Laby Business Report

Yes, according to money man Jim Cramer. That is if you need your money within the next 5 years. That’s because of the market volatility. The New York Times reported that today “the Dow Jones industrials finished more than 360 points lower, dropping below the 10,000 mark for the first time in five years.”

If you’re not planning to retire before then, you’re better off leaving it in the market.

Leading economist, Nouriel Roubini believes our bank deposits may not be as secure as we assume. According to Roubini, there is a nationwide slow run on banks. This run could accelerate if people realize that the FDIC has only about $50 billion to ensure the $1 trillion in assets held in the nation’s financial institutions . This means that unless Congress votes to recapitalize the FDIC, the FDIC will not have enough money to ensure all of the open accounts.

While there is no reason to panic (if nothing else, we probably can count on Congress to vote to maintain faith in the retail banking system), it is a good idea to only keep the maximum amount the FDIC ensures - 100,000 in one account.

With the housing market collapse have come all sorts of new words such as Alt-A loans, ninja loans, subprime, that leave many of us confused. This article by Jack Rosenthal from the New York Times take a stab at explaining some of the most commonly heard terms.

By the way an alternate Alt-A loan is one in which borrowers have excellent credit scores but can’t document their income and assets. Lenders are becoming increasingly concerned that these may be the next set of loans to default.

For those of you hoping that the housing market had bottomed out, the news released yesterday indicates otherwise. Fannie Mae reported losses amounting to $2.3 billion, while its country cousin, Freddie Mac’s last quarter losses amounted to $821 million - far more than had been anticipated.

While some experts believe prices have fallen enough to get a bargain, I believe that the news from the country cousins indicate house prices still have a way to go before they reach the bottom. This means if you are contemplating buying a new home, it might be a good idea to wait. For those of us who had counted on our homes to provide additional retirement income, this is not good news.

The purpose of the rebate checks was for people to spend thereby reinvigorating the economy and preventing it from falling into a recession. The reality is that faced with soaring debt and risking gas prices, some people are opting to save the money or use it to pay bills. As for the others, they’re spending their rebate on furniture, clothes and electronics and especially gas. 

Experts predicted that we’d behave like we did in 2001, when we spent between 20 and 50 percent of our rebates. Because American spending equals 70 percent of our country’s economic activity, they believed the spending would keep the economy growing through the summer, after which they expected the effects to drop off. This would leave off where we started: a deteriorating job market, eroding paychecks, tight credit, and falling real estate prices.

How have economists predictions panned out? The economy expanded slowly from April to June - slower than economists expected. The reason it grew at all was because of increased spending by consumers and increased exports. The problem is that spending and exports can’t keep growing. In the case of the tax rebates, they have mostly been distributed. They bolstered spending, but they have not been enough to generate the type of activity that will continue after the cash has cycled through the system.   

As of now the housing market is still in free fall, unemployment is trending up - the latest report shows unemployment rate is now at 5.7%, and there is a possibility that the anemic growth may be revised to show that it was really a contraction. With all this bad news do anyone believe we are not in a recession?

The online version of the New York Times has a series on the impact the current economic downturn is having on ordinary Americans. Interviewed for the series are a young couple, a middle age woman, and an elderly woman, all of whom are at risk of losing their homes because of debt.The villains in the piece are the banks and other financial institutions, which make obscene profits off the misery of ordinary people.

According to the article, unlike in the past, banks don’t hold loans on their books. They package the loans and sell them to investors generating large fees. In the past it was critical to lenders to be repaid. Now getting paid is less important than the fees the loans produce.

Home buyers are charged 50 percent more in junk fees. To buy a home, mortgage lenders charge junk fees such as $75 for emails and $100 for document preparation, and $70 for courier services, inflating the cost to homebuyers an average of $700. 

Fees also play an especially strong role in the credit card market. Although interest rates may have fallen to the single digits, credit card companies charge even those with good credit around 19 percent in interest. Average late fees have almost tripled since 1994 and charges for exceeding credit limits has more than doubled.

These changes net the financial institutions billions. This unchecked greed on the part of the financial institutions coupled with weak job growth is causing untold misery for millions of Americans.      

Eric J. Weiner recently wrote an interesting article for the Los Angeles Times about the really bad shape our economy is in. It turns out it is in really bad shape. So bad that US Treasury Secretary Henry Paulson has been shopping around trying to get Middle Eastern investors to buy up American companies. 

It’s not like this is the first time the American economy has had to be bailed out by rich investors. But unlike in the past when one or two wealthy individuals or investment banks could step in and stop the bleeding, the economy is in such bad shape that only the investment income of rich countries can make a difference. Just recently Paulson approached the heads of Abu Dhabi Investment Authority, the world’s largest “sovereign wealth fund” (SWF) encouraging them to buy American businesses. 

SWFs are excess capital generated by a country or region that is invested in mutual funds. In the 1990s the funds held $500 billion combined. Today they hold about $3.5 trillion. That’s more than all of the assets controlled by all the hedge funds in the world. By the end of 2012 this figure is expected to be at least $10 trillion.

According to Weiner, the new power of SWFs has been on display during our recent mortgage crisis. They’ve essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20 billion from a consortium of SWFs from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10 billion from a Singapore fund that now controls 9% of the bank. Merrill Lynch took in about $11 billion from SWFs from Kuwait, Singapore and South Korea. Even Morgan Stanley got $5 billion from China’s SWF.   Weiner notes that this is a change in the way globalization has traditionally worked. In the past real power in international finance was held by a few individuals, whereas now it is held by rich countries. 

This turn of events is not without potential problems. Since it is foreign governments which control the funds, these countries will increasingly own substantial investments in companies in important industries such as biotechnology, computer technology, and aerospace. According to former treasury secretary, Larry Summers, there is no way to know the political intent behind these investments. It may reach a point where decisions about our jobs, home loans, school loans rest on with foreign governments.      

Fannie Mae and Freddie Mac stand behind most of the United States’ mortgage debt. In recent days their stocks have taken a nosedive. With the housing meltdown, these two entities have become more important to the housing market. This is because the pullback over the last year of banks and others who backed mortgages has forced them to pick up the slack. 

Reasons given for the falling value of their stock is fear that they won’t be able to raise enough money from investors to cover growing losses from bank defaults. Freddie Mac’s stock has fallen 50% in the past week. Experts see their troubles as further evidence that the housing downturn may last well into next year.   

Fannie Mae and Freddie Mac are privately owned companies whose stock is publicly traded. They were charted by the federal government to buy or guarantee loans and mortgage securities. They are owned and operated by stockholders. They are protected financially by the federal government. This means that taxpayers are on the hook for any losses. Among government support they receive is access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. They do not lend directly to homebuyers, but buy up loans from lenders then bundle the loans together and sell them to investors.  

Today’s New York Times reported on the problems small businesses have in securing healthcare insurance for their employees. This is a huge problem since “Of the 47 million uninsured people in this country, at least 20 million are employed by small businesses or work for themselves — a figure that has increased by an average of more than 500,000 a year since 2000.” 

Small businesses pay about 18% more than do major firms for the same type of coverage. They face wild jumps in rates when they replace a younger worker with an older worker or a male with a female. In some cases, workers must also qualify, that is prove that they are in good health; something older workers have a harder time doing.

The abuses in the healthcare system are many. They will continue as long as we allow the healthcare providers the freedom to do whatever they will. Last year,  even as the  CEO of Anthem Blue Cross received $42 million in bonuses, in an act called rescission, they have been systematically dropping individuals’ healthcare policy after they seek service for major illnesses and refusing to pay valid hospital claims. You can imagine most of those affected are in their middle or older years. (Recently, 480 California hospitals banded together and successfully sued Blue Cross).

The fact that these types of abuses are a part of our healthcare system is an indictment against our society. Does the right of these firms to exploit us trump the rights of the people to have reasonable healthcare? With more of the population working for small companies, this issue deserves serious attention, since an unhealthy society cannot compete in this globalized world.