This scares me

If you’ve read this blog for any period of time, you know that I hold very pessimistic views of the economy. I worried about the housing bubble long before it burst–though I admit I knew nothing about the financial instruments that Wall Street was creating that enabled the bubble and made its bursting a bigger economic event.
Lately, I’ve been concerned that the cycle where the US issues government bonds to essentially enable our lifestyle that allows us to buy lots of imports from places like China, and China buys those bonds to ensure that there continues to be a market for their goods. That cycle can’t go on forever.
Today, I was listening to a recent Planet Money podcast about Greece’s current debt problems. One of the people interviewed on the podcast made the following statement which seems to say the same thing I’ve worried about (emphasis added):

Most of the developed world is screwed . . and that makes this crisis particularly different than anything we’ve seen in our lifetimes. . . The countries that aren’t screwed are the emerging market countries. They have very low levels of debt, both public and private sector. So, they’re not impacted to the same extent. It’s been a complete flip-flop. The developing world is now where the rich world was 30 years ago. . . The world has been turned on its head, so now the emerging market is lending money to the rich world, so the rich world has continued to spend more than they’ve made for decades.
What we’re talking about here is an adjustment that’s going to happen not just in Greece, around the rest of Europe. It’s going to have to happen in the UK, it’s going to have to happen in the US as well. People at some point are going to have to develop a better connection with what government spending means for them personally. We’ve had the better part of a couple of decades where people have lost that connection. It’s viewed as manna from heaven and it’s just an entitlement, something that everyone has deserved that has no impace, or should have no impact, ever on them. They should be able to borrow unlimited amounts, get unlimited amounts of government services and benefits with no repercussions. It’s not all free money. The money has to be paid back.

Playing by the rules

The New York Times recently ran an article about Brooklyn judge Arthur M. Schack who readily throws out foreclosure motions if the lenders do not have their paperwork in proper order. The depressing part of the article is this:

“To the extent that judges examine these papers, they find exactly the same errors that Judge Schack does,” said Katherine M. Porter, a visiting professor at the School of Law at the University of California, Berkeley, and a national expert in consumer credit law. “His rulings are hardly revolutionary; it’s unusual only because we so rarely hold large corporations to the rules.”

Doom and gloom

If you read my blog regularly, you probably already know that I’ve long been pretty pessimistic about the economy. My over-simplified layman’s take is: since so much of the economic growth of the last couple of decades was based on unsustainable and/or imaginary things (e.g., real estate values; crazy, unregulated investment vehicles,etc.), the new reality–after we stop the decline of the global economy–will be much different. For instance, see this post by Rafe Colburn and my comment about it.
Now, I’ve found an article in The Economist that backs up my pessimism. After going through details of the current and future economic situation, here’s the summary:

The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.
Consider what that means. Much of the rich world will see jobless rates that reach double-digits, and then stay there. Deflation—a devastating disease in debt-laden economies—could set in as record economic slack pushes down prices and wages, particularly since headline inflation has already plunged thanks to sinking fuel costs. Public debt will soar because of weak growth, prolonged stimulus spending and the growing costs of cleaning up the financial mess. The OECD’s member countries began the crisis with debt stocks, on average, at 75% of GDP; by 2010 they will reach 100%. One analysis suggests persistent weakness could push the biggest economies’ debt ratios to 140% by 2014. Continuing joblessness, years of weak investment and higher public-debt burdens, in turn, will dent economies’ underlying potential. Although there is no sign that the world economy will return to its trend rate of growth any time soon, it is already clear that this speed limit will be lower than before the crisis hit.

(Via 3 Quarks Daily)

A sense of honor

The theme of this week’s This American Life radio program is ‘Scenes from a recession.” In the first act:

Ira goes to the Rogers Park area of Chicago to talk to some condo owners who are in a precarious situation—since the housing market crash, the developer who renovated and sold them their units has all but disappeared. He’s in foreclosure on half of their building’s units, and in the meantime, they have no one to pay for the upkeep and maintenance of the building they all bought into.

It’s a nightmare situation for the owners. At the end, Ira talks with two of the owners about why they haven’t just defaulted on their mortgages in order to get out of this horrible situation. First, each owner concedes that the consequences of default would not be that onerous for them, but then each owner explains why she stays. The first owner says it’s a matter of honoring her word: she signed a contract, she has the ability to pay on it. The second owner says that she stays out of a sense of obligation to the community of unit owners. Her departure would just make the situation that much worse for the remaining owners.
I’m shocked at the stark contrast between the attitudes of these people and of the people and institutions who got them into this situation–not just the slimy developer who fled the country, but also the bank that is stalling on foreclosure as long as possible, when foreclosure is what the unit owners need to move forward.
I know that this story was produced so as to highlight this contrast, but I’d say it’s a pretty clear depiction of how we’ve gotten into our current economic mess.

Car buying sucks, continued

After relating one of my car buying horror stories yesterday, I should offer some advice to help others from getting screwed. Here’s a detailed Consumerist entry on how the four-square sales method works and how to get around it.
Whether or not the salesman uses the four-square method, his goal is to mix together the several different transactions you’re undertaking (buying a car, selling a car, getting a loan): by lumping those together, the salesman makes it harder for the consumer to spot that he’s getting screwed in any individual transaction (though in the story that I linked to in my last post, the dealers tried to screw this inexperienced car buyer on just the one transaction).
The best thing to do is to eliminate as many of those combined transactions as possible ahead of time: get pre-approved financing from your bank or credit union before you walk into the dealership, sell your old car yourself. But if you have to do two or more of those transactions at the dealership, undertake each one separately and make sure you understand the terms of each one: this is the amount I’m being given for my trade-in; this is the amount I’m paying for the car I’m buying, and these are the terms of the loan: interest rate, period, amount financed, etc.

Car buying sucks

Here’s another fine example of why people dread the car-buying experience so much. In short: guy walks into multiple dealers with cash in hand, knowing what he wants, dealers try to screw him every which way.
I’ve had several bad car-buying experiences, but this one was the worst: back when we lived in New Jersey, a tree limb fell on our beloved Camry and totaled it. A few days later, I walked into the local Toyota dealer, explained to the salesman what had happened, and told him exactly what I was looking for: another 2-3 year-old Camry with a particular set of features, color doesn’t matter.
Instead of consulting his inventory, the salesman’s response was, “Well, let’s go see what we have on the lot.” Already off to a bad start. As we walked around the lot, the salesman would point to a car and ask, “Do you like that one?” or suggest “Why don’t you drive that one home and let your wife take a look at it.” He would point at another car and ask if I’d like to test drive it or if I liked the color.
Each time, I responded with “Does it meet the requirements I gave you?”, “As I mentioned, I don’t care about the color”, “My wife only cares that it meets the requirements I told you” or “Once we find a car that meets my requirements, sure, I’ll test drive it to make sure it runs.”
Each time we went through this process, my blood pressure inched up. After we’d walked around the lot for about 10 minutes, I had had it. I don’t remember exactly how I expressed my frustration, but when we went back into the showroom, the salesman excused himself to go talk with the sales manager. A few minutes later, the sales manager asked me into his office; I recounted the story above, to which the sales manager just replied, “Well, it looks like we’re not going to sell you a car today.” I walked out of that dealership never to return.
In hindsight, that stupid salesman managed to turn away a customer who was already in love with his product. I was an easy sell.
And it amazes me how many car salesmen seem incapable of adapting their sales pitch to the individual customer.
(geez, my heart rate is up just writing this blog post)

The real economic crisis

The current economic crisis is just a symptom of what really keeps me up at night–the trade deficit. Here’s a really clear explanation of it:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

And why it keeps me up at night:

Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

The issue is finally going mainstream. See this Time Magazine article.

The Wall Street crisis in a nutshell

In the broadest sense, how did we get to the current economic crisis? This MeFi comment meshes with my general understanding:

The conversion of the financial system from wealth generation to gambling (aka wealth extraction) continues apace, to the point that they’re even backing gambling itself.

A large fraction of the modern financial system doesn’t create new wealth anymore. It’s not a factory that makes wealth; it’s a casino that extracts it from the economy, while giving little to nothing back. You can see it most clearly with the idea of backing gambling as an “investment”, but the system is full of ideas like these. A gambler creates no wealth, he just takes it from other players. Likewise, most hedge funds create nothing: they just take it from everyone else in the economy.

It’s now more profitable to manipulate other people’s wealth than it is to generate your own, so that’s where all the best and brightest minds are going — into taking whatever they can out of the economy, at your expense. Most of these are zero-sum games, and it’s the average citizens that are on the losing side.
Oh, and the Treasury.

Good analogy

Rafe Colburn makes an excellent analogy about the government takeover of Freddie Mac and Fannie Mae:

Letting these two quasi-governmental companies fail would crater an already failing housing market, destroying an awful lot of wealth. That’s not something any politician is going to let happen if they can stop it (nor should they). The US is sort of like the family where the single income earner takes month’s wages and blows them at the casino. You may hate them for what they did, but you still have to take them back in because they’re the only one with a job in the first place.

Till Tampering

cash_register.gif A New York Times article discusses software for altering cash register data to cook the books in order to pay fewer taxes. Interesting.
Locally owned businesses seem to have a long history of reducing their recorded income. When I was a teenager, I worked in a family owned restaurant in the Texas hill country. I remember that the owners would pay me from the cash register usually. When I receive my Social Security summary, I see that the owners did report some of my income, but the numbers are in the report are much lower than my actual income those years. So, it appears that a certain percentage of the owners’ business (income and expenses) just never got recorded.
A small family-owned restaurant that I frequent here in Austin is pretty brazen with their cash siphoning. You pay for your meal at the register, and I’ve noticed that about half the time I pay, they simply open the register and make change, not recording the transaction at all. Until recently, they only accepted cash, so it was pretty easy to do that. Now that they take credit cards, I don’t think they can manipulate the portion of their payments made by credit card–at least not as easily.
(Via BoingBoing)