savers | Online Savings Blog

Inside the Root Cause of the Flailing Economy
09.24.08 | Money | 2 Comments | by Fred Siegmund

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Savers might want to read Treasury Secretary Paulson's press conference statement titled "Comprehensive Approach to Market Developments." He is asking for $700 billion for the U.S. Treasury to buy defaulted mortgages.

An economy runs on a flow of transactions. Billions in defaulted mortgage payments cuts down the flow, which will spread to other payments.

The government must support these financial institutions or watch the economy slide into recession or worse, but that does not mean the Secretary's plan is the best one.

The Federal Reserve Bank has both the ability and authority to support these institutions without an appropriation or legislation — so it is not clear why the Treasury is requesting funds for itself. Treasury Secretary Paulson does not tell us why the Treasury should be the purchaser when the Federal Reserve Bank has the liquid funds to support these institutions.

The Treasury Secretary's statement gives causes for these current defaults. He explains that the Treasury has been coping with financial problems on a case by case basis, but now the time has come "to address the root cause of our financial system's stresses."

One paragraph later he suggests the root cause: "lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford."

The statement blames irresponsible lending and irresponsible borrowing, but these defaults show that many banks and major financial institutions had billions of dollars of loanable funds, which were available for loans to businesses and corporations to fund plant and equipment or other business needs.

We have to think a bank with qualified business or corporate borrowers, or qualified home buyers would lend to them before lending to unqualified borrowers in the sub prime lending market. The term sub-prime defines a loan where lenders knowingly lend to unqualified borrowers.

Lending billions to unqualified borrowers suggests there was a large surplus of loanable funds.

Remember too that the Federal Government is a qualified borrower that needs billions of savers' dollars pay for its deficits, but still they had billions for unqualified borrowers.

Toward the end of his statement Secretary Paulson tells the country he will be working with members of Congress "to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies."

As savers we hope that happens, but lax lending practices were not the root cause. When Secretary Paulson tells us how and why an economy generates billions in loanble funds for unqualified borrowers then we will learn about the root cause of this failure.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
Price Fixing is Legal: Why It Matters
09.09.08 | Consumerism | 0 Comments | by Fred Siegmund

Savers should beware that the U.S. Supreme Court recently reversed earlier Anti-Trust rulings preventing price fixing.

Under new rules established a year ago, manufacturers are now allowed to fix minimum prices for resale of their products and coerce retailers to stop discounts by cutting off supplies and refusing to sell to them. The practice is called Resale Price Maintenance and can be expensive for savers.

A recent Wall Street Journal article, Price-Fixing Makes Comeback After Supreme Court Ruling, quotes from the Court's ruling that Resale Price Maintenance "could foster competition by giving retailers enough profit to promote a brand or offer better service." In the ruling the phrase "giving retailers enough profit" suggests that retailers should be happy with the decision.

The article quotes many retailers and all of them detest resale price maintenance because it hurts their business. Higher prices definitely hurt consumers.

A discount retailer of baby products was quoted as saying that it "prices a baby car seat made by Britax, the Boulevard Convertible, at $309.99, the manufacturer's minimum. If he didn't, Britax would cut off the supply of a popular product." The retailer is also quoted as saying he could sell the seat of $229 and still make a $50 profit.

However, there is previous experience with Retail Price Maintenance because Congress passed a Fair Trade Act in the 1930s that permitted states to craft their own Resale Price Maintenance. Experience shows it goes with branded products, especially apparel, shoes, consumer electronics and home furnishings and it will raise prices for brand name products.

Savers can save by avoiding brand loyalty and concentrating on price and finding store brands or generic labels.

If the practice catches on, experience shows that retail outlets that go along with resale price maintenance for branded products have a drop in sales at the higher price. Their drop in sales gives them incentive to resell their surplus supplies in the wholesale market to other retailers, especially discount retailers.

Some years back, reselling took place in the designer jeans market where designers were trying to maintain their image with a high price. Jeans were resold as "bootlegged" products to discount retailers. Since the only way for manufacturers to enforce their restrictions is to cut off supplies, it was hard for them to know where the "bootlegged" supplies were coming from and therefore who to cut off.

The courts' ruling is anti-competitive despite the suggestion it could "foster competition." Free enterprise includes the freedom to set price at all levels of the marketing chain. Competition includes price cutting and allows for new entrants who attract customers with a lower price. We suspect that the court has underestimated the power of competition.

In the meantime, take care before you buy and ask yourself if a brand name is really worth it.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
How Exchange Rates Affect Savers' Bottom Lines
08.19.08 | Work | 0 Comments | by Fred Siegmund

Last spring, the Washington Post ran an article entitled "Foreign Buyers Flock to DC Office Market." The article explains that foreign investors bought 10 times as much commercial property in the District in 2007 as they did in 2006, with 2008 looking like 2007.

Buyers from Europe, Australia, Asia Pacific and Latin America have bid up prices to a record $867 a square foot.

Washington is an office-based economy with a stable or growing job base, so it is good to have the construction industry creating jobs and making way for even more office jobs. It would be better if the savings and savers financing the buildings were Americans.

Foreign nationals have so many dollars to invest because Americans buy so much oil and import so many products from Europe, China and other countries abroad. In 2001 and 2002 Americans paid around a dollar for a Euro, Europe's universal currency. By 2005 they had to pay around $1.35. Today, it is around $1.57.

A bottle of French wine that was $10.00 in 2002 now costs Americans $15.70. A higher price for wine makes it easy to see how higher exchange rates and a falling dollar value discourage consumption.

It might not be as obvious how higher exchange rates and a falling dollar value can benefit American savers. American buying abroad has supplied so many dollars to foreigners they are using their surplus in America's capital markets.

Some of it is loans but some of it is to buy America's assets like the office buildings mentioned above. It is sobering for real savers to see Americans trading assets like office buildings to pay for import consumption, but the devaluing dollar will begin to change that.

The devaluing dollar that limits American consumption will also limit the dollars foreigners have to invest in United States capital markets. If Americans have to rely more on its own savers, then savers can expect to earn higher interest rates.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
Savers Beware: What Are Your Underlying Assets?
06.16.08 | Money | 0 Comments | by Fred Siegmund

There was a time when it was common for corporations to create long lived assets with borrowing. It may take several years to build a steel mill or a power plant before there is something to sell, but loan or bond payments will come from revenues and the economy will have more steel, more electricity and more assets.

Banks, or financial intermediaries as they are called now, are still happy to make loans for plant and equipment. Trouble is there are more loanable funds to loan than borrowers willing and able to borrow for long lived assets.

As a result, banks make more consumer loans that support consumption spending like credit card debt. Loans that support consumption helps support jobs and the economy and provide an outlet for savers looking to earn interest income. However, credit card purchases like vacations, housewares and clothing have little value as security for credit card balances.

The home mortgage should be a secure loan because a home is a long lived asset. It used to be that Savings and Loans would make mortgage loans at 6 or 7 or 8 percent interest and the home would be the asset in case of default.

Lenders with home mortgages on their books could sell their mortgages if they needed to raise cash but they would tend to hold them to maturity, earning a steady income. In case of selling a mortgage it would usually be sold to another financial institution such as the Federal National Mortgage Association.

That changed when adventurous money managers started to buy thousands of mortgages and bundle them for resale into something like to a bond that pays interest on invested principal. They call them collateralized mortgage obligations (CMO) or collateralized debt obligations (CDO). In that way, mortgages could be resold to smaller investors who would not normally be willing or able to buy individual mortgages.

What is important to notice though is that repackaging and reselling mortgages does not create new assets. Reselling mortgage credit means more transactions that allow money managers to charge management fees and potentially make money with price fluctuations in CDO prices.

Bear Stearns held collateralized debt obligations in their hedge fund, but apparently so many of the underlying mortgages were to people who were sub prime borrowers that defaults set off a chain reaction. Since Bear Stearns borrowed money to buy collateralized debt obligations for their investors, they defaulted on their loans and threatened the solvency of major banks.

With so many new ways for money managers to attract savers, it is more important than ever to notice the underlying assets and ability to pay.

Did Bear Stearns investors know so many of the underlying assets were sub prime loans? Savers beware!

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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