What Just Happened? (and do I care?)

Talk about high drama on Wall Street. I don't even know where to begin. Normally when large established companies start to tank, they are gobbled up by healthier companies. They don't just fail.

The Economist's Nightmare on Wall Street has a pretty succinct recap.

EVEN by the standards of the worst financial crisis for at least a generation, the events of Sunday September 14th and the day before were extraordinary. The weekend began with hopes that a deal could be struck, with or without government backing, to save Lehman Brothers, America’s fourth-largest investment bank. Early Monday morning Lehman filed for Chapter 11 bankruptcy protection. It has more than $613 billion of debt.

Other vulnerable financial giants scrambled to sell themselves or raise enough capital to stave off a similar fate. Merrill Lynch, the third-biggest investment bank, sold itself to Bank of America (BofA), an erstwhile Lehman suitor, in a $50 billion all-stock deal. American International Group (AIG) brought forward a potentially life-saving overhaul and went cap-in-hand to the Federal Reserve. But its shares also slumped on Monday.

Then, of course, the Fed bailed out AIG with an $85 Billion Loan Rescue.

I have read thousands of words this past week that relate to derivatives and credit default swaps, and I regret to inform you I still don't know what they are. Although the Globe and Mail did a decent job that my brain understood for a few seconds what was what, as does the NYT's The F.A.Q.’s of Lehman and A.I.G..

So what's a person, a little person with piggybank blues, supposed to do? I'm not talking about desk jockeys on Wall Street (that's more like Fort Knox blues...), I'm talking about grad students, people who work for non-profits, freelancers, baby white collars, artists, the just-trying-to-get-by-ers: people who may or may not have even heard of AIG before Monday and couldn't tell a CDS from an MP3, but certainly understand that this is ass-backwards socialism and a free-marketeer f*ck up.

Well, first things first, check the IRA!

Morningstar has a nifty little list in Lehman, AIG, Merrill: Which Funds Are Most Affected?. Fidelity pops up a few times. Most of my Roth is with T. Rowe Price, so I called them. The lady was nice. My list was Lehman, AIG, and Merrill and she had the foresight to add Washington Mutual. So-called Lifecycle or Retirement Funds, a mutual fund that is a basket of funds whose allocation and risk are tied the year you want to retire (so my Roth is in a fund called Retirement 2040), probably have a little of one of those troubled companies. In my case a couple funds own less than 1% of AIG and WaMu. And here's where diversification actually works. Even if two of my funds own less than 1% of those sickly companies, that's two out of, say ten, mutual funds in the Retirement 2040 fund. Morningstar also has an article on Funds Exposed to Other Dangerous Financials. A few posts ago I said I was selling a fund and buying stock instead, well the fund was Oakmark Select and they're cited in the article as owning 3.47% of Morgan Stanley. So I say, call the toll free number of all your mutual funds and ask them just how much you own of Lehman, Merrill, AIG, and whatever major US company happens to be on the brink of failure that day. They've already heard the question a million times, and they'll be more than happy to tell you the answer. Some, such as TIAA-CREF's open letter to shareholders simply tell you what's what on their website.

Another thing people are worried about are the "safe assets", like money market funds. Lots of money market funds buy things like the debt of a nice big cozy company called AIG. A money market fund is no savings account, even though people use it for a similar purpose- to safely stash some cash. A money market fund is a fund with shares, ideally trying to stay above a dollar per share. If money market funds dipped below a buck a share, then it's time for the little guys like us to worry. Buy stuff on eBay? Your money might be sitting in PayPal's money market fund. Have an online brokerage account? Your extra cash might be sitting in a money market fund. Or maybe you actually do have a significant chunk of change in a money market fund because they historically perform better than savings accounts and are supposedly "just as safe". They're probably fine, but I'd still move something like an emergency fund from a money market to a savings account if that's what I had. And two friends of mine just sold their apartment and need to stash a fair amount of money for an indeterminate amount of time, but not long term. For large account holders I would check out Your Cash: How Safe Is Safe? for a better handle on your options.

So that's all. Call your mutual fund companies, know what your risk exposure is and sleep easy. And hope you don't have to retire in 2009. Other than that, I'm going back to trying to figure out just what's really on sale in the stock market to buy, and what's just a financial flotilla of garbage.

A Middle Finger to the American Savers

First, I would like to congratulate myself on two posts in two days. After a year of blogging, I realized that even my virtual free association on economic matters needs to take some time off every now and then. I sense that the blogging vacation is officially over, so back to work I go.

Business Week's article, Why American Savers Have Drawn the Short Straw tells us what we already know; sucks to be us. And by us I mean the savers, today's white unicorn.

Presumably right about now it's the savers who should be rewarded. We lived within our means and ignored the white noise of those big bad institutions who were trying to get us snookered into their own profit making scheme. We paid down/off credit card debt instead of punting it to the moon. We put a little away for retirement, for a rainy day, for a future purchase to be paid in full. And now when everything comes tumbling down, we should be basking in our glory, the proud but silent collective I told you so!

Fat chance.

Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.

Since August of last year, the Federal Reserve has slashed interest rates from 5.25% to 2.00%—wielding a blunt instrument that was swung enough to bend the yield curve in favor of suffering banks. You know, the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits that they can loan out at several points higher.

My ING savings accounts are certainly not keeping up with inflation. I've tapered off what I save to the bare bones because things like groceries and gas are taking a noticeably bigger bite out of my monthly budget. And my Roth IRA is losing money as fast as I'm putting it in. So when I read this morning's WSJ headline announcing that the Federal government is taking over Fannie and Freddie, I'm having an apoplectic seizure in front of my laptop. Sure, I'm a just little guy (or gal, as it would be), my piddling savings isn't propping up nearly half of the outstanding mortgages in this country (like Fannie and Freddie, in case you were wondering why they get the bailout). But seriously. Moral Hazard anyone?

Moral Hazard is a term economists like to banter about; it basically means that if you don't hold companies in check, they think they can do whatever the heck they want. And they do. And the bailout of Fannie and Freddie, and previously Bear Stearns, pretty much fits the bill of creating a moral hazard. Joseph Stiglitz did an outstanding job of breaking down Fannie and Freddie's moral hazard in a recent article for the Financial Times.

Defenders of the bail-out argue that these institutions are too big to be allowed to fail. If that is the case, the government had a responsibility to regulate them so that they would not fail. No insurance company would provide fire insurance without demanding adequate sprinklers; none would leave it to “self-regulation”. But that is what we have done with the financial system.

Even if they are too big to fail, they are not too big to be reorganised. In effect, the administration is indeed proposing a form of financial reorganisation, but one that does not meet the basic tenets of what should constitute such a publicly sponsored scheme.

First, it should be fully transparent, with taxpayers knowing the risks they have assumed and how much has been given to the shareholders and bondholders being bailed out.

Second, there should be full accountability. Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.

Finally, taxpayers should be com­pensated for the risks they face. The greater the risks, the greater the compensation.

All of these principles were violated in the Bear Stearns bail-out...

But the proposed bail-out of Fannie Mae and Freddie Mac makes that of Bear Stearns look like a model of good governance. It sets an example for other countries of what not to do. The same administration that failed to regulate, then seemed enthusiastic about the Bear Stearns bail-out, is now asking the American people to write a blank cheque. They say: “Trust us.” Yes, we can trust the administration – to give the taxpayers another raw deal.

So, I would like my bailout, please. I would like the consumer savings account to have its own interest rate, and I would like it to be at least 1% higher than the rate of inflation. I'm sure this would cause all sorts of problems for Fannie and Freddie, and I'm sure that it is a suggestion only an economic neophyte could make. But think of it this way. Maybe American savers can bail out America, instead of China doing it for us. If only you'd stop giving us the middle finger.

Concisely Painful Economic Forecast

I'm sure it'll be blogged to death, but the NY Times' Uncomfortable Answers to Questions on the Economy is really, really good. And not in its positive outlook, but in its format. Simple questions, concise yet broad answers. What the average person really wants to know about what the hell is going on out there, but was afraid to ask.

Is This a Recession? Who knew some private institution was the semantic god of the big "R" word, no wonder economists are arguing over are we or aren't we ad nauseum. So the Economic Bureau of Economic Research says no, most others say yes. The article breaks down why.

How Bad is Housing? The article is fantastic when it talks about housing. They break it down, and the gravitational free fall isn't over yet. Economists expect another 10-15% drop in housing prices, and there's currently enough homes on the market to satisfy 2+ years of demand, without ever having to build another. I'm no real estate guru, but that sucks tailpipe.

When Will Banks Revive? $300 billion in write offs with an expected ceiling of $1 trillion. Those numbers are so off the charts they mean nothing to me. Other than someone made a $h*tload of money f@ck*ng up. Again, the article does a short and sweet breakdown, but you read stuff like that and you just want to go out and kick some banker butt.

Is My Job Safe? It aint over 'til the fat lady sings, and she's not even warming up yet. We're workers in an economic Jenga, and pile that on with wallet busting gas prices, 5% overall inflation, lower wages-- it's a bleak picture. That said, "only" a few hundred thousand more workers will lose their jobs. “In every dimension, people are worse off than they were,” said Mr. Roubini, the New York University economist. In a market of millions, cross your fingers and hope your job has nothing to do with the housing market.

Are Consumers Done? and the last question, an American favorite, Who's to Blame? This is the part that's horrifying. Consumer spending counts for nearly 70% of all economic activity. Are ya kidding me?? My take is, you can't have your cake and eat it too. I don't care where you got your MBA from. You can't feed the American consumer indigestible food, watch them puke it up, and blame them for the mess. Look, obviously as a PF blogger I have my issues with those who spend beyond their means. But get real. The blame goes high and low, and pretty much nobody is unscathed. And that's the part of the article most painful. Yes, we all did this to ourselves, but we sure had some help along the way.

The Multi-Class Squeeze Economy

Last week M bought some groceries and came back flabbergasted at the prices. And last night we ordered some take out from a taqueria, and on the walk over we passed an empty Blue Ribbon and Stone Park and the cheap Mexican joint was packed. You know it's bad when the fancier places are unusually empty, and the cheap eats places are hopping. Welcome to the universal economic squeeze.

CNN Money has an interesting take on it in Making a good living, but still feeling strapped.

Hoyt of Economy.com argues that every income strata is feeling it. The wealthy are hurting from the roiling stock market, the middle class from falling home prices and working folks from rising prices.

Food prices, for instance, climbed 5.1% over the past 12 months and April's 0.9% rise was the largest in 18 years, according to the Consumer Price Index. Gas, meanwhile, hit its highest recorded price of $3.937 on Monday, up nearly 21% from a year ago and 9.7% over the past month, according to AAA.

That's right, last month's food prices spike was the highest in eighteen years. Egads.

The interesting thing about the economy is the point of departure between consumer perception and the perception of the economists. Consumers are pretty much freaking out (one man in the article points out that he didn't mind penny pinching to send his kids to college, but not to buy eggs), while the economists are mucking about the statistical wash of price indexes and the increase or decrease of important numbers. Basically, I don't think we're walking around thinking are we or are we not in a recession. Sure, I know the debatable criteria for real economic recession, but I also know that my place in the economic food chain is in a steep recession. And I'm not the only one.

Suddenly, people who aren't used to looking at certain bills are getting shocked from their eye sockets to their pockets. I mean, I looked at my bill from the Associated supermarket, but not like I do now. I'm running around the apartment turning off random lights. And I think that I finally might just put a dent on that lifelong project of eating down the pantry.

What does this mean for the larger economy? I don't know, but for now I think the war of perception is being won by us, the consumer.

photo by caseyhelbing via flickr

Shop 'til you Drop- A Lesson in Math

Barbara Ehrenreich's article at The Nation, The Fall of the American Consumer, is a requiem for the world's number one economic piston.

While Americans search for interview outfits in consignment stores and switch from Whole Foods to Wal-Mart for sustenance, the world watches tremulously. The Australian Courier-Mail, for example, warns of an economic "pandemic" if Americans cut back any further, since we are responsible for $9 trillion a year in spending, compared to a puny $1 trillion for the one billion-strong Chinese. Yes, we have been the world's designated shoppers, and, if we fall down on the job, we take the global economy with us.

Wow, nine trillion dollars. Let's hazard a guess and say there are approximately 217 million Americans 19 and older. That's an average of $41,475 in spending per year per adult; that's a lot of spending. Of course, it's not an accurate illustration for obvious reasons (adjust the number for age and class), but nine trillion is too hard a number to comprehend. Our consumer spending is about 70% of our GDP, a standard measure of the size of an economy.

GDP = consumption + gross investment + government spending + (exports − imports), or,
GDP = C + I + G + (X-M)

Don't say I never told you nothin'!

Well, patriot that I am, I'm going to an outlet mall with a friend on Tuesday :)

The American Euro

Clive Cook has an article over at The Atlantic, The End of the American Exception, that takes a look at how America (the US, sorry Mexico and Canada) is becoming more and more like Europe.

He concentrates first on universal health care, something that seems to have been standard in Europe since Madame LaFarge stopped knitting.

"Europe" is a gross simplification, so think about Britain—which continental Europe regards as a mid-Atlantic offshoot of the United States—and, say, the Netherlands. U.S. taxes are 27 percent of national income, British taxes are 37 percent, and the Netherlands' are 39 percent. Recall that America spends fully 10 percentage points of national income more than Britain on health care, public and private combined. Suppose the bulk of the existing costs of U.S. health care eventually migrated to the public sector, and nothing else changed, American taxes would have to approach or exceed British and Dutch levels.

It's a short article, but he goes on to compare unions (noting that one just shut down Hollywood and the television industry for months, something that a European union wouldn't have the power to do) and regulation (noting that Sarbanes Oxley is the most stringent in the world).

As both Europe and the US approach the center, he calls an end to the idea of "American economic exception"-- something I think is a little premature. American capitalism will always be the nexus of nationwide social policy; basically, if it doesn't effect big business, it has a chance, but if it does- prepare for a long fight and maybe even death. However, like our democracy, I think the whole point of America is to move to the center. But maybe I'm being naive. I still think it's apples and oranges. America just has a long historical march towards its ideals, and its institutions are slow to follow.

I will say this, the dollar has certainly plummeted into a reversal of US-European roles!

cool map courtesy of Bill Rankin at Radical Cartography

Economy Sheds Employment Numbers

For the very few left in the back seat saying Are we there yet? regarding a recession, this morning the government released a bleak jobs report. In the Times' report, Economy lost 63,000 Jobs in February, an economist said, "I haven't seen a job report this recessionary since the last recession."

The private sector lost 101,000 jobs last month, the biggest drop-off in five years. Retail, construction and factory jobs were hit hardest.

...Wages grew more slowly, further depressing the outlook for consumer spending over the next few months. Among rank-and-file workers — more than 80 percent of the work force — average pay grew just 0.3 percent to $17.20 an hour. Wages are effectively running flat when adjusted for inflation.

News travels fast. The dollar has already dropped against the Euro even more, creeping to $1.5459 per euro.

For people in the restaurant biz, it's a mixed bag. I was at Gotham Bar & Grill for lunch the other day (business meeting, not on my weakened dime), and it was dead. I'm sure, however, they are busy for dinner. The Chinatown hand pulled noodle shop under the Manhattan Bridge, however, was packed for lunch yesterday. Uniqlo, the Japanese clothing retaliler on Broadway, was dead. The streets of Lower Manhattan? Filled with European tourists. I'd be interested to see how this will pan out in the city. The true test will be how long the wait is tonight at Lombardi's. I'll keep you posted.

Dear Foreign Investors- We're on Sale!

In today's NY Times there is a great article-- Overseas Investors Buy Aggressively in U.S.

For much of the world, the United States is now on sale at discount prices. With credit tight, unemployment growing and worries mounting about a potential recession, American business and government leaders are courting foreign money to keep the economy growing. Foreign investors are buying aggressively, taking advantage of American duress and a weak dollar to snap up what many see as bargains, while making inroads to the world’s largest market.

We're talking huge sums here, last year alone was $414 billion, or a quarter of "all announced deals". Frankly, I think it's globalizations karmic retribution that's kicking us in the pants right now, and thank god because clearly our economy needs money from somewhere. After years of American companies snapping up factories, labor, and land in currency depressed nations, the world is returning the favor. And in economic irony- NAFTA, that trade agreement that allowed the US to bum rush Canadian and Mexican markets with it's big bad dollar and superpower-like economy, is now luring foreign investors into our market. If they own our companies, they enjoy the same open trade borders.

I wrote about sovereign welath funds a while ago, and certainly there is a ton of this foreign government investment vehicle in the mix, but it is not the majority of the money. The article refers to it as a trickle. Still, the nationality of foreign investors can ruffle some Buy American feathers. In an attached multi media graphic, the top spenders in announced mergers and acquisitions last year were (in descending order) Canada, Britain, Australia, Spain, Germany. The UAE follows, then Saudi Arabia, with China ranked 14- all of whom invested significantly less than the top three. The bruhaha about these three countries may be that in 2000 they were not even on the charts.

For many, it is a complicated pill to swallow.

Five million Americans now work for foreign companies set up in the United States, Mr. Kimmitt said, and those jobs pay 30 percent more than similar work at domestic companies. Nearly a third of such jobs are in manufacturing, which explains why Rust Belt states have been wooing foreign investment.

“We’ve lost 400,000 manufacturing jobs,” said Michigan’s governor, Jennifer M. Granholm, a Democrat, who has traveled three times to Europe and twice to Japan in pursuit of investment since taking office in 2003. “I’ve got to get jobs for our people.”

Some labor unions see the acceleration of foreign takeovers as the latest indignity wrought by globalization.

“It’s the culmination of a series of fool’s errands,” said Leo W. Gerard, international president of the United Steelworkers. “We’ve hollowed out our industrial base and run up this massive trade deficit, and now the countries that have built the deficits are coming back to buy up our assets. It’s like spitting in your face.”

Given the state of our economy, this level of foreign investment will only rise. The fact is, we need the money, and it's a prudent long term investment for them. They're buying blue chip companies in a blue chip market at a seriously steep discount. And honestly, it doesn't bother me. What does bother me are the economic and political forces that tanked our economy to begin with. And for that, the US has nobody to blame but itself.

NASA photo by TopTechWriter.US' via flickr

Riding Out a Recession

Uh oh, the R word is upon us. The economy has been like sixth grade dodgeball class for a while now, and we just got smacked hard.

Today Merrill Lynch just reportedly lost 9.8 billion dollars. This is a few days after Citibank stunned us with their own loss of 9.83 billion dollars.

What is more shocking than the loss is the bad write offs. You see, the loss in profits is offset by, well, their profits. Kind of like when we do a net worth and save a hundred dollars but lose a hundred and fifty bucks in the stock market. The loss is only fifty bucks on paper, but our wallet is screaming dude, you just lost me a hundred and fifty bucks!

"Citigroup's record loss was caused by write-downs from soured mortgage-related securities and reserves for current and future bad loans totaling $23.2 billion. Responding to a string of dismal quarters, the bank said it would also lay off another 4,000 workers, on top of announced reductions of 17,000 employees, and cut its dividend to conserve $4.4 billion cash annually."

Maybe it's the Rust Belt girl in me, but when money factories are laying off workers and bleeding cash from a severed artery, the recession is on. So what's one to do to ride out the storm?

Jean Chatzky's Eight Ways to Ride out a Recession is a great way to start. Forbes also has a multimedia 11 Steps to Weather a Recession. Both are short and sweet, and a reminder not to panic. After reading much of the suggestions, it's really the same as any other time. Pay down your debt, build an emergency fund, and reign in spending. It's just that our interest rates got mugged, our net worth is walking the plank, the job market might be a little hairy, and lots of people in suits will be on TV stern faced and frowning when throwing out very big numbers regarding very big companies. While distressing to some, it doesn't control how much we spend and how much we save. Unless, of course, you get laid off.

I'm no economist, but I have to say this recession in particular is pissing me off. Fancy pants with MBAs and bonuses the size of a small nation's GDP found a way to make a $hitload of money off of, frankly, moronic number crunching, and the banks and rating agencies all went along with the scheme. So now we get to ride out the storm slowly plugging along, and they get bailouts from Asia and the Middle East to the tune of 59 billion. Sigh.

But back to not panicking. Help (ie a stimulus package) may be on the way. In the meantime, hold on tight. Because as Money magazine's Riding out a Recession reminds us, most recessions don't last a long time.

photo by Mr. Wright via flickr

The Economic Cost of Political Apathy

The other evening I was at a dinner with someone we'll call Ramona. Ramona is an old friend of mine who just had a baby, lives in Connecticut in a McMansion, husband is a partner at a midtown law firm, and she is by all accounts, not the least of which my own, a really nice person. She is fun, kind, and down to earth. I like Ramona a lot. The after-dinner conversation turned to the next Presidential election. Ramona is a lively conversationalist, so her sudden silence was noticeable. Afterwards, M was commenting that Ramona, for all of her good intentions and glowing reports of purging her closets every season for clothes that would fit the starving folks in Africa, was probably going to vote Republican. M couldn't understand it, and wished she could connect the dots for Ramona.

I come from an Upstate NY blue collar lifelong Republican family, so I understood it only too well. Connecting the dots for the self-interested voter is virtually impossible. And voting for your own self-interest is, I think, a debilitating casualty of political apathy. For the record, I like to declare myself a Social Capitalist, though M insists that such a thing doesn't exist and how could I even put those two words together. I think she's coming around, though :) So yes, once in my short-ish lifetime I voted Republican (a local election). That would be the time I didn't vote for my self-interest, but for the long term benefit of the city I live in. While it has meant that I haven't been happy regarding a lot of stuff, it also means that my city is solvent post September 11th, 2001. I divulge this info just to be clear that, despite my left wing name tag, I'm not a thoughtless partisan that mechanically votes.

This is what I think: If you live in a leafy suburb where there is no class diversity, no cultural diversity, nothing but a mirror of your very own lifestyle, class, and more often than not, color, then political apathy becomes tantamount to blindness. Throwing more money at the problem of public schools seems unnecessary (despite the amount of school tax your wealthy enclave pays), because, quite frankly, your schools work great(!) under No Child Left Behind. When you go and vote at your nearby public school, you aren't reminded of the architecture of a federal prison, nor are your children targeted to end up in one. Your neighbor is financially stable, as is your neighbor's neighbor, and subprime mortgages were never even thrust upon you when you bought your home. Nobody from your town is in Iraq or Afghanistan, but you have a yellow ribbon magnet on all three of your cars. Being patriotic is in and of itself concern for others. And since you own three cars for two drivers, the federal funding for public transportation seems just fine to you. You are a good person, so poverty is most assuredly not your fault, and therefore not your problem. America is safe and great, just look around you. And boy would it hurt if your tax cut was reversed.

The cruel starkness of wealth and poverty in New York City is hard to ignore, but people do. Connecting the dots for people is hard no matter where or how they live. I love my family, their Republicaness and all, and I grew up at a dinner table where three generations (I grew up in my grandparents home) would disagree with me. What is most striking is that my family is the opposite of Ramona. They were, until quite recently (thank god for pensions), the working poor. Everytime Reagan announced the new poverty line, my mom would quip, "Well, we missed it again!" And yet, like Ramona, they believe in The American Dream, whose power seems to hold sway to those who are living it and those who aren't. I learned very early on that I am not smart enough or articulate enough to help them see that who they vote for is hurting their very own self-interest. Because really, if I cannot pin national interest unto the lapel of self-interest, then I have lost their attention.

Speaking of attention, I've gone and probably lost yours! So I brought you this long-ass-never-ending post because I just read a great article that just might help me the next time I sit down with my family for tuna fish casserole. Joseph E. Stiglitz, the Nobel Prize winning economist and best selling author of Making Globalization Work and Globalization and its Discontents, wrote a piece in the latest Vanity Fair- The Economic Consequences of Mr. Bush. It is a little long, and one may or may not get it all, but if ever there was a time to connect the dots, this would be it.

photo by QXZ via flickr

The Federal Reserve, What Is It Good For!

I was reading the headlines this morning, and I can save you the trouble of doing so yourself. Economically speaking, it's all in the crapper. Dollar disappoints, growth will be slower than expected (and you can be assured those expectations weren't exactly Himalayan), various big companies report disappointing earnings, another bank is feeling the pain of sub-prime mortgage hangover, and the Fed is doing this and that. Which got me thinking, what exactly does the Fed do and why does everyone care so much?

Okay, so I know a vague answer. But not enough to post on it, so I thought I'd take a stab at it. And hours of online research later, here we go... The US Federal Reserve was started by my buddy, historically speaking, Alexander Hamilton. You gotta love a guy that was an orphan and an immigrant (just like me!), a born-out-of-wedlock leading architect for both the US Constitution and the US economy, a Revolutionary War hero who fought alongside George Washington at a time when wars were fought with bayonets, and a New Yorker with a gun and a slow draw at an inconvenient time. Nevermind the fact that the Federalist Papers are nothing to sneeze at. I bring up Hamilton because the beginnings point to the present.

The American Revolution was largely fought over economic reasons, one of which was the right of the colonies to print their own currency (denied). To say that after the American Revolution the economy was in shambles is putting it lightly. To fight the war, practically starving minutemen were robbing and stealing from households as they marched along. The war was financed by the printing of Continentals, and to keep up with expenses they just kept printing and printing like the Energizer bunny. By the end of the war a Continental was worth one thousandth of its nominal value. It's like leaving home to go shopping with a thousand dollars in your pocket, and by the time you get ready to pay it's magically been reduced to a one dollar bill. The chaos between creditors and lenders was more than dramatic, it was often violent. During colonial times, actual British currency was scarce (hence wampum and certificates for tabacco), the Spanish peso was widespread, and after the flood of Continentals it was all a mess. The US Federal Reserve was created to bring peace and harmony to an economic mudslide. It is a role it competes for to this day.

The Federal Reserve is the central banking system of the United States, who first and foremost directs the traffic of money flow. And here's the part where you can lose interest. So let's talk about the here and now.

Open market operations- If the Fed sells US Treasury bonds, people like your grandma will buy a bond and for the next fifty years, or however long it takes you to find where you hid it, that money she handed over to the gov't for your bond is out of circulation. This would help curb inflation's enthusiasm. The formula goes like this, when the Fed buys government securities (ie you finally found Grandma's bond and want to cash it in) it is putting money into circulation, so there's more money around, interest rates go down, and more money is borrowed and spent. The reverse- when the Fed sells a bond to your grandma, Grandma's money is taken out of circulation, interest rates go up so it's harder to borrow money and spend. Substitute Grandma's bonds with China's US Treasuries, and we're talking our entire federal budget for years on end. In other words, some unfathomable amounts of currency are put in and out of circulation.

The alteration of reserve requirements. Yikes, there's a mouthful! The Fed decides what percentage of a bank's (ie Citibank) deposits must be held in reserve at a Federal Bank (there are 12 scattered around the country). The percentage only applies to transaction accounts, like your checking account, not savings and time deposits (CDs). The reserve requirement is currently 10% for big banks- so again it is a way to remove money from circulation, which theoretically means lower inflation. I say theoretically because banks can pay the Fed a premium to borrow the reserves it needs, but that's another story.

And most famously, the Fed decides key interest rates. I won't get into them all because my poor brain is tired by now (and hooray to you for reading this far!), but the most famous one is the recent spotlight hog, the nominal federal funds rate. Remember that previous 10% I mentioned? Private banks lend money to to each other, yes it's just a one night stand, and it's that interest rate that has everyone's panties in a jam. Which is why you hear phrases like key short term interest rate that impacts consumer loans.

So what's the big deal? Well, if you lower the rate at which a consumer can borrow money you supposedly let us all go hog wild and shop until we drop. Which is exactly what we've seem to have done (that would be the headlines about consumer spending slowing down). The other thing, banks make big money loaning each other money overnight. And you thought it was your direct deposits. So when things like "credit crunch" and "liquidity fears" are tossed around, you better believe that the rate at which they can borrow money is important.

So that's the long and the not at all short of it. Now you know why the news just says "The Fed lowered the interest rate"! There are much more informed individuals out there who can wax mathematical poetic on the rate cut (feel free to chime in), and there's plenty of basics I still don't get. But with an unkempt economy, any action of the Federal Reserve is both an ongoing discussion and, apparently, a lesson for me in economics.

Business Leans Left

The front page of todays WSJ has an interesting article, "GOP Is Losing Grip On Core Business Vote". The stronghold Republican business base is leaning Democrat, and that has potentially huge implications for the upcoming Presidential election.

Between the current administration's handling of the war in Iraq, the yawning federal budget deficit, the avalanche of employee health care costs on businesses, the inevitability of global warming and the potential new business opportunities available, and the stranglehold of social conservatives over the party's agenda that many in business disagree with, and top that with Greenspan's recent spanking of the Republicans, and you've got yourself a compelling read. Some highlights:

In the Wall Street Journal/NBC News poll in September, 37% of professionals and managers identify themselves as Republican or leaning Republican, down from 44% three years ago.

Federal campaign-finance reports document shifting support in some quarters of the business community. Hedge funds last year gave 77% of their contributions in congressional races to Democrats, up from 71% during the 2004 election, according to the Center for Responsive Politics, a nonpartisan analyst of campaign finances. Last year the securities industry gave 45% of its money to Republicans, down from 58% in 1996, the center said.

Some intraparty tension is rooted in cultural differences. Social conservatives tend to be relatively lower-income, less educated, concentrated in the South and West, and newer to the party than many old-line Republicans of an economic or business bent. Each blames the other for the party's current state -- often employing pejoratives such as "Bible-thumpers" or "country-club Republicans."

Bubble? What Bubble?

New Yorkers like to think that they are immune to the housing bubble bursting because, well, quite frankly, have you looked at the cost of a two bedroom co-op in Brooklyn? But for those who are really paying attention beyond the affordability of half a million dollars and still not enough closet space, it's not about if the bubble will burst, it's about how painful it will be. And if you rent? There's no bubble because there's no space. Rents climbed 7.2% last year. Make nice with your landlord.

This week's New York Magazine's cover asks The $1,333,316 Question: How Long Before Our Real Estate Bubble Pops? What's with the price tag, you say? Well, that's the average sale price of all co-ops and condos and Manhattan, so you'll forgive us for choking on our leftovers, but for those with PiggyBankBlues that's a little too Lifestyles of the Rich and Famous. The article goes on to break down the risk factor expensive neighborhood by expensive neighborhood (it is real estate obsessed New York Magazine, after all). Williamsburgh prices are down by almost 10 percent, Bed-Stuy/Bushwick has 225 properties on the auction block, while Park Slope has zero.

"But brownstone Brooklyn’s real hedge comes from its mix. Park Slope and its ilk are home to a highly mixed demographic, with bankers next to teachers next to Safran Foers, notes Corcoran’s Deborah Rieders. That lends stability if, say, financial-industry bonuses go south next year. The locals are also stable in another way: Though plenty of residents cashed out during the recent run-up, many more have been here a while, which means not everyone bought at the top. In other Brooklyn hot spots, Gallant says, quite a few recent buyers could soon “wake up and say, What was I thinking?” (The wild card, of course, is Atlantic Yards. If 6,000 apartments are slammed into the neighborhood in a few years, they’ll play havoc with both the area’s makeup and its supply-and-demand equations.) The danger zones are likely to be areas that have glommed onto the cachet of these old reliables, where asking prices may be overreaching: the bottom edge of the Slope, say, or the fringe where Carroll Gardens fades into Red Hook."

* photo of David Blaine at the Lincoln Center by Knut Vidar Siem

Count Me In!

The NY Times headlines blares "4-Year Growth in Jobs Ends; Stocks Plunge". Considering I'm unemployed, I'm not suprised. Which reminds me, I better go study for my proofreader's exam :(

Things like job growth numbers, the Fed's interest rate dance-a-thon, and the peaks and valleys of the Dow Jones might sail over some heads like a disinterested breeze, but everybody who is trying to get their financial footing needs to be aware of what's going on. Even if you just get the gist of the effect. Which today might be- Buy some shares of the Dow Jones (DJI) in your Roth IRA, everything on sale, one day only!

For a lighter read, Barbara Ehrenreich, of Nickel and Dimed fame, wrote a scathing commentary, "Welcome to Fleece U". Please pass along to your favorite collegian, or at the very least read for your own special i'm-laughing-out-loud-but-crying-on-the-inside afternoon diversion.

Sovereign Wealth Funds

I have long assumed that foreign governments use their trillions of US dollar currrency to buy our debt. China (whom the US consumer throws dollars at like money really does grow on trees) buys approximately one billion dollars of US treasury bills a day. However, this morning I was reading an article online by Joshua Kurlantzick that detailed what he referred to as "the next big market catastrophe"- sovereign wealth funds.

Governments have piles of US dollars and US consumers pretty much drive the world economy. Our voracious appetite for objects and oil is not going anywhere. When we buy goods in US dollars, foreign companies, and therefore banks and therefore governments, then have trillions of US dollars that are worthless as is. So they invest it. US treasury bills are issued by our government to pay for the things we can't/won't afford. They are secure and have various interest rates. Not high, but high enough that interest on a few trillion dollars worth will fund your own government quite nicely.

Sovereign-wealth funds, however, are using their monetary reserves to buy shares of foreign companies. Kurlantzick notes that they have an estimated worth of two times that of every hedge fund put together. The government used funds of Norway have transparency. The government used funds of Russia do not. Imagine China having its own hedge fund, investing trillions of dollars and euros without any international regulatory control, accountability, or transparency. The world markets suddenly look three sheets to the wind in unpredictability.

"If a fund backed by the Chinese government invests in an oil deal in Africa or Asia, is it making the same profit/loss calculations as, say, ExxonMobil, or is it investing because Beijing's leaders desire that asset, making it impossible for another company to compete for the deal? Did Russia buy into Airbus because it thinks the aerospace firm is a good deal or because the Kremlin wants to have more power over Western Europe through this company? If the fund owned by the United Arab Emirates invests in a defense company, is it trying to gain military technology for the UAE, potentially upsetting the balance of power in the Middle East?"

We should all be thankful that the US government has no room in its budget to do the same.