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Posts Tagged ‘economic predictors’
Tuesday, July 14th, 2009
The Universal Postal Union (UPU) was established in 1874. Today it is an agency of the United Nations. According to its website, the UPU sets the rules for international mail exchanges and makes recommendations to stimulate growth in mail volumes and to improve the quality of service for customers.” Its mission is “to develop social, cultural and commercial communication between people through the efficient operation of the postal service.” One of the services provided by the UPU is the International Reply Coupon (IRC).
“When one writes to a stranger and requests a reply, it is considered polite to enclose a self-addressed stamped envelope. This works well when both persons live in the same country; however, if they are from different countries, the enclosed postage stamp will not be valid. This technical problem was solved in 1906 when the Universal Postal Union, during its Congress in Rome, introduced the International Reply Coupon service. As the service began before the days of airmail, the earliest coupons could only be redeemed for a single-rate ordinary postage stamp to a foreign country.”
What a charming description of a beneficial, useful, and entirely unexceptionable resource. Who could imagine that IRCs would be at the heart of the one of the greatest financial scandals of the 20th Century?
Charles Ponzi was an Italian who immigrated to the United States in 1903 at the age of 21. He managed to spend five of the next 14 years in prisons in Canada and the US for various white-collar crimes. Ponzi discovered IRCs in 1919 when he received one from a Spanish company asking for a catalog he was hawking at the time. The catalog company failed, so Ponzi had no use for the IRC, but he had a Great Thought. IRCs had not caught up with the huge changes in foreign exchange rates following the end of World War I. If he could buy IRCs in Spain with Spanish pesetas, he could sell them in the US for a whole lot more dollars.
The total value of all the IRCs in existence in 1919 was less than $1 million, and, of course, they were all in very small denominations. But Ponzi thought it was worth a shot. He placed a few magazine ads claiming his postal coupon idea would double people’s money in a few months. Forty thousand suckers took the bait.
Between February and May 1920 Ponzi received more than enough money to set himself up for life back in Italy. “Investors” mailed in $420,000 in May alone, which is more than $4.5 million in today’s money. The original plan became untenable; Ponzi had $3.5 million more than the size of the IRC market. Needless to say, Ponzi did not buy any IRCs. Why bother with markets and real investing when so many people sent money merely because you placed na ad? Instead he simply paid early investors with funds received from later investors. It couldn’t last and it didn’t. By July, the newspapers were on his trail. Instead of making a break for it, Ponzi foolishly fought back. Maybe he believed his own hype. At any rate, the end came on August 12, 1920, when Ponzi was indicted for mail fraud. The whole thing lasted barely six months, but it was long enough for many foolish people to lose their homes, their life savings, and their innocence.
Charles Ponzi should have been no more than a footnote to the financial mania of the Roaring Twenties. He wasn’t the first swindler to fleece the unwary in a pyramid scheme—they had been around since 1720. And he certainly wasn’t the last. Not even Bernie Madoff’s 150-year sentence is enough to guarantee that. But for some reason—maybe because his rise and fall was so meteoric, or maybe just because his unusual name caught peoples’ fancy—pyramid investment scams have been known as Ponzi schemes ever since.
There is a moral to Charles Ponzi’s sad story. (And it is sad. He died penniless and blind in a Buenos Aires charity hospital in 1949 after several more prison stints.) The moral is, “If it sounds too good to be true, it is.” Now that sounds simple and obvious, but too many people translate this maxim as, “If it sounds too good to be true, it usually is,” or “it probably is,” or “it is, except in just this one special case.” Here’s the real translation: “If it sounds too good to be true, it is, absolutely is and always is and especially is this time.”
Tags: community development, economic predictors, green banking, Ponzi Scheme, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Tuesday, June 9th, 2009
As an ordinary American, wondering if you can keep your job or make your mortgage payment, you may be surprised to learn that the recession is almost over. But, this is what the economists are telling us. All the indicators, they say, now point to recovery. One on the key data series showing better days ahead is Personal Income and Outlays, released monthly by the Bureau of Economic Analysis. Earlier this week, the BEA reported that American’s disposable personal income rose 1.1% in April to $10.91 trillion on an annualized basis. That’s a big jump, but let’s look at the details to see if it really is a harbinger of spring.
Collectively, personal income has five components, shown below as percentages for April:
As you can see, the biggest contributor by far is employee’s compensation, but that’s not the source of April’s increase. Rather it can all be found in higher government transfer payments and lower taxes.
According to the BEA, “Provisions of the Federal Additional Compensation Program of the American Recovery and Reinvestment Act of 2009 boosted the level of personal current transfer receipts by $11.8 billion at an annual rate in April.” What a mouthful, but, hey, $11.8 billion is a lot of money! Except what it actually translates to is an extra $25 a week if you are collecting unemployment insurance.
Much bigger contributions came from tax reductions. The Making Work Pay Credit provision of the Act reduced personal current taxes by $49.8 billion at an annual rate in May. This provision allows a refundable tax credit of up to $400 for individuals and $800 for working couples. Reductions in payroll taxes added $63.6 billion (again, annualized) to May income.
What did we do with this bounty? Answer: We saved it; that is, we didn’t spend it. The BEA calculates the savings rate by subtracting personal outlays from disposable personal income. Putting $100 in the bank counts as saving, but so does paying off your credit card bill. Using this definition, the rate of US savings as a percentage of disposable income rose to 5.7%, the highest since 1995. Spending actually decreased 0.1% from March, and spending, not saving, drives the economy. Also, a little suspicion about the permanence of tax reductions might be warranted, with the Federal budget deficit spiraling into the trillions and only a handful of states able to balance their budgets.
Still, there are powerful signs that a recovery has begun. The Dow Jones Industrial Average has gained more than 2100 points or 33% since hitting its low early in March. Globally, commodity prices are soaring as is industrial production in China. In the US, long-term interest rates are rising because bond traders have started worrying about inflation, which can accompany strong economic growth. As result, the average rate for new 30-year mortgages jumped to 5.29% last week, from a low of 4.78% a month ago. I’m feeling better already. Aren’t you?
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Tuesday, May 5th, 2009
Memorial Day, 1937. Chicago. Several thousand striking steelworkers and their families gather in a field near the Republic Steel plant to obtain recognition for their union. Singing “Solidarity forever! The union makes us strong!” and carrying banners, they approach the plant. But between the men, their families, and Republic Steel stand 500 Chicago policemen. The police move forward, first swinging their nightsticks and then firing tear gas grenades and guns shouting “you got no rights.” Within a few minutes seven workers are dead and more than one hundred seriously hurt. The event has come down through Labor history as the Memorial Day Massacre.
May 1, 2009, a day celebrated in many countries as International Workers’ Day in honor of the achievements of Organized Labor. New York City. The United Automobile Workers, representing Chrysler’s unionized workers, agrees to a bankruptcy that would effectively give it a 55% ownership stake in the company. The UAW’s contract is preserved through the bankruptcy, meaning it will not have to renegotiate its lucrative salaries and benefits with Fiat, the Italian automobile manufacturer that will operate the new Chrysler.
Of course, the deal will be worth nothing if Chrysler goes down, a very real possibility. New, Fiat-designed Chryslers will not be roll off the assembly lines for two years or more, and Fiat, in the past, has had no success in cracking the American market. Not that Chrysler has had much success lately. Its U.S. deliveries in April dropped to 76,682 units, down 48% from a year ago and 60% less than in April 2007. Chrysler isn’t alone; total U.S. auto sales fell in April, for the 18th consecutive month to just 819,540 units. But, at 9.4% of U.S. sales, Chrysler is behind GM, Ford, Toyota, and Honda.
Organized labor, still oppressed in 1937, reached its zenith in the 1950s and 60s, when America’s industrial might was unchallenged. The notion that one of the Big Three automakers could fail would have been preposterous. Labor flexed its muscles, wringing ever-greater concessions from Capital. But the world turned, and now, at least at Chrysler, Labor is Capital.
Tags: community development, economic predictors, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Tuesday, March 17th, 2009
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” – Winston Churchill, November 10, 1942, describing the Allied victory at El Alamein in North Africa.
The Census Bureau reported this morning that retail sales in the United States, excluding autos and gasoline, rose sharply for the second consecutive month. The percentage increases were 1.4% in January and 0.5% in February. Sales of electronic equipment, clothing, sporting goods, books, and general merchandise have all risen this year. Gasoline sales are up as well, though mostly because of rising prices following the steep fall late last year. Automobile sales remain in the doldrums. Total vehicle sale in the US fell to an annualized rate of 6.4 million units, the lowest since 1981. 
Separately, the Labor Department announced that first-time applications for unemployment insurance remained above 600,000 for the sixth consecutive week. Initial claims of 654,000 brought the total number of Americans collecting unemployment compensation to an all-time high of 5,317,000.
The two-month rebound in retail sales marks one of the first hopeful economic signs in many months. Retail sales are the main driver of our economy and shopping is our national pastime. But, until initial unemployment claims begin to slow down, we won’t know if today’s report foreshadows a real or a false dawn.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line, unemployment rate
Posted in Banking Industry | No Comments »
Friday, February 20th, 2009
As President Obama made clear in his speech in Phoenix, the on-going foreclosure crisis is having huge ramifications for the entire economy. Not only are responsible homeowners at risk of foreclosure being hurt, but the situation is negatively impacting their neighbors—who may not even have a mortgage or own a home, local businesses and the communities in which we all live and work. A landmark Chicago study cited by President Obama in his speech found that for each foreclosed home on a one quarter-mile radius block, the home values of adjacent properties can decline by up to 9 percent. The crisis means that cities and towns are losing tax revenues, which means everyone who depends on their services is hurt. This crisis is no longer—if indeed it ever was—limited to “a bunch of irresponsible people who bought or sold more home than they could afford.”
The President’s Home Affordability and Stability Plan substantially enhances Fannie Mae’s and Freddie Mac’s ability to help homeowners whose loans they own or guarantee, and establishes a system under which all lenders and servicers—including those, like ShoreBank, who hold loans on their books—will be incented to work with homeowners to provide affordable modifications for loans on the house they live in. ShoreBank already has a loan modification program in place, so if you are a homeowner with a ShoreBank loan that you are having trouble paying, please get in touch with us as quickly as possible. One of the valuable lessons we have learned since we started our Rescue Loan Program in 2007 is that too many homeowners, for whatever reason, wait until it is too late to take actions that could save their home from foreclosure. And while we view bankruptcy as a last resort, we agree with President Obama that the Bankruptcy Code needs to be modified to allow judicial modification of loans on a primary residence.
Going beyond what President Obama has announced, I hope the additional $200 billion the Treasury will make available to Fannie and Freddie will encourage them to buy more of the loans on the books of ShoreBank and other lenders. That will enable us to make loans to new homeowners—the new loans that are so critical to stabilizing the housing markets.
The speed and efficacy with which the President’s entire program will be implemented depends on the capacity and willingness of servicers and lenders, as well as borrowers, to make use of these new tools and to work together. And that, in turn, depends on both stopping the hemorrhaging of jobs and stabilizing the banking system. We’re pleased this Administration is working hard on all these fronts.
For additional information on how the plan may help you, click here. Or listen to this.
Tags: community development, economic predictors, green banking, home affordability and stability plan, ShoreBank, triple bottom line
Posted in Mortgage Lending | 10 Comments »
Tuesday, February 17th, 2009
You will read in the papers on see on TV that the official unemployment rate jumped from 7.2% in December to 7.6% in January. You will also learn that the economy shed 598,000 jobs in January and 1,772,000 during the last three months. What you are less likely to be told is that 17,873,000 Americans are out of work, and that the real unemployment rate, which includes those too discouraged to seek employment and part-time workers who want to work full time is 15.4%. Comparable figures for January 2008 are 10,804,000 and 9.9%. (At the height of the Great Depression, about 13 million Americans were unemployed, which then represented about a quarter of the workforce.)
The graph below shows the percentage of employed men going back to 1948. (I selected men only because the entrance of women into the workforce in large numbers beginning in the 1970s skews the long-term data. That’s not to say that changes in longevity and other societal forces don’t skew the data for men, just to a lesser degree.) The current percentage is the lowest on record and has dropped massively over the last three months. The non-seasonally adjusted unemployment rate for men 20 and older has jumped from 5.2% to 9.1%, while the rate for women has increased from 4.4% to 6.6%. It’s even worse for minorities. The unemployment rate for African-American men has increased from 9.2% to 15.8%. Unemployment among Hispanic males has risen from 6.2% to 9.4%. These data are the human cost of the huge declines in manufacturing and construction where men are more heavily represented. Health care and education are the only fields where employment has increased steadily, and here women are over-represented.
Tags: community development, economic predictors, green banking, ShoreBank, triple bottom line, unemployment rate
Posted in Banking Industry | 1 Comment »
Monday, January 26th, 2009
Why aren’t banks making more loans? Hasn’t the Federal Reserve lowered the cost of overnight, unsecured loans between banks virtually to nothing? Since banks can borrow no-cost money, they should surely make low-interest rate loans to borrowers. In fact, and contrary to the daily headlines, banks are lending. Consumer loans at US banks increased 8% to more than $860 billion in 2008. Banks would like to lend more. That’s what they’re in business for. One reason they aren’t, is that the United States is in a liquidity trap.
“A liquidity trap occurs when a country’s nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long-term investments. This makes a recession even more severe.”
From: Wikipedia: The Free Encyclopedia
When the economy stumbles, the Fed lowers interest rates in order to stimulate spending. Very low rates of interest make borrowing cheap. They also make savings unrewarding. Normally, the combination is enough to kick start the economy. But 2009 isn’t normally.
Question: Who in their right mind would put $1,000 in the bank just to earn $5 a year? Answer: Someone who put $2,000 in the stock market a year ago and now has $1,000 left.
A liquidity trap is born when enough people decide to protect principal, no matter how little it earns. Once the trap is sprung, low interest rates lose their power to revitalize the economy. Fear of the future trumps the willingness to take risk.
In our economy, the trap has an added barb. Over the last few decades, the demand for consumer credit expanded exponentially. Banks had nowhere near enough money to meet the need. The result was the invention of loan securitization, which is the sale, aggregation, and re-division of loans into bonds that are sold to all sorts of investors all around the world. Unfortunately, these investors no longer have the risk appetite to buy pools of securitized loans, except those guaranteed by the Federal government. They too have fallen into the liquidity trap.
It takes a long time to build a liquidity trap. It will take a long to climb out. But, with “imagination joined to common purpose and necessity to courage,” we will get out.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | No Comments »
Friday, January 9th, 2009
Ethnographers like to study those few remaining peoples so deeply ensconced in the vast Amazonian rain forests that their lives still resemble our hunter-gatherer ancestors. Some of these groups are so primitive that they only have three counting words: one, two, and many. The financial debacle of 2008 may have us all yearning for such simplicity. Instead, we are being subjected to a grisly post-mortem as statisticians and economists count the cost.
My vote for most gruesome statistic is the world-wide loss of market capitalization of all publicly-traded corporations. (Market capitalization is a company’s net worth calculated by multiplying the number of its shares outstanding in the markets by the price per share. For example, if a company has 200,000 shares of stock outstanding with a stock price of $30, the company’s market capitalization is $6 million.) On October 31, 2007, the total value of publicly-traded companies around the world was $62.6 trillion. By December 31, 2008, their value had fallen nearly in half to $31.7 trillion. The difference, $30.9 trillion, is approximately the annual Gross Domestic Product of the United States, Western Europe, and Japan combined. (Gross Domestic Product of GDP is the total market value of all the goods and services produced within the borders of a nation during a specified period.)
I don’t know about you, but I can’t count to a trillion. For me, a trillion is the equivalent of the Amazonian “many;” it’s just too big a number to grasp in any real-world way. So, what does it mean to lose $30.9 trillion? In one sense, it’s frightening real and exact. The market capitalization of a stock (or a market or all markets) at any given moment can be calculated down to the penny. But that does not mean in practice that all the investors in the stock (or the market or all markets) could, at that moment, turn that value into cash. One investor could; two investors could; but if many investors started to sell that value would very quickly deteriorate. That’s essentially what happened to the US stock market on October 19, 1987, when the Dow Jones Industrial Average lost 22.6% of its value. To this day, nobody really knows why the market fell so hard and so fast. The best explanation is simply that there were more sellers than buyers.
It took the Dow about a year to recover the losses of October 19 and about two years to top the record high it reached in August 1987. With some luck, the worldwide stock markets will recover this time too, although probably not so quickly. In the meantime, have fun amazing your friends and neighbors with that $30 trillion stat.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
Posted in Banking Industry | 1 Comment »
Tuesday, December 23rd, 2008
Happy Holidays! This season is a time for giving, especially to those in need. In the midst of our last-minute holiday preparations, it is easy to overlook the gift that the Federal Reserve has recently given. I know that varying opinions abound regarding the Federal Reserve’s past performance and decisions. Let us momentarily set aside those evaluations. I feel that the Fed’s recent decision to cut the target for the federal funds rate to a range between zero and 0.25 percent can be perceived as a gift. Many of you might have expressed, as I initially did, “A gift? From the Fed? In the midst of this economic crisis? But I’m a saver! What does this mean for my interest rate?” While a rate cut isn’t something you can wrap or put a name card on, this rate change does give the gift of hope to those stricken by the credit crunch and on the verge of homelessness.
Mortgage rates are at their lowest level in 37 years. This is great gift to almost all homeowners, even those to whom the recession has not financially impacted. Even a small decrease of 0.5 in your mortgage interest rate can make a financial impact.
The Fed’s rate cut enables ShoreBank to give, through its Rescue Loan program, the gift of increasingly affordable continued homeownership. As our SVP of Mortgage Lending and ShoreBank Voices blogger Michelle Collins said on Chicago’s abc7 News “The rates are coming down, so we’ve lowered our rates at ShoreBank three or four times over the last three or four weeks, and the fed’s continuing to cut rates to let us offer more affordable interest rates, so the time is great.”
For when mortgages become unaffordable, individual homeowners begin losing their homes and property values plummet. Since many of these affected borrowers are concentrated in a handful of communities, the impact of these cascading foreclosure is amplified. The net result can ignite a cycle of community deterioration.
That is why the Fed rate is a holiday gift to our economy. For those of you in need, all you need to do is to ask. I can think of few better gifts than one that prevents homelessness.
On that note, I wish you all a very Happy Hanukkah, Merry Christmas, and Happy Kwanzaa.
Tags: community development, economic predictors, financial crisis, green banking, Rescue Loan program, ShoreBank, triple bottom line
Posted in Banking Industry | 2 Comments »
Monday, December 15th, 2008
Messengers have little to fear when delivering good tidings, but no messenger wants to be the bearer of bad news. Yet the fact remains: we are a long way from victory as the scope of the Panic of 2008 emerges in its full gloom. We are in a consumer-led recession, where loss of wealth from eroding home values and plunging 401(k)s leads to loss of both the ability and the willingness to spend. Less spending leads to less employment, which leads to less wealth in a cycle that is beginning to turn vicious. Eventually the cycle will be broken, but that time isn’t now.
One of the key indicators I watch is the Bureau of Labor Statistics’ weekly count of the number of persons filing unemployment insurance claims for the first time. To be eligible for unemployment compensation a person must:
* Have worked during a one-year period.
* Be unemployed through no fault of his or her own.
* Be physically and mentally able to work.
* Be available for work.
* Be actively looking for work.
Over the last five weeks 2,678,000 Americans, an average of 536,000 a week, met these criteria and applied for unemployment benefits. Nothing like this has been seen since the major recession of the early 1980s. From September 1981 through June 1983, weekly initial unemployment claims averaged 543,000. They peaked at 695,000 in October 1982, and never were less than 434,000.
Today, 4,429,000 Americans are collecting unemployment benefits, compared to an average of 2,725,000 over the last 20 years. Looking back again to the early ‘80s, we see that continuing unemployment claims averaged 3,862,000 and topped out at 4,713,000 in November 1982.
Times were different then, and the enemy was rampant inflation. The Federal Reserve and the Treasury moved more slowly and less aggressively. But the message is that bad times are not going away soon. Keep an eye on weekly unemployment claims, released every Thursday morning for an early clue to a turnaround.
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line, unemployment rate
Posted in Banking Industry | 2 Comments »
