How to Save on Gasoline

The American Taxpayer's Burdens

Sweetening the Wall Street Bailout

Yesterday, March 24, 2008, news services reported that the Federal Reserve-backed offer made by JP Morgan Chase to acquire Bear Stearns was increased from $2 per share to $10 per share. Sweet.

Living with Inflation on a Fixed Income

As the Federal Reserve commits tens of billions to bail out Wall Street, people having fixed, moderate or low incomes struggle with the inflation monster. Whatever comfort Fed governors take from seemingly low core inflation rates, a person who must choose between buying either bread or milk won't feel real good.

Investing in Hard Times

With real estate, stocks, corporate debt, and almost all other assets declining, it's tough to figure out what would be a good investment. But hope springs eternal. Old fashioned American optimism will always find an outlet. Maybe you'll find investment inspiration below:

Dog Food Manufacturers. Inflation of food prices is close to the double digit level. People will turn away from filet mignon and lobster, and toward less expensive alternatives. Sales of dog food could rise, and not necessarily because dogs are being treated better. Dog food manufacturers might jump on this bandwagon and bring new gourmet offerings to the market.

Big Breweries. Think about the large, national breweries that produce the cheap swill and malt liquor that gives you a big bang for the buck. They will probably enjoy increased sales at the low end.

New York City Food Cart Permits. As Wall Street cuts back on expense accounts, $1,000 bottles of wine will sit on store shelves, and hot dog vendors in Manhattan will see sales increase. When you consider that ketchup, mustard, onions, relish and sauerkraut can all be classified as vegetables, the hot dog looks better and better when you have less than $5 for lunch.

Real Estate Opportunities. Afficionados of late night television know that there are always opportunities in real estate, and hard economic times are no exception. Even when people are down and out, they still need a place to live. Think about mobile home parks, welfare hotels and slums.

Credit Card Companies. Even though the Federal Reserve has been lowering interest rates, many credit card customers have had their interest rates raised. Increased fees have also been imposed. If you're being gouged, consider investing in credit card companies as a hedge against your losses. If you haven't been gouged yet, think about how likely it is that you will be gouged in the future (have you ever met a nice credit card company?) and consider credit card companies as a way to offset future expenses.

Electric Utilities. With the deregulation of electricity, utilities aren't as predictable an investment as they once were. However, many people will be faced with a choice as to what bills to pay. Electricity is used for an enormous variety things today. For example, how could you face your family every evening if the big screen TV couldn't be turned on? How would you keep your sanity if your kids weren't diverted by mind-rotting computer games? As you cut back on restaurant meals, how could you "cook" without the microwave? The electricity
bill will be paid before many other bills, so electric utilities might turn out to be a good investment.

Yellow Mustard Manufacturers. Yellow mustard goes well with bologna, pepper loaf and a variety of other inexpensive meat products. It also helps to mask the flavor of day old and rancid food. Yellow mustard manufacturers can look forward to flush times.

Unlimited Credit at the Crossroads

The problem with debt is that you are expected to repay it eventually. When you accumulate a lot of debt, the burden of repayment is heavy. Americans--including consumers, home buyers, investors, speculators, and banks--have accumulated a shipload of debt. The ongoing deleveraging of America is the natural result. Refi isn't a legal right. It's just more hair of the dog that bit you.

The Federal Reserve has recently nationalized a major investment bank, Bear Stearns. That's not the precise legal form of the transaction. But that's largely the effect of the deal. The government bears a lot of the risk of loss (on some $30 billion worth of potentially toxic assets). And the government gets a large voice in the management of Bear Stearns' activities. JP Morgan Chase gets the upside if Bear Stearns' shareholders approve the deal. But Bear Stearns' shareholders reportedly can reject the deal and get 12 months to shop the firm for a better deal. In the meantime, presumably the government will run things there. Bear Stearns: now a subsidiary of the Federal Reserve?

It's odd, to say the least, that the full faith and credit of the United States has been pretty much placed behind an investment bank that performed badly. The ones that performed better don't (as yet) have this government guaranty. But let's not be cynical, shrug, and say, "that's life in the rabbit hole." Let's consider whether federal regulators could do better in the future so that we don't have to nationalize more investment banks behaving badly. What could be done?

The problem is that banks can pretty much create unlimited amounts of debt unless someone restrains them. Lack of restraint--by the banks and their regulators--is what got us into this mess. The Federal Reserve and other federal regulators can prevent this from happening again. The Fed has several tools: reserve requirements, monetary policy and regulation of bank accounting rules.

The reserve requirements compel banks to place a certain percentage of their deposits in non-interest bearing accounts at the Federal Reserve Banks. The reserve requirements can encourage lending (if they are low) or discourage lending (if they are high). High reserve requirements reduce the amount of money banks can lend and force them to choose their loan customers with greater care (which means ascertaining whether or not they in fact can repay the loans). Not much attention is paid today to reserve requirements, but they could be dusted off.

Monetary policy, which consists of regulating interest rates and the size of the money supply, is the most prominent way by which the Fed controls lending. There is little evidence of restraint in current monetary policy. Perhaps the Fed is right in combating the recession that it doesn't predict, but it certainly is running the risk of inflating prices, as well as new asset bubbles.

Accounting rules dictate what assets must be on a bank's balance sheet and what assets can be swept under the rug into SIVs and conduits. The size and asset-mix of the bank's reported balance sheet determines its capital requirements. Lack of capital is a severe problem at the major banks today, in substantial part because they in actuality had to bear the risk of loss from assets that weren't on their balance sheets--and which accordingly weren't buffered by increased capital. Accounting must bear a fairly close relationship to reality, or it fails to serve its intended purpose. The federal banking authorities can impose accounting requirements to eliminate this hide-and-seek game with SIVs and conduits, and they can deploy phalanxes of examiners to make sure the banks are complying with the rules.

The administration has announced a flurry of actions designed to clean up the mortgage lending process. That's all well and good. Irresponsible, fraudulent and downright outrageous things have happened to mortgage borrowers. But today's problems extend well beyond the mortgage markets, and into the regulation of financial institutions. Government regulation is a central part of the financial markets, and vigorous, effective regulation is essential to maintaining public confidence. That's the lesson of the Panic of 1907, and it's the lesson that has had to be relearned a century later.

The Federal Reserve Bailout of Wall Street: Not Enough Lifeboats

With this week's announcements of an increase in the Fed's Term Auction Facility to $100 billion, the creation of a $200 billion Term Securities Lending Facility for the Fed primary dealers, and Bear Stearns' individualized line of credit at the Fed discount window, it's clear that the Fed is paving the way for a federal government bailout of Wall Street. But there aren't enough lifeboats on this sinking ship. Although the Fed has almost $900 billion in assets, there are trillions upon trillions of dollars of CDOs, CMOs, and other hinky debt instruments out there. The Fed can't buy or finance it all without creating the mother of all inflations that would turn America into another Argentina (except most Americans can't do the tango).

So who should get priority in the bailouts? First, brokerage and investment advisory customers (e.g., widows, orphans, paraplegics, Mom, Pop, 401(k) plans, and pension funds) should be protected, and beyond SIPC limits if it comes to that. Their money constitutes the investment funds that Wall Street depends on, and if they lose confidence, the current financial crisis will feel like a gentle Spring breeze. Second, counterparties of Wall Street firms (including other Wall Street firms in their capacity as counterparties, as well as non-Wall Street entities) should be protected. Counterparty confidence in the markets is necessary to make the financial system function.

The debt holders and shareholders of Wall Street firms should not receive full protection. The government should receive senior debt and preferred stock in connection with any bailout, so it can profit if and when the firms rebound. If the taxpayers are going to bear some burdens here, they should get some upside potential. (Chrysler paid this price for its 1979 bailout and the taxpayers actually did make a profit.) Debt holders and shareholders that are unhappy about being diluted can (a) take their chances in bankruptcy (which is another way of kissing their investments goodbye) and/or (b) shake the tree until current management decides to pursue other interests. Of course, that's if the government doesn't force a change of management, which it should if there's going to be a federal bailout. Providing taxpayer funds to the same executives who mismanaged these firms so badly they need a federal bailout would be absurd. There's no room on the lifeboats for them. New leadership is needed at the firms if public money is needed at the firms.

Mysteries of the Alternative Minimum Tax

Easy Credit Is Like Good Champagne

Last fall, the Federal Reserve implemented a policy of monetary easing (i.e., lowering the cost of credit) in response to the credit crunch. That's how we got into trouble in the first place. Is it any surprise that today we have gold and petroleum prices bubbling up?

100% Home Financing: It Works If Prices Never Drop

Where to Find Individual Health Insurance Coverage

For some real ways you might find individual health insurance coverage, please go to http://blogger.uncleleosden.com/2007/06/how-to-find-health-insurance.html.

The American Consumer, Propping Up the World

Federal Policy for the Financial Crisis: Chewing Gum and Rubber Bands