I ran across one of my Market Updates from May, 2002 this morning, and it struck me how easy it was to see the future. I even warned about the trillions of dollars of derivatives being purchased by the banks.
The depressing thing about this is that I worry that my current predictions of America's future might come true as well. While I still think that American technology, capital and freedom will keep our nation solid, I fear that we are moving rapidly to a high-debt, socialistic state that will decrease the standard of living for us all. We will still have great lives, but it will become harder and harder for our children and grandchildren to keep this balloon afloat.
Blame for the mortgage meltdown can be spread everywhere, to conservatives to liberals to greedy capitalists and toothless regulators. Obama, individually, had little to do with the problem. The biggest blame must go to Wall Street for excessive greed, to Congress on both sides of the aisle, to fraud at Fannie Mae, to Alan Greenspan for fueling the fire, to George Bush for not crying loud enough and to Bill Clinton for trying to end "corporate greed" (by eliminating the tax deduction for salaries over $1 million, which triggered the big wave of stock options and a short term business focus.).
I have tried to go easy on our new administration. Lord knows, George Bush disappointed most of us, on both sides of the political aisle. Mr. Obama was elected and he deserves the opportunity to attempt to implement his agenda. However, I am continually amazed at how flat-out naive he can be. Whether it is arrogance, ignorance, or poll-driven politics, Obama is walking us down dangerous paths that even the intrepid should fear to tread. Iran may go unchecked until they nuke someone, hopefully not New York. Our national debt will rise to a point where we'll be crippled by debt payments. Business will suffer because capital is being taxed away from the people that create jobs.
I understand that this is all being done with the objective of "fairness." That still doesn't change the fact that these policies come with a very steep price that most of us do not understand, especially politicians.
I will attempt to keep my criticism of Washington to a minimum, while I pick at the edges of social trends. I do believe in the U.S. Constitution and the right of the victor to get his/her chance to implement legislation. Our nation was founded on the belief that conflict is healthy and necessary to govern in a way that is best for all. While I celebrate Obama's ascension to the political throne, I also celebrate my liberty to assert my contrary opinions.
Here is what I wrote:
Market Update – May 10, 2002
Big Asset Class Disparity
Here is what I see happening in the financial marketplace.
Some of you may have received my market analysis on January 26, 2000 that warned of the coming collapse of the tech stocks. Those of you fortunate enough to listen to me allocated a good portion of your growth assets to the small value sector. During the past two years, the small value sector is up more than 35%, while the growth sector is down more than 20%.
I see the same huge market disparity today as I did back then. The market sector where I see the greatest opportunity is in Emerging Markets. Traditionally, emerging market stocks act like a yo-yo. They can be up or down 50% or more in any give year. Emerging market stocks represent one of the highest risk categories of stock investments, and potentially the one of the highest returns as well.
I believe that a portfolio should always be well diversified across many asset classes. Yet, sometimes it makes sense to do a little strategic tinkering with the overall mix. That time is now. Let me explain.
Of 192 emerging market funds I analyzed, the average Price to Earnings Ratio was 18.6. (The average share is trading at 18 times earnings per share.) The average U.S. growth mutual fund (of 3,345 analyzed) holds stocks that are selling at an average of 31.9 times earnings. The expectation inherent in a P/E ratio is that stocks with a high P/E ratio are expected to grow more rapidly than those with a lower P/E. Stocks with a high P/E can also fall farther and more rapidly than lower P/E shares if earnings growth slows.
The Price to Book ratio for emerging shares is a much more conservative 3.2 versus 4.9 for U.S. growth stocks. May we be so bold as to see emerging market stocks as value shares? They are priced that way.
Now let’s look at trailing earnings growth. The earnings growth of our emerging company shares have grown at an average of 28.9% (through April 30, 2002) for the past three years. Our U.S. counterpart shares have earnings growth of just 14.9%. Get the picture? Emerging shares have twice the earnings growth, and are selling at half the P/E. This is a highly unusual disparity.
For those investors with a long-term perspective, who don’t mind taking some risk, emerging markets might represent a huge buying opportunity. Would I place a big, big bet here? No. I don’t recommend big bets in any asset class. However, for investors with excess assets over and above their needs, a 10% to 15% holding of emerging market funds might pay off handsomely.
I must warn you that investment returns are not guaranteed and all stock investments involve risk—so invest with care.
GLOBAL & DOMESTIC OUTLOOK
Those of you who know me know that I am bullish on America, and bullish on the long-term prospects of the U.S stock market. I expect that the S & P 500 will average slightly below normal for the next decade, but not as anemic as the 1970s. Moreover, I think investment managers who do the bottoms-up research will outperform the averages.
I don’t want to alarm anyone, however, but if you have an investment horizon of less than 10 years, you ought to take heed of these next few paragraphs. Even if you have a long-term investment horizon, you should at least be aware of the potential risks during the next few years.
The world economy walks on a financial razor’s edge. U.S. corporate debt is now in excess of $5 trillion. Company debt has been growing at a much faster rate than our Gross Domestic Product (GDP). This kind of leverage can magnify risk and return.
Companies like Nextel, PSINet, Xerox and 7-Eleven have incurred huge amounts of debt, particularly when measured against their cash positions. A number of such companies will fail during the next few years.
The recent stock market downturn has erased a huge portion Americans’ life savings, perhaps by as much as half. At the same time, consumers have been refinancing their homes at a record pace (due to the dramatic fall in interest rates) and have been spending this equity just as fast. This trend has kept the country from entering a significant recession, but it has dramatically eroded personal wealth. Not good.
A downturn in real estate prices, coupled with a leveling of interest rates will dramatically reduce consumer spending and could create a drag on economic growth.
The telecommunications industry is swimming in debt. Global Crossing defaulted on tens of billions of dollars of debt. This may be only the beginning. We may see company defaults exceed a hundred billion dollars. This too will keep the economy sluggish.
There is $400 billion in venture capital loans outstanding, and a big portion of that could be headed toward default.
Banks are holding huge amounts of hedge securities, or “derivatives.” Derivatives are volatile and can be quite risky. U.S. banks hold trillions of dollars in derivative securities that could turn south.
Japan, the world’s second largest economy, is now mired in debt. Japanese banks hold more than $1 trillion in debt, much of it non-performing. As a nation, Japan has wrung up national debt at a staggering rate. Until recently, the Japanese government has allowed its banks (by funding them) to continue operating, despite the fact that many of them are technically bankrupt. There are signs that Japan may stop this policy, something that will force Japanese banks to unload huge amounts of U.S. stocks and bonds.
China is an awakening financial giant. In the 1960s, 70s and 80s Japan flooded the U.S. market with cheap goods. Over time, Japanese quality improved to exceed that of equivalent American goods. This one-two punch was harmful to the American economy, as our domestic imports increased and our balance of payments deficit ballooned precipitately. The technology revolution put an end to Japanese dominance, since their culture of cooperation versus innovation could not cope with the new style of business. Not so with China.
The Chinese people are extraordinarily capitalistic. As the shackles of Communism are slowly removed, China will become a powerful economic rival to the U.S. Unburdened by concerns over pollution and human rights, China will continue to produce goods and services for a small fraction of the cost to their U.S. counterparts. Look for the Chinese stock market to fare well in the upcoming years. Then look for Chinese economy to give us a serious run for our money by the end of the next decade.
Finally, there is oil. There are no signs that the Middle East tensions will ease anytime soon. The war on terrorism will go on, as it should. This puts us over an economic barrel when it comes to oil. If OPEC decides to raise prices or drop the production of oil as a show of Arab solidarity, and this continues for months, this will cause a spike in prices and a dramatic slowdown in the economy.
The U.S. has the domestic oil reserves to be energy self-sufficient. Much of this can only be recovered at higher prices, and a lot of it is under protected lands in Alaska and the Gulf Coast. We need not worry about our long-term energy needs, but we should be aware that we are dangerously vulnerable to a sort-term oil crisis.
THE GOOD NEWS
Now that you know the downside, let’s talk about the upside.
Productivity American companies continue to enjoy historically high productivity increases. While some experts disagree, I expect this trend to continue strongly for the foreseeable future, as technology advances continue to allow employees and businesses to operate more efficiently.
Technology
Because of our individualistic culture, our system of higher education, and our capitalistic economy, the U.S. continues to dominate world technology. The global marketplace is driven by technology. Twenty years ago it was possible for the Japanese to copy an American product, and then build it for less. Today, product cycles last just a few months. It is impossible to copy and reproduce. This gives America a strategic advantage that is virtually impossible to overcome. This translates into profits.
Within the next few years, hopefully, we will be driving SUVs that get 40 miles per gallon. New cars will be equipped with a new power system that utilizes fuel at twice the efficiency. This will help keep oil prices down, continuing the long-term trend of oil price growth that is significantly under the long-term rate of inflation.
Capital
There is a great pool of investment capital in this country—far more than any other. Money makes money. It always will. Money will continue to find its way to new, innovative business ideas that will drive our economy forward.
Social Structure
The European companies and governments have been giving workers more and more entitlements like guaranteed health care, shorter working hours, etc. This has put a drag on the ability for European businesses to compete in the world arena. European taxes have increased as well. This hampers the source of new investment capital for business growth. The same has occurred in Canada. This has allowed U.S. companies to maintain a competitive advantage over our competition, which will continue for the foreseeable future.
Medical Breakthroughs
Get ready for medical advances that will dramatically reduce the costs to society. Genetic technology will bring about cures for many diseases that will reduce human tragedy and bring about economic opportunity. People will live far longer. There will be economic costs brought about by our aging population, but the costs will be outweighed by benefits of medical advances. A cure for cancer would bring about an economic renaissance like nothing we have ever seen, and can barely imagine.
Friday, March 27, 2009
Tuesday, March 17, 2009
AIG Bonus Problem: Simple Solution
The $165 million that AIG is paying in bonuses to the same executives that forced the $160 government billion bailout is the ultimate in hubris.
I understand that much of these bonuses are due to “contractual” obligations of the company. Wish I could get a job where I lost my company billions and made millions to do it.
While the Obama administration and Congress seem powerless to do something about this, the solution is quite simple.
Establish a conduit, where executives can refuse their bonus and have it go directly to the bailout funds that are being used to fix this mess. Or, have it go to help fund unemployment benefits. Then, publish the names of each executive that does not redirect his/her bonus to the fund. Then let the “marketplace” of public awareness do its thing.
Many people appear willing to cheat in anonymity, while few care to do it in the public spotlight. As Shakespeare might have said, “Let these people suffer the slings and arrows of fate.”
Problem solved, I assure you.
I understand that much of these bonuses are due to “contractual” obligations of the company. Wish I could get a job where I lost my company billions and made millions to do it.
While the Obama administration and Congress seem powerless to do something about this, the solution is quite simple.
Establish a conduit, where executives can refuse their bonus and have it go directly to the bailout funds that are being used to fix this mess. Or, have it go to help fund unemployment benefits. Then, publish the names of each executive that does not redirect his/her bonus to the fund. Then let the “marketplace” of public awareness do its thing.
Many people appear willing to cheat in anonymity, while few care to do it in the public spotlight. As Shakespeare might have said, “Let these people suffer the slings and arrows of fate.”
Problem solved, I assure you.
Friday, March 13, 2009
Obama Stimulus "Pork" For McDonalds
In the most recent Obama stimulus “tax cut” bill, the administration opted for a reduction in payroll taxes of about $10 per week, rather than sending everybody a $500 check.
Now, rather than taking a $500, $1,000 or $1,500 check to a retailer and buying something, individuals will have a little spare change during the month.
In my 20+ years at building and servicing 401(k) plans, I have had the opportunity to work with tens of thousands of retirement plan participants. When I speak to groups of employees, I often tell them about the “401(k) Diet.” I encourage non-participants to have $50 or $100 taken out of their pay per month, just to get started. I tell them that they won’t miss the money. The only thing they will miss is a little spare change, resulting in a few trips less trips to McDonalds. This will help them lose weight. So, not only will they save for retirement, they will also lose those ten pesky pounds they’ve been meaning to diet away.
Because of its structure, the Obama “stimulus” program will put a little spare change into everyone’s pockets each month. And I know just where it will go─McDonalds. As our recession progresses, look for McDonald’s sales to stay strong, and for people to put on the pounds. The next time you read about obesity becoming more and more of a problem in this country, look to the Obama stimulus as one of the prime culprits.
http://www.lumbert.com/
www.shaksperbooks.com
Now, rather than taking a $500, $1,000 or $1,500 check to a retailer and buying something, individuals will have a little spare change during the month.
In my 20+ years at building and servicing 401(k) plans, I have had the opportunity to work with tens of thousands of retirement plan participants. When I speak to groups of employees, I often tell them about the “401(k) Diet.” I encourage non-participants to have $50 or $100 taken out of their pay per month, just to get started. I tell them that they won’t miss the money. The only thing they will miss is a little spare change, resulting in a few trips less trips to McDonalds. This will help them lose weight. So, not only will they save for retirement, they will also lose those ten pesky pounds they’ve been meaning to diet away.
Because of its structure, the Obama “stimulus” program will put a little spare change into everyone’s pockets each month. And I know just where it will go─McDonalds. As our recession progresses, look for McDonald’s sales to stay strong, and for people to put on the pounds. The next time you read about obesity becoming more and more of a problem in this country, look to the Obama stimulus as one of the prime culprits.
http://www.lumbert.com/
www.shaksperbooks.com
Tuesday, February 24, 2009
The $30 Trillion Con
I don’t know about you, but I get this strange feeling that our government is deliberately covering up the biggest con of all time.
Let’s do the math. I am going to use round numbers here, so please don’t quibble with me about minutia.
U.S. Home equity is about $10 trillion. American homeowners have about $10 trillion in mortgages. Total home value is about $20 trillion.
Somehow, Wall Street found a way to sell $50 trillion to $60 trillion in securities (no one knows exactly how much was truly sold, but this is a general consensus), all based upon $10 trillion of U.S. equity.
Where did the money come from to buy all this stuff, you wonder? Most of it was borrowed. Where did the underlying value come from to justify the purchase of these securities? It was manufactured on paper. The value was never there; it was a ghost.
This should have been an easy problem to fix. Six months after the fall of Countrywide, one of our nation’s best teams of economists (University of Chicago) issued a white paper predicting that the total loss would be about $500 billion. This should have been the case―certainly not the $10 trillion to $20 trillion that has been lost to date.
Let me explain. Let’s say that a nightmare scenario occurred to cause 10% of all mortgages to default. 10% of $10 trillion is $1 trillion. The market could have absorbed this. Congress could have written a check. Even with no intervention, investors may have lost a few hundred billion. End of story.
Even as the Obama administration commits to stabilizing home values and subsidizing mortgages to make thing right, the world is going into economic free-fall.
What has happened is something so far removed from this that it can only be the result of massive ignorance, deceit or outright fraud. Subsidizing defaulted mortgages should have fixed the problem. This is the underlying asset (collateral) of the CDO (collateralized debt obligations) market. But this has done nothing. Nothing. When these securities were sold to investors, insurance companies, banks, etc., they were assigned bloated, inconceivably high values that could never be achieved.
In all my reading, I have not seen this mentioned as the cause. So, either I am stupid, the world is ignorant, or there is a massive cover-up underway. (I vote for the ignorant world).
The only way that fixing the underlying asset would not have corrected this problem would be that the values attributed to the securities sold were wildly overpriced. Wall Street took $20 trillion in securities. They broke them up into small pieces. Then they sold the pieces at a markup. If the SEC does the forensic accounting (provided these records have not been destroyed) I believe they will find that Wall Street took in more than $50 trillion on $20 trillion of value.
Using this math, $30 trillion in borrowed money has no collateral. And that, Martha, is why we are in this mess.
http://www.lumbert.com/
http://www.jaylumbert.com/
http://www.shaksperbooks.com/
Let’s do the math. I am going to use round numbers here, so please don’t quibble with me about minutia.
U.S. Home equity is about $10 trillion. American homeowners have about $10 trillion in mortgages. Total home value is about $20 trillion.
Somehow, Wall Street found a way to sell $50 trillion to $60 trillion in securities (no one knows exactly how much was truly sold, but this is a general consensus), all based upon $10 trillion of U.S. equity.
Where did the money come from to buy all this stuff, you wonder? Most of it was borrowed. Where did the underlying value come from to justify the purchase of these securities? It was manufactured on paper. The value was never there; it was a ghost.
This should have been an easy problem to fix. Six months after the fall of Countrywide, one of our nation’s best teams of economists (University of Chicago) issued a white paper predicting that the total loss would be about $500 billion. This should have been the case―certainly not the $10 trillion to $20 trillion that has been lost to date.
Let me explain. Let’s say that a nightmare scenario occurred to cause 10% of all mortgages to default. 10% of $10 trillion is $1 trillion. The market could have absorbed this. Congress could have written a check. Even with no intervention, investors may have lost a few hundred billion. End of story.
Even as the Obama administration commits to stabilizing home values and subsidizing mortgages to make thing right, the world is going into economic free-fall.
What has happened is something so far removed from this that it can only be the result of massive ignorance, deceit or outright fraud. Subsidizing defaulted mortgages should have fixed the problem. This is the underlying asset (collateral) of the CDO (collateralized debt obligations) market. But this has done nothing. Nothing. When these securities were sold to investors, insurance companies, banks, etc., they were assigned bloated, inconceivably high values that could never be achieved.
In all my reading, I have not seen this mentioned as the cause. So, either I am stupid, the world is ignorant, or there is a massive cover-up underway. (I vote for the ignorant world).
The only way that fixing the underlying asset would not have corrected this problem would be that the values attributed to the securities sold were wildly overpriced. Wall Street took $20 trillion in securities. They broke them up into small pieces. Then they sold the pieces at a markup. If the SEC does the forensic accounting (provided these records have not been destroyed) I believe they will find that Wall Street took in more than $50 trillion on $20 trillion of value.
Using this math, $30 trillion in borrowed money has no collateral. And that, Martha, is why we are in this mess.
http://www.lumbert.com/
http://www.jaylumbert.com/
http://www.shaksperbooks.com/
Wednesday, February 11, 2009
I've Made Mistakes Too
I make a living by giving financial advice and selling books. Over my career, there have been times when I have done pretty well. There are other times when I have made some really stupid decisions, usually when I’ve sold any of my companies.
I have made some really poor personal decisions as well. I did make one great choice, though. That was marrying my wife. This lucky choice makes up for all the bad ones, proving that we don’t have to be right all the time, just more often than we’re wrong. Still, without Deb, I would probably be a lost soul.
When I make comments and recommendations, do not make the mistake of thinking that I am not flawed. I am flawed. We all are flawed. That is not to say that we can’t improve. I try to improve, every day. Sometimes I win. Other days are not so good.
Throughout my life I have tried to do what is right, particularly when it comes to others. I have not always succeeded. None of us do, not all the time. But I have tried to walk a good moral line. I have actually walked away from small fortunes, because doing so was the right thing to do.
When you read my words, I hope that they will make you think. Maybe, if I am lucky, you might join some cause that is important to me. The cause of freedom. The cause of family. The cause of morality. The cause of goodness over evil. The cause of fairness over trampling greed.
Life is not black and white. Everything we do has shades of gray. Choices have consequences, some good, some less good. Self-service often stands in the way of service to others. Service to others can stand in the way of self gain. Somewhere in the middle we find our own playing field.
In our own game of life, we’re like the one kid with the ball. We can share it with our friends, or we can play alone. Sometimes, the more we share, the more we enrich others and the more we have. But sometimes, the more we share, the less we have. Good guys do not always win. Sometimes life just sucks.
What I try to do is help others see the difference, and find ways to improve their lives without trampling on the opportunity and freedom of others. There are times when I read my words and wonder what gives me the right to stand on my little soap box and shout what I think, or what makes me some moral arbiter with wisdom others should hear. I’m not some great shining example of morality or achievement. I am just a man with things to say, perhaps something worthwhile, someone whose words might be heard above the din and sink in, somehow spreading light on the dark secrets of this crazy world that spins around us.
I felt that it was important for me to fess up to my own imperfections and frailties. It is so easy to sit behind this keyboard and sound like I (we) know it all. That we’ve got some magic answer that no one else can see.
The simple fact is, I don’t. None of us do. All we can do is our best. I do try to do my best, every day. I hope that you do too. Because if we all do our best, despite our flaws and mistakes, this world will be a far better place.
Tuesday, February 10, 2009
Geithner Plan Not Even Close
Today, Timothy Geithner’s proposed plan to restore order to our nation’s financial markets fell so far short of solving the problem that it completely missed the target. This plan is like using a popgun to take down a bull elephant, or steering through a tsunami in a boat made of cork with no rudder. It won’t happen. This plan does too little to restore capital to a completely bankrupt banking system, and it lacks the punch needed to get loans flowing to qualified consumers and businesses as soon as we need it (today).
$1 trillion just won’t do it, folks, not if we want a healthy world economy. The world was so leveraged on mortgages (30-50 times equity), that underfunding the bailout could still be disastrous. Geithner: Wake Up!
What we need is to reset bank capital, and set compensation plans in motion that will not allow executives to (metaphorically) rape the taxpayer. I know that this is a powerful and distasteful analogy, but truth is truth.
In 1992, Congress limited the corporate tax deduction on salaries in excess of $1 million. I threw up big warning flags then, and I am doing it still. By limiting the corporate deduction, companies are forced to compensate executives in other, tax-favored manners, usually in stock options. This caused (and still causes) executives to cook company earnings and make short-term decisions to affect short-term stock prices rather than long-term viability and solvency. Hence, all the leverage.
Executives are like entertainers and sports figures. There is a big market for top talent and they will get paid. By trying to “end corporate greed,” the 1992 Congress put corporate greed on steroids.
Here is what we need to do. We need to start fresh. We need to tear down this old fixer upper and build something new, something that will survive.
First, we need to restore banking capital to healthy levels. We should create an independent bank to purchase bad debt from financial institutions, particularly from the banks. Additional capital should be in the form of convertible debt at low interest rates. (I hate the thought of bank nationalization, but the taxpayers should get repaid somehow). Some will argue that this is inflationary. Restoring lost capital is far less inflationary than creating new capital. When compared to the alternative of fifty million people out of work, and an economy less than fifty percent of what it was, I will pay an extra one or two percent per year for goods for a while.
Second, the new bank should work out all the loan terms with the mortgages they have bought. This includes blanket agreements with creditors and affordable terms with homeowners with the ability to repay. Homes that cannot be refinanced should be sold in an orderly manner, not liquidated through rock bottom auctions. If this means renting properties until home prices stabilize, and this proves to be the most profitable solution, get it done. Remember, this is the taxpayer’s money and it is precious.
Third, changes must be made to compensation structures. We should restore the corporate tax deduction for salaries in excess of $1 million. This will encourage more long-term thinking. If we need to cap salaries, we should do it at levels comparable to other high-paying professions like athletes and performers. Business executives produce at least as much as entertainment figures (which athletes and performers are). If we want to cap salaries to a lower level, then cap the salaries of actors, musicians and athletes, too. Set a price cap on movie tickets, CD and download sales and baseball games. Do not try to cap executive salaries at abnormally low figures, because then all you will get is mediocrity. We don’t want mediocrity now, we need brilliance. We want these men and women making big money, provided they do so for their shareholders (and the taxpayers) over time. This is part of what made our country great.
Fourth, if an executive earns money from stock options, it should be paid into a trust. Payments to the executive can then be made from this trust, provided the company returns a certain return on equity over time. For example, let’s use a term of ten years. If an executive earns $20 million from stock options, the entire amount will be placed in trust. Each year, $2 million will be paid, provided the company remains profitable (within some reasonable parameters). This will significantly reduce the short-term thinking and outright fraud that has been perpetrated on shareholders and taxpayers.
Fifth, stop dictating that Fannie Mae (and other quasi-government organizations) conduct social policy and call it business as usual. These companies were forced to lend enormous sums of money in areas where traditional bankers feared to tread. Estimates are as high as 50% of loans. If the government wants to create social policy (which every government does), then do it with a separate organization. Fund it in a manner that is transparent to the taxpayer, not in a way that bankrupts the world.
There is no hiding from this problem. This entire mess has screwed the country for the next fifty years, perhaps forever. The economics of government, trade and tax policy have changed so dramatically that economists are going to have to rewrite all the texts. This will become one great experiment, where fortunes will be made and lost, where good people’s lives will be destroyed, and other nations (namely China) will become superpowers long before their time.
There is no sense in trying to restore things to the way they were. This will never happen. Never ever. All we can do is make the best of this situation. This will require drastic, dramatic and immediate action that is beyond anything we have ever seen. Our government must take bold steps, decisive steps and do it fast. Otherwise, we are going to be living in a world where today looks like the good old days.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
$1 trillion just won’t do it, folks, not if we want a healthy world economy. The world was so leveraged on mortgages (30-50 times equity), that underfunding the bailout could still be disastrous. Geithner: Wake Up!
What we need is to reset bank capital, and set compensation plans in motion that will not allow executives to (metaphorically) rape the taxpayer. I know that this is a powerful and distasteful analogy, but truth is truth.
In 1992, Congress limited the corporate tax deduction on salaries in excess of $1 million. I threw up big warning flags then, and I am doing it still. By limiting the corporate deduction, companies are forced to compensate executives in other, tax-favored manners, usually in stock options. This caused (and still causes) executives to cook company earnings and make short-term decisions to affect short-term stock prices rather than long-term viability and solvency. Hence, all the leverage.
Executives are like entertainers and sports figures. There is a big market for top talent and they will get paid. By trying to “end corporate greed,” the 1992 Congress put corporate greed on steroids.
Here is what we need to do. We need to start fresh. We need to tear down this old fixer upper and build something new, something that will survive.
First, we need to restore banking capital to healthy levels. We should create an independent bank to purchase bad debt from financial institutions, particularly from the banks. Additional capital should be in the form of convertible debt at low interest rates. (I hate the thought of bank nationalization, but the taxpayers should get repaid somehow). Some will argue that this is inflationary. Restoring lost capital is far less inflationary than creating new capital. When compared to the alternative of fifty million people out of work, and an economy less than fifty percent of what it was, I will pay an extra one or two percent per year for goods for a while.
Second, the new bank should work out all the loan terms with the mortgages they have bought. This includes blanket agreements with creditors and affordable terms with homeowners with the ability to repay. Homes that cannot be refinanced should be sold in an orderly manner, not liquidated through rock bottom auctions. If this means renting properties until home prices stabilize, and this proves to be the most profitable solution, get it done. Remember, this is the taxpayer’s money and it is precious.
Third, changes must be made to compensation structures. We should restore the corporate tax deduction for salaries in excess of $1 million. This will encourage more long-term thinking. If we need to cap salaries, we should do it at levels comparable to other high-paying professions like athletes and performers. Business executives produce at least as much as entertainment figures (which athletes and performers are). If we want to cap salaries to a lower level, then cap the salaries of actors, musicians and athletes, too. Set a price cap on movie tickets, CD and download sales and baseball games. Do not try to cap executive salaries at abnormally low figures, because then all you will get is mediocrity. We don’t want mediocrity now, we need brilliance. We want these men and women making big money, provided they do so for their shareholders (and the taxpayers) over time. This is part of what made our country great.
Fourth, if an executive earns money from stock options, it should be paid into a trust. Payments to the executive can then be made from this trust, provided the company returns a certain return on equity over time. For example, let’s use a term of ten years. If an executive earns $20 million from stock options, the entire amount will be placed in trust. Each year, $2 million will be paid, provided the company remains profitable (within some reasonable parameters). This will significantly reduce the short-term thinking and outright fraud that has been perpetrated on shareholders and taxpayers.
Fifth, stop dictating that Fannie Mae (and other quasi-government organizations) conduct social policy and call it business as usual. These companies were forced to lend enormous sums of money in areas where traditional bankers feared to tread. Estimates are as high as 50% of loans. If the government wants to create social policy (which every government does), then do it with a separate organization. Fund it in a manner that is transparent to the taxpayer, not in a way that bankrupts the world.
There is no hiding from this problem. This entire mess has screwed the country for the next fifty years, perhaps forever. The economics of government, trade and tax policy have changed so dramatically that economists are going to have to rewrite all the texts. This will become one great experiment, where fortunes will be made and lost, where good people’s lives will be destroyed, and other nations (namely China) will become superpowers long before their time.
There is no sense in trying to restore things to the way they were. This will never happen. Never ever. All we can do is make the best of this situation. This will require drastic, dramatic and immediate action that is beyond anything we have ever seen. Our government must take bold steps, decisive steps and do it fast. Otherwise, we are going to be living in a world where today looks like the good old days.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Has Cheating Become the American Way?
Yesterday, Alex Rodriguez admitted to taking performance enhancing drugs. It seems like every new member of the Obama administration has broken the law. The Bush administration convoluted the truth to commit us to war. The Clinton administration was run like a mafia whorehouse. A Congressman can run a prostitution ring from his Washington home and remain in an influential position of power. Wall Street can defraud the public of trillions of dollars and we just look the other way. Even an Olympic superstar can break our hearts.
What has happened to America? Have we become a nation of cheaters? Everywhere I look, I see people breaking the law with impunity and a clear conscience. “Everybody else is doing it…” we here from the cheaters. As if that makes it okay.
We are acting like teenagers, warping the truth into something we want it to be. Illegal aliens are needed in our society. Pedophiles must be understood, not punished. Drugs should be decriminalized because (name your reason).
I know that some laws are just stupid. Like that 55 MPH speed zone that should be 65 MPH, or having to stop for three full seconds at that stop sign when there is no one around. But things have grown out of whack.
The human genome wires us to conform, to follow leaders and to lead. Most of us have all three traits, mixed into some order of priority. The instinct to follow, this “flocking” behavior, makes us want to be like everyone else. We don’t want to be weird or wear the wrong clothes. There are those of us who buck the big trends, like wearing a nose ring, but this usually puts us into a smaller sub-group, not a solo experience.
As our media bombards us with examples of (previously) aberrant behavior, many in our society have found new groups that make them feel “normal.” We see pro athletes who use steroids or HGH, so kids think it is the way to succeed. We see pop stars doing drugs, so kids think it is cool. We see our national leaders cheat on taxes and their spouses, so we think it is fine for the little guy. We’ve even seen sex become not sex.
When I grew up, we left our house unlocked. Keys were left in the car, sometimes overnight. Young kids played away from home unsupervised. Sure, homes were robbed, cars were stolen, and children abducted. But it wasn’t “normal.” Criminals didn’t see a constant barrage of like-minded criminals being talked about, or even celebrated.
This free flow of information has allowed everyone to break into smaller and smaller sub-groups. It has allowed previously “aberrant” behavior to be considered “normal,” and to become accepted.
Along the way, our morals have begun to bend, our laws have grown more lax, and our society has begun to break at its seams. If this continues for much longer, our society will grow closer and closer to anarchy, were crime goes unpunished, where crime becomes more and more normalized, and deviant behavior becomes the norm. The rights of the few will outweigh the rights of the many, because we all belong to some group of the few.
If we want to stop this gradual slide into the acceptance of cheating, immorality and the systematic trampling of individual rights (in the name of individual rights) we are going to have to begin holding our leaders and role models to higher standards of behavior. Our politicians will have to become good people, not good manipulators of the system. Our athletes will have to realize that the huge money they earn comes at a price. That price is responsibility, not to themselves, but to the children who follow their lead. Wall Street will have to stop rewarding the carnivores and promote the farmers.
If we don’t, I am afraid that the America we used to know, and even the society we know today, will seem like the days of innocence, something to look back on with nostalgia, and not something to emulate. God bless America, and please help us save her.
http://www.lumbert.com/
http://www.jaylumbert.com/
http://www.shaksperbooks.com/
What has happened to America? Have we become a nation of cheaters? Everywhere I look, I see people breaking the law with impunity and a clear conscience. “Everybody else is doing it…” we here from the cheaters. As if that makes it okay.
We are acting like teenagers, warping the truth into something we want it to be. Illegal aliens are needed in our society. Pedophiles must be understood, not punished. Drugs should be decriminalized because (name your reason).
I know that some laws are just stupid. Like that 55 MPH speed zone that should be 65 MPH, or having to stop for three full seconds at that stop sign when there is no one around. But things have grown out of whack.
The human genome wires us to conform, to follow leaders and to lead. Most of us have all three traits, mixed into some order of priority. The instinct to follow, this “flocking” behavior, makes us want to be like everyone else. We don’t want to be weird or wear the wrong clothes. There are those of us who buck the big trends, like wearing a nose ring, but this usually puts us into a smaller sub-group, not a solo experience.
As our media bombards us with examples of (previously) aberrant behavior, many in our society have found new groups that make them feel “normal.” We see pro athletes who use steroids or HGH, so kids think it is the way to succeed. We see pop stars doing drugs, so kids think it is cool. We see our national leaders cheat on taxes and their spouses, so we think it is fine for the little guy. We’ve even seen sex become not sex.
When I grew up, we left our house unlocked. Keys were left in the car, sometimes overnight. Young kids played away from home unsupervised. Sure, homes were robbed, cars were stolen, and children abducted. But it wasn’t “normal.” Criminals didn’t see a constant barrage of like-minded criminals being talked about, or even celebrated.
This free flow of information has allowed everyone to break into smaller and smaller sub-groups. It has allowed previously “aberrant” behavior to be considered “normal,” and to become accepted.
Along the way, our morals have begun to bend, our laws have grown more lax, and our society has begun to break at its seams. If this continues for much longer, our society will grow closer and closer to anarchy, were crime goes unpunished, where crime becomes more and more normalized, and deviant behavior becomes the norm. The rights of the few will outweigh the rights of the many, because we all belong to some group of the few.
If we want to stop this gradual slide into the acceptance of cheating, immorality and the systematic trampling of individual rights (in the name of individual rights) we are going to have to begin holding our leaders and role models to higher standards of behavior. Our politicians will have to become good people, not good manipulators of the system. Our athletes will have to realize that the huge money they earn comes at a price. That price is responsibility, not to themselves, but to the children who follow their lead. Wall Street will have to stop rewarding the carnivores and promote the farmers.
If we don’t, I am afraid that the America we used to know, and even the society we know today, will seem like the days of innocence, something to look back on with nostalgia, and not something to emulate. God bless America, and please help us save her.
http://www.lumbert.com/
http://www.jaylumbert.com/
http://www.shaksperbooks.com/
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