The number of vacant properties, including foreclosures, residences for sale and vacation homes, was little changed from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. The quarterly homeownership rate was 67.3 percent, seasonally adjusted. U.S. homebuilders may record $10 billion more of writedowns this year for property, joint ventures and expenses to walk away from land options, according a May 21 report from analysts at Deutsche Bank AG. A Standard & Poor’s measure of homebuilders fell to the lowest since 2000 in November. The shares then started to rally on speculation a federal tax credit, low mortgage rates and increased affordability would boost demand.
The index rose 91 percent from the November lows to May 4. It’s 7.8 percent off that high as the number of homes in foreclosure climbs and the federal tax credit is scheduled to expire later this year. First-time homebuyers have to complete the purchase of a home before Dec. 1 to qualify for the credit. “There are some dark clouds on the horizon,” said David Goldberg, an analyst at UBS AG in New York. “There’s a real chance things are going to get worse and the back half of the year could be worse than the first half.” Mortgage rates have risen to 5.2 percent from a low of 4.78 percent in April, according to data from Freddie Mac, the McLean, Virginia-based mortgage buyer.
Rising foreclosures also are forcing price cuts by builders. The median price for a new home in the U.S. fell 3.4 percent to $221,600 in May, according to the Commerce Department. Home values probably will decline in more than half of the largest U.S. cities through the first quarter of 2011, mortgage insurer PMI Group Inc. of Walnut Creek, California, said on July 7. Chris Serra, senior equity analyst at Thrivent Asset Management LLC in Appleton, Wisconsin, said all the pessimism about builders may be overdone given that affordability is at record levels and consumers are buying foreclosed properties to clear inventory.
Thrivent Asset Management owned shares of several homebuilders, including almost 300,000 shares of Los Angeles- based KB Home at the end of April and 1.7 million shares of Horsham, Pennsylvania-based Toll at the end of March, according to data compiled by Bloomberg. Thrivent Asset Management is a unit of Thrivent Financial for Lutherans, which has $61 billion in assets under management. “It’s an interesting time to start dabbling,” he said. “We’re on the path to a gradual recovery here. I don’t see it getting terribly worse.”
Homebuilders are trying to gauge demand. In some cases, they are opening communities and closing others. They may also open developments in stages to meet customer orders. Toll plans to be careful about reopening developments, Chief Financial Officer Joel Rassman said. He declined to provide the locations.
“The fact that we had to close them was an indication of the economy in September, October, November, December, January, and the decreasing economy before then,” Rassman said in a telephone interview. “We have opened some communities in recent months and we’ll look to open more communities that have been closed, and if the economy continues to bounce around a little for a while, we’ll be careful in opening communities.”
Central Park West is a planned community of 1,380 homes that takes its name from New York City.
The development in California’s Orange County also has a luxury high-rise project, called Astoria, with units for sale. The Astoria is being developed by Intergulf Development Group and Lennar. The Central Park West community crisscrossed with streets named Waldorf and Rockefeller, sits largely completed, down to the chaise lounges by the pool, pet-waste bag dispenser at the park entrance, and gas grills in the outdoor cooking area. One can spend a half hour midday walking around the development without seeing another person.
Lennar declined to comment on whether anyone lives at Central Park West. “We have had a longstanding policy of not attempting to keep the public informed of the details of any individual community beyond the information provided in our quarterly conference calls, or published on our Web site,” said Lennar spokesman Marshall Ames in an e-mail.
10 purchases not to put on your credit card
Six in 10 Americans don't pay back their credit cards every month. Simply put, they spend more than they take in. It's not because of the economic contraction; in just the recent boom times, it was closer to two-thirds, so we've cut back, but we're still in the hole (often while complaining that government spends more than it takes in but since we do the same, it should come as no shock we're simply electing people just like us). With credit card defaults rising, some companies are looking for reasons to cut your plastic. To make these decisions, banks rely on data about what you buy, where, and the company you keep.
Analyzing that information is called data-profiling. It's a $25 billion business, and business is up 50 percent over last year. Big players are companies like Equifax, Experian and TransUnion and using data to draw conclusions about credit worthiness is at the center of what they do. This is the general direction the financial industry is taking in the wake of the recession. And today, data is plentiful. Twenty years ago, you could get age, income, home ownership. Today, you can get thousands of variables, just from online transactions alone. Do you purchase online? It's no longer just knowing that the next trip is going to be a cruise in France, but what type of boat, what type of amenities.
With sophisticated computer software, it's easy for analysts to plug all those bits of information into intricate models that examine your past actions, figure out what makes you tick and then predict what you will do. Banks are some of the most sophisticated data profilers around and they're very secretive about it. But they'd rather risk cutting the credit of an upstanding bill payer than having another default on their books.
The say cash is king. Yeah, now more than ever. We are the most prosperous nation on Earth because we support the free flow of capital. But what's missing from that formula and what we need to do is add "money management." In fact, add "money management" to reading, writing and arithmetic. Blame the banks all you want but accept some responsibility for believing in the "free lunch" of easy credit. Buy now, pay later, but good luck.
10 purchases not to put on credit cards:
Why these things? They're red flags. Credit card companies are always watching for signs of consumers with questionable finances and according to "Credit Card Nation," by Robert Manning, any one of these 10 is a sign:
- 10 Booze: Springing for too many drinks may be a sign of job stress, financial stress, or relationship stress. Card companies will jump to conclusions at your peril. Carry cash to the bar.
- 9 Income taxes: Whenever you rack up one bill (by using your credit card) to pay another bill (your taxes) it raises a red flag.
- 8 Personal pampering: If you don't normally splurge at the spa, don't put your facial or massage on your plastic. It may look like you're trying to relax because you're worried about --what else-- money. Or a job loss, or maybe you're prettying up for a job search.
- 7 Cash advances: Credit-card companies used to love these products because they brought in loads in interest charges. But tapping your card for cash? Or using a credit-card check to pay other bills? Not a good look.
- 6 Lottery tickets: Not a good financial plan, plus you'll look like a gambler to your card company.
- 5 Marriage counseling and therapy: Needing therapy may make it look like you're unstable. Besides, the majority of marital problems are about money. It's a one-two punch for card companies.
- 4 Adult playthings: Porn is seen as escapism by card companies. And guess what they're thinking you're trying to escape from? Financial worries. Same thing for strip clubs.
- 3 Bargain binges: Downshifting to lower-cost retailers like Wal-Mart or shopping at places that attract financially pinched shoppers makes it look like you're worried about your finances or your job.
- 2 Retreading your tires: As opposed to buying new tires. What, who does this? Apparently, a lot of people. Why? They can't afford new tires. If you've bought new tires in the past, this can look like a desperate move. Credit card companies don't like desperation.
- 1 Traffic tickets: No one wants reckless people around money and traffic tickets make you look reckless. Besides, your insurance rate goes up, which might make it harder for you to pay your bills.
Bonus: Infomercials. You don't need a Snuggie or a Shamwow anyway, let alone buy one with a credit card.
When Debtors Decide to Default
Melissa Birks is being stalked. Her cellphone keeps ringing, always from a caller marked “unknown.” She says she knows it is her credit card company wondering why she stopped making payments. Ms. Birks, who owes $28,830, has nothing to say. Those on the front lines of the debt industry say there is a small but increasingly noticeable group of strapped consumers who, like Ms. Birks, are deciding they will simply stop paying. After loading up on debt eagerly provided by the card companies during the boom times, these people now find themselves trapped in an endless cycle where they are charged interest on interest and fees upon fees while the lenders get government bailouts.
They are upset — at the unyielding banks and often at their free-spending selves — and are pre-emptively defaulting. They could continue to pay for a while longer but instead are walking away. “You reach a point where you embrace the darkness of default,” said Adam Levin, chairman of the financial products Web site Credit.com. The lending industry term for these people is “ruthless defaulters.” In a miserable economy where paychecks, savings and expectations are all diminished, their numbers will surely grow.
“They’ve done the math on their account and they’re very angry,” said Corey Calabrese, a Fordham Law student who is an administrator of the school’s walk-in clinic for debtors at Manhattan Civil Court. Public sentiment is on their side, she added: “For the first time, Americans are no longer blaming the borrower but are looking at the credit card companies.” (That’s certainly true in the mortgage crisis. According to a Quinnipiac University poll in February, 62 percent of those polled blamed lenders “who loaned the money to people who may not be able to pay it back.” Only a quarter blamed homeowners.)
The deteriorating relationship between Americans and their creditors has not yet reached the level of Shays’ Rebellion, the 1786 uprising by poor farmers in western Massachusetts during a recession. But the basic issues are strikingly similar, suggesting an eternal tension between creditor and consumer. Boston merchants, who were suffering themselves, aggressively sought payment from their customers. When the folks could not pay, which was often, they were jailed. The incensed farmers sought “reforms that would permit repayment on less destructive terms,” writes Bruce H. Mann in “Republic of Debtors,” a history of bankruptcy in early America. “Creditors replied with lectures on frugality, luxury, virtue and the sanctity of obligations.”
Shays’ Rebellion provoked mixed reactions, then and now. Were the rebels trying to remedy grievous wrongs in the spirit of the Revolutionary War, or were they threatening public order and the fledgling state — acting as terrorists, in the modern parlance? Shays’ followers were quickly arrested and quickly pardoned, although two were hanged. Ruthless defaulters today face different perils. Delinquency destroys credit scores, can prompt a lawsuit and guarantees a very large number of hostile calls from collection agencies.
Still, all that can seem the better alternative. Like many who default, Ms. Birks first asked her credit card company to lower her 19 percent interest rate. No dice, Bank of America responded. After she tried to get the bank’s attention by skipping a payment, it immediately raised her rate to 25 percent. As Ms. Birks’ debt swelled, so did a sense of injustice mingled with helplessness. Bank of America has its hands full, with a June default rate of 13.8 percent, up from 12.5 percent in May. The other major credit card companies are in a similar fix. Estimates of the total industry losses are over $100 billion for the current recession.
Collectors are noticing a shift not only in ability but in willingness to pay. “With all the bailouts the government is giving everyone, no one has any personal accountability about their own debts,” said Roger Knauf, who runs a trade group of debt-buying firms. Many of today’s debtors were maxed out long before the recession. Much of this debt was of course in the form of junky mortgages on wildly overpriced houses, and it was here that people first began to rebel.
Countrywide Financial, the country’s biggest and most aggressive lender, surveyed its customers about why they were defaulting in the summer of 2007. One of the leading reasons was “low regard for property ownership.” In other words, people concluded that owning these houses was a bad deal. That people would intentionally default on loans they never should have gotten in the first place took lenders by surprise. “I’m astonished that people would walk away from their homes,” Bank of America chief executive Kenneth Lewis said in late 2007.
Nineteen months later, walking away from mortgages is widespread if impossible to quantify, and no cause for embarrassment. Rather the opposite: it shows savviness. “I’ll walk away before I take a loss,” a Dallas financier recently boasted to Barron’s magazine about his efforts to sell his $6 million vacation estate. With credit cards, this type of chest-pounding seems less evident, at least so far. Ms. Birks, 43, readily admits that no one forced her to use her cards. “Some people are good with money,” she said. “I was stupid.”
Still, just about everyone made mistakes during the boom — regulators, Congress, Wall Street. If Bank of America got a bailout for making bad loans, Ms. Birks figured, she deserved a bailout for accepting them. “You have to start looking at the future,” says Ms. Birks, who has been a writer and editor for various publications. “I already feel horrible because I can’t find a good job.” She earns $15 an hour as a copy editor for a magazine and does other part-time work.
In previous downturns, Ms. Birks’ only recourse would have been a debt management plan, where she would restructure her payments with the help of a counselor, or bankruptcy. Now there is a third option: debt settlement. This means going on strike until the lender accepts a partial payment. Ms. Birks asked Bank of America about a settlement this spring. Since her account was up to date, she was told she didn’t qualify. She stopped paying, the bank started calling. When Bank of America finally got her on the phone, it agreed for the first time to drastically reduce her interest rate. She did not take the deal, but considered it progress.
Main Street's soaring sour loans
As the effects of the economic collapse began pouring down Main Street, the government last year was left holding a record $2.1 billion in write-offs of small business loans it had guaranteed. Officials expect the number of defaults to rise as the nation continues to climb out of the recession. Records obtained under the federal Freedom of Information Act show the public is paying to offset bank losses on small business loans across the country, from a convenience store in the tiny Canadian border town of Houlton, Maine, to a graphic arts design company on the island of Hawaii, more than 5,000 miles away.
Despite having loans written off, little companies such as Caffe Sportivo, an espresso shop and small gym in Redwood City, Calif., are barely scraping by. "I just couldn't make any payments. I was barely making rent or payroll," owner Chris Sakelarios said on a recent afternoon when her cafe stood empty except for two patrons who read as they sipped coffee. "The same as everyone else. We're in a hovering pattern." It's a sign that even as record profits re-emerge on Wall Street, thanks to massive government loans and guarantees for banks deemed too big to fail, the pain on Main Street is as profound as it's been in half a century. The companies that were not too big to fail are failing.
Their plight is a shift from previous recessions when small business bounced back ahead of big employers, said Todd McCracken, president of the lobby group National Small Business Association. "This could be the first economic recovery we've seen in a long time that hits small business the hardest the longest," he said. The Small Business Administration purchased $2.1 billion in bad loans from lenders last year. Agency officials say it's likely that this year will see another high as the recession nears the two-year mark.
"It's frustrating when (banks) are getting bailed out for bad decisions they made, that there isn't more assistance for the small business," said Eric Geedey, who manages Caffe Sportivo for Sakelarios. Sakelarios obtained a $20,000 SBA loan from Union Bank in late 2007 to start her business when the economic outlook was brighter on the affluent San Francisco Peninsula. Within a year, however, she was scraping by with the help of a landlord and vendors who let her adjust payments. She has reduced the hours of her seven employees and relies on her brother and a friend to help keep the doors open on weekends. The balance of the loan was written off in early January. In addition to being dogged by bad credit, the cafe will have to report the loan charge-off as taxable income, Geedey said.
Sakelarios isn't the only recession victim and she won't be the last. SBA loan defaults generally occur in two stages. The first is when the bank decides it won't get its money back and asks the government for the guaranteed portion of the loan. In the second, the government decides it won't get any more collateral or money from the borrower. Years can elapse between the time that the borrower stops paying and the government writes off the loan.
In 2008, for example, the government concluded it wouldn't be able to recover $1.3 billion in defaulted bank loans it had guaranteed. Many loans were part of a backlog, according to SBA officials. But an AP analysis found that the time between loan approvals and loan defaults is narrowing. According to the analysis:
- More than $235 million in restaurant loans have been charged off since 2007. The 2,586 restaurant charge-offs make up the largest number of defaulted loans, according to the SBA. More than 150 loans made to Quiznos franchises — worth nearly $15.5 million — have been written off since 2007.
- The Gulf Coast fishing industry, battered by two major hurricanes in 2005, has been hit especially hard. Half of the 10 cities with the highest industry-specific write-offs are in Biloxi, Miss.; New Orleans; Ocean Springs, Miss.; Lafayette, La.; and Abbeville, La. All told, the shellfish fishing industry had 45 loans charged off, at a total cost of $19.5 million.
- The banks making the loans have also been hit hard by the recession. Bank of America Corp., which has received $52.5 billion in government aid, has had nearly 7,000 loans worth $238 million charged off since 2007. More than 660 loans worth $174 million have been charged off by CIT Group Inc., a major commercial lender forced to turn to bondholders in an effort to try to avoid bankruptcy protection after the government refused to save the company. JPMorgan Chase & Co., which repaid $25 billion in taxpayer loans last month, has written off nearly 2,300 loans worth $117 million.
"I have never seen it as rough as it is right now," said Scott Hauge, president of Small Business California, a business advocacy group. Small businesses account for half of all private-sector workers and have created roughly half of the nation's jobs over the past decade. They received some help from the $787 billion federal stimulus package in February, including higher microlending amounts and federal loan guarantees. Congress also authorized the U.S. Treasury to purchase $15 billion in pooled loans to encourage lenders to provide money to small companies. The SBA recently announced it will guarantee short-term bank loans to help small businesses pay off existing bills.
The White House has floated a proposal to take money from a $700 billion bailout of the financial system and provide small companies with working capital, allowing them to add inventory and employees. If it happens, the White House said, help might arrive by fall. That's too late for thousands of defunct companies with shuttered windows, disconnected phones and broken dreams.
Diego Garcia's soccer supply store in the modest Northern California city of Richmond has shrunk to one small location after Garcia was forced to close his two larger stores last year. Garcia started the business after launching a youth program and soccer league in gang-ridden Richmond. He had turned away from his own gang lifestyle after being shot in the chest at age 18. Garcia expanded fast, never imagining how quickly his booming business would decline. When he couldn't pay up, his bank wrote off nearly all of his $45,000 loan. He lost rental property to foreclosure at the same time.
"It's too much of a loss," he said. "We had to get loans to get bigger. Then everything went the opposite way." Eric Zarnikow, SBA's associate administrator for capital access, said the bad numbers probably will continue to rise as the agency receives charged-off loans in the future from defaults occurring now. Sakelarios, a breast cancer survivor without health insurance, tries to stay optimistic. "Anytime anyone asks me how it's going, I say the same thing. It's going really good."
Bank of America Drastically Cut Small Business Loans after Bailout
According to data compiled by the Service Employees International Union (SEIU), Bank of America isn’t quite the friend of small business it claims to be. The overwhelming majority of loans made through the Small Business Administration are called SBA 7(a) loans, and they are used to finance operating expenses. During FY 2007 (October 2006-September 2007), BofA gave out 10,878 SBA 7(a) loans worth $336 million. But during the 12-month period between May 2008 and April 2009, those numbers plummeted to just 484 loans worth $20 million. During this same period, Bank of America received $52.5 billion in taxpayer bailout funds.
Despite being named the top lender by the Small Business Administration 10 years in a row, BofA wasn’t all that generous during that time. The ranking was based on total loans issued, which belied the fact BofA lent considerably less money to small businesses than many other banks. In FY 2008, the average SBA 7(a) loan was $182,492, but BofA’s average loan was only $31,032. The real #1 lender for each of the last nine years was CIT Small Business Lending Corporation.
The SEIU also notes in its report that the bank has shifted its lending opportunities for small businesses by giving out more “Express loans,” which are smaller and have a higher rate of default, and credit card loans. According to the report, BofA has even hampered the ability of smaller banks to resume lending by demanding that banks that received TARP money pay off the credit lines they had with Bank of America.
The rich have never had it so good
Here's a truism: The wealthiest 1 percent have never had it so good. According to government figures, 1-percenters' share of America's total income is the highest it's been since 1929, and their tax rates are the lowest they've faced in two decades. Through bonuses, many 1-percenters will profit from the $23 trillion in bailout largesse the Treasury Department now says could be headed to financial firms. And most of them benefit from IRS decisions to reduce millionaire audits and collect zero taxes from the majority of major corporations.
But what really makes the ultra-wealthy so fortunate, what truly separates this moment from a run-of-the-mill Gilded Age, is the unprecedented protection the 1-percenters have bought for themselves on the most pressing issues. To review: With 22,000 Americans dying each year because they lack health insurance, Congress is considering universal healthcare legislation financed by a surcharge on income above $280,000 -- that is, a levy almost exclusively on 1-percenters. This surtax would graze just 5 percent of small businesses and would recoup only part of the $700 billion the 1-percenters received from the Bush tax cuts. In fact, it is so minuscule, those making $1 million annually would pay just $9,000 more in taxes every year -- or nine-tenths of 1 percent of their 12-month haul.
Nonetheless, the 1-percenters have deployed an army to destroy the initiative before it makes progress. The foot soldiers are the Land Rover Liberals. These Democratic lawmakers secure their lefty labels by wearing pink-ribbon lapel pins and supporting good causes like abortion rights. However, being affluent and/or from affluent districts, they routinely drive their luxury cars over middle-class economic interests. Hence, this week's letter from Democratic dot-com tycoon Rep. Jared Polis, of Boulder, Colo., and other Land Rover Liberals calling for the surtax's death.
Echoing that demand are the Corrupt Cowboys -- those like Sen. Max Baucus, D-Mont., who come from the heartland's culturally conservative and economically impoverished locales. These cavalrymen in both parties quietly build insurmountable campaign war chests as the biggest corporate fundraisers in Congress. At the same time, they publicly preen as jes' folks, make twangy references to "voters back home," and now promise to kill the healthcare surtax because they say that's what their communities want. Cash payoffs made, reelections purchased, the absurd story somehow goes that because blue-collar constituents in Flyover America like guns and love Jesus, they must also reflexively adore politicians who defend 1-percenters' bounty.
That fantastical fairly tale, of course, couldn't exist without the Millionaire Media -- the elite journalists and opinion-mongers who represent corporate media conglomerates and/or are themselves extremely wealthy. Ignoring all the data about inequality, they legitimize the assertions of the 1-percenters' first two battalions, while actually claiming America's fat cats are unfairly persecuted.
For example, Washington Post editors deride surtax proponents for allegedly believing "the rich alone can fund government." Likewise, Wall Street Journal correspondent Jonathan Weisman wonders why the surtax "soak(s) the rich" by unduly "lumping all of the problems of the finances of the United States on 1 percent of (its) households." And most brazenly, NBC's Meredith Vieira asks President Obama why the surtax is intent on "punishing the rich." For his part, Obama has responded with characteristic coolness -- and a powerful counterstrike. "No, it's not punishing the rich," he said. "If I can afford to do a little bit more so that a whole bunch of families out there have a little more security, when I already have security, that's part of being a community." If any volley can thwart this latest attack of the 1-percenters, it is that simple idea.
For Prophets Of Cataclysm, A 'Mad Max' Curriculum
It's a sticky Saturday morning, and I'm handcuffed in the back seat of a Jeep Grand Cherokee parked on a Philadelphia street. On one side of me is my boyfriend, Bruce, and on the other his best friend, Nick. Both of them are also cuffed -- and, like me, sweating like pigs. I reach into my hair and pull out a bobby pin that within seconds I've fashioned into a simple device I use to jimmy open my handcuff locks. Our assignment now is to evade 12 professionally trained trackers in a 25-square-block area for the next eight hours.
It may be hard to believe, but we asked for this. Actually, we paid for it: $550 apiece. Today is the final day of a three-day "Urban Escape and Evade" course offered by onPoint Tactical, a New Jersey-based company that teaches urban survival skills to soldiers, police officers and, increasingly, civilians.
Among the lessons we've learned are how to break through zip ties and telephone cords (the most common materials used as binding by kidnappers), smash a car window without making a sound, pick tumbler locks and padlocks, puncture the tires of a pursuit vehicle with homemade caltrops, call for help using a ham radio, kill an attack dog -- and, of course, how to escape from handcuffs. To make the exercise even more difficult, we've been assigned a variety of missions that will test our newfound prowess in urban tactical maneuvering.
OnPoint, started in 2004 by Kevin Reeve, a 52-year-old professional scout and tracker, is the only school in the country that teaches urban tactical skills. In the past nine months, demand for the course has surged. For the first time, Reeve approximates his annual revenue will top $200,000 -- a fair sum for a business in which the overhead consists largely of renting out space in community centers for classes and buying enough bobby pins to prop up coifs at a beauty pageant. In years past, Reeve said, he barely pulled in enough revenue to make a profit.
Driving the growth, in part, is a fear that resonates from the wealthiest consumers to blue-collar workers: that with the global financial crisis dragging on, life as we know it is undergoing a radical change. Looking forward, pundits say that at best we will no longer be able to subsist on the diet of credit we have so ravenously consumed for the past decade. At worst, our future looks like something out of a "Mad Max" movie.
What this has to do with breaking out of handcuffs or picking padlocks requires a rather Hobbesian leap. It assumes that if the government can no longer provide for or protect its citizens, there will be a complete upending of the societal order. It assumes that humans will act to the worst of their capacity. There is a sense that these skills are a necessity as our society becomes ever more precarious.
Each escape-and-evade class has 15 to 20 slots, and one is held each month in a different U.S. city. Last month it was Nashville, the month before that Chicago. When I attended, the class was split between the sleepy town of Medford, N.J., and downtown Philadelphia. Soon, Reeve will have a mobile training team that will be able to set up shop in Atlanta, Charlotte, Chicago, Dallas, Los Angeles, Philadelphia, Phoenix, Salt Lake City and Seattle.
Increased exposure has also helped propel onPoint closer to the mainstream. Neil Strauss, who is best known for his 2005 book "The Game: Penetrating the Secret Society of Pickup Artists," attended Reeve's class in 2007 as part of a larger quest to prepare himself for an impending disaster. In March, the diminutive writer and veritable god among sexually frustrated males published a book about his experience, "Emergency: This Book Will Save Your Life," which spent 12 weeks on the New York Times bestseller list. More than half of the people in the class I attended were there because they had read it.
Although it isn't formally tracked, the growth in the survival industry is not limited to onPoint. Firearms sales in the most recent quarter at Sturm, Ruger & Co. and Smith & Wesson have grown more than 20 percent from a year earlier. The number of background checks for firearm purchases, required before the sale of a gun at a federally licensed dealer, has risen to 6 million through May of this year, a 25.5 percent jump from the same period in 2008.
The media attribute the spike in background checks and firearms sales to fear that President Obama will move to curb gun rights. They have also claimed it is attributable to increased interest in ammo and weapons as an investment vehicle. But isn't it also possible that it has to do with the same fear that is propelling sales at camping supply and military surplus stores, which are up 50 percent?
Traffic at Post Peak Living, an e-commerce site that sells survival kits, has also swelled, particularly as the price of oil rises, says co-founder André Angelantoni. Seizing the business opportunity, he has begun to offer online courses. You can learn how to raise chickens or how to start your own garden, and then there's the $199 flagship "Uncrash" course, which helps registrants evaluate how each facet of their lives will be affected by the inevitable fall. Angelantoni and his business partner, Craig Wichner, think the world has reached its peak in oil production and society will regress to the way it operated in the Colonial era.
People have always anticipated the end of days. And in truth, while having survival skills -- whether they are tactical or horticultural -- could save your life, in reality they aren't likely to do much more than what stockpiling canned beans and toilet paper did in preparation for Y2K: that is, lend a sense of security.
At the end of the final day, after my cohorts and I had successfully evaded Reeve's trackers, we convened at a Chili's restaurant and swapped stories with the other students. None of them had been "caught," either, but many of them had been spotted by Reeve and his trackers and had run for it. Some went deep into disguise; the most shocking of all was Kyle cutting off at least 24 inches of dreadlocks for the exercise. The mood was lighthearted; we were all drinking beer. Maybe it was because, with our knowledge, we all felt a little safer -- or at least better prepared next time we got locked out of our homes.
Chinese steel executive beaten to death
The privatisation of a state steel company has been scrapped after an executive was beaten to death by workers angry at the threat to their jobs from a takeover of their firm, according to a Hong Kong rights group. The violent riot in north-east China late last week involved up to 30,000 workers, a reminder of the ongoing sensitivity about lay-offs from state firms in industries targeted for consolidation. The government laid off about 50m workers in state enterprises in the 1990s, equal to the combined workforces of Italy and France at the time, but many firms still retain bloated staffing rosters.
Tonghua Iron & Steel, a traditional state enterprise, has about 50,000 workers and has struggled to make consistent profits in recent years, making it a prime target for restructuring by its owner, Jilin province. The privately-held Jianlong Group, one of China’s largest private steel companies, had first proposed taking over Tonghua in 2005, backed out of the deal when the economy slowed last year, but re-entered negotiations recently when industrial demand picked up.
Propelled by the government’s stimulus package, China produced steel at an annualised rate of 545m tonnes in June, a record level of output. The interim general manager sent by Jianlong to run Tonghua, Chen Guojun, had infuriated the workers with his high-handed attitude, according to comments posted on internet bulletin boards in China. He had reportedly said that he would re-establish Tonghua “under the name of Chen” and lay off nearly all the employees.
“With Tonghua Steel’s retired workers each receiving only Rmb200 a month for living expenses, Chen Guojun was paid an annual salary of Rmb3m,” the rights group reported. When Mr Chen returned to the plant late last week, a large crowd of workers surrounded his office and beat him unconscious, according to a report issued by the Hong Kong Information Centre for Human Rights and Democracy. Outside the factory, mobs of workers stopped an ambulance and police from entering the compound to rescue him. The thousands of riot police then mobilised by the authorities took several hours to bring the situation under control.
Staff at Jianglong’s headquarters in Beijing confirmed Mr Chen’s death but declined to give any further details. The owner of Jianlong, Zhang Zhixiang, was China’s tenth-richest man in 2008, according to China’s most widely quoted richlist, with a fortune estimated at $2.9bn. Private entrepreneurs in China have made substantial inroads into the steel sector in the past decade, usually by buying up and restructuring tottering state-owned firms like Tonghua.
Rich China, Poor Peasants
China recently announced its GDP grew by more than 7.1% in the first half of this year, putting the country on course to displace Japan as the world’s second-largest economy by year’s end. But it’s not time to break out the maotai just yet. Peasants and migrant workers, who compose more than 65% of China’s 1.3 billion people, aren’t benefiting much from this growth. Much of it is hoarded by the central government. Last year, Beijing collected taxation and other levies of more than six trillion yuan ($878 billion), an eye-popping four trillion yuan more than five years ago. Since the turn of this century, funds flowing into the Beijing treasury have increased by around 22% a year, more than double the average 10% GDP growth for the past two decades.
This wouldn’t be a problem if worker incomes were growing in tandem with tax revenues. But according to official statistics, salaries and other income of workers and peasants as a percent of GDP declined to just 41.4% in 2006—the last year when data was available—from 53% in 1998; salaries typically are 50% to 60% of GDP in developed countries like the United States or Japan. A lion’s share of national wealth is being snapped up by about 140 state-held business groups such as the three oil-and-gas giants, four major state-owned banks and similar government monopolies in lucrative sectors such as insurance, energy, mines, telecommunications and transportation.
Under the largely nominal control of the State-owned Assets Supervision and Administration Commission of the central government, the assets and sales of these behemoths grew each year by an average of respectively 1.5 trillion yuan and 1.3 trillion yuan for the five years ending 2008. These firms are heavily supported by the government. State-owned banks issued loans worth $1.08 trillion the first half of this year, a figure which exceeds the full year of loans last year. Barely 5% of these loans went to small- and medium-sized companies, most of which are privately owned. The central government bars private firms from about a dozen of the most profitable sectors.
The top executives of these state-owned firms are mostly retired ministers as well as offspring of party elders. Li Xiaolin, the daughter of former premier Li Peng, is chairman of China Power International Development Ltd., an electricity monopoly. Her brother Li Xiaopeng used to head Huaneng Power, another energy heavyweight. President Hu Jintao’ son Hu Haifeng is chief of Tsinghua Holdings, which oversees state-held high-tech firms spun out of the prestigious Tsinghua University.
Today China boasts around 300,000 super-rich Chinese with assets of more than 10 million yuan. This wealth hasn’t trickled down. Official statistics show Chinese peasants make about one-third of what their urban counterparts earn. Tsinghua University sociologist Sun Liping estimates the standard-of-living discrepancy between cities and the countryside was actually closer to six times. He says the average global urban-rural differential in living standards is around 1.5 times.
Poor Chinese face other adversities, too. Rural residents are not allowed to permanently settle in cities and cannot enjoy the health, education and pension payouts taken for granted by urbanites. A 2008 Ministry of Health report said up to 200 million workers and peasants suffer from occupational ailments. President Hu’s mantras include “upholding social justice” and “creating a harmonious society.” Yet social inequality is yawning ever wider in China.
British banks show little interest in lending
One missed credit-card payment never used to be reason enough to refuse a mortgage application. But in these times of financial crisis, the few lenders left in the market are pickier than ever. According to Ray Boulger, senior technical manager at broker John Charcol, it is evident that while the government may have rescued the banks, their customers have been left out in the cold.
The credit card slip-up meant one client was forced to accept a smaller mortgage. Boulger says: "There is a lack of competition in the market. There are only six mortgage groups who are active in the market and that is having an impact on [profit] margins." There is growing public discontent with banks, and the issue is spanning traditional religious divisions, as RBS chairman Sir Philip Hampton discovered last week.
He was handed copies of the Torah, the Qur'an and the New Testament by religious leaders protesting about exorbitant rates of interest. As well as cracking down on City traders' bonuses, they would like to see the government bringing back the ancient laws of usury, limiting how much banks can charge for loans.
Boulger says the impact of a lack of competition has already become increasingly apparent. Before the meltdown, there were up to 100 brands fighting for business in the mortgage market. Now, by his reckoning, the only serious players left are the part-nationalised Royal Bank of Scotland and Lloyds Banking Group, HSBC, Barclays, Santander (Abbey and Alliance & Leicester) and Nationwide Building Society.
The mortgage market is the clearest illustration of the reduction of competition. But in the savings industry, too, the plethora of institutions offering headline-grabbing rates has also shrunk. The collapse of the Icelandic banks, the rescue of the Irish financial industry and the flight of savers to safe institutions has cut the number of savings products on offer. The withdrawal of some very active competitors has alleviated the pressure on those that remain to fight for customers. In the savings market, brand is now what matters. "We've gone back to a premium on the name," says one banker.
Competition, or the lack of it, in the banking industry was highlighted last week by shadow chancellor George Osborne, who pledged that a Conservative government would hold an investigation before the taxpayer's stakes in RBS and Lloyds were put on the market. "We need to have a strategic view of the kind of banking system we want at the end of that process," he said. "We shouldn't just go into it blind."
While Labour accused Osborne of hiding behind a competition review in order to avoid having to devise his own policy on the disposal of bank shares, the government itself has acknowledged that there is a problem to be tackled. In allowing Lloyds TSB to rescue HBOS last September, competition rules were deliberately overlooked on the grounds of financial stability.
The Office of Fair Trading warned the business secretary, Lord Mandelson, that the tie-up would cause "substantial lessening of competition". The combined bank controls about 25% of personal bank accounts and about 28% of the mortgage market, which would normally have raised concerns.
The reduction in competition appears to be allowing those financial firms left standing to do business more profitably. Sandy Chen, banks analyst at Panmure Gordon, says: "The margins on new business are wider. They are charging a lot more." However, Boulger points out that, in the mortgage market at least, lenders' existing loans - known as the "back book" - are likely to be loss-making, given the dramatic cuts to interest rates that have left some tracker products offering very cheap deals for their customers.
Chen's gloomy analysis of the banking sector suggests that the poorer sections of society are being hit hardest. The top earners, he argues, "are enjoying falling mortgage payments (if they have a mortgage at all), a generally deflationary environment and excess household cash flows". However, "at the other end, roughly half of UK households are facing negative cash flows, an inflationary environment and the combined threats of negative equity, difficulties in refinancing or remortgaging, and unemployment."
As long ago as March 2000, an influential report by Don Cruickshank into the banking industry was already raising concerns about competition, noting that the barriers to new entrants were high. One new lender - Bank of China - has jumped those barriers in recent weeks by piloting a range of mortgage products. But many more will need to follow to get the competition flowing again.