New Jersey CFO

It’s Unemployment, Stupid!

Pittsburgh protesters demand G20 do more for jobs
Forbes
“We’re not going to accept a jobless recovery,” said Larry Adams, a postal worker who came from Jersey City, New Jersey, for the protest. …

1 comment September 21st, 2009

Operation Rollback: Wal-Mart’s World of Business

The expansion of international “supply chains” from Asian factories to American consumers has certainly created global trade imbalances and international currency flows that are not necessarily sustainable over the long run. A readjustment of the world economy, not a slackening demand for inexpensive consumer products, strikes me as the greatest threat to the Wal-Mart business model. And, for its part, the chain is already adapting to new circumstances. In recent years, Wal-Mart has expanded well beyond the borders of North America into Europe, Mexico and Asia. It imports factory goods from China and also operates its own retail stores there. But the stores look very different from their American counterparts. In Kunming, near the border with Myanmar, Wal-Mart rents space inside its store to independent vendors, who pay $1.20 per day to hawk Yunnan coffee, tobacco bongs filled with local rice wine and condiments made from eggplant, soybeans and ginger. The atmosphere is “festival-like, even chaotic,” as vendors shout out their wares, sometimes through loudspeakers or while pounding on drums, and customers crowd a stall to fish pears out of a solution of sugar, salt and licorice root–”a Wal-Mart store sans Wal-Martism,” according to sociologist Eileen Otis. Another Chinese employee explains his loyalty to the company by suggesting that Sam Walton was, in fact, a student of Chairman Mao who “adopted the revolutionary strategy of ‘the countryside encircling the city.’&nthinsp;” And so the revolution continues.

How Wal-Mart’s Ruthlessness Led to Its Undoing – Jefferson Decker, Nation

1 comment September 18th, 2009

The end of the recession will merely be the start of a long, painful journey, says Edmund Conway.

t’s a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.

Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a “V-shaped” recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don’t go back that far), and started talking about “double dips”.

When Recovery Comes, It Won’t Feel Like It – Ed Conway, Daily Telegraph

Add comment July 9th, 2009

Obama’s Volunteer Initiative Is Economically Bankrupt

Responding to the almost monolithically positive coverage of the Obama administration by the national press, Phil Bronstein, editor-at-large for the Hearst Newspapers, observed recently that the Administration and the reporters covering it should “get a room.” And while USA Today’s account of Barack and Michelle Obama’s “United We Serve” initiative appeared after Bronstein’s quip, its coverage of same serves as yet another example of a media apparently unwilling to show even the remotest amount of skepticism about an Administration and program that deserve a great deal of it.

As USA Today’s Andrea Stone wrote, “First Lady Michelle Obama will launch a summer of service” that the “White House hopes will help the economy recover through the work of individuals.” This is not a joke, and this is also not a parody of slavish White House reportage from the Onion. Stone was serious.

But back to reality, and taking nothing away from either charitable work or volunteerism, neither has anything to do with economic growth. If anything, for drawing potential workers away from the wage economy, volunteerism detracts from economic activity.

Nothing Stimulative About Obama’s Volunteerism – John Tamny, RCM

Add comment July 2nd, 2009

Obama’s Plan For A Debt-Ridden Future

President Obama has officially begun the era of bigger big government by proposing to go on a multitrillion dollar borrowing spree that risks doing to the “full faith and credit of the United States” what excessive borrowing during the housing bubble did to private credit.

Under his budget plan for America’s future, spending will average 23.7% of GDP for at least a decade (a whopping 20% higher than in 2000-08).

Near-record deficits increasing at record rates will push the public debt of the U.S. beyond the economy’s plausible capacity to pay — 70% of GDP by 2012, heading quickly to 82% of GDP in 2019 and on pace to be astronomically higher soon thereafter.

The Avalanche

American families over the last year have already lost 8% of their net worth — in part as a result of inept government meddling, past and present. For many of the same reasons, they are also buried under a mountain of mortgages and private-sector debts gone bad. On top of that, if the president has his way, they will soon be hit with more than a 100% increase in public debt (from $8 trillion this year to $17.3 trillion in 2019).

Furthermore, the Treasury (and taxpayers) will soon have to begin repaying to Social Security more than $5 trillion in payroll tax revenues that the government had taken from the trust fund and spent for earmarks and other purposes.

Even without the Obama surge in debt — and taxes to pay it off — taxpayers face the prospect of 60% to 70% income-tax rates in the future to pay for $48 trillion in unfunded liabilities under existing entitlement programs. Now the president plans to burden the economy’s limited taxpaying capacity with a universal health care entitlement.

Foreigners purchased two-thirds of the Treasury debt sold during 2004-08 — and now own 50% of U.S. public debt.

Scholars at the Peterson Institute for International Economics warn that the “net foreign debt” position of the U.S. is becoming unsustainable.

Even if the bond rating of Treasury obligations is not formally downgraded for risk, foreign investors may start to resist buying more U.S. debt and, if the situation gets worse, may start withdrawing from the U.S. economy the trillions of dollars of capital they have already lent us. Then what?

The current level of private saving in the U.S. is grossly insufficient to make up the shortfall. In fact, Washington is doing nearly everything possible to prevent Americans from adding to their savings.

In theory, the U.S. government can always pay its debts by increasing taxes, but the problem with taxes — and ultimately with big-spending government — is that tax increases harm the economy disproportionately and quickly reduce the economy’s taxpaying capacity.

Before she became the chairman of the president’s Council of Economic Advisors, Christina Romer demonstrated in a research paper prepared for the National Science Foundation in 2007 that it costs the private-sector economy $4 ($1 of tax and nearly $3 of economic damage) to provide the government with $1 to spend.

In a research paper published by the National Bureau of Economic Research in 2006, former CEA Chairman Martin Feldstein concluded that the private-sector cost of an additional dollar of income-tax revenues for the government is $2.50 ($1 of tax and $1.50 of economic damage).

Paying off Obama’s 10-year string of deficits that add up to $9.3 trillion with income tax increases of $9.3 trillion over 10 years would cost the private sector $23 trillion (Feldstein) to $37 trillion (Romer).

In effect, American families would over time lose an amount greater than an entire year of GDP — a blow far more severe than the damage being done to them by the current recession.

Dubious Direction

It is irresponsible stewardship for Obama and Congress to go on a borrowing spree that puts America in the same unsustainable position as an overstretched boomer with too much debt and too little income and whose only option is to refinance at higher costs just to pay the interest.

The responsible alternative is for Washington to spend less — a lot less. Otherwise, the next Washington-created bubble to burst may be the full faith and credit of the United States.

Christian and Robbins are, respectively, the executive director and the chief economist of the Center for Strategic Tax Reform (cstr.org) in Washington, D.C.

Obama’s Plan For a Debt-Ridden Future – E. Christian & G. Robbins, IBD

Add comment June 11th, 2009

A skill drain with significant repercusssions

A topic not much talked about with a correspondingly similar problem I have noticed in accounting:

SKILL LOSS AT BANKING: http://www.nakedcapitalism.com/

Banking has suffered a not-sufficiently-acknowledged loss of know-how on the lending side. Back in the stone ages when I got an MBA, there were a few fellow students from big commercial banks like Chase (and no former investment banking analysts, the two year posts for college graduates) and they had all gone through credit training. But by the mid 1980s, the big end of town was fascinated with automated models and expert systems. American Express was considered the sophisticate of the crowd, allegedly with the most finely tuned program.

Fast forward 20 plus years, and the credit card issuers formerly seen as most savvy, Amex and Capital One, now are sporting credit losses not markedly different than their peers. FICO based mortgage lending has proven to be a train wreck.

The problem is that there isn’t a good substitute for knowledge of the borrower and his community. Does he understand what he is getting into? How stable is his employer? What are the prospects for the local economy? Those are important considerations, and they require judgment. That may still in the end be used as an input to a more structured decision process. but overly automating borrower assessment has resulted in information loss. It’s hardly a surprise that the quality of decisions deteriorated.

Meredith Whitney has pointed to this issue, but it has received surprisingly little attention:

Since the early 1990s, key bank products, mortgages and credit card lending were rapidly consolidated nationally. Banking went from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralised underwriting. The government should now motivate local lenders (many of which have clean balance sheets) to re-widen their product offering to include credit cards and encourage the mega banks to provide servicing and processing facilities to banks that sold off these capabilities years ago.

Getting better customer input is crucial whether the powers that be are successful in putting in the reforms needed for private securitization to revive (the inaction on this front speaks volumes) or whether the end game is more on balance sheet lending by banks. The Financial Times’ John Dizard in April 2008 said that the Fed expected to see a considerable reversion to more credit intermediation by banks, but wasn”t taking the commensurate steps:

Think of the main US banks and dealers, along with their regulators, as the Iraqi government – though without the same unity, purpose or long-term planning. The cash positions and liquidity of both are better now. The Iraqi government is not squandering its money on food for the ration system, medicine, electric plant or water treatment.

The US banks and dealers are through the first quarter, and are backstopped by a Federal Reserve that has gone from vestal virgin to camp follower. Some of the accountants would have appended the above quote from Matthew’s gospel to their opinions on the banks’ and brokers’ quarterly earnings statement, but it did not fit the guidelines of SFAS 157, the accounting standard.

It is not fair to say the Fed does not have a plan. It does. The plan is for the banking system to recapitalise for a new on-balance sheet world by raising a minimum of $200bn in a short period of time, not longer than two quarters. That way, there is no credit crunch, according to the model.

We seem to be on to Plan B, which is to have the Fed step in to pretty much every credit market (adding commercial mortgage securities to the TALF is the latest wrinkle). If there ever is an exit, it would involve either a bigger role for traditional banks or considerable fixes to the securitization model, but we aren’t hearing any noise on either front.

I’d be curious if readers can point to milestones in this devolution. Some have suggested that the consumer lending skill loss took hold in the 2003 period onward, but Whitney pegs it as a 1990s phenomenon, and I saw some elements of behavior change even earlier than that. Any input here would be very useful.

Add comment May 3rd, 2009