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.
The government plans to offer Social Security benefits via a debit card. This is intended to make it easier for the 4 million Social Security recipients who don’t have bank accounts. The government believes a deibt card is safer, more reliable and cheaper than paper checks.
It saves the government 88 cents per recipient, and saves recipients the average of $6 they pay to cash a check. It also reduces inconveniences associated with lost, delayed and stolen checks.
The card can be used in the same way regular debit cards are used. There is no annual balance, and account balances can be checked online or by phone. Those who are intimidated by this type of technology can elect to continue to receive paper checks.
According to a recent study, workers with office plants rated themselves happier with their work life than those workers without plants. They also rated themselves as happier with life in general. The most satisfied were those lucky enough to have windows and office plants, but that group was only slightly happier than those who did not have windows but did have office plants. It is believed that the reason they benefit is because indoor plants help to purify the air, provide a calming visual, and link us to our evolutionary past.
With the cost of fuel increasing, many Americans may find it in their financial interest to move from the suburbs to the metropolitans. If they make the move, they will reverse the trend of moving to the suburbs that began in the 1940s with the creation of the Levittown, NY suburbs.
Moving to the suburbs was originally motivated by a desire for space, quiet, safety, better schools and to get away from Jews, Hispanics, and Blacks. Of course later, those groups would challenge the laws that made it legal to exclude them, and move to the suburbs themselves. The resources put into making the suburbs desirable could have easily been invested into cities, increasing their desirability. When gas was cheap suburban life made sense, but with gas prices skyrocketing and no end in sight, many suburbanites are beginning to reconsider suburban living. Empty nesters who no longer have to factor in schools will find this an easier decision to make.
I made the decision to move to the city almost 8 years ago, long before gas prices reached the more than $4 /gallon level. I was living in the Los Angeles area and was exhausted by the commuting I had to do in order to make my life work. Even then I felt that the cost of maintaining a car was too costly. I was also concerned about the environmental cost associated with owning and operating a car. My decision was made easier with the death of my Alzheimer’s mother, and with my youngest child’s completion of the public high school. Although there are some things that are pleasanter in the suburbs, I like the grittiness of city life, and the fact that amenities such as museums, concerts, theaters are easily accessible.
Yes, according to the New York Times. The Times reported a few days ago that spurred on by more bad news in the housing sector, the Senate is near to approving a bill to help homeowners. The latest housing index showed prices had declined in April by more than 15 percent from a year ago. This is especially bad news for soon to be retirees who expected their homes to provide some of their retirement income. While this group cannot expect the housing bill to help much, there are others who can benefit.
The Senate is considering a rescue-refinancing plan that is intended to stem the more than 8000 foreclosures a day. The plan would allow qualified owners to refinance into more affordable, 30 year fixed rate loans with a federal guarantee. The legislation benefits first time buyers, who would receive a refundable tax credit up to $8000 or 10 percent of the value of a home. The limit on loans that Fannie Mae and Freddie Mac could purchase would be increased from $417,000 to $625,000 in the expensive housing markets.
We may be in a bear market. If that’s true, aging baby boomers may end up with less retirement income than they anticipated. That’s because unlike in earlier times when we could expect to retire with company provided pensions, since the 1980s, we have increasingly come to expect our 401(k)s to take care of our retirement needs.
Your 401(k) is a portion of your salary that is deducted from your paycheck and placed into a special acount. That money is invested in mutual funds. Mutual funds are a collection of stocks and bonds. In other words, your retirement income is invested in the stock market. If the market is headed for a prolonged decline then expect that income to take a nosedive. That’s what has happened to retirement income during earlier bear markets.
In “What to do if this goes on … and on,” by the L.A. Times, by Wall Street’s definition, the period between 1966 and 1982 was a secular bear market. During that period the Dow made no net progress, although there were huge rallies and steep declines, typical of a secular bear market. Many of the people who had invested in stocks for their retirement ended up with far less than they expected.
By 1982 Americans had sworn off stocks. But in the ‘80s and ‘90s there were big increases in stock prices. Prices reached their height during the dot com bubble. The bubble burst in 2000 and stock prices plummeted. Some experts believe that we’ve been in a secular bear market since that time. The first phase was when overvalued tech and blue chip stocks crashed. The new phase is the credit crunch stemming from the housing crash. There are some who expect this to slow economic growth for years. It doesn’t help that we are now facing record oil and commodity prices, driving inflation up.
Given the precarious nature of the economic times, if you are close to retirement, it might make sense to invest in cash and short term bonds.
For those of you who can’t keep it straight, a bear market is the bad one. A bear market is usually signified by a 20% decline in stock prices. According to the L.A. Times, for Wall Street “a very long period of falling or, at best, sideways-moving stock prices” is considered a ‘secular’ bear market.” The most recent bear market followed the tech bubble burst and lasted from March 24, 2000 to Oct. 9, 2002.
