Credit Card Madness: Can We Play a Game?

By not drinking the Kool-Aid you didn't enjoy the party. Everybody else enjoyed the party; they have better cars than you, they took bigger vacations than you and now your credit is being whacked for something you didn't do."

This is a quote from my husband today as we sit here contemplating the state of the union as we do most evenings while catching up on our Tivoed "real" news: Nightline and Frontline, Meet the Press and BBC News, 60 Minutes and CBS News Sunday Morning. Not to mention our "fake" news The Daily Show and The Colbert Report. It takes us a while to slog through it all because we are always pausing and commenting throughout. "Pause that" is an often used phrase.

We have been reacting strongly to the current credit card situation because we funded our small business with credit cards at cheap rates and now we are being forced to pay back "old" borrowed money that is 2 and 3 years old at a steeper rate. In addition our credit lines are being cut as well. I'm not too concerned about preserving the credit lines because we never used these cards for any other purpose than for the business. Now that the business is defunct, we are simply just paying them down as quickly as possible.

Anyhow, I was railing about the fact that Bank of America had simultaneously cut one of our credit lines very close to the current balance and doubled the interest rate, creating a situation where we were over the limit once they added on the finance charges. In fine print, in the middle of the statement, along with all of the other benign announcements, was a penalty agreement stating that we would be charged over the limit fees unless we brought the balance down, below the new credit limit, within 20 days of the statement date; a date, mind you, that was over a week prior to the usual due date. Furthermore, we must keep the balance under the limit going forward or else we would have to pay the fees. In order to remedy the problem you must be aware that you need to include enough funds to cover the next addition of finance charges or else find yourself back over the limit again and subject to those penalty fees. Did I ask them to drop my credit line by $18,000. No. Did I ask them to double my interest? No. Yet, by their action, they deliberately attempt to trip me up so that they can collect fees as well. Ain't that some shit? This is just madness.

Bank of America is one of those banks rushing to pay back its TARP funds because it is suddenly flush. I would be flush too if I got to borrow from the Federal Reserve at practically 0% and then turn around and jack up the interest rate on existing credit card balances to 15% and over in most cases. Anyone could make lots of money if they had this kind of deal. To make matters worse, they are not lending much at all which was the sole purpose of the bailouts, was it not? We have had a credit-fueled economy for the last decade, credit card companies cannot just turn off the spigot without unleashing another set of dire consequences for the economy.

Gingerly Hoping for the Best

This weekend brought warm comfort from dear friends as we commiserated together and reset our outlook. I have never been surrounded by so many professionals simultaneously out of work or underemployed in my whole working existence. We are all hoping for the best. It is hard to fathom the breadth of this economic collapse. It is even harder to establish a comfort zone when all you have to look forward to is a quagmire of dwindling finances.

Before last week's devastating news, I had a plan for our income tax refunds. Our Federal refund was, without question, immediately directed to savings to help bolster our emergency funds. Most of the State refund was actually earmarked for closing out two smaller credit card balances with the remaining used to purchase some much needed supplies for the house but, of course, all of those purchases go back to the hold pile; that money has been re-directed to the survival pile. I try not to count my chickens and in fact my list which was remarkably mundane - things like a shower door, no problem we'll stick with the curtain and a door between the kitchen and un-heated sunroom where thermal curtains will remain, indefinitely - had the caveat "if chickens hatch." They, unfortunately did not.

I feel like I can't even dare to dream lest those "green shoots" be mowed down before they even have a chance to thrive. But, I do not want to be trapped in a downward spiral of negativity either. So, I gingerly hope for the best.

The Bailing Out of the Reckless Has Gone Global

The euphoria on Wall Street with its recent rallies and the reactions to the G-20 summit, which essentially calls for nations to commit more money towards economic stimulus efforts worldwide including $1,000,000,000 for the IMF to help to prop up developing countries, once again puts the celebration squarely on bailouts as the only way to combat the collateral damage of the near-collapse of world financial markets; the bailing out of the reckless has gone global.

In the meantime, the only people who do not seem to be benefiting from any of this financial benevolence are those who "did the right thing." Those who were responsible for their financial actions are getting a rude blow; while their irresponsible compatriots are defaulting on their mortgages, credit card payments and other loans, the dutiful credit borrowers who paid on time, never missed a payment and did not carry large balances are having their credit lines slashed in droves at a time when the credit cushion safety net is most needed. Wasn't this the reason why you paid on time and kept your balances low, so that you could have the credit line available for a financial emergency?

Instead of reward, banks are reducing the credit lines of the diligent folk in order to reduce the amount of reserves required to cover the balances of those who default on their payments. While Wall Street may think their world is getting better now that they are infused with taxpayer cash to meet their debt obligations, the taxpayers are wondering how they are going to meet their debt obligations.

You know the consumer credit crisis is coming; it has already been forecast since the beginning of last year and finally the news is beginning to trickle out. A couple weeks ago it was reported that credit card defaults had reached a 20 year high. It is surer than sure that this whole consumer credit market is seriously about to blow. Nearly 2,000,000 people have lost their jobs this year alone. Compare this to 2008 where the total job loss for the year was 2,600,000. The current clip puts the US on track to lose at least 5,000,000 jobs this year. That is a heck of a lot of people who will stop paying on their cards or will be charging up what's left of their credit lines to survive now that they are jobless; soon they will run out of credit and stop paying on that too. Bankruptcy filings have risen 55% on Long Island this year.

Lenders are tightening their standards, raising interest rates and reducing or canceling consumer credit lines as fast as they can. Unfortunately, credit has fueled our consumer-based economy; consumer spending is responsible for nearly 70% of the US Gross Domestic Product (GDP). 2008 GDP was approximately $14,000,000,000,000. To put it in perspective, the government and the Federal Reserve have lent, promised or guaranteed approximately $12,000,000,000,000 to stem the financial meltdown. The consumer borrow and spend mentality that has fueled this decade's growth will have to be replaced with something else in order to maintain the current GDP. What will that be?

All of this bailout and "not being held accountable for one's actions" does make it very tempting to quit paying those credit card bills and suffer the consequences along with the rest of the folk. Those with business debts and other debts may just abandon paying because they see no reward in doing so. After all, should any of us really be concerned with the negative marks on our credit reports. If your score is below 720, what do you have to lose? No one is going to give you any new credit anyway. I think sometimes of abandoning paying back the credit cards that were used to start our unsuccessful business venture. I have been laid off from the job that I specifically went out and procured to pay this business debt. We are struggling to pay them since I still have not received any unemployment compensation.

However, I am chicken. I want to be able to refinance my mortgage should interest rates continue to fall. I want to be able to get a job in the future without being disqualified because of a bad credit score. My car was originally leased as a business vehicle and the lease is up in a year; I will need good credit to get a replacement vehicle. The relief for the prudent is non-existent, only the assurance that without all of this economic and financial intervention for the greedy and irresponsible, we would all fail. So much for keeping up with the Joneses.

The News That Surrounds Me

With all of the news that surrounds most of us, it is easy to understand why Americans are 6 in 10 against the bailout of the auto companies. It is hard to emphasize with the UAW when the realities of your own situation pale in comparison to their privileged world:

There are rumors that my husband's company is ready to do a significant layoff next week. It is a large company but it has significant debt that creates an almost permanent negative impact on the books; there are always quarterly losses prompting quarterly layoffs over the last few years. The rumors are usually true since the layoffs have become more regular now, the corporate culture is one of uncertainty, about people holding onto their jobs for a paycheck until they are the next to go; no one expects a week without upheaval. There is no union preventing people from being laid-off at-will or exacting the promise of a paycheck even if the work dries up. Most employees now work at their own risk, the propects of a similar job for similar pay are slim since the industry has been suffering a downturn since 2001 from which it has never really recovered.

The other major aspect is that management has changed little, with the layoffs coming bottom up, not top down. Unfortunately, this scenario gets compounded by the fact that management usually has the most management experience even if they have done a terrible job. If you listen to the logic of most companies, they have to preserve bonuses and other perks to keep their managers from absconding; how can they run without experienced managers? Unfortunately, many of these managers may be the very same people who ran the company into the ground in the first place. It is clear that my husband's company has been badly run for some time but those people are not getting rid of themselves anytime soon.

My husband is grateful that he has a job and receiving a decent paycheck for his hard work and so am I. Hopefully he will survive the next round but we still could tighten our belts even further and save even more money just in case. I double-checked with my benefits representative that if he loses his job and we lose our health benefits that I qualify to sign us all up for the health benefit at my job; I am currently waiving mine since both of our plans cost about the same and there is no reason to upset the cart, for now.

Since I have only been at my job for 3 months, I simply have no comfort zone at all. I don't think I will ever settle in since the job trimmings continue despite the assurance after the layoffs last month that we were the crew going forward, in fact the executive who told us that is no longer with the company having been terminated last week.

"R" Word Comes Out of the Closet

Today, the National Bureau of Economic Research finally played the "R" Card. Not only is the U.S. economy in a Recession but it has been so since last December. What? The Think Tank of Think Tanks finally deigns to call a spade a spade almost a year into the card game. How long was it going to take before the experts recognized the Commerce Department's sleight of hand as it issued false positive GDP data all year long (only to revise the numbers long after the fact and when we stopped looking.) There was barely an eyebrow raising last week when they released their revised data.

All of us little people have known the truth for as long as it has taken for the experts to parse the numbers. With major banks crashing, major industries crashing, 30 U.S. States deeply in the red, retailers going belly-up, the stock market at an all time low and Wall Street firms in disarray, the Treasury and the Federal Reserve having spent trillions trying to shore up the financial markets and so on, we needed to wait til December 1 to find out the truth. We have been drowning in so much negative data that we have plum forgotten the stimulus package we the people received last Spring, the first of many handouts that was supposed to save the economy.

Of course this "new" bad news sent the markets down nearly 700 points for no reason whatsoever. No surprise here, just another round of end of the world scenarios to get our knickers in a twist over. Tomorrow, the slightest smidgen of good news can provoke a rally in the other direction. Meaningless.

Yes, we have been in a Recession for quite some time. If this is news to you, then you must be too rich to notice and in that case, I want to be your friend.

The State of New York

Probably the most disturbing statistic I read about this weekend is the extent to which New York State depends on Wall Street. Apparently, 20% of state revenue is garnered from the taxes on bonuses paid to investment bankers and capital gains (source: Newsday). Now I knew it was a significant amount but 1/5 of the budget is alot. New York State has a budget of $120,000,000,000 a year. Of course with the decimation of most of the major financial firms continuing to escalate, Citigroup announced layoffs of 50,000 workers today, it is not hard to predict that this stream of revenue will be significantly reduced. 50% is the amount currently anticipated or approximately $12,000,000,000 less. The State is on track to have a $1,500,000,000 deficit this year and a $12,500,000,000 deficit next year.

This past July, Governor Patterson sounded the early alarm and hauled the Legislature in to address an additional $600,000,000 in budget cuts to cover the then-anticipated budget shortfall for this year and at the time projected a deficit of nearly $6,000,000,000 for next year. As we can see, these numbers have more than doubled since July so tomorrow the Legislature is being hauled back in again to address the spiraling budget deficit. From the top - corporations and governments - to the bottom - individuals, we are all saddled with decreasing income/revenue and higher debt. 

Unfortunately, instead of trying to come up with solutions, the advance notice is of Legislators bickering about programs that they do not want to touch, funds for education, healthcare, adminstration, pensions and themselves. Yes, it will be difficult to cut funds for all of these programs, New York spends nearly half of its budget, $59,000,000,000 for public health care costs, Medicare, Medicaid and Child Health Plus, alone. 

These funds represent the neediest cases but for all of those people who are losing their jobs, the projection is over 160,000 jobs across the state this year, the prospect of a majority of those persons paying into COBRA; extending their employer-based healthcare beyond a layoff is slim. Cobra costs are daunting. I have done it. It cost us $1200 a month to COBRA our healthcare costs a few years ago when we decided to go into business for ourselves. Most people will not be able to afford COBRA so that will be more people on the public health rolls. How do you cut the budget here? The other major area is education. None of the Legislators want to cut those funds either; New York State funding helps to keep my school taxes at an unrespectable $7,000 a year. Long Island school taxes are legendary, most of us are hanging by a thread, we couldn't survive a hike in taxes if the state cuts aid. 

So if not, health and education, then where? You have try to cut people but NY State is a union state. The teachers union is 600,000 strong then there is the Civil Service union with 300,000 members and police and transit and service employees and healthcare employees adding tens of thousands more; all the heavy-hitters with generous pensions, healthcare benefits and salary to boot. All of the Legislators owe some allegiance to one or the other of these unions so who will have the balls to cut them? Look, the Congress is arguing over saving GM for precisely the same reason; huge legacy costs will probably crimp its ability to become self-sustaining even if it does come up with the car of the future.

There is no good solution to the state's budget crisis but someone has to pay because there is no more money; most economists have now agreed that we will suffer a deep and protracted recession. So far Governor Patterson has been effective in keeping everything on the table. Instead of bellyaching and intractability, our Legislators should attempt to come up with some budget-reducing ideas that they could swallow; like it or not, we all have to do it.

Frozen Credit Markets: What They Are Not Telling Us…

…And why they are not telling us. Those three toxic words driving the financial crisis and the credit freeze: credit default swaps (CDS). They cannot tell us because it is too big to comprehend and too hard to explain. CDS contracts are essentially bets on the bets on the bets that the underlying financial instruments, mainly mortgages, would continue to be profitable. The bets on the bets on the bets are a whole lot bigger number than the underlying mortgages themselves. MIT caliber mathematicians came up with those statistical models; risk moves towards zero when divided into infinitesimal slices shared by a greater mass of investors. Of course this is only good when underlying values increase; nobody calculated the downside. Whoops! First we have to understand credit default swaps...

From wikipedia:

“In layman’s terms the CDS is essentially an unregulated insurance policy. It guarantees the performance of a security instrument, e.g., a mortgage. The buyer of the CDS pays the maker a fee or “premium” (think insurance) for protection against a loss. Historically the US Treasury has not classified derivatives as “insurance,” and therefore they trade free of any government regulations. Because of that, the firm selling the CDS is not required to set aside any reserves from the premiums received to insure against possible future loss claims. This obviously makes the sale of the Credit Default Swaps extremely profitable and default loss payments very expensive.”

“Credit default swaps are the most widely traded credit derivative product. By the end of 2007 there was an estimated $45 trillion to $62.2 trillion worth of credit default swap contracts outstanding worldwide.

Today, AIG asked for even more money; we the taxpayers have already loaned them $85,000,000,000 then another $38,500.000.000 and now they want another $12,000,000,000. If you insert AIG in where it says "the firm" in the above quote then you will understand AIG’s problem. They sold a lot of CDS and all of those mortgage losses mean potentially trillions in loss claims; that’s a heck of a lot of payouts. Insurance is good when everyone pays premiums but only a few collect; there are simply too many people collecting due to these defaults. All of those failing mortgages mean billions, even trillions, in insured defaults.

Adam Davidson of NPR stated that “The pure size of the CDS business is enough to make a failure of AIG a threat to the entire global economy…The fear is…if AIG collapsed, banks would stop lending money to each other. The Treasury Secretary and the Federal Reserve Chairman, Paulson and Bernanke respectively, know this and that is why they keep pumping the money into the credit markets. Over $2,000,000,000,000 has been committed by the Treasury and the Fed so far but the banks are not budging, they are still not lending money to each other; the credit freeze is not thawing. With trillions of CDS sold, no one knows how deep it goes. All of this money may just be a drop in the bucket.

The next President is going to have to understand this because this economic chasm is like quicksand. It is going to swallow up a whole lot of dough. NPR tried to explain it and 60 Minutes tried to explain it but it is too monumental an amount to comprehend and maybe it is better if we don’t know and just hope that some institutions become greedy enough to start lending again. This is essentially what we are left with to solve this crisis, hope. Huge risks yield huge rewards, the American taxpayer has already taken on that premise. If we can convince more institutions to put equity into this new game then fear diminishes and lending begins. Thus, the big outlay on the part of banks around the world. But then again, maybe we shouldn’t be running on so much debt after all. What point expansion if the debt overcomes the gains in the end?

Presidential Debate #3: Truth or Smear?

Tomorrow, the 3rd and final Presidential Debate will take place at Hofstra University, one of Long Island's premier institutions of higher learning. Once again Americans will have high hopes of hearing a meaningful discussion about the issues. After all, both Obama and McCain have introduced brand new addenda to their economic plans this week and we want to hear about them. Also, the debate has been painted as McCain's last attempt to shine given that recent polls show an increase in Obama's lead.

McCain, fresh off his pandering-to-the-base tour, has offered up yet more gems of economic inconsistency touting benefits that still tilt toward reducing the tax burden of our wealthier denizens. He has also hinted that he will bring up Obama's connections to Bill Ayers. Does he not realize that Obama's lead has increased exponentially since those attacks began? Well, Obama did say that he was surprised that McCain did not bring up those negativisms to his face during the last debate and now, McCain the man seems compelled to respond. This is the conclusion we all would make, I suppose, if we were coming off the same tour as McCain; egged on by his narrow-minded rabid fans.

McCain seems to have forgotten that he has plenty of guilt by association skeletons in his closet too so he may want to leave that stuff on the redneck trail where it belongs. Moreover, he had better be mindful that he will be in a blue state tomorrow with actual thinking people who will not respond to anti-intellectual cheap shots, or will they?

Obama also has plenty of explaining to do because I swear the man is on democratic liberal crack unveiling reams of spending plans to help everybody. I don't know how he expects the taxpayers to pony-up that kind of dough now that we have guaranteed all the bank deposits in the world. After all, that $500,000,000,000 deficit that has already been projected for the 2009 U.S. budget is definitely double by now.

Irrational exuberance has now taken over the U.S. government; the national debt clock in Times Square has run out of digits but somehow we have unlimited funds to guarantee the world financial markets and give tax breaks to poor Tom, healthcare-less Dick and jobless Harry. All hands are out and less money is supposed to come in? I hope these candidates find some financial rectitude and tell it like it is tomorrow.

World Bails Out World

Apparently, the Dow rose 936 points today, the single highest gain in 75 years, because more than a dozen European countries pledged billions of dollars to prop up their banks and ailing companies and because the Japanese lent $9,000,000,000 to Morgan Stanley. Yet, when the U.S. Congress pledged $700,000,000,000 to do the same thing for America, the Dow fell nearly 800 points.

I guess investors are more confident now because taxpayers the world over are taking on an unprecedented amount of debt; all governments are bailing out their banks. It wasn't enough for America to do it, the whole world has to do it. All governments must over-leverage themselves to bail out all of their banks and corporations that are over-leveraged, because all of our economies are doomed if the credit markets remain frozen. Edward Yardeni, the investment strategist, stated in the New York Times today that all of these bailouts will essentially “provide unlimited liquidity to the world’s banking system."

Is it really better to shift responsibility for all of that debt from private banks and corporations to the public trust? Is anyone going to stop and assess whether any real change in the fundamentals will occur. Are company profits going to suddenly improve so those who still have jobs can stop worrying about being laid off? Are new jobs going to be created for those who need them? Is the magic fairy going to wipe out everyone's credit card debts? No, no and no. Unfortunately, all the taxpayer will get for their largesse is a big, fat, whopping bill.

What a Difference a Weekend Makes...

Much clarity has been given to certain situations though many more waters have been muddied...

The Bailout Fails: In a vote of 228 Nay vs. 205 Yea, the House of Representatives failed to pass the $700 billion bailout package with a resounding 2 to 1 nay on the part of the Republicans. Thank you Republicans. There, I said it. I am happy this bill did not pass because I did not know all of the details and I think it was too large a sum to make such a hasty decision.

I understand that this is really about Commercial Paper and not bailing out Wall Street but then don't put forth a bill with little explanation granting vast powers to Treasury Secretary Hank Paulson, who is from Wall Street and has private interests (mainly Goldman Sachs) to protect. There are many other methods, all equally valid, that would assist in returning liquidity to the Credit markets. This is about confidence in lending; banks and others are all undermined by their own lapsed judgment in lending. The Federal Reserve is doing all it can by dropping additional hundreds of billions into the global markets but still the Commercial paper market remains frozen. If banks don't lend to each other then small businesses and individual borrowers suffer the most. It is possible that the Fed is overextending itself, more to follow on this I am sure.

The rest of it is that the markets do need to correct; we accept correction in every other market except this one? In any case, a bailout package should, at its core, provide relief to struggling home owners; there has to be a provision to allow borrowers to re-negotiate their loans with a fixed interest rate between 6.5% to 7% and a longer loan term of 40-50 years. The point is the loan amount remains the same but the payments become more affordable and when the markets return to health these borrowers will be able to refinance to a shorter term loan or better interest rate. This way the prudent people who did choose affordable loans do not feel punished for being prudent.

Dow drops 777.68 - A Day That Will Live in Infamy: The Dow suffered one of the worse days in history dropping nearly 500 points the instant the House vote was closed; it was already hovering around $280 points down pre-vote. We watched it in real time; most of my coworkers checked in on the CNN Money site which crashed momentarily; MarketWatch, my preferred choice, stood firm though refreshed at an agonizingly slow pace. All hell instantly broke loose; political spin, partisanship blaming; John McCain claiming credit for bringing together the bailout package then having to sidestep himself when it failed damningly by his own party. Ouch. Also John McCain appeared with Gov. Sarah Palin in a joint interview to save her from remarks she made about Pakistan that he criticized Obama for saying in the debate. Double Ouch.

Saturday Night Live Palin Skit Dead On: Yet another Sarah Palin skit was unveiled on Saturday night this weekend with a send-up of Gov. Palin's interview with Katie Couric. All it required was Tina Fey, who does a very convincing comic caricature of Palin, essentially espousing verbatim Palin's exact phrases from the interview. Hilarious but sad; Palin is living the Peter Principle. Enough said.

Last But Not Least: This is the most engrossing reality show on record as we watch our economy and politics explode, the Republican party implode and the Democratic party standing to bear the brunt of this economic disaster if Obama is elected. He will be blamed if the devastating outcomes of this debacle persist over the next 4 years and of course, it will be doubly damning because he is 1/2 a black man. Sad but true. At the end of the day, politics and fear aside, we all have to give ourselves a financial housekeeping. Plan for the worst and you will survive. The net effect of all of this is that decrease in consumer spending will kill our GDP splintering all industries and the credit card market will be next in line to send up its wave of bad debt. It does not look pretty out there. What were the economic terms that we had before "market correction?" Depression, recession, inflation? Think about McCain & Palin leading us through these times...try not to cringe while doing so.

You Want $700,000,000,000 for What?

So, let us get this straight. Spreading risk infinitely by bundling packages of mortgages then slicing those up and selling as securities is fine when the market keeps going up; the reverse is true when markets crash and this spread of risk gets multiplied 10 fold because no one knows how widespread it is or what percentage of those bundles is truly bad debt. This falls into the realm of perception; good mortgages and bad mortgages were packaged together, what percentage of any slice of these securities is more good than bad; more bad than good? Nobody knows but everyone is afraid that these securities are worth less than they think.

When the value of real estate kept escalating, this type of securitized debt was a goldmine. Everybody made money and all was right with the world. The greater the risk, the higher the reward. Greed will make you forget the rules of the game; you start chasing the money-maker like a gambler caught up in the belief that if you bet more, you will win more. Soon you find yourself over-leveraged, your investors/backers get scared and call your debt but you don't have the capital to back it all. Las Vegas or Wall Street? Bear Stearns, Merrill Lynch, Lehman Brothers and others forgot the rules and ended up overexposed when mortgages started defaulting and the value of housing started to tumble. Investors got spooked and any perceived value in these bundles plummeted. To make matters worse, these securities were insured by insurers such as AIG giving us a house of cards situation. Ever tried to insure a bad asset? It is like having a pre-existing condition when you shop for health insurance.

How is the average American supposed to understand this? How are they supposed to understand that despite the greed, the big bonuses and rewards, we still have to bailout these be-ast-turds? Why? Perception. There is a complete lack of confidence in the financial markets. It is possible that some of these assets are worth more than we think, after all most of these mortgages are still backed by a real asset; brick and mortar construction. Real estate may lose value but rarely is anything worth zero. Perception is 9/10ths just like possession.

Who knows how this will all shake out. All I know is that for the average American to understand these complex credit instruments and to make a choice about anything based on this knowledge is impossible when the experts don't know what to make of it all. Treasury Secretary Henry Paulson spent 30+ years on Wall Street and he is running to the government for an emergency loan of an unprecedented $700,000,000,000. What the hey? We are all supposed to figure this out by Friday? Good luck with that, taxpayer. Whatever the outcome, we will be fleeced!

Bailouts 'R Us

The Federal Government is now the money store. Financial companies get in line, they’re practically giving it away, even foreign banks will get a piece of the bailout pie. Small business people, we need to unite! When do we get our bailout? I would like the Federal Government to forgive the SBA loan used to purchase a franchise that, due to a series of unfortunate events, failed leaving us with mountains of debt. We accepted our lessons, licked our wounds and moved on pledging to pay down that debt while resigning ourselves to the enormous damper on our lifestyle for many years to come. We did not make any money or recognize any return on this investment; we took our knocks, plotted a new course of action and pressed on.

I know that our failure will not bring down world markets but it brought down ours. We were not greedy, we didn't overextend ourselves, we were not reckless and we worked very very hard. Sometimes things just don't work out but thankfully our prudent decision-making and prior savings allowed us to weather the financial setbacks that befell us. From our standpoint, the Wall Street bailouts, mortgage bailouts and other free passes are difficult to swallow. Besides struggling to pay for our own debt, we now have to pay for others. We know many small business-people; all are carrying a huge debt-load and struggling to make ends meet day-to-day. Where is their break? Where was ours?

America should forgive the SBA loans of small businesses that failed, are currently failing or are drowning in debt; this would help a lot and go a long way to helping another vital sector of the economy get back on their feet. So airlines, car companies, and others get in line…behind us.

Bailout Bonanza Continues to Prevent Trickle Down of Bad Debt

The Federal Government reversed itself after 2 days of record declines in the financial markets; it is pretty clear that there is no faith in the financial markets without the government guarantee. The mantra of “too big to fail” has completely taken over though I do not understand the criteria used to choose who wins and who loses. Why let Lehman fail but not AIG? As I write the Fed and the Congress are feverishly meeting to create a new government entity to buy up the rest of the bad debt out there. If this is the case, Lehman got a bum wrap.

However, it was good news for the market and it leaped over 400 points. I am not convinced this is the best solution no matter how much we fear financial failure because I am not convinced that it is a good idea for the government to keep borrowing funds for all of these bailouts. If the government had the money that would be fine but it doesn’t. The taxpayer is on the hook for the largest transfer of debt in American history.

Before George Bush was elected President, the discussion centered on his ability to ruin just about everything he touched. 9-11 saved him from himself for a while and delayed the inevitable. There was a point when he enjoyed incredible popularity much to my dismay, I might add. We were “winning” the war on terror and Americans improved their standard of living; trading up to bigger houses and better things because George Bush was right prosperity did trickle down. Unfortunately, we did not realize the sleight of hand; victory and prosperity were an illusion. And while the war rages on and the rest of us take on 2^nd jobs and plunder our 401k’s to remain afloat, the government has chosen to bail out some of the richest companies in the world supposedly to prevent all of that bad debt from trickling down.

Democratic Convention: Obama-Biden is the Ticket

With a lead up by President Bill Clinton and Sen. John Kerry, Sen. Joe Biden of Delaware accepted the nomination as the Democratic Vice Presidential Candidate and launched into a speech that without a doubt made it clear why he was chosen and what this ticket would offer to the American people. And, although Sen. Barack Obama, the Democratic Presidential nominee had not been present at the convention thus far, he presented himself at the end of Biden’s speech to seal visually and completely the Democratic ticket for President.

Once again the speeches were on point and delivered exactly what was expected of them. Though the press may want to continue to trump up a Clinton-Obama discord between the delegates, it was pretty clear that the Democrats had reached common ground.

Whether we want to accept it or not, this election is different. The policies of the past 8 years have left the country bereft. Reaganomics worked in the 80s when we needed to spur industry and growth, back when America still outranked the world economically and created wealth within its borders. This decade it has had a negative effect because in this decade it is about competing in the world economy. The wealth no longer trickles down only to Americans; it is spread across the world. As we can see, many countries in the world have improved their economic standing greatly.

Which candidate will help America to reclaim its helm and once again set an example of innovation and prosperity? We cannot continue to borrow from China to purchase oil from the Middle East; whether we consider them Allies or not should not be of consequence. We are the Superpower; we should still be rich enough to buy what we want when we want it on the world stage. We should not be borrowing for our basic needs. This is in fact what many middle class folks are doing; should America, the greatest country on earth be doing that too?

Federal Debt: How Much is Too Much?

I have been especially worried about this economic downturn because of the amount of debt associated with it. Not just for individuals but on the part of the federal government and its entities. The treasury and the federal reserve are borrowing and spending like wildfire to prop up the economy. The federal government has tacked on more debt in the past 8 years than it had acquired in its entire previous existence. The 2009 budget deficit is already close to $500 billion ($500,000,000,000) and the national debt is over 10 trillion ($10,000,000,000,000).

The government has the highest level of debt it has ever had. The American people have the highest level of debt they have ever had. Yet we don’t seem to be too worried. While we all worry about the state of the economy, many look to the government for help and the government is helping. Maybe we Americans simply do not understand how much the government is borrowing for all of the bailouts. Many Americans are suffering now because they didn't recognize their debt limit until it was too late. New York state is currently trimming its budget in order to combat its rising deficit before it becomes unmanageable. When will the federal government realize that it has borrowed too much? What amount will that be?

Manic Stock Market Does Not Inspire Confidence

Hello Monday! The stock market went down 180 points today but this is no longer unusual; 2008 is the year of break-neck rallies and steep declines and lately we do not even know what each day will bring. First crude prices skyrocketed because of worldwide demand that was apparently out of our control; India and China and the rest of the world were consuming so much more oil that it was out of our hands. Even the President went over to the Saudis begging for more production. Now the price of crude has dropped $35 per barrel since mid-July because inflation, America’s reduced consumption and a stronger dollar are helping to bringing the price down. What suddenly happened to world demand?

The Financials are hemorrhaging billions in cash to the point where we are numb to it. After borrowing countless billions from the Fed, they are still posting massive losses. Financials have tapped the Fed for at least $300B that we know of. Fannie Mae and Freddie Mac are on the brink of insolvency. No one seems to care that the government is borrowing money to finish out 2008, to pay for the war and all of these bailouts and that the 2009 federal deficit is already $1/2 trillion ($500,000,000,000) in the hole not to mention the federal debt of $10.6 trillion ($10,600,000,000,000). When will the taxpayer wake up and say enough is enough?

Consumer spending is 70% of GDP. Unfortunately, the consumer is out of funds right now and in debt up to their eyeballs. The consumer has been spending borrowed money for the last 7 years and now they have run out of sources to borrow since the credit markets have dried up. Real income has not budged this decade. Where will the consumer get the money to keep spending?

Right now, all of the behavior in the market is speculative; none of it makes any sense. Bad news is good news. Good news is bad news. How can the market reflect true economic reality when government bailouts, losses that fall short of wall street expectations and massive layoffs are considered good news these days?

What is the average person who does not understand the nitty gritty of the financial markets but is an investor through a 401k or retirement account supposed to think with the market yo-yoing back and forth, especially over the past 4 months. Regular folk are depending on the market for their retirement and this type of manic market behavior does not inspire confidence. When are we going to get back to the business of investing?

Thank Goodness for the Olympics

The dog days of summer are just that; dog days. The economy is in the toilet and no amount of massaged news can reverse reality. We are getting a little bit of a reprieve at the gas pump with gasoline prices now averaging $3.89 a gallon, down about 40 cents a gallon since July. Unfortunately, for middle class Long Islanders, this is not enough savings to stave off the indebtedness we are all facing and the fact that the home heating oil season is soon to be upon us. Thankfully for the past few days and another week or so to go, we have had the distraction of the Olympics and these games have been far from ordinary.

The sheer magnitude of the opening ceremonies captured our imaginations so completely that we were immediately swept up in the glory of the games. There is no way to deny that the Chinese are a force to be reckoned with; a new rival. We were completely upstaged in these opening ceremonies, for most of us felt that America (or any other country for that matter) could not have, would not have, produced anything so breath-taking and amazing, yet we are enjoying the games. It is a dichotomy that speaks volumes. There is a tacit understanding as we cheer for America that this is our last chance at glory; we have to win the most medals or more medals than the Chinese at least. We are now directly competing against the Chinese with our athletes as they are with us, mano a mano, except we compete with our last vestige of status, our advantage, a (perceived) dominance in sports. I’m certainly enjoying every minute of it. May the best country win!

Stock Market Has 2nd Biggest Rally in 4 months: Day Traders Ecstatic

It was nice to learn today that the Dow had its biggest one day rally since April 1 rising 331 points. This is good news I said and quickly chided myself for not being a day trader. So much money to be made, so little knowledge of the process. Why don’t I know these things? I could be out there making money. These last 4 months of triple digit run ups and run downs would not be complete without another milestone to add fumes to the fire. The Dow is now 11,615 points, this is fantastic! At this rate, the Dow will reach the highs that it had back in 2000. For all the pomp and circumstance, we are where we were 8 years ago. In fact, if we subtract fees, losses and taxes paid, we haven’t made any money since then. But, that’s alright; we shouldn’t ruin the spirit of these breakneck days.

Today was a great day because the Federal Reserve, concerned about inflation and a weakening economy, kept the key interest rate the same, making it still beneficial to borrow cheap money, if you can get your hands on it. Those of us with HELOCs should be elated; we get to keep our rock bottom rates! The banks, Wall Street financial firms, Fannie Mae and Freddie Mac get to keep their federally funded deals too. They all have access to the fed discount window, borrowing unlimited funds at 2%. How is it that we can’t get any of those deals? I’m going to have to look into this. Also, to make matters better, oil fell a few more dollars and now is only twice as much a barrel as it was last August.

It really is hard to enjoy these dog days of summer with all of this drama on Wall Street. With the government propping up the financial institutions, the housing market, and the credit markets, it is good to see Wall Street taking this all to heart and rallying in the face of fiscal calamity. America will be saved after all and I hope to be right there with them. The economic realities that cautioned the fed to keep interest rates the same and caused the price of oil to drop means that things are going to be OK. The market is rallying on fumes despite the economic realities so don’t try to understand it or apply any logic. Go with the flow, get your money in and get more money out on a daily basis. It’s like Vegas, we just have to learn a different set of rules. Now that things are really looking up, I plan to stop worrying about all of this not making sense and run with the bulls. Now, if only someone can teach me how

Are You Maxing Out Your HELOC?

My June 27, 2008 Bracing for the Big One entry regarding the lowering of credit limits for credit cards failed to mention that home equity lines of credit (HELOCs) are also under the knife. In response to the threat of credit line deductions, many Americans are doing the next best thing; taking out whatever balance is left on the HELOC and putting it into savings accounts. Fearing the real possibility that their credit lines won’t be there when they need it, some folks have realized that they do not have to sit idly by and watch the banks snatch back their credit lines, why not take the money now, just in case, as a way of propping up their emergency funds. By doing so, they are opting for higher principal and interest payments now in an effort to secure those funds and a little peace of mind.

During the housing boom, many took out HELOCs to fund home improvements and personal finance experts recommended using the HELOC as a source of emergency funds in lieu of actually saving the necessary 3-6 months living expenses. Saving 3-6 months expenses outright is a difficult task for most middle class Americans living paycheck to paycheck and HELOCs were a cheap available source of money. As the economy sours, many are worried about their jobs and their well-being and many have little or no savings.

The reduction in interest rates and the fact that interest payments are tax-deductible make HELOCs a very attractive loan source right now. However, most HELOCs have variable rates tied to the prime rate so if the Federal Reserve starts to raise rates to combat inflation then those payments will rise significantly. Taking another loan now to ward off the possibility of financial disaster may be the last resort that some people have but they must remember that defaulting on a HELOC can cost you your home.

Fiscal Responsibility is the Dullest Topic

No one cares about fiscal responsibility. Why do I waste my time? I should be happy thinking about food, television, celebrity, entertainment and sports. No one thinks about the government bailouts or what they are going to cost in the future. Everyone simply wants their handout, as quickly as possible. Greed is good and much of this financial recklessness is being rewarded. Everyone who made a bad judgment in the mortgage debacle is being bailed out, the lenders, the borrowers and everyone in between. The bailout mentality has taken hold of the government, much to the delight of Wall Street and I’m pretty sure that there will be more to come now that the trough has been opened.

The value of fiscal responsibility with which my generation was raised is no longer part of the vernacular. Save now to buy it later has been replaced with get it now and pay it later. Everyone is entitled to have whatever they want, whenever they want, with as little down as possible. There are few savers out there, they are in the minority, and in fact the national savings rate is practically zero. We have become so addicted to debt that we are immune to the billions and trillions of debt being reported. Yet, if you ask most people how many zeros are in a billion (9) or a trillion dollars (12) they probably don’t know. People spend to buy things on sale when they don’t even have the money. The logic is that it was a bargain. The question of whether it was a necessary expense is dismissed without a second thought. The fact that it was charged and that any and all savings will be negated by interest payments doesn’t seem to register.

The fact that the average interest rate is approximately 12% for your basic consumer credit card and the average family has close to $9000 doesn’t seem to bother most people. No one sits down to do the math because most people hate math anyway. If they did, they would see that if they never charged another thing until this debt was paid off, it would take 5 years with a payment of $200 a month to pay it off. Debt never really seems like that much until you actually try to pay it down. But most people don’t think that far ahead when they are in the store whipping out the card to purchase some soon to be forgotten item and why should they? The government is sending the debt is ok message loud and clear to the tune of $10 trillion dollars and counting. All those who made it this far should be applauded, fiscal responsibility is the dullest topic, if only I could stop talking about it.