Friday, December 18, 2009

Merry Christmas

I lied. I had to write another blog before the end of the year, particularly because of what's going on in D.C. with TARP money.

Treasury guru and tax cheat Tim Geithner is proudly puffing his chest proclaiming victory, as bank after bank lines up at the door to pay back TARP funds they received earlier this year. After all, this prevented a meltdown of epoch proportion and saved us all from financial ruin. And banks have stepped to the plate by paying us back, right?

Hold on Timmy. Let's re-visit the whole TARP debacle in the first place.

Those funds were issued to save failing banks and prevent insolvency, so in that respect, yes, the financial system was saved. Additionally, consider the fact that the FDIC is unable to make good on the deposits at Citi, Wells or Bank of America should one of them collapse. In this sense, TARP prevented the treasury from having to loan the FDIC another $500 billion (adding to our debt, of course.)

However, TARP funds were explicitly given to stimulate the economy through one of two methods. Banks were supposed to use the money to LEND - both to businesses and consumers. That ain't happening. The other proposal was to have banks use the funds to write off the debts as bad debts and start from scratch. That isn't happening either. If you have any doubt, just see how many foreclosures are going on nationwide and business closing are occuring.

In short, banks aren't lending anymore today than they were a year ago.

Instead, banks used the funds to prop up their balance sheets, or in some instance (cough...cough... PNC) buy weaker banks at a 0% interest rate.

Now the banks are proudly stepping up to the plate to payback those funds! Yippee skippy! This is good, right?

Maybe not. The reason Citi, Wells and BOA are so happy to payback the TARP funds is because if they don't, they will have their compensation capped. (cue 'crickets chirping in background noise' here....)

Yep. We're passing legislation that caps compensation to firms that accepted TARP or TALF monies. So what is any good CEO and/or board of directors to do? Pay the damn loan back, that's what! Otherwise, bonuses become obsolete and second homes need to be sold, girlfriends need to be dumped and yachts need to be crashed into the rocks.

So Citi and others are paying at back. They're doing it, of course, by issuing more worthless shares of stock that for some reason, investors are purchasing. Can't anyone read a balance sheet anymore and realize that banks are supposed to make money by making loans? Think about it for a minute. If Krispy Kreme stops selling donuts, is their stock worth very much? So why would BOA, Wells, etc. be worth anything if they aren't making quality loans or they haven't written the bad loans off and basically started over?

The irony, of course, is that we still proclaim victory and that the banks are acting admirably. That's crap and everyone knows it. Tax payers gave them free money for a year and now that they are demanding retribution, the banks are more than ready to give something back to the community. Give me a break.

Please do me a personal favor this Christmas. Take a small sum out of your large bank (if they accepted govt. money) and place it in the local bank that actually knows your name and address - one that didn't accept funds from Tim Geithner. You know the one. The bank president probably sits next to you at church or your kids plays soccer with the VP of lending's kid on Saturday. Stick it to the big banks.

Now they want to take the extra $200 billion and create jobs. Here's a novel concept. Give it back to me and my buddies who fronted it in the first place. Best estimates show that about 150 million of us pay taxes annually. Split the $200 billion up and mail us each a check. That way all of us would get a NON-TAXABLE check for about $1300, or $2600 for a married couple. It's our money anyway. Imagine how far $2600 would go for your family. I know ours would enjoy a much merrier Christmas, as we'd... GASP.... SHOP. Stimulating the economy on our own without the help of D.C.

This is bad, folks. Even for a professor who is supposed to be enjoying his month vacation. My blood pressure is almost above normal which isn't good for a guy that's trying to be Jimmy Buffett.

Tuesday, December 1, 2009

Holiday Cheer

Just a brief update from the blog-o-sphere. I will be taking the month of December off to regroup (yeah, like I need THAT!)

In any case, you can always reach me via email or cell phone if you need me.

Happy holidays to everyone.


Monday, November 23, 2009

Let's See How Far We've Come

I confess. I'm a Matchbox Twenty kinda guy. You know the type - not real macho, but someone who likes a neat little hook, some guitar and inspiring lyrics. Thus the reason for the blog this week.

This past weekend I found myself in Washington, D.C. with the family and some friends. We did the whole sight-seeing thing (on our own since I used to live there and am not intimidated by the traffic, the trains, etc.)

Somewhere between the Lincoln Memorial, The Capitol Building and the Vietnam War Memorial I couldn't help but begin singing the words to "How Far We've Come" by Rob Thomas and the boys. If you aren't familiar with the lyrics, the chorus is pretty simple:

"let's see how far we've come, let's see how far we've come.... " The verses basically talk about wondering if things will get better, blah blah blah.

You get the point.

But standing in the elbow of the Vietnam War Memorial (the 'V' portion) and looking at the Washington Monument, The Capitol and Honest Abe, I really need to ask: Have we come far at all?

The Wall is amazingly simple, elegant and breathtaking. Total silence comforts strangers walking along the worn path as they examine row after row of names - all of whom died fighting the war. Flowers are left near names, a report card from a grandchild rests below the section containing a grandparent who never made it home and countless unopened letters line the walkway. It's humbling.

Somewhere we got lost.

Today we're a nation going backwards with no direction. Worse, I am going to argue that we have no leadership able to find our direction. In short, we are divided and I don't see anyone capable of stepping up to the plate who can motivate, inspire and act in the best interest of the majority any longer. That's called leading.

So I have to answer Matchbox Twenty's question "let's see how far we've come" by the only response I know:

We need to look in the rearview mirror often for guidance, even if we are attempting to lead forward. Otherwise, lessons will be forgotten and mean nothing. We haven't come far at all. In fact, we've drifted slowly backwards into somewhere I don't want to be now...or ever, for that matter.

Tuesday, November 3, 2009

Tax is a dirty word

Well it's official - the state of Pennsylvania LOVES to tax its residents. One type of resident, however, seems to pay more than others. That resident is one who participates in 'sins,' like drinking (Allegheny County has a special drink tax to fund public transportation) smoking (currently about $2.45 per pack in PA) and gambling. MAdditional legislation is being proposed in Pittsburgh to tax gambling profits more so that the city can balance the books.

One sin flies under the radar, however, and it's actually worth examining - pornography.

It certainly makes one stop and ask why, doesn't it? After all, we're more than happy to tax smokers until they are literally blue in the face, and taxing adult beverages hasn't hurt profits or the number of drinks ordered. Doesn't it stand to reason that our society's appetite for pornography would remain consistent even with additional taxes?

Come to think of it, doesn't it make sense that the adult entertainers might actually be required to pay a portion of their hourly rate and claim 'tip' income, similar to my favorite waitress at Susie Q's?

While I'm no proponent of paying taxes, this industry has gotten a free pass too long and instead of burdening industries that are already paying more than their fair share, like bars and restaurants, shouldn't another industry shoulder some responsibility? Particularly when that industry likely serves alcohol and allows smoking?

So why don't our legislators touch this proposal with a ten foot pole (pun intended?) Only Senator Jane Orie, a Republican from McCandless, has attempted to tackle the debate so far, and she is getting no traction whatsoever.

As a free market thinker, it seems to me that our legislators are sending a clear signal that rather than stimulate the economy with tax paying businesses like restaurants, casinos, service companies, etc., they are suggesting it makes better business sense to get into the pornography industry. After all, it's basically a tax free business that has proven to be recession-proof. What kind of message is this? The industry is likely responsible for as many marital conflicts as drinking problems, gambling problems, etc., so if that's the hurdle to be classified a 'sin,' pornography definitely fits the bill.

It's got to be more than that. Perhaps our legislators have friends that run in these circles and contribute to not only their personal campaigns, but their personal entertainment as well. Who knows.

In any case, this is actually one tax I'd support completely, as it would actually legitimize the business, its participants and those who enter the darkened-doors.

Tuesday, October 27, 2009

Oh behave!

Good news coming out of Washington! Apparently there is no inflation and things aren't costing more.

What? Does anyone in Washington purchase their own food, gasoline or healthcare? I forgot - those expenses are covered by lobbyists.

On a serious note, the CPI is down about 1.3% compared to a year ago, meaning that goods or services that cost you $10 a year ago now cost about $9.87. So what's the real story?

Behavior finance and economics suggests that most consumers feel pain more vividly than they feel joy. Basically, we like to avoid losing money more than we like making the same amount of money, even though 'old school' economics teaches us that consumers seek to maximize their pleasure, or 'utility.'

Former Wimbledon champion and tennis great Ivan Lendl perhaps said it best when he was quoted saying "I hate losing more than I like winning." Remember, this is coming from a guy who used to win all the time.

We drive around searching for gas that is $2.72 per gallon instead of $2.75, but won't cross the street for cheaper gas that's $2.08 instead of $2.11. Why? It's a better bargain in the second scenario, after all.

The applications for the economy are far-reaching. We see gas prices going up, but forget that they are down 30% from a year ago. That doesn't offset the 29% increase in prices of fuel over the past six months. We have short term memory, and the figures seem to support behavioral theory. Consider the following (yes, I'm keeping the math simple because it's early and my brain isn't working too well yet)

Assume that gas a year ago cost $3.00 per gallon. A 30% drop in fuel would mean that gas costs $2.10. WOW! That's signficiant. Oops. Now gas goes up 29%, resulting in a new cost of $2.71. Yikes! That hurts, even though it's still less than the original starting point of $3.00.

The same calculations can be applied to the stock market. Assume your retirement plan had $50,000 a year ago and the market lost 25%. You'd be down to $37,500. It takes a 35% gain this year to get back to square one. Sadly, this is what's been going on with investments the past two years, creating opposition to something called the wealth-effect. In short, if consumers feel wealthy (good returns on their 401k, appreciating values on their homes, lower unemployment figures, etc.) they are more likely to spend. There hasn't been much good news or even 'paper returns' to allow consumers to feel wealthy - even a nice return in the market the past six months.

To further support this 'behavioral stuff,' as my wife calls it, consider an even-money bet. Let's say I flip a coin and we bet $1. If it comes up heads, I win $1 from you. If it comes up tails, you win $1 from me. Easy enough? We know that most people would take the bet. What if I won two straight times? Three times in a row? How about four or five?

What if I make the bet $10 per flip, or even $50? At what point do you jump off and act out of 'fear' rather than rationality? We allow the dollar amount to skew our ability to judge. Don't worry, I'm guilty of this too. Studies have shown that when the bet goes to $100 per flip, most folks would demand payment of $160 if they win. I'm not about to take the other side of that bet anytime soon, by the way.

See what I mean? We're easily tricked by math and to be frank, it stinks. I fall for it all the time and I study this junk!

So sit back, relax and take consolation in the fact that you are paying less for things today than you were a year ago while you're driving around looking for the cheapest gas station around.

Thursday, October 15, 2009

Lining the litterbox with Time

I promised my doctor that I would keep my blood pressure in check, yet Time Magazine continues to get those numbers well above the 120 over 80 requirement.

In the most recent edition, Time suggests it's time to eliminate the 401(k) plan and instead, re-institute pension funds from corporations. The writer is Stephen Gandel, who apparently is not certain what direction to go. Please let me explain.

While Time is entitled to their opinion and Mr. Gandel entitled to his own, it seems to me that once your opinion is formulated and you've spent, oh, I don't know, twenty years or so writing about financial issues, you should have a pretty clear idea of where you stand.

Apparently Mr. Gandel has difficulty in that arena.

You see, he writes in the most recent article that the 401(k) has been a debacle, serving no one and simply creating fatter paychecks for executives. He attempts to site a simulation run by T. Rowe Price as an example of searching for an optimum portfolio, but doesn't give any clear indication of the results other than a fancy "most of the time the market goes up slightly. But some years - KAPOW - stocks and bonds do spectacularly poorly." Big word there, Mr. Gandel.

Especially coming from a guy that only three years ago suggested that 401(k) contributions were the smartest thing an individual consumer could make. That's right. Our beloved Gandel wrote that it would be wise to "contribute as much to your 401(k) that the employer will match." In short, he summarized a 401(k) contribution as a smart thing to do in an interview with

If you'd like to read his jibberish or need proof, please click here:

Please also note that he thinks sometimes we need to "trick people into investing." Lucky for us he's writing for Time, eh?

No, Mr. Gandel. The answer is the same as it's always been. Small, regular contributions to a self-directed retirement account, with most of the contributions going toward stocks and growth while one is young, and then gently moving toward bonds and money markets as one gets closer to retirement is the best bet. Always. Prove otherwise if you don't agree.

A simple rule of thumb to follow is put your age into bonds (as a perecentage.) For example, I am 40 in December (ouch) and should have 40% of my retirement contribution going toward bonds funds and others 'safe' investments. No more than 10% of my portfolio should have my company's stock in it, by the way.

I ask each of you to call Time (their email is down) and ask them to begin behaving like a real magazine rather than allowing some journalistic hack like Stephen Gandel change his spots "Time and Time" again. Pun intended.

Saturday, September 26, 2009

Answer truthfully.

Who can you name first, the Federal Reserve Chairman or Brad Pitt's wife?

That's what I thought. And while you're at it, why don't you take some time to explain to me the inner-working of the Federal Reserve system, like the number of branches it has, who the board of governors are and the primary role of the Federal Reserve. Psst. By the way, it is NOT the job of the Federal Reserve to insure your money at the bank. That's the FDIC, who we will mention later.

Not many Americans get beyond answering Angelina Jolie, by the way. Which is deliberate in design in my opinion.

After all, if you ran an organization that was created by Congress but wasn't responsible for opening its' books for audit, would you be in a hurry to make the organization well-known? That's exactly what are friends at the Federal Reserve are suggesting, by the way, when they appeared earlier this week in front of the House Financial Services Committee. The committee is suggesting the Federal Reserve open the books for an audit conducted by the GAO (General Accounting Office.) After all, it is our money and we would like to see exactly how it's being spent from time to time. And yes, I agree with Barney Frank on this one. Representative Frank is proposing this legislation.

The prevailing mentality seems to question what the Fed is hiding and why they don't want to open the books up for review by the very body that created their existence. Our friends at the Fed maintain the position that theirs "is a politically neutral position" and any dabbling in the books would have an adverse impact on the economy.

Psst. Excuse me, Mr. Bernake? Take a look around. The economy already is in shambles and by the way, I pay your salary and am your boss. Remember that Obama guy who re-appointed you? Yeah, well Joe Taxpayer voted him in and it's his job to make sure you're doing things right.

My thoughts? It's deeper than that. And at the risk of getting too technical, I'm going to tie-in previously mentioned FDIC (Federal Deposit Insurance Corporation) and our friend Shiela Bair. You're going to be hearing a lot from Sheila in the coming months, so I'd get used to hearing her name. She runs the FDIC, which is an insurance company in place that allows us to feel safe and secure knowing our money will be paid back to us if our bank should fail. The banks fund the insurance policy through their membership, and the organization was created in response to the great depression rush on the banks. Naturally the thought process was to avoid another run on banks when depositors felt unsure about their bank's stability.

Guess what, folks? They are running out of money at the FDIC. Sheila and her group had a balance of just over $45 billion in June of 2008 according to Fortune Magazine. As of close of business June of this year, the balance clung to about $10 billion. Gulp.

And with more banks set to fail (to date the FDIC has allowed 94 banks to fail this year and 25 last year) the FDIC is getting precariously close to the edge of needing it's own bailout. By the way, the FDIC has a list of over 400 troubled banks that could go under at any minute.

Shazam! Flash back to our friend Ben and his merry men at the Federal Reserve Board. The Fed has extended an open line of credit for up to $100 billion to the FDIC in case of emergency (think of it like a Visa card for you and a credit line of $1 million.) Additionally, new legislation passed this year allows the FDIC to hit that line for up to $500 billion in an extreme emergency. This is the same Fed that gave bailout funds, er, I mean TARP funds to banks like PNC so that they could buyout ailing banks at a 5% rate. Banks like National City, who otherwise would have already imploded and further hit the FDIC wallet, further reducing that $10 billion balance. Odds are good there's another bank of significance on the brink (Cough Cough... Citi....)

So back to our beginning question and resulting debate: Why is the Federal Reserve really afraid of opening up its' books and allowing the General Accounting Office to take a peek under the hood? Could it really be to avoid political bias, or could it be more a reason of fear. Fear that there is no oil in the engine, the battery is dead, the brake lines have been cut, the transmission is leaking and oh yeah, by the way, it's out of windshield wiper fluid too. I propose the latter.

One final note to ponder, and then I'll let you go this fine morning. The Federal Reserve raises funds through auctions of Treasury Bills and notes, also known as DEBT. You issue debt when you don't have enough money to meet short-term expenses. Joe Taxpayer is footing the bill for this.

Let the banks implode. Get rid of the Federal Reserve and let the FDIC figure it's own way out of this one. Enough of the fiscal parenting for lousy monetary policies. Let's get back to basics and provide budgets that are real and attainable and a government that is there to merely implement the will of the people.

I can't believe I actually agree with Barney Frank!