Saturday, January 30, 2010

Acronym Time! The SOTU and Q&A

I have been called a "glass half full" person, and I rather like that. But perhaps what I am even more is a devil's advocate. When liberals were dumping on Obama, I pointed out reasons to support him. Now in the wake of a powerful SOTU speech and wrangling of House Republicans, while we're still high on the fumes....

Would you like a moment to compose yourself?

...I'm going to address some things I wanted to see in the speech and didn't.

--What he said: "...each time a CEO rewards himself for failure, or a banker puts the rest of us at risk for his own selfish gain, people's doubts grow. Each time lobbyists game the system or politicians tear each other down instead of lifting this country up, we lose faith."
He also tied much of his agenda to elevating or keeping the U.S. in a world-leading position.

In addition, I wanted to hear him say he was willing to get personal, something like, "if you or your hired lobbyists are standing in the way of progress, then you are an anchor holding America back from being great, and I will call you out. Coal, oil, health insurers, I don't care how long you have been in business or how much money you have, if you are not helping us build the future, if you are fixated on keeping things the way they were, then you are a problem for all Americans, and I will identify you by name."

In other words, I want to bring more public pressure on the obstructionists as a tool to divide and conquer the opposition. Friday was a good start in doing this. I love seeing people reap the full benefit of their own words and actions, good or bad. But so many of the people who need to see this kind of exchange can't be bothered to watch it. How will he reach them?

--In talking about financial reform, Obama said he doesn't want to punish banks. Ok. But right after that, he says that the House has already passed reform and the lobbyists are trying to kill it. So, who does he think is paying the lobbyists? And by saying he doesn't want to punish banks, isn't he tying his own hands to fight back, or at least arming the other side for retaliation against whatever he does?

--He takes "his share of the blame" for not explaining health care, then asks for support for "the plan we've proposed" - never explaining what that is or how he wants it passed. So if people want to support his plan, what do they do? Demand passage of the House bill? The Senate bill? A patch? Something new in reconciliation? Some combination? You see the problem. He had our attention. This was the time to hit the bullet points.

--His call to action on national security was "...let's put aside the schoolyard taunts about who's tough. Let's reject the false choice between protecting our people and upholding our values." Again, long on rhetoric, short on actual action items.

In this speech, and especially in the Q and A with Republicans on Friday, the word "parental" kept appearing to describe his demeanor (though on Friday he was more Father Flanagan than Ward Cleaver). One of the best parenting tips I ever heard says that parents spend too much time dwelling on the bad and not enough time turning kids toward good behavior. So instead of yelling "don't" or "stop," a parent should say "here, try it this way instead."

This "try it this way instead" is what I don't see enough of as he addresses Congress. As he addressed the Republicans Friday, I heard something like, "no, that's not what I'm thinking, but keep guessing." That just sounds like game-playing. Is he trying to wear them down? Tame them? Or just annoy them?

Don't get me wrong. Overall, I love his tough tone and the relentless refusal to pander, either to Republicans or to voters. I love the call to progress and rational problem-solving. I love the direction this is going. I just wish we had some clearer signposts.

Wednesday, January 27, 2010

Hope for Health Care (copyright pending)

After reading this article from Time that was called to my attention by reporter Tim Fernholz, my thoughts went something like this:

  1. How could so many people be so far out of touch with reality? The unsustainability of the current health care system has been around so long that it should be a truism by now. President Obama gave a fact-filled speech about it recently. Beyond just the swelling ranks of the uninsured, more people, insured as well as uninsured, are driven to bankruptcy by health care costs than ever were by toxic mortgages.
  2. Denial rears its ugly head again. People want to believe everything is ok until they are forced to admit it's not. It's human nature. It's the root of the self-help industry. It's hard to believe is what it is, but apparently denial has been stronger than the evidence so far.
  3. If ordinary reporting doesn't get through people's denial, what will? What is a recent example of something that gets people out of their seats and motivates them to take action?
Answer: the Haiti telethon.

The Haiti telethon raised $25 million and counting, all for a problem that didn't exist a month ago. Of course the earthquake in Haiti is an unusually big problem, but telethons also exist for individual diseases. Isn't national health care as worthy a cause as any individual disease? I think it is.

The telethon format is also a good match for communicating the health care problem.
There are great personal stories out there of both health and financial loss. Story after story after story will kill any notion that these are isolated incidents, plants, or extreme cases. It draws people into telethons, charities, and reality TV.

These personal stories can be interwoven with charts and facts presented by celebrities, plus star performances, all with the urgent appeal to take action to prevent these conditions from continuing.

Obviously we want Congress to fix health care, but what action do we want people watching the telethon to take? It's great to raise money for free clinics, but that's only a temporary solution. Do we want people to flood Congressional switchboards with calls? Marching on Washington is impractical, especially for the infirm and unemployed, plus it's so....teabaggy. People hate writing letters--the action needs to be something easier and more quickly accomplished.

I admit I'm a little fuzzy here. What should people do? Calling Congress seems like the best solution, but I doubt Congress is as ready to handle a flood of calls as...say...American Idol.

And anyway, it's not what people do in the short term that is important. It's that they need to understand, at a minimum, that 1) the current health care system is unsustainable; 2) it's on course to wreck our whole economy; and 3) we don't have a lot of time to fix it before it's too late.

I'm only half-joking about the telethon, but entertainment has proven itself as a way to get people's attention and burn things into their brains. Why not use that power for good? I memorized the preamble to the Constitution back in 8th grade thanks to Schoolhouse Rock. Why not write a filk about universal health care? Well, why not?

Let's toss out the box, people. We need to find new ways to educate the population that they will understand and remember. What we've been doing so far hasn't worked.

Anybody got a rhyme for "preexisting condition?"

Tuesday, January 26, 2010

Economic Confidence

I have not seen what Obama’s spending freeze entails, but I am surprised by the general conclusion that it is:

  1. Inconsistent with his “hatchet vs scalpel” comment during the debate
  2. Designed to appease Congressional Republicans or conservadems
  3. Going to kill the economy

First point: In response to McCain’s call for an across the board spending freeze (with limited exceptions) during their debate, Obama said that McCain’s plan was a hatchet when what was needed was a scalpel. Obama never said McCain was taking a hatchet to a healthy patient, which would be the expected analogy if Obama believed no cuts were necessary. Instead, he talked about using a scalpel, which means he believed and stated that some cuts were necessary. Now he’s making some cuts--and in a fairly passive way.

Second point: Consider the timing and the form of this news. Brown just won Massachusetts. Voter exit polls showed that among other things, voters wanted the federal government to be much tougher on the financial industry. Shortly thereafter, Obama proposed tougher-than-expected regulations on the financial industry. This was widely recognized as seeding the ground for the 2010 midterm elections.

The next news major we heard was about the spending freeze. This was widely recognized as capitulation to conservatives.


What else did Massachusetts voters say? They are worried that government spending is out of control. They are not the only ones. Citizens of all political stripes across the country are worried about what it means when the government issues $2.1 trillion in debt in one year (2009), double the next-biggest year, and China owns a substantial portion of our debt—of us.

Voters are also worried about inflation. Yes, with over 10% unemployment and a real estate market that is still falling, people are worried about inflation—again, because of government spending. They may not know all the factors that go into inflation, but they understand that printing more money dilutes the value of every dollar in circulation, and they understand the relationship between currency dilution and inflation.

Now notice how the news of the spending cuts came out. It was floated out there Monday that Obama would announce it Wednesday; it was put out as a teaser.

There is no reason to tease Congressional Republicans about a spending cut. On the other hand, putting out a teaser to voters about something they dearly want to hear is a great idea. Notice how quickly Bayh and McCain called for even bigger spending cuts. And yet they got drowned out (except on Fox, I suppose) because everyone is all abuzz about Obama’s proposal.

In one move, Obama said something voters have been waiting to hear, claimed fiscal responsibility for the Democrats in the fall elections, and generated some buzz that drowned out Republicans. That’s some pretty good politicking. In short, I think it’s more likely that this teaser was for voters, not politicians, just like the announcement of financial regulation that came just before it.

Third point: No one, not even a fool, is going to claim that there is no waste in the budget. Just because the government needs to continue to put money into the economy doesn’t mean it needs to throw money at anything that moves. It’s not a bad thing to show some discretion, even in a bad economy. I say this having no idea what he plans to cut—nor does anyone else, I believe.

I think Obama is doing pretty well at walking the tightrope he stepped onto a year ago, at least regarding the economy. He inherited an economy that could have turned into a black hole, sucking everything into its maw. Instead, Obama boldly put a big stimulus plan out there to fill the hole, and it’s done very well. It could have done even better if the banks had done what they were supposed to and passed their money along as loans.

Considering that Obama has a track record of success with the economy, why do liberals assume he now wants to undo that success and take the economy back down? Is that the first thing that comes to mind, really? Has he not earned at least the benefit of the doubt?

Monday, January 25, 2010

What You Don't Know Can Hurt You

As we move forward into the battle to regulate the financial industry, I’d like to discuss the communications networks that the big banks are already using to sell the idea that regulating banks is bad.

Big banks and wire houses (for now one and the same thing) spend big money on generating financial information, aka marketing. This takes many forms: TV and magazine a, stock analysts’ reports, market forecasts, charts, quotes given to financial writers and commentators, articles written for financial publications, and more.
Their opinions are woven into the fabric of financial discussions in the U.S. But it goes deeper.

There are thousands of financial consultants out there who give investment advice to ordinary individuals. Most of these financial consultants operate from one-consultant offices, which means they don’t have the resources to buy or generate much financial data beyond the returns on their Bloomberg terminals.

So what do they do? They turn to the free, detailed, and polished material of the big banks. Suppose Chase has a nice pie chart of the current sector composition of the S&P 500. Suppose you want that same information for your clients. Why reinvent the wheel? Instead of going to the federal government source, why not just copy Chase’s chart?

Suppose Chase also bought historical sector data not available from the government and used it to make another chart with a very sophisticated analysis of sector proportion and subsequent market movement over the last 75 years. Wow! If you’re a small planner, you might not have even thought to do that. Why not copy that one too? Your clients will be very impressed!

For a small financial planner, borrowing data not only expands what you can provide to clients, it removes liability. Financial planners are regulated by the SEC and audited every few years. At these stressful audits, planners must show sources for the data they present to clients. How convenient to be able to cite a big, reputable bank as a source! You, small planner, are off the hook.

But there’s more. Smaller planners in the financial industry also repeat the conclusions of the big banks regarding economic assessments and forecasts. This allows the big banks to shape perception of financial action and consequences. Big banks don’t mind at all—they can promote their agenda to investors who might be suspicious of a Morgan Stanley but will trust their personal financial planner.

For example, from SEI’s newsletter last October:

The global economy will face a variety of headwinds in the years ahead that may temper long-term growth and increase the frequency of economic recessions. These headwinds include:

1) Financial reform that will limit the growth in debt

2) Private-sector deleveraging that will limit the growth in debt

3) A trend toward increased government intervention (an activist industrial policy, healthcare reform, climate change legislation, etc.) that may impose substantial costs on the private sector

4) Volatile energy markets

This newsletter asserts as unquestionable or assumes several things that are very much in dispute:

a. People paying down or paying off debt (private-sector deleveraging) is bad for the economy

b. People need to load up more debt to increase long-term economic growth

c. Any financial reform that interferes with people loading up debt is bad

d. The government requiring businesses to pay for things is bad for the economy.

e. Government reform poses dangers to the economic recovery

Most people who read this will simply absorb the whole message, the explicit and the implicit, and add it to their understanding of how the economy works. And it will be amplified by repetition in newspapers, on CNN, on, in Barron’s, Money magazine, Business Week, Time, Fox financial news, Sunday political shows, Wall Street Journal, and more. No wonder intelligent business people are afraid of government intervention. Coming from all these sources, it seems to be accepted common wisdom instead of simple repetition.

Yes, there are other voices and other opinions out there, but any other opinion is going to seem like a minority theory next to this onslaught.

Briefly, there are other consequences of letting banks lead the financial discussions.

First, there are bazillions of facts and statistics out there. Whoever is crafting the message is choosing those facts and statistics that best support the thesis. Never doubt this.

As an example, returns for the S&P 500 are unusually high for 2009 and unusually low for the last decade (about 26% vs -9%). Both of these are undisputed facts, but I can choose either data point I want—or both or neither—to support the conclusion I want my reader to take away. If I’m writing for a big bank, you will not get the whole story if it’s not in their interests that you know. You can look it up yourself, but how many investors do that? How many would know they needed to do that?

Second, financial communication consistently underplays the impact of investors on the market and of the market on the economy. Expectations play a much larger role than is usually discussed in the media. It’s a bit scary to admit that the market keeps going because we all, collectively, expect it to, but it’s the truth. If we all truly believed the market were dead—and acted on it—it would be dead.

Follow that logic to economic forecasts. Banks say financial reform would be bad for the market. If investors believe that—and there’s every indication they do—they will pull away from the market if reform passes. Banks will then blame government reform for the drop in the market when it was really the expectation set by banks that caused it.

Logically, investors should be delighted to see financial reform that protects the market from abuse. Unfortunately, investors are driven by emotion, and expectations are built on emotions.

However, at least right now, people are also driven by hatred for the big banks. People also hate being manipulated and being made fools of. The more that people realize how they’re being played, the more likely they are to resist.

Related subjects that I glossed over here but that are worth separate discussions: how financial media works, why bank$ want to promote debt (previous post), investor behavior, how the investment market really works, investor psychology

Saturday, January 23, 2010

Car Dealers and Selective Credit

In December 1995, I went car shopping for a Ford.1995 was a year when Ford made many more cars than they sold, so I was prepared to make a good year-end deal. After getting a price quote, I sat down with a dealer to discuss terms.

We already had credit union financing, but Ford offered a much lower rate for buyers with good credit like us. Or did they? As I read the financing agreement (while they watched me impatiently) I saw that Ford did not guarantee that a buyer would get the low financing rate, but did guarantee that every buyer would be given financing. If you didn’t qualify for the good rate, Ford guaranteed that it would finance you at a very high credit card-type rate.

Ok, so Ford didn’t guarantee that a buyer would qualify for its best rate. Fair enough. However, Ford did not say what its best credit rating was based on. Third party credit score? Some formula of its own? Could be anything.

At the same time, when you, the buyer, signed the financing agreement, you agreed that if you did not qualify for the good financing rate, you must accept financing at the high rate. Once you signed the agreement, you could never back out of the deal for reasons of financing because Ford guaranteed financing at some rate.

Here was my question to the dealer: if I signed that agreement saying I was obligated to finance under Ford’s highest rate, what was Ford’s incentive for qualifying me under a lower rate?

He didn’t have an answer for that one. I didn’t expect him to.**

(By the way, given the high financing rates, is it any wonder car financing was the cash cow of the auto industry? Given that Ford (and presumably GMAC) guaranteed credit to everyone, is it any wonder that these financing entities struggled as much as any bank suffering from toxic mortgages?)

Now consider this:

Individuals and small businesses have always had two ways to get business financing in the open market. If you have good credit, you can get a low-rate loan direct from a bank. If you’re a bad credit risk, you have to resort to high-interest loans, including the very high credit card.

The line separating good and bad credit risk floats up or down depending on the economy. Right now it’s very high. Banks are not lending much, so fewer people can get direct bank credit.

In 2008, this was caused by the credit crunch. In 2010, the banks have received a flood of money from the government to loan, but they are not lending it out.

Why? We have seen the banks give out big bonuses, but consider another reason as well. Interest rates are unusually low right now, while credit card interest rates are unusually high—and big banks have both to offer.

So why should big banks lend to small businesses and individuals directly for less than 8% interest when they can make much more by denying credit and forcing people to finance on their bank cards for over 20% compounded interest?

Some of those people will go to other banks—just like I financed my car through my credit union—but some won’t. And those that don’t—or can’t—are making banks a lot of money.

I have a line of credit, and my balance has been about 20% of the total available. In late 2008, I got a notice from my bank that my line of credit was reduced unilaterally from the original amount available to slightly more than my balance. I had not missed payments or had any credit problems. It was “the credit crunch.” Fair enough.

But in early 2009, just a couple of months later, I got a notice that the credit limit on my credit card was being doubled.

It would seem we are experiencing a selective credit crunch.

**that dealer did other dishonest things too, and I'm happy to tell you the name of the excellent dealer we bought the car from after we left the chuckleheads described above. The good guys are: Person Ford in LaVerne, CA

Thursday, January 21, 2010

The New World Order

Tonight Keith Olbermann did a great commentary on how the new SupCt ruling will ruin the world. I condense, but that’s the jist of it, and I agree with it. I would agree even if I hadn’t just read the book Jennifer Government.

However, I do disagree with one small point. He said after eliminating all the news outlets that oppose corporations, the new world order of sponsored politicians would eliminate even the news outlets that supported them, like Fox News, after which the only news that would reach our awareness would be news favorable to corporations. All other news would never see the light of day.

I believe that Fox News will carry on because it serves an important purpose in that same new world order, and it’s the same purpose Fox has had for a while now. Specifically, Fox News’ purpose has been to:

1. Distract people from real issues with false issues
2. Muffle or drown out the truth when the truth doesn’t match Fox’s agenda
3. Scare and confuse people generally

In the world Olbermann envisions, a world where you believe what the powers that be want you to believe because you don’t know any better, while at the same time living conditions, rights, and quality of life deteriorate, Fox News is, as it always has been, the corporation’s friend.

The book Jennifer Government (spoiler alert) begins in a world already run by corporations, and the largest ones have divided themselves into two factions that started out as customer loyalty plans. An ambitious Nike executive moves up the corporate ladder with a series of daring moves involving murder to increase sales.

His career seems limitless until he makes the mistake of killing the President of the nominal government. He thinks a world without government would be better for corporations. However, the other executives know that the existence of this nominal, mostly ineffectual government is a big part of keeping regular people content and allows corporations to shield what they do. Just like Fox News does.

If this is the sign of things to come, Keith forgot to mention another thing: in the book, both loyalty programs relied heavily on private for-profit armies.

Monday, January 18, 2010

The Last Word

This is the night before the special Senate election in Mass. I live in California, so my only interest in this race is how it affects the party balance in the Senate.

Tonight Jon Stewart skewered Democratic candidate Martha Coakley for lack of style in campaigning, then turned around and poked Mass. voters for preferring style over substance (we thought they liked liberals--turns out they like good-looking men).

Why is Jon Stewart suddenly taking the Joan Rivers style chair? Is the last thing he wants to leave voters with the fact that Martha Coakley's gladhanding skills could be better? Of all the substantive differences between the two, he wants to talk about sports knowledge? Not Martha Coakley's record as (a popular) Attorney General? Not all the money that's been pouring in from Wall Street and health insurers to Brown? Not Brown's suggestion that Obama was born out of wedlock? Not his affiliation with the wingnuts and Tea Partiers?


Yes, sure Democrats have to start pushing harder. They shouldn't need a supermajority just to get some watered-down insurance reform. But it is what it is, and right now, that's what it is.

Supermajority or not, would you ever want a Scott Brown over a Martha Coakley? You want to send a message? Here's a good one, courtesy of Shoq:

"...only voting can prevent your nation from sliding right back into the right wing, corporate dominated, science hating, pluralism fearing, gay bashing, infrastructure ignoring, education slashing, marriage mashing, arts crushing, book burning, war mongering, bigoted cesspool of greed and self-destructiveness that you hoped it was finally crawling out of.
"1 January 17, 2010