As I sit to write this I have $21 in my wallet, a $20 bill and a (soon to be worthless) $1 bill. Looking on the back of these bills I see the words “In God We Trust.” On the $20 bill these words sit in the sky above the White House.
I wonder how long it is going to take Congress to change those words to “In Government We Trust.”
Our country was built by groups of malcontents and misfits who left their countries of origins to seek opportunity in a new land. They risked much to come here. They sacrificed. They produced. They overcame. With hard work, these (predominantly) God-fearing men and women defied the odds and created the finest nation this world has ever seen.
The United States grew from a unique combination of human nature and freedom. Individuals were free to stretch their abilities as far as they could go. Government’s role was protection and a bit of infrastructure. Taxes were low. We didn’t have an income tax until the “temporary” tax was instituted to help fund World War I. So much for temporary.
One of the great prices of freedom is the freedom to fail. Great success comes at great risk. Modest success comes at modest risk. I remember reading about our “energy shortage” back in the 1700s, when newspaper headlines read “World To Go Dark,” because of the shortage of whale blubber (for lamps.) I remember studying about market crashes and economic turmoil long before the Great Depression. Somehow we made it through all that, emerging stronger and better.
Make no mistake. Those days are gone. We are now entering an era of government planning and control that is fundamentally different that what our nation has ever seen.
We have ourselves to blame. And I fear there is no turning back.
To begin with, our entire banking system is bankrupt. A quick review of the math will prove my point. Before this “mortgage crisis” occurred, worldwide capital in the banking system was somewhere around $2 -$3 trillion. Based upon their capital, banks are able to make loans. The aggregate total that a bank can loan is a function of their capital—usually no more than ten to fifteen times that capital. Banks are able to “borrow” capital as well, but let’s keep things simple.
Somehow, the banking system figured ways to lend $50-$60 trillion based primarily on the inflated equity value of U.S. homes. As home values plummeted, so too, did bank capital. The United States has pledged $700 billion to the banking system. Governments around the world have pledged a somewhat similar amount. I estimate that it will take another $4 trillion or so, in the U.S. alone, to replace our banking system’s capital. This far exceeds the historic high water mark for banking capital. Ever.
We have always seen booms and busts in our economy. Remember hula-hoop’s and pet rocks? Cabbage Patch Dolls and Pong? These minor product fads take place on a much larger scale in the world economy. The latest craze was Mortgage-Backed Securities. But when economic crashes occur, we all suffer.
I have always believed that the free market gives the greatest number of people the greatest opportunity to succeed. But we have just witnesses the free market lead the world (except for government-run China) into bankruptcy. How sad is that? This is where I would use one of my little-used swear words.
There are a number of solutions to this problem. We can force our banks to fess up to their true capital position and let Bank of America and Citi fail. We can relax our banking capital standards, allowing banks to operate with no capital. This would require greater government guarantees, or there would be a further flight of deposits. The government can buy insolvent banks. This will mean that most major banks will become nationalized. Or, we could create a single national bank that would buy up the bad mortgage debt and high values, thereby replacing bank capital to working levels.
If we allow companies like Bank of America and Citi to fail, we will face another Great Depression. If we relax banking standards, our nation will have as much faith in banking as they have in politicians. If we nationalize many banks, we will have the government creating more social and political policy through its banking policies. In the long run, this might make the problem worse, not better.
As I see it, the only viable solution (I am simplifying here) that will allow the United States to keep any vestige of what made us great—our freedom— is for Washington to give banks a do-over, buy purchasing the bad debt and replacing capital. This would require a separate national bank whose only job is to purchase bad mortgages, negotiate new terms with homeowners and restore an orderly housing market.
In a later blog I will tell you who should get the blame for all this. It is a long, long list and it will surprise you.
I will also tell you why I am still optimistic for our nation’s economy.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Friday, January 30, 2009
Wednesday, January 28, 2009
The Coming National Bank
Make no mistake; the economy is on the brink of a minor depression. So too, is the world. The United States has trillions of dollars in bad debt. Much of it is owned by financial institutions that have yet to completely fess up.
The first $350 billion in the bailout TARP package sent a small ripple through the financial community, salving fears of imminent collapse, but it has done nothing to swell the company coffers to the point where they will part with cash in the favor of loans to individuals and businesses.
Let me give you an idea of how bad this is has become. I have a client that is a very successful company. The company has no debt. They have millions of dollars in cash. They earn millions per year, and have tens of millions in annual revenues. This company went to purchase new company vehicles. The dealer was running a “special,” where financed vehicles received an additional $1,000 off the purchase price. This sounded like a good deal, so my client applied for financing. They were turned down. This is one of the most solid, privately held companies you will ever find, and they could not get credit from a car company that is dying to sell cars. How is the rest of American business going to survive and thrive? (By the way, this company simply paid cash for their cars.)
As low as interest rates are, banks still do not have the money to lend, or the margin for error that will allow them to take any risk at all. As the great philosopher, Mr. T used to say, “Pity the fool.” In this case, we are all fools.
All this leads me to believe that we are going to see one big time national bank. I would prefer the scenario where a separate bank is formed. This bank purchases the “bad debt” from major institutions and works out arrangements with the homeowners. If done right, there may not be too much of a loss. Eventually, this bank can wind itself down and stay out of the way.
The alternative is for the U.S. to begin purchasing existing banks. This would begin to fully nationalize banks, causing a whole host of new issues. Congress helped create this mess by mandating that Fannie and Freddie give low credit loans (some claim that this reached 50% of all loans). While I cannot fault the intent of the legislation, I can fault its economic soundness. This was bound to fail.
This would have become a problem, but nothing on the scale we have seen. What Congress failed to see (as did most other financial experts) was that investors (and investment banks) would rely on statements from Fannie and Freddie that these loans were sound. Capitalism would seize upon the interest rate plan and leverage these things to the hilt to create enormous profits and enormous (unforeseen) risk.
We ain’t in Kansas anymore. The world has changed—forever.
As much as I hate to see it, there are many good people, myself included, who are feeling the strong pinch of this economic slowdown. It is like a vice clamping down on opportunity. If business is the engine that pulls our prosperity, capital is the fuel that makes it run. We can have the best people, the best products and the best technology, but if we lack the capital to run our businesses, the whole train shuts down.
I expect that talk will quickly heat about creating a national bank. It will be another big hit to our national debt. I estimate $4 trillion. If done properly, this cost could shrink to less than $1 trillion by the time the debt is wound down.
When this comes to pass, and it will, look for the stock market to make a 20%-30% rally, as uncertainty fades. Then get ready for a long road back to our former prosperity. The increased national debt, plus our government’s inability to reduce its spending, has cause me to lower my growth expectations significantly.
All this said, we are still the land of opportunity. We have the intellectual capital and ingenuity to better our world from where it is today. Yes, we will have higher taxes. But there is great hope for anyone with the will and perseverance to succeed.
This reminds me of an old quote. It goes like this:
Press on. Nothing in this world can take the place of persistence. Talent will not. The world is filled with unsuccessful individuals with talent. Education will not. The world is full of educated derelicts. Genius will not. Unrewarded genius is almost a proverb. Persistence and determination alone are omnipotent.
Press on!
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
The first $350 billion in the bailout TARP package sent a small ripple through the financial community, salving fears of imminent collapse, but it has done nothing to swell the company coffers to the point where they will part with cash in the favor of loans to individuals and businesses.
Let me give you an idea of how bad this is has become. I have a client that is a very successful company. The company has no debt. They have millions of dollars in cash. They earn millions per year, and have tens of millions in annual revenues. This company went to purchase new company vehicles. The dealer was running a “special,” where financed vehicles received an additional $1,000 off the purchase price. This sounded like a good deal, so my client applied for financing. They were turned down. This is one of the most solid, privately held companies you will ever find, and they could not get credit from a car company that is dying to sell cars. How is the rest of American business going to survive and thrive? (By the way, this company simply paid cash for their cars.)
As low as interest rates are, banks still do not have the money to lend, or the margin for error that will allow them to take any risk at all. As the great philosopher, Mr. T used to say, “Pity the fool.” In this case, we are all fools.
All this leads me to believe that we are going to see one big time national bank. I would prefer the scenario where a separate bank is formed. This bank purchases the “bad debt” from major institutions and works out arrangements with the homeowners. If done right, there may not be too much of a loss. Eventually, this bank can wind itself down and stay out of the way.
The alternative is for the U.S. to begin purchasing existing banks. This would begin to fully nationalize banks, causing a whole host of new issues. Congress helped create this mess by mandating that Fannie and Freddie give low credit loans (some claim that this reached 50% of all loans). While I cannot fault the intent of the legislation, I can fault its economic soundness. This was bound to fail.
This would have become a problem, but nothing on the scale we have seen. What Congress failed to see (as did most other financial experts) was that investors (and investment banks) would rely on statements from Fannie and Freddie that these loans were sound. Capitalism would seize upon the interest rate plan and leverage these things to the hilt to create enormous profits and enormous (unforeseen) risk.
We ain’t in Kansas anymore. The world has changed—forever.
As much as I hate to see it, there are many good people, myself included, who are feeling the strong pinch of this economic slowdown. It is like a vice clamping down on opportunity. If business is the engine that pulls our prosperity, capital is the fuel that makes it run. We can have the best people, the best products and the best technology, but if we lack the capital to run our businesses, the whole train shuts down.
I expect that talk will quickly heat about creating a national bank. It will be another big hit to our national debt. I estimate $4 trillion. If done properly, this cost could shrink to less than $1 trillion by the time the debt is wound down.
When this comes to pass, and it will, look for the stock market to make a 20%-30% rally, as uncertainty fades. Then get ready for a long road back to our former prosperity. The increased national debt, plus our government’s inability to reduce its spending, has cause me to lower my growth expectations significantly.
All this said, we are still the land of opportunity. We have the intellectual capital and ingenuity to better our world from where it is today. Yes, we will have higher taxes. But there is great hope for anyone with the will and perseverance to succeed.
This reminds me of an old quote. It goes like this:
Press on. Nothing in this world can take the place of persistence. Talent will not. The world is filled with unsuccessful individuals with talent. Education will not. The world is full of educated derelicts. Genius will not. Unrewarded genius is almost a proverb. Persistence and determination alone are omnipotent.
Press on!
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Tuesday, January 13, 2009
Kudos to Jim Rice HOF
Yesterday it was announced that Jim Rice was voted into the baseball Hall of Fame. It was a long time coming (15 years) but an election well-deserved.
Jim Rice dominated baseball for a period of ten years, putting up near-steroid numbers in an era when beer, caffeine and greenies were the only performance enhancing drugs. His numbers paled when compared to the inflated totals of McGuire, Sosa and Bonds—athletes built up to gargantuan proportions by illegal drugs.
I am glad that Rice finally received his due. He was my favorite player for a decade and I still like and respect him as a man. I recently heard that he had Lasik surgery and can see well without glasses. Too bad Lasik wasn’t an option when he was playing. He was never comfortable with glasses and I still believe it was his eyesight that shortened his career, not his bat or his heart.
HOF is no longer a four letter word for the old left fielder. Now it is a badge he can wear with pride and honor.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Jim Rice dominated baseball for a period of ten years, putting up near-steroid numbers in an era when beer, caffeine and greenies were the only performance enhancing drugs. His numbers paled when compared to the inflated totals of McGuire, Sosa and Bonds—athletes built up to gargantuan proportions by illegal drugs.
I am glad that Rice finally received his due. He was my favorite player for a decade and I still like and respect him as a man. I recently heard that he had Lasik surgery and can see well without glasses. Too bad Lasik wasn’t an option when he was playing. He was never comfortable with glasses and I still believe it was his eyesight that shortened his career, not his bat or his heart.
HOF is no longer a four letter word for the old left fielder. Now it is a badge he can wear with pride and honor.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Thursday, January 8, 2009
Detroit's Secret Plan
If you are baffled at how GM and Ford can rack up a combined annual loss of more than $50 billion and still call themselves viable without making drastic changes, don’t be. They have a secret plan.
Whatever rhetoric you hear from Detroit and Washington, don’t believe it.
The UAW has no intention to give up its contract. Why should they? This was bargained in “good faith.” (Some might argue that the threat of a strike is not good faith, but the fact is: both sides agreed to this deal.)
Management seems more intent upon joining the Washington bread line than fixing the fundamental flaws in its operations.
Here’s why. Detroit and Washington have a secret plan and it has two parts.
Nationalized health care. This will transfer the burden of Detroit’s massive health care costs for current and former workers to the American taxpayer.
Force their competition (Toyota, Nissan, Honda, BMW, Daimler, etc.) to join the UAW. This will level the cost field, as Detroit’s competition will have the same labor costs. It will also drive car prices up another $2,000.
This is why Detroit seems content upon taking handouts from Washington.
The Clinton’s made a strong push to nationalize health care during Bill’s first term. This attempt failed dramatically. Obama made it a central part of his platform, although he couched it in different words. The new administration will not hit us with it like the Clintons did, it will be presented as simply part of “the great solution” to our national ills. I see this as virtually inevitable. Whether it is the best thing for our nation will be debated for decades. Only time will tell.
With the rapid evolution of Socialistic thinking in America (the belief that government can solve everything—witness AIG, Lehman, Citi, Countrywide, Fannie & Freddie, etc.) it is a now just a small step to the next level. The Fed and Congress have poured trillions into failing companies and they (Congress) will soon explain that it is “far more efficient” to have single-payer health care. It is good for the country. Reminds me of the joke about the Canadian health care system: There is a ten month waiting list for a maternity bed.
Under current law, voting by employees deciding whether or not to unionize is a private matter. Votes are counted, with no one knowing how anyone votes. There is a bill that is making its way through Congress that will force “open voting” when company employees choose whether or not to join unions. This will place enormous pressure on those voting not to join unions. Many of us have seen how this can happen. I have seen (and felt) this myself. Should this bill become law, it will take little time for auto industry wages and benefits in right-to-work states to skyrocket.
Problem solved. Detroit is competitive again. Auto workers keep their substantial six figure jobs. They keep their benefits and their marvelous pensions. While you and I pay more in taxes and more for our cars.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Whatever rhetoric you hear from Detroit and Washington, don’t believe it.
The UAW has no intention to give up its contract. Why should they? This was bargained in “good faith.” (Some might argue that the threat of a strike is not good faith, but the fact is: both sides agreed to this deal.)
Management seems more intent upon joining the Washington bread line than fixing the fundamental flaws in its operations.
Here’s why. Detroit and Washington have a secret plan and it has two parts.
Nationalized health care. This will transfer the burden of Detroit’s massive health care costs for current and former workers to the American taxpayer.
Force their competition (Toyota, Nissan, Honda, BMW, Daimler, etc.) to join the UAW. This will level the cost field, as Detroit’s competition will have the same labor costs. It will also drive car prices up another $2,000.
This is why Detroit seems content upon taking handouts from Washington.
The Clinton’s made a strong push to nationalize health care during Bill’s first term. This attempt failed dramatically. Obama made it a central part of his platform, although he couched it in different words. The new administration will not hit us with it like the Clintons did, it will be presented as simply part of “the great solution” to our national ills. I see this as virtually inevitable. Whether it is the best thing for our nation will be debated for decades. Only time will tell.
With the rapid evolution of Socialistic thinking in America (the belief that government can solve everything—witness AIG, Lehman, Citi, Countrywide, Fannie & Freddie, etc.) it is a now just a small step to the next level. The Fed and Congress have poured trillions into failing companies and they (Congress) will soon explain that it is “far more efficient” to have single-payer health care. It is good for the country. Reminds me of the joke about the Canadian health care system: There is a ten month waiting list for a maternity bed.
Under current law, voting by employees deciding whether or not to unionize is a private matter. Votes are counted, with no one knowing how anyone votes. There is a bill that is making its way through Congress that will force “open voting” when company employees choose whether or not to join unions. This will place enormous pressure on those voting not to join unions. Many of us have seen how this can happen. I have seen (and felt) this myself. Should this bill become law, it will take little time for auto industry wages and benefits in right-to-work states to skyrocket.
Problem solved. Detroit is competitive again. Auto workers keep their substantial six figure jobs. They keep their benefits and their marvelous pensions. While you and I pay more in taxes and more for our cars.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Wednesday, January 7, 2009
Theft In Detroit
In September, 2007 I warned of the impending collapse of the financial markets. I felt a little silly for the next month or so, as the stock market continued to climb. But I was certainly vindicated in the next 15 months. The Dow plunged from well above 14,000 to below 8,000.
Late last year I warned that the next collapse would occur in the Hedge Fund markets. Then we hear about the $50 billion lost by Bernie Madoff. This is more complicated than a simple financial failure, but the results are the same. Hedge fund managers had free reign to alter values (particularly with mortgage securities) to what they wanted them to be. Madoff is one of many.
This time I am going to address the situation in Detroit. According to General Motors documents, in 2006 the total cost per worker is approximately $73.26 per hour, or $146,520 per year. The Associated Press reported that this figure dropped to $69 per hour in 2008. This compares to an hourly cost of $48.00 per hour for Toyota, in this country. For you non-geeks this represents a disparity of $21 per hour, or about $42,000 per year per worker. Yikes! How would you like a $40,000 raise?
U.S. car makers pay an estimated $2,600 per car in excess wages and benefits to current and former UAW employees. This compares to about $300 per car for the Japanese car makers. This means that, before an American car leaves the lot, it must fetch $2,300 more than its competitors to achieve the same profit. Good luck. Unless this disparity vanishes, there is absolutely no hope for the U.S. auto industry.
I estimate that it will take $100 billion or more just to get these companies through the current business downturn. Even then, they will return to marginal profitability, if any, unless serious changes are made.
I don’t blame the unions for negotiating the best deals they could. But things change. Business changes. The world changes. And if companies cannot adapt, they will fail, or at least they should. Many companies have been forced to trim their work force. Some have lowered wages. Many have cut back capital expenditures and closed plants.
The UAW has given back some (little) of its gains, but many of the union contracts still call for exorbitant benefits (and salaries) to be paid to non-workers. Full health care is provided for early retirees. A worker still gets $30,000 per year put into his retirement accounts. Hello. This is the 21st century. These things don’t happen anymore. Do you get $30,000 put away each year into your retirement account?
In December the U.S. government stepped in with a temporary bail-out for U.S. auto makers, worth about $14 billion. This should help them stay in business for a few more months, until our new president can have his say. I fear that we will hear more spin and the problem will linger for years, with the U.S. taxpayer footing the bill.
If we are going to continue to subsidize union workers and inefficient businesses, we should at least understand what this really means to Americans.
Because of this wage disparity, every person who buys a new car will spend $2,000 more than they should, whether they buy American or not. Because of the UAW wage inflation, every competing car manufacturer is able to charge more for their cars and still remain competitive. Basic economics, folks.
Every person who buys a (relatively new) used car will pay more too. Used cars are priced in relation to new cars. If new cars cost more than they should, so will used cars.
Why should ten or fifteen million people per year pay more for their cars, just so UAW workers can keep their huge pension accounts? And why should the U.S. government subsidize this theft?
That’s not all. If Washington provides a long-term, $100 billion bailout, as I fear they will, this represents a $2,000 cost to each of fifty million tax payers. If you pay taxes (Social Security included) then your wallet will be affected. Do you want to send $2,000 to Washington and pay $2,000 extra for your next car, just so some early retiree can have free health care and a line worker will get his $30,000 pension deposit? I thought not.
Late last year I warned that the next collapse would occur in the Hedge Fund markets. Then we hear about the $50 billion lost by Bernie Madoff. This is more complicated than a simple financial failure, but the results are the same. Hedge fund managers had free reign to alter values (particularly with mortgage securities) to what they wanted them to be. Madoff is one of many.
This time I am going to address the situation in Detroit. According to General Motors documents, in 2006 the total cost per worker is approximately $73.26 per hour, or $146,520 per year. The Associated Press reported that this figure dropped to $69 per hour in 2008. This compares to an hourly cost of $48.00 per hour for Toyota, in this country. For you non-geeks this represents a disparity of $21 per hour, or about $42,000 per year per worker. Yikes! How would you like a $40,000 raise?
U.S. car makers pay an estimated $2,600 per car in excess wages and benefits to current and former UAW employees. This compares to about $300 per car for the Japanese car makers. This means that, before an American car leaves the lot, it must fetch $2,300 more than its competitors to achieve the same profit. Good luck. Unless this disparity vanishes, there is absolutely no hope for the U.S. auto industry.
I estimate that it will take $100 billion or more just to get these companies through the current business downturn. Even then, they will return to marginal profitability, if any, unless serious changes are made.
I don’t blame the unions for negotiating the best deals they could. But things change. Business changes. The world changes. And if companies cannot adapt, they will fail, or at least they should. Many companies have been forced to trim their work force. Some have lowered wages. Many have cut back capital expenditures and closed plants.
The UAW has given back some (little) of its gains, but many of the union contracts still call for exorbitant benefits (and salaries) to be paid to non-workers. Full health care is provided for early retirees. A worker still gets $30,000 per year put into his retirement accounts. Hello. This is the 21st century. These things don’t happen anymore. Do you get $30,000 put away each year into your retirement account?
In December the U.S. government stepped in with a temporary bail-out for U.S. auto makers, worth about $14 billion. This should help them stay in business for a few more months, until our new president can have his say. I fear that we will hear more spin and the problem will linger for years, with the U.S. taxpayer footing the bill.
If we are going to continue to subsidize union workers and inefficient businesses, we should at least understand what this really means to Americans.
Because of this wage disparity, every person who buys a new car will spend $2,000 more than they should, whether they buy American or not. Because of the UAW wage inflation, every competing car manufacturer is able to charge more for their cars and still remain competitive. Basic economics, folks.
Every person who buys a (relatively new) used car will pay more too. Used cars are priced in relation to new cars. If new cars cost more than they should, so will used cars.
Why should ten or fifteen million people per year pay more for their cars, just so UAW workers can keep their huge pension accounts? And why should the U.S. government subsidize this theft?
That’s not all. If Washington provides a long-term, $100 billion bailout, as I fear they will, this represents a $2,000 cost to each of fifty million tax payers. If you pay taxes (Social Security included) then your wallet will be affected. Do you want to send $2,000 to Washington and pay $2,000 extra for your next car, just so some early retiree can have free health care and a line worker will get his $30,000 pension deposit? I thought not.
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