Recession- We’re All In This Together

By Cliff Moore  Oct 21, 2009

NJTaxwatch.com, March 4, 2010

Governor Christie seems to be trying to do two things that in New Jersey at least, are mutually impossible. The first is to lower the state debt, which grew from $3B in 1983, to $39B at the end of 2009. The second thing is to reduce property taxes.

The reality is, the State won’t be able to cover a lot of  services the way it did in the past.

Naturally, there are websites with lots of information available from both sides of the political aisle. Some of it is actually true! One new website is NJTaxwatch.com,  which says that it has analyzed various budget takebacks to see how they will effect individual New Jersey municipalities now that the State won’t or can’t cover the bill.

The short answer is that commuters, hospitals, and schools will feel it first, as well as aid to municipalities. The Montgomery Township School District, for instance, will see a loss of some $1,879,584, according to this site, or $35.3% of total property tax for education. Somerset Hospital will be hard hit, losing some $83,831 of State funding. This will also mean losing a matching Federal grant, so their total lose will be $83,831. Likewise, University Medical Center at Princeton will lose a toal of $24,684, and Robert Wood Johnson Hospital in New Brunswick will lose some $19,366.

“Unfortunately,” the website says, “we will probably be updating the site very often, because Gov. Christie has shown time and again he thinks New Jersey’s middle class taxpayers should be paying more in taxes, while he gave those making more that $400,000 a huge tax cut.”

“You can pay now or you can pay later,” as my old Latin teacher, Frank Clarke of Rocky Hill, used to say. This is what happens when you pay later.

Dr. Strangelove At Work
Feb 16

For several years I’ve been pondering the great mystery: why are New Jersey property taxes as high as they are compared with other states? I’m not alone in that query. New Jersey taxes average somewhere around $6,500 per home, and here in Montgomery, more than $13,000 per home. Just across the Bay in Delaware, by comparison, the average tax is $600 a year. That’s right: $600 per year.

I always assumed it was because of DuPont largesse (family and company), as well as the huge numbers of national companies that find it convenient to incorporate there for tax purposes: it costs far less to pay taxes in Delaware say, than in New Jersey. A recent US Supreme Court decision may reduce that advantage over time, but that doesn’t explain the huge disparity.

A friend who visited his aged mother in Delaware gave me a clue. He said that after the recent snow storms, which affected Delaware (and Maryland as well as other southern states) far more than it did us, the roads had not been plowed at all. Cars traveling over the bridge from Jersey were told that roads in the state of Delaware were closed. Park here or go back.

It wasn’t that they didn’t want to plow the roads; it’s that they didn’t have snowplows.

Several years ago, a State of Delaware cost accountant (let’s call him Dr. Strangelove) did a cost-benefit analysis. Dr. Strangelove determined that since there hadn’t been a major snowstorm to affect Delaware in some time, the state didn’t need to have those expensive snowplows, nor the crews to man them. And think of all the overtime they would save!

So Dr. Strangelove sold the plows and laid-off the crews under the theory that if there was a snowstorm, the cost to Maryland taxpayers would be less than the property taxes paid to cover incidental weather conditions when times didn’t call for them, such as the nice sunny day when he made that decision.

The result was that my friend’s aged mother (90+ at last count) lived on a street in a town where the streets were impassible. She hadn’t had mail delivered in over a week and had run out of food. My friend (68 himself) had to drive from Griggstown to make sure his mother didn’t die.

This is part of the terrible equation at work: people want benefits but they don’t seem to want to pay for them. They want someone else to pay for them instead.

Simple Demographics – not so simple

Feb 9, 2010

Recent reports from economists from both sides of the NJ political fence say that two related phenomena are occurring: first, we are told by tax-payer groups that wealthy tax payers are fleeing the state, never to return. Some have pointed to individual, anecdotal examples, for instance, that of a man who closed a deal leaving him with $60 million. He supposedly saved $6 million by moving first, then signing off. Further evidence of this, supposedly, is the declining number of students in public schools, and the rising number of empty homes statewide.

The second phenomenon is unemployment. Those numbers have declined nationwide to under 10% for the first time in a long time. But the number of jobs nationwide has also declined: they’ve disappeared, nevermore to return, at least for now. At one point, there were six job seekers for every real job.

So, how do these two phenomena correlate?

It’s simple demographics: the recession, and its job losses, hit at a time when baby boomers were moving into retirement. The previous recession, the dot-bomb crash in the early 90’s, a remarkably mild and short-lived one by comparison, also affected baby-boomers disproportionately. Employers tend to hire younger people fresh out of college first because it’s cheaper to do so. But as had been true in the post, most baby-boomers, then still in their early fifties, were eventually able to find jobs.

Now those jobs have disappeared. More than half the unemployed are over the age of 50. Some of those boomers are finding that, in affect they have been shoved into retirement and the tender mercies of the Social Security system, Medicare and devalued 401k plans (aren’t you glad President Bush didn’t have his way flogging that dead horse?)

But the same may be true of those wealthy tax-dodging carpetbaggers. People with money tend to be older. And New Jersey, the wealthiest state in America a few short years ago, had lots of rich people. Why wouldn’t more of them move away if there are more of them to move away?  True, some of them may simply have had it with NJ’s tax climate, not to mention the lousy weather, but many of them, especially those without long New Jersey roots or family, would have moved anyway

Pecora Commission Redux
January 13, 2010

In 1933, the Senate, then controlled by Republicans, reluctantly authorized a commission to look into what the precise cause was for the Great Depression, and ways, if any, to prevent it happening again.

The first two chairmen of the commission quickly got the chop when their investigators started asking the wrong questions of the right people. The third chairman filed a report that pleased no one, named no names, and got nowhere.

But by then the Senate was in the hands of Democrats whose electorate were howling for blood. They wanted a show trial and they got one when the fourth chairman hired a former assistant district attorney for New York County, Ferdinand Pecora as chief investigator. Pecora knew a stone wall when he saw it; but he persisted, put more witnesses on the stand, asked hard questions, and prepared a report when he was done.

It came up with a host of reasons for the Crash, as they called it then – simple greed and human nature of all parties concerned, including that of the stock-holders, being somewhere on the list. Banking reforms, chiefly the Glass Steagall Act, that quickly followed.

But among the names trolled before Congress was that of Goldman Sachs, which was shown to have used the available rules to profit, regardless of the consequences, because they were within the law to do so.

Flash forward. Glass-Steagall was repealed in 1997, and the same Goldman Sachs discovered that the new law allowed them to do some fancy footwork with derivatives: the right hand of their company could bundle and package some $40 billion worth of mortgages they knew were garbage, offload it and make big bucks doing so. Their left hand (sinister, is the Latin word for “left,” if memory serves me right) could simultaneously short-sell those same derivatives, that is to say, bet big money that they would decline in value for whoever bought them, and make even more money.

Senator Angelides, a former treasurer of the State of California, said during current hearings on the subject, “It sounds to me like selling a used car with faulty brakes, and then buying an insurance policy on the driver.” Indeed.

The Federal Reserve, authorized to oversee such amazing practices, was headed Alan Greenspan, who believed with all his heart that wise corporate leaders would never do what was against their own best interest. He had even written papers on the subject. The problem with that theory was that there were no “wise” corporate leaders: any of them would have happily thrown their own mothers under a bus for the kind of sort-term profits they could get.

Why? Because in 2007, Goldman Sachs, among many others, set aside 50% of its profit for bonuses to be spread around the company, chiefly among the top dogs. Shareholders got the rest. Their bonuses totaled $16 billion for 2009. “A billion here, a billion there, pretty soon your talking big money,” as others have said in the past.

This year Goldman Sachs, having joined the other banks “too big to fail” seen snuffled for dollars at the public trough has paid back the government loans which kept them – and by extension, all of us – afloat.

The Fed, now headed by Montgomery’s own Ben Bernanke, showed a $45 billion profit after collecting returns on last year’s $2.2 trillion bank bailouts.

These banking heads mostly appeared contrite, but all insist that there is no need to return to the sorts of controls that prevented this from happening for low, these many years.

The latest Senate commission examining the causes leading up to the current financial follies, according to one investigator, will be looking everywhere, including, we are assured, “the greed, the hubris, and the corruption.” So far, the later has only been shown to be the personal level.

Neither of the first two is, strictly speaking, illegal.

One Big TARP Redux, Dec 7, 2009

When Washington began the process of bailing out financial institutions during the Bush administration some 18 long months ago, many voices were raised in populist rage that government money was just bailing out the same Rolex-bedizened avatars of free enterprise who caused these problems to begin with. They argued, plausibly, that it was just throwing good money after bad, and just look, banks are losing billions but they’re giving out those huge bonuses.

They had a point.

The economist John Maynard Keynes, however, long ago recognized that in a depression – as opposed to an ordinary recession – the only thing that would bring back any recovery was for government to spend money, because nobody else had enough to make a difference. It mattered only that the money spent would bring employment to workers and that it was spent on things like roads and bridges and bringing electricity to farmers (new technology – hint, hint) and so on. If the money was simply lent or granted to manufacturing, the stimulus would be wasted, because without full general employment, customers would never buy the products, and inventory would stack up without buyers. Those with jobs would fear losing them and cut back on spending. The whole cycle would just continue indefinitely.

The point – the whole point – was to get as many people back to work as quickly as possible. Public debt didn’t matter (and doesn’t today to Keynesian economists), as long as the money is spent on projects such as infrastructure, and that people are employed. Eventually, the government will get repaid, they argue, provided there is a fully functional economy.

The purpose of TARP – Troubled Asset relief Program – wasn’t to bail out the fat cats who had stupidly traded in worthless paper, but instead, to keep the machinery of commerce running; without a working credit system things would, and did, quickly grind to a halt. The idea behind bailing out at least some of these clueless institutions was to encourage them to continue making loans to individuals and small businesses. Naysayers said that the taxpayers would never see that money again.

Now that some time has passed, where do we stand?

On one score, at least, not too badly: Ben Bernanke, Chairman of the Fed (and former Montgomery Township Board of Ed. president), said that as of November 2009, of the $205 billion loaned directly to the banks, half has been repaid, including $10 billion in interest, and that ultimately the government will make money on those loans.

However, all is not clear sailing: the money loaned to some businesses teetering on the brink, such as AIG, General Motors and Chrysler, may end up costing taxpayers as much as $150 billion. Why? Because Congress, as political under the Democrats as it was under the Republicans, lost track of what the purpose of Keynesian restructuring was all about. Those companies are not creating jobs at all, but instead, shedding them, compounding the problem.

Those that worry about their grandchildren repaying our national debt may have something to worry about, but not because of money lent to Wall Street. They should worry about money loaned to General Motors: who would buy a car from a company with one foot in the grave?

For the many Americans among the 10% unemployed as of Thanksgiving 2009, the recession is not over by a long shot. The unavoidable delay between how Wall Street is doing and what actually happens on Main Street leads to a lot of the present unhappiness at stories of big bonuses this Christmas at those same Wall Street businesses that a year ago came to Washington hat in hand.

Seeing the Light - Dec. 2, 2009

A recent story in the New York Times got me thinking about light bulbs.

One way economists of a certain sort think is to look at the entire cost of production to determine if something really saves money, or if it is actually good for the ecology. I haven’t figured our what “carbon footprint” means, but evidently, a smaller footprint is good.

They were trying to figure out if light bulbs made from light-emitting diodes (LED’s) are actually efficient for the economy. The answer is yes, as it happens, according to the New York Times. Also, they are good ecologically as they use few natural assets to make, use unbelievably little energy to operate, and last forever, more or less.

My experience with them is a little different. I have used them on a sailboat for several years. The bulbs they replaced drew 15 to 30 watts each, compared with 3 or 4 watts for each of the new LED’s. Better yet, the bulbs they replace at the masthead, the manufacturers claim, will last some 50,000 hours of continuous operation before dying. That has a special appeal if you have ever need to climb to the top of a mast while it whips around at sea to replace an inconveniently dead light bulb. I also replaced all the bulbs in the cabin as well. They’ll probably outlast the boat.

Even though these bulbs were remarkably expensive at $10 to $35 each (the old-style bulbs cost about $5 each) they use considerably less energy than the bulbs they replace. Although the boat uses solar panels for charging during the day, a few cloudy days can draw down the batteries. Too much power loss and the batteries won’t be able to start the engine. That could get ugly.

Sailboats are a niche market though. What manufacturers have been trying to do is get people to use these things in private homes, as the energy savings for our nation could be considerable.

A few years ago I was given a compact fluorescent light (CFL) at the Earth Day celebration at MHS. Before long, we had replaced every bulb inside our home with these, and a few in our unheated garage as well. They took some getting used to: they don’t turn on immediately when you flick the switch on; the delay is about ½ a second or more, and when they do come on, they are dim at first, requiring about two or three minutes to come to full power. However, once at full power the light is very much like what I was used to, with none of the fluorescent flicker or the cold, blue light of the old-fashioned fluorescent bulbs. The light was warm and much like what I was used to, and they are available in different power ratings, including a 100-watt replacement equivalent drawing 17-watts.

Better yet, a bulb putting out as much light as an old-fashioned 60-watt bulb only drew 13 watts. I was also able to find blister-packs with as many as six CFL’s for $15.

Over time I got a sense of what they cost, although a little interpretation was required: even though the cost of electric rose over the past few years (from 11 to 17 cents per kilowatt hour) my average electric usage fell approximately 20%. That includes running a refrigerator, computers, televisions, and so on.

I found a few LED's on sale and tried them out. They tend to be directional, best suited for low-power spotlight-type use, such as desk lamps. One of them is in my hallway overhead light, in a kind of Tiffany lamp. They turn on instantly and are resistant to thermal-shock, a major reason for CFLs and conventioanl lights to fail. It means you can turn them on and off as often as you like, or leave them on. No matter, either way, they're good for 50,000 hours or more. They tend to be cool light, but I found a few "warm," lights that look more like incandescent light. They aren't as universally useful as I'd like, but I understand that new designs are in the pieline.

However, LED’s for home use draw as little as 1 watt. A 1-watt LED left on for 1,000 hours (41 ½ days) would cost me 17 cents. A CFL left on for the same period would cost $2.21. An old-style bulb would cost $10.20. Amazing.

One of the big box stores had a two-pack of LED bulbs for $19. Do the math.

Halloween Lessons Learned

November 2, 2009
 I couldn’t help thinking this year that Halloween has long been one way that children have learned a valuable lesson in economics: how to maximize a return on investment. If return on investment is time invested divided by money (or goods) received, then a real world example is right before our eyes each Halloween.

For example, this year there are 94 children from Rocky Hill attending Montgomery Township schools. There are more than 3,000 (the exact number escapes me, but isn’t important in this case) from the Township attending Township schools. But every year, there are more than 94 children hitting many Rocky Hill homes at Halloween. How can we account for that?

Rocky Hill is a fairly compact community, running about a mile from the geographical center, near the Rocky Hill Inn, to the furthest edge, near the intersection of Rt. 518 and Rt. 206. Most of the homes near the center are close together. A dedicated trick-or-treater could hit 75% of Borough homes, or about 188 of them, within an hour or so, provided they didn’t have to drag their parents around with them.

On the other hand, Montgomery Township students, with the exception of those living at Montgomery Woods or Pike Run, live where housing is not so compact, where the distance from the curb to the front door is often 50 yards or more, and the distance between homes is even greater. That is especially true in the Skillman area.

Township kids quickly learn they won’t do as well going from home to home in their own neighborhood unless they are lucky enough to live in Pike Run or Montgomery Woods. Consequently, those with greater organizational skills, who are quicker off the mark and more dedicated to filling that bag with candy, learn to cadge a ride to Rocky Hill, where their chances of success are greater. The Borough makes it easier by providing crossing guards and well-lit intersections, as well as free snacks at the Firehouse.

But kids learn a valuable economic lesson – put the effort where it is more likely to pay.

The $500 Porsche Oct 21, 2009

Some time ago, a Nobel Prize was given out for determining why and how things are priced the way they are. It seems like a simple subject, supply and demand. But, as it happens, there’s a certain amount of psychology involved. For instance, would you pay $500 for a ballpoint pen? Probably not. But I’ll bet you’d pay that for a Porsche.

So, there’s an old story: a guy is driving along and he sees a Porche 911 parked on a lawn with a “For Sale $500” sign in the window. He stops and knocks on the door, and a middle-aged woman comes to the door. He asks, “Is that sign correct, are you really asking $500 for that Porsche?”

She says, “Yup. It belonged to my husband. He ran off with his secretary and left me the car. He told me to sell it for what I could get.”

“Lady,” the guy says. “You can way more than $500 bucks for it.”

“Yes,” she agreed, “But he babied that car. Kept it in a garage, took it to the shop every time it hiccupped. Changed the oil every month. He loved that car more than anything else, and I knew it would kill the rat if I sold it cheap.”

I was reminded of that recently by a letter to the editor from a concerned Montgomery Township citizen who was complaining with some passion about Township property taxes, a sore point for many.

She used the word “huge,” when referring to Township municipal taxes, in particular, to the portion devoted to paying for Skillman Village. I replied to her email and reminded her that the decision to buy Skillman Village had been made during dozens of open Township-wide meetings attended by hundreds of concerned citizens over a period of years, a project that took more than ten years in total. I said that it was, in affect, a group decision, not just one made by Township Committee.

Although the purchase came during the height of the market, it was considered a good deal at the time. Even though the real estate market has since declined, sooner or latter it will come back. Even so, many still consider it to be a good deal, if only because it guarantees open space for future needs.

Her letter was one of several supported a position suggesting that by offloading Skillman Village it would both reduce COAH obligations, and substantially lower municipal property taxes. The word often used was “substantially.”

As I didn’t have at the time the exact numbers to reply to her with, I called the Township Tax Dept. to get them.

The average Township home is assessed at approximately $509,000. The total tax bill on that home is somewhere in the neighborhood of $12,500. Ouch!

However, as every knows, the school portion amounts to about 65%.

Of the remainder, $2575 is Somerset County property tax, approximately. The Township municipal portion is only about $1800. The cost this year for Skillman Village, according to the Tax Dept., is $88.

That’s right. All that fuss over $88, an amount smaller than some families spend for popcorn at the movies during the course of the year.

In other words, from a certain angle, Skillman Village starts to look like a $500 Porsche – a real bargain price for open space. Why sell it for, what one letter called, “fire sale prices?” Because it’s an election year, and when it comes to election year rhetoric, ordinary English words, like “huge” and “substantial” lose their meaning.

Township Economic Development Committee Meets
-Answers question: Is the recession over?

Sept 16, 2009

There’s an old joke: two economists find themselves at the bottom of a well too deep to climb out of. The one asks desperately, “How do we get out of this?” The other carefully ponders their situation, stroking his chin thoughtfully. Finally, he says, “Assume there’s a ladder…”

So, is the recession over?

One answer is, according to economist and Township resident Dana Saporta from Desdner Kleinwurt, Inc. at the Aug. 15 meeting of the Township Economic Development Committee Forum, “It looks like the worst is behind us.”

The panel of the forum, composed of Chairman Walter Geslak, Township Committeewoman Kacey Dyer, Mayor Louise Wilson, Ms. Saporta, and Paul Ceppi of the New Jersey Economic Development Authority met to a full house at the newly renovated Elks Club building on Rt. 518.

Mayor Wilson pointed out some of the actions taken by Township Committee, including new bus shelters, increased number of public transit buses, and recent plans to increase sewer capacity for business near the Rt. 518/206 intersection, and said, “These incremental things over time, collectively position Montgomery to be a very attractive place for people who will live here all their lives. But by far the greatest asset is human capital.”

Mr. Ceppi reviewed some of the small business development features offered by his agency, including relatively low-interest business loans. But Ms. Saporta’s 15-minute talk, which covered the cause of the recession, what happened, and how things are looking now, was riveting.

She led off by praising the actions of former Montgomery Township School Board President Ben Bernanke, now chief of the Federal Reserve, for his prompt and timely actions of a year ago, almost to the day. Mr. Bernanke, a close student of the Great Depression, was the right man for the job, she felt.

First of all, it was a real estate bubble. Home prices increased 107% before peaking in 2006. However, since then they declined 33% before bottoming out in April of this year. For those holding property long term, the result is that their homes are still worth more than they paid for them, but less than they would have been if they sold them in April. They have since risen about 2% in value on average.

The recession was initially contained, she said, before the market collapsed seriously at the end of 2007. She called the phenomena, “An adverse feedback loop,” in which the more financial firms shed assets, the less value the assets were worth, until even the big boys were teetering on the brink and had to be bailed out. She said it would have been catastrophic if they had not been bailed out. (A recent poll showed a majority of visitors to our website, www.montynews.com, disapproved of the bank bailouts).

“Unemployment grew from 4.5% to 9.7 percent. During the second quarter of 2009, 20% of the homes sold were sold for less than the owners paid for them. 1/3 of the homes sold were in foreclosure or close to it.”

She noted that to economists, we are recovery, “But not the kind of recovery you will recognize. It covers mostly firm inventory growth. If you go into some stores you will see a lot of space but not much inventory.” This “inventory adjustment” really needs consumer spending, which has, she said, “Bottomed out.” She predicted a good 3rd quarter 2009 growth of 3% and another probably 3% during the 4th quarter of this year, but not nearly so well for 2010. 2010, she says, growth will be 2%, which is, “Lower than we need to be to make the economy grow.” And not helping it at all, “The banks won’t be as aggressive as they were,” she says.

She noted that although unemployment has been higher in several other recent recessions, this time, now it’s different. “66% of the unemployed have lost jobs,” as opposed to previous highs of about 61%.” The remainder of the unemployed are persons new to the job force – graduating students, housewives and so forth. “They all have bills to pay, but those who have lost jobs tend to have bigger bills,” such as mortgages, and kids in college. This leads to what we have now: less consumer spending and more savings in banks, or what Ms. Saporta called, “The Keynesian Paradox of Thrift, when everyone is doing the same thing.”

On the plus side, she said, “The momentum of job loss has declined,” but predicts that joblessness will still top out at 10% in 2010, leading to more foreclosures.
Those lucky enough to survive on of this altered economic landscapes will be in pretty good shape after 2010, she says.

So, are we out of the well yet? It depends on who has the ladder.
 

Another Look at a Tea Party
August 7, 2009

The other day I was getting coffee at a Rocky Hill coffee shop when I ran into one of our advertisers. He introduced me to another coffee drinker, and said, “You ought to talk to this guy. He's going to a tax protestor Tea Party.” I'd heard of those groups without knowing much more about them than that they want their taxes cut.

Jeepers, who doesn't want their taxes cut?

This fellow said, “We're paying 7 percent tax. Didn't they fight the Revolution over a 3 percent tax?”

I couldn't help pointing out that the correct answer was, “No, we fought the Revolution in part because we were being taxed without representation, not over a luxury tax,” which, I pointed out was actually much higher than our current sales tax. In fact, unless I'm mistaken, about half the actual cost of goods during the later half of the 18th century was eaten up by taxes, a considerably higher level than we pay today.

No matter, it was the lack of representation part that got things going back then. Something much like that is happening in Rocky Hill over the issue of schools, but that's another story.
That close brush with facts didn't seem to phase my new friend, who pointed out, in his opinion, “All those politicians are crooks.” This is a widely held view these days, especially in New Jersey during an election year.

I told the guy that the real problem with his point of view is that some people always seem to want something for nothing. They want goods and services, nice roads, good schools, effective policing, and entitlements such as Social Security and Medicare, but they want somebody else to pay for it. “I won't tax you if you won't tax me. We'll tax the fellow under that tree,” as they say in Washington. 

As it turns out, this group isn't so much against taxes as they are against any sort of government issued health care plan. Some of them are so ignorant they don't even know that Medicare and Medicaide are government issue. They don't care: they're against it because, they say, it's "socialized medical care." They'd rather die than have "socialized medical care." Of course, if the swine flu epidemic comes along as some say it will, a lot of us will die, but of course, by then it will be too late.

Much of this movement seems to be whipped up by what pundits have been calling an “Astroturf movement,” as opposed to a more spontaneous grassroots movements. An “Astroturf movement” is one that has been started by professionals, demogogues, really.

A recent newspaper column by Paul Krugman named the two leading proponents: Dick Armey, a particularly cheesy specimen, the former Republican majority leader and now head of a group called Freedom Works; the other is a fellow named Rick Scott, who ran a for-profit hospital chain that was forced to cough up a $1.7 billion (not million) fine following a fraud investigation under his leadership. He now heads a group called Conservatives for Patients Rights. Doesn't that sound patient friendly? They are, in short, phonies who demonize proponents of rational healthcare as "socialists." They have been helped along by the usual talk show hosts.

Unfortunately, those of us who lack health care insurance have been held captive by people like those two, who have been snuffling fully insured at the public trough for far too long.

But the folks who attend these unpleasant, loud, uncivil, and near dangerously violent - one short step from tarring and feathering - “bash the congressman” sessions are true believers, God help us.

Well, it's a funny old world, as they say in England, and it takes all kinds. I'll stick with my Breakfast Blend coffee.

A Lesson in Obamanomics

July 24

I've been away on vacation these last few weeks and it's given me an appreciation for how things are for some other parts of the country. For instance, on places like Block island and Marthas Vineyard, which, just as the Jersey shore, depend on tourism, little things can make a big difference.

There were more than 21 rainy days in June. That meant for 21 days, day trippers stayed at home.

On Block Island, Champlins Marina, famous for stacking boats four deep at the dock, had half their dock space empty in early July. At Mystic Seaport, one staffer told me I could have found dock space on the 4th of July, a first for her. “We had room for a 100 foot boat,” she said.

Optimists among the local business people like to think that they can make it up at the end of the season, but the realists, call them what you may, know those tourist dollars won't come back: 21 rainy days are 21 business days gone forever.

But up here, there has been one ray of sunshine. Since the end of June – at least three weeks before the White House officially confirmed it – local papers have been touting the idea that President Obama will be vacationing on the Vineyard. Even the BBC jumped in, with hints on what people wear on vacations at he Vineyard, as if we needed to know.

On the day that the White House officially confirmed the visit, phones began jumping off the hook at local real estate offices, with requests for vacation homes in August, especially during the week the Obamas will be visiting. A high speed ferry announced a daily run from Highlands, NJ to the Vineyard (and back), and found immediate passengers.

Its nice to see how small things can make a big difference.

RECESSION SIDEBAR

SOCIALIZED MEDICINE?

July 13, 2009

Now that the discussion of whether or not to actually bring in a unified national health care system to all Americans, many of its opponents are crying “socialized medicine,” much as they did when the first discussions were underway to bring in Medicare. My grandfather, who began his medical practice in 1912 with a horse and buggy, for the first time in his life enjoyed a regular cash flow after a long working life being paid with live chickens and bushels of corn. It was that bad.

Nevertheless, as aging baby boomers head for the home stretch, some are predicting that no matter how it looks, a healthcare system will finally become reality before Obama's first term is up.

How would things have been if something had been in place earlier? For one thing, some say that the Great Detroit Bailout might not have been necessary. They point out that the difference in production costs between GM and Ford cars and their foreign competitors, was insignificant. What killed it for American auto makers was that the benefit package to American auto workers was approximately $4,000 per car. For Toyota and Honda, it was about $1600 to$1800 per car. That difference was the difference between making money (Toyota, until recently) and loosing it as GM did, hand over fist.

A few years ago, American auto executives flew their Gulfstreams to Washington to beg Congress to introduce a healthcare system for all Americans, before it was too late. They knew that after years of caving in to auto unions for benefit packages they could no longer afford, the union packages were killing them.

Congress's response? Not on your nelly: we won't have that socialized medicine on our watch. The result was Detroit collapsed, and now we've had to keep the wolf from our door by spending trillions of dollars to revive it. News flash: it might have been cheaper to have a national health care policy years ago.

A history professor I had years ago pointed out that the problem with socialism is that small businesses, such as the 80% of those employing American workers, enjoy the benefits of capitalism (nature red in fang and claw); the big boys – GM, Ford et al – get to enjoy the benefits of socialism, with its tax breaks and perks.

So, how bad can socialized medicine be if socialism has worked so well for GM? We'll find out, hopefully before too many of us need it.

June 11, 2009

Gas Prices Doing the Detroit Shuffle

On December 15, when I started this blog as an attempt to explain to my self just what was going on with the economy, I noted the decline in gas prices from around $5 a gallon, to as little as $2 a gallon, and that some economists had been predicting that gas prices would begin to rise again as the economy began to recover. Supply and demand - it stood to reason.

The New York Times reported on June 11, that gas prices have indeed begun to rise, as much as 3.6% since April, but were still 38% below April a year ago. Why? Because shoppers are spending money: new cars and parts sales are up 0.5% since April, and you have to burn gas to get to the mall, where spending is still 9.6% below where it was a year ago, alas.

That seems a small number, but if it continues at that rate, spending will have increased 4% for the year, which isn’t too shabby. Most of the car sales are buyers taking advantage of car dealers dumping inventory after Detroit’s 100 year bender.The government just bought 17,000 new cars - mostly Fords. Go figure. But its not a bad sign at all.

Another marker is that claims for unemployment fell by 24,000, a larger than expected decline. Also good news.

Does it mark the end of the Recession? Or the beginning of the end, as a statesman would have said? That's a definite maybe.
 

May 16, 2009

Montgomery Towsnhip Foreclosures

The Montgomery Township home foreclosure in in 2008, according to the New York Times, was 0.3%. By comparison, the worst was Essex,at 3.1%. Camden, NJ was 1.6%

Dead Cat Bounce
May 4, 2009

Some economists with long memories remember the term “dead cat bounce.” It is a term for a phenomenon sometimes seen following a long, sharp fall of the stock market, such as during the Great Depression during the Thirties. It describes a sharp rise after the bottom has been reached, followed by another fall, sometimes to below numbers seen during the first bottoming out. It gets its name from the saying, “even a dead cat will bounce if it falls from high enough.”

The market had fallen to a new low of 6469 during March, and is sharply up, to 8370, as of May 4, within 1% of the level it was at its highest point during 2008. Some point to the week of April 15 as the start of a new bull market, and numbers have been generally up since then.

So, is the current rise in the stock market a dead cat bounce?

First, a little perspective: the rise in the market during 1934 is generally felt to have been a result of programs put into place from Washington, starting with the election of FDR, and major changes in bank regulation. People felt safer and started spending money and putting it back into the banks, which then began to lend it. However, some say, the market also reacted unfavorably when Washington, perhaps wishing to avoid the label “socialist,” reversed itself, and restored some tax programs. The result was a second “Black Friday,” and the term “dead cat bounce” arose.

Something like it could well happen today if Washington, responding to partisan talk show hysteria, reverses itself in the face of rising national debt.

Unemployment numbers also continue to rise as companies shed personnel. Some sectors, such as auto making, will probably never return to their former prominence. But, some say, employment will always lag behind the market, because recovery would probably not be possible if corporations, which have to answer to stockholders, had to carry excess employees. Many of those same stockholders are the formerly employed, nervously eying their depleted 401k’s.

“Who will pay for this?” is the question generally asked on talk radio. Good question. Projected numbers of national debt as a percentage of GNP indicate that debt will rise to the same levels approximately, as America had at the end of World War II. And who paid for that? We did.

Revisionist historians, economists, and social theorists have argued recently that Roosevelt’s policies made things worse, and that the whole thing would have blown over if he just left things alone. They point to the fact that the Depression didn’t end until rising arms sales in the late Thirties began to get the economy moving again. Maybe.

Others say that the prosperity of the past twenty years has been primarily as a consequence of the age of the Internet. Yes, it was a boom and bust business, with hundreds of dead corporations in its wake, but there have been hundreds more, great and small, which prospered.

Twenty years ago, the Internet was strictly a grad school geek phenomenon. Today, for instance, I can send and receive emails and text messages through my cell phone, answer calls hands free as I drive my car, geo-locate by GPS, all in something smaller than a pack of cigarettes. It’s a service I willingly pay good money for, as do countless millions of ordinary Americans.

Microsoft, Google, Amazon, AOL, Dell, and so on, were small and struggling at the beginning of the 80’s (some are still struggling!). Microsoft gobbled up hundreds of small companies whose former owners, vastly wealthy as a result, started new companies, or retired early. The American economy seemed to be better off for it and, on the whole, there were more winners than losers.
Will something like that happen again? Stay tuned.
 

MARCH 19, 2009
I’ve known several millionaires over the years, though not well enough to have any of it stick to me. None have actually admitted to making their money the old fashioned way, which is to say, that they stole it or the married it. A few of them got it by carefully choosing their parents. Some few more made it by working hard, or by selling something for more than it cost them to make or buy in the first place. Hardly any of them admit to wealth at all, at least none of those working on Wall Street. Especially lately.

Thanks to those wonderful people at AIG who brought me, I must admit, auto insurance that is actually cheaper than that sold by a certain green lizard, Wall Street millionaires are definitely not flavor of the month these days. For proof, I offer our own website (www.montynews.com) polling question: Should Congress continue to give money to banks? 77.8% of you have said “no.” Once lords of all they surveyed, their approval ratings today, as we teeter on the brink, hover slightly above child molesters and car bombers.

Take AIG, for instance. AIG, having snuffled at the public trough to the tune of $186 billion in tax payer funds so far, has given the same individuals responsible for getting them in trouble to begin with (its financial products division) $165 million in bonuses. Everyone in the specific department handling collateralized debt obligations (CDO’s) took home a bonus, some in excess of $1 million.

Now it appears, in order to keep their doors open, AIG may want more money. What’s so funny about that?

Our government (you and I) now owns 80% of AIG shares. They have been holding what amounts to a shareholders meeting in Congress, minus the board of directors. Actually, it more closely resembles a weenie roast, with the new AIG Chairman Edward Liddy’s weenie roasting on the fire.

Liddy, on the job for only six months, has trotted out the usual, irritatingly shop-worn cliché, that unless he pays these bunglers a bonus negotiated, we assume, during happier times, that they will take their business elsewhere. Some of us think that may not be a bad idea, as there are now thousands of unemployed financial workers whose job performance in the past has actually been sterling, who wouldn’t know a CDO from a trout, who are less likely to lead us down a dark alley, and who are less ethically challenged than those currently employed at AIG. Any of them could, one supposes, do a better job.

It beggars belief that Chairman Liddy would “request” his employees to return half of the money. Congress and the White House are looking for ways to get that money back. The name for that process in bankruptcy court is descriptively called “claw backs” and at some point, lawyers are involved. It can get ugly, but it’s great sport provided, as ever, that’s its not my money.

Liddy claimed that some of his people have been getting death threats, some of them more inventive than others, and suggested that to name these employees would be to expose them to more of the same. Senator Grassley (R) has already suggested “Hari Kari” as a solution for Wall Street ethical lapses. He immediately apologized for his impolitic remark, but he had a point, because it gets to the heart of what the problem has been all along.

Former Fed Chairman Greenspan, it is safe to say, was not a believer in regulation, and felt that those in the market would generally behave in their “enlightened” self-interest. He used economic models and principles that showed that given a choice of killing the golden goose or merely waiting for the egg, traders would wait for the egg.

The reality turned out to be that most on Wall Street (and to be fair, Main Street, too) given that same choice, would happily steal the goose and then kill it by the close of business if there was even a remote chance that it would yield a greater return. Enlightened self-interest in an open, free market always means “me first if it’s the last thing I do.” Hence, the results with the unbridled trade of toxic CDO’s.

Congress, finally responding to taxpayer outrage, is offering a special 90% tax on bonuses granted to employees at companies that accepted bailout money.

Next time, maybe I’ll buy car insurance from that green lizard.
 

MARCH 5

“It takes two to tango," my old granny always used to say, and it would appear from remarks at the March 5 Princeton Area Chamber of Commerce meeting by guest speaker Anthony Terracciano, Chairman of the Board of Sallie Mae, that Granny was an optimist. Sallie Mae is the banking group that underwrites student loans. He was discussing the causes of the recent credit meltdown and someone asked him about responsibility: was it the lenders? Was it the borrowers?

Mr. Terracciano said that, like many complex issues, it wasn’t so simple. He pointed out that in crises of this sort there are two models. “There is the Othello Model: most people do the right thing. One guy doesn’t. You identify him; find him; kill him; then move on. But there is also the Oedipus Model: a lot of well-intentioned people who all mean well, but somehow, can’t do the right thing.”

The credit crisis appears to be more the Oedipus Model, and he went on to show the way that regulators prevent some banks from using sensible models to prevent failure, lenders loan money to buyers with low, adjustable teaser rates who have no intention of owning a home, and homeowners who unknowingly bite off more than they can chew.

“In Florida,” he said, “50% of the mortgages were made to people who had no interest in moving into the house.” Those mortgages were made to real estate flippers: people who were banking on the value of a new home rising even as it was being built. Such a home could be “flipped” to the next guy for a tidy profit.

In banking, he said that there were various levels of responsibility for loan making: the higher level a banker is, the more money he can lend on his own say so. “But sometimes the guy with the most information about a subject is the guy with the least authority.”

Banking and tax laws make it difficult also: one reason banks dump mortgages onto a secondary market is because they don’t make enough money if they hold onto a mortgage.

Regulators are no help. “After 9/11, they looked for offshore money transfers,” he said. “That’s when these complex derivatives began to move around.” The problem with the regulators is, “They believe in original sin, but they don’t believe in free will.”

Asked about interest rates, he said,” Rates are likely to stay low for the next 18 to 24 months. Its going to be a very, very time. Corrections will happen in two stages. Stage One is bottoming out. Stage Two is a return to the final system. The new system cannot reconstruct the old model.”

Having studied past financial crises, he left his listeners with a sobering thought: that all past economic fixes created conditions that caused the next set of problems. “The seeds of the next financial crisis are the solution to today’s problem.”

Meanwhile, some economists are beginning to use the d-word: Depression. A Recession, some say, is self-correcting; leave it alone for long enough and things bounce back. A Depression is not self-correcting.

RECESSION SIDEBAR March 1, 2009
 

Well, our readers, nine of them anyway, have voted: some 54% voted to help bail out the banks. That sounds like a large number, but it’s only four against the bailout, five for it and one of those votes was mine.Come on, its never too late to let us know what you really think!

But clearly, some banks are in trouble.

Despite that, tales emerge, greeted with censorious pursed lips, of private jets, $87,000 area rugs, multimillion dollar office redecorations, secret $3 billion bonuses to Merrill Lynch execs after losing $500 million in 2008, and in at least one instance, all paid vacation trips to private trout fishing streams in Scotland.

One can’t help thinking that this is breathtakingly delusional at a grand level, titanic in its scope. Indeed, First Class on the Titanic is more like it. The words of German Chancellor Bismarck, who said, “Against stupidity, even the gods are helpless,” seem oddly prophetic.

 Now that One Great Tent has turned into TARP (Troubled Assets Recovery Plan) some asset managers evidently haven’t quite gotten over that ”masters of the universe” thing that propelled them to such great heights, and from which they have declined, alas, as have we all.

Bank CEO’s complain of restrictions against pay exceeding $500,000 for executives of the banks troubled enough to take money from taxpayers. How, they ask, can they be expected to hire the brightest and best?  Some are using the n-word to describe it - "Nationalization of banks!" they decry. Others use the s-word. "Socialism!" Oops, it slipped out. Sorry.

Another old saying is that “an army is only as good as its officers.” So how is the army doing at Citibank, with assets of over $1600 billion? They were recently in line for the government's gravy train after choking down Wachovia Bank. Wachovia, in turn, had been assisting the authorities with their inquiries into, alledgedly, private banking practices of telemarket scammers. According to the Financial Times, the Fed will bail them out by converting debt into $25 billion worth of Citigroup stock (out of $45 common stock). Boy, that's a spicy meatball! But then, an army marches on its stomach.

How’s that working for them?

There’s a great story going around over the internet. In all fairness, it isn’t just Citibank that behaves this way. Anyone with a credit card and a pulse can tell his own favorite tale. Although we all hate to kick a dog when he’s down, this story says it as well as any. Enjoy.

“A lady died this past January, and Citibank billed her for February and March for their annual service charges on her credit card, and added late fees and interest on the monthly charge. The balance had been $0.00 when she died, but now somewhere around $60.00. A family member placed a call to Citibank. Here is the exchange:

Family Member: 'I am calling to tell you she died back in January.'
Citibank: 'The account was never closed and the late fees and charges still apply.'
Family Member: 'Maybe, you should turn it over to collections.'
Citibank: 'Since it is two months past due, it already has been.'
Family Member: So, what will they do when they find out she is dead?'
Citibank: 'Either report her account to frauds division or report her to the credit bureau, maybe both!'
Family Member: 'Do you think God will be mad at her?'
Citibank: 'Excuse me?'
Family Member: 'Did you just get what I was telling you - the part about her being dead?'
Citibank: 'Sir, you'll have to speak to my supervisor.'
Supervisor gets on the phone:
Family Member: 'I'm calling to tell you, she died back in January with a $0 balance.'
Citibank: 'The account was never closed and late fees and charges still apply.'
Family Member: 'You mean you want to collect from her estate?'
Citibank: (Stammer) 'Are you her lawyer?'
Family Member: 'No, I'm her great nephew.' (Lawyer info was given)
Citibank: 'Could you fax us a certificate of death?'
Family Member: 'Sure.' (Fax number was given)
After they get the fax :
Citibank: 'Our system just isn't setup for death. I don't know what more I can do to help.'
Family Member: 'Well, if you figure it out, great! If not, you could just keep billing her. She won't care.'
Citibank: 'Well, the late fees and charges will still apply.'
Family Member: 'Would you like her new billing address?'
Citibank: 'That might help...'
Family Member: ' Odessa Memorial Cemetery, Highway 129, Plot Number 69.'
Citibank: 'Sir, that's a cemetery!'
Family Member: 'And what do you do with dead people on your planet???"
 

RECESSION SIDEBAR
JAN 26

How bad are things? Things are so bad that, for the first time, Microsoft is laying off employees, about 5,000 over the next 18 months, from some 94,000 employees world wide as customers are buying fewer new computers (although in fairness, problems with Vista may account for some of their woes – it’s a dog). Even Home Depot, the bell- ringer of the economy, is laying off workers in their home centers. And the numbers of foreclosures increases as well.

The government has put over $800 billion on the table to fix these systemic problems. Why isn’t it working?

One answer may be that the interest the government is charging the banks for this $800 billion is zero. But the interest the banks are charging for fixed mortgages is just over 5%. They are charging even more for floating rate mortgages.

Compounding that, the banks have reduced their risks by tightened up their requirements for borrowers. Fewer loans will go to big contractors for shopping centers and housing developers as the banks cherry-pick their customers.

Historically, banks earned the difference between their cost for money and what they charged for it, less expenses. The last time the spread between these two interest rates has been this high was in 1982, according to Bloomburg.com.

One of the big problems Ben Bernanke now faces is how to get the banks to reduce the rate they charge homeowners. Until that happens, the housing market will remain stuck. Until it unsticks, the rest of the economy will remain just as frozen.
 

Recession Sidebar
Jan 21

19 readers voted on our poll question, which was, “What should be the most important thing the next president should deal with first?” Overwhelmingly, people voted for the economy as the most important sector. 15.6% felt the environment was critical, and 5.3% each voted for the Energy Crisis (that seems like a long time ago!) and the War in Iraq.

Our new question is, “Should the government continue to give money to the banks?”
Anyone can vote, but only vote once.
 

RECESSION SIDEBAR
Jan 9

Why are the financials as important as they appear to be?
At a recent meeting of the Princeton Area Chamber of Commerce, Dr. Eric Maskin, a New Jersey native and winner of the 2008 Noble Prize in Economics, had an answer.

“Credit is the lifeblood of the rest of the economy. Small changes to the market are often multiplied. And the credit market is not self-regulating.”

He went on to describe, for instance, what would happen if a potato farmer got into trouble. He said that it probably wouldn’t affect other potato farmers, although it might have some local effects. In the larger world, other potato farmers would take up the slack. Prices might temporarily increase for consumers, but that would act as an incentive to other farmers to grow more potatoes. More supply would eventually result in less demand and thus, lower potato prices. The same is true of other commodities, even for fuels.

That process if one of self-regulation. “Attempts by the government to fix this problem by imposing price caps on potatoes would in all probability, make it worse.” Other farmers would have no incentive to grow more, nor would it affect demand for potatoes.

But he said that the credit market is completely different. All banks are inter-related. Problems in one bank, even a very small one, can very quickly spiral out of control., as we have seen recently. Not to mention what happens when you try to fold a $50 billion fraud into a potato soufflé. Here, self-regulating will not work, because banks that aren’t in trouble will tend to hoard cash and stop lending. That occurred when Secretary of Treasury Paulson loaned $700 billion to a few favored banks, which promptly sat on it because they were under no obligation to actually lend it out to help ailing mortgage payers.

The credit market, Dr. Maskin said, requires prompt action and is one of the areas of the economy that government must always monitor and regulate. Here self-regulating, a feature of President George W. Bush’s administration, will never work, as it flies in the face of bankers experience and tradition. One bad potato in the credit market can quickly bring down an entire economy.

On the other hand, he emphasized, “Bankers must be free to offer creative responses to market conditions.”
Asked how the government can force banks to lend money under such conditions, he replied, “They must be offered incentives to act.”

The Princeton Area Chamber of Commerce used the occasion to introduce their new president, Peter M. Crowley. A member of the board of directors of the Bank of Princeton, he has a long career in the banking world.

RECESSION SIDEBAR:

JAN 1

“Wall Street got drunk, and the American people got the hangover,” is what President Bush said in response to Wall Street's 33% decline in 2008, the greatest decline since 1931.

However it may not be that simple, either. Economists have noted with great alarm the growing imbalance America has with its trading partners, in particular, with China and the oil producing countries. Essentially, we pay for cheap goods made overseas (and of course, for oil) with dollars. Our overseas partners can either exchange those dollars for Chinese yuan or Eurodollars and use them in their own countries, or re-invest them back in America.

This happened spectacularly when Japanese investors with a surfeit of dollars bought Rockefeller Center when it was at the height of the New York real estate bubble during the 80’s. They lost money big time.

Something similar was attempted a few years ago when Dubai investors attempted to purchase companies with contracts to regulate US port traffic. That was stopped due to security concerns, but the lesson was learned: go under the radar screen. Saudi investors put billions into several Wall Street firms just before the bubble burst. Ooops! Another lesson learned.

The Chinese prefer safety and have been backing the US dollar by buying Treasury bonds, which have a lower rate of return than other investments, but are considered safer. Since the collapse of the market and the resultant freeze of capital, so many investors have been parking their money in T-bills that the interest rate has dropped to just above 0%. Up to a point, this is a good thing for Americans: it means free money. As long as this continues, the treasury can continue to print dollars and float them into the economy without triggering inflation, which is the great fear among some economists.

However, if anything interferes with the flow of dollars to China – say, we stop buying those cheap goods – then fewer dollars will flow into T bills, even those paying no interest. In March 2008, Chinese foreign exchange reserves stood at $1.68 trillion, much of it in T-bills. The Chinese could decide to exchange those dollars for Euros, taking a hit on the exchange rate, and seeking a higher return elsewhere. That would be a bad thing.

Another thing that could interfere is the cost of the War in Iraq, which is currently running at $341.4 million per day, and goes a long way toward explaining that deficit. Iraq has been described as “an environment awash in $100 bills.” Some have remarked on the site of tribal leaders paid with duffel bags full of $2 million worth of shrink-wrapped $100 bills with no receipts recorded. Several military personnel have been indicted for stealing some