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Making Folks Whole

A key feature of the Obama administration’s plan for reviving the economy involves making the banks whole, but what about consumers? As some top economists have been telling us, until the federal help gets down to the household level, it won’t be enough to start the nation’s economic engine.

Much of this unwholeness has to do with credit cards. Comedian Jon Stewart recently proposed that the feds give consumers enough money to pay off their credit card debt. They’d be whole, and the banks would be, too, at least as far as that segment of their balance sheets goes.

But how do you give consumers the money while ensuring they actually use it to deal with their debt? You could offer them a choice: The feds could say, we’ll pay off your credit card, but in return, you agree to hold only a single card with a credit limit of $1,000. Or, the card becomes a charge card only – you have to pay the balance off at the end of the month. Those cardholders with existing credit lines who don’t need the help and want to continue with their card companies could do so under their current terms. Simply put: If you accept government help, you live with the conditions imposed. But you don’t have to accept that help.

This would not preclude the banks from loosening up the restrictions on the bailed-out consumers after, say, one year. But the banks would have to hang on to those deals they make.

The other leg of this stool is revising the whole credit score system so that it’s based on individual creditor performance. A bank’s relationship with the cardholder should be based on that relationship only, not on how that debtor is performing with other creditors. If a debtor accepts direct federal help, perhaps one of the conditions could be the imposition of a baseline credit score, which would go up as the consumer responsibly deals with debt going forward.

Once consumers are made whole, they will resume spending, because they’ll feel better. Will it be at the same level as the old days? No. The nation’s economic engine will be running at much lower RPMs.

But really, would that be so bad? Does reality have to bite?

There, now I’ve said it.

Trader or Traitor?

Just at the moment when our confidence capital is in its shortest supply, the Bernard Madoff scandal is another black eye for the American financial system.

Everyone, of course, is innocent until proven guilty, but should the allegations be true, Mr. Madoff’s actions are, in my view, right up there with treason, in terms of the damage done to this country’s standing in the world. The only mitigating factor is that treason probably wasn’t his intention, but the result is about the same.

You may not have a lot of sympathy for the Madoff clients in Palm Beach rushing to pawn their Ferraris, but many individuals who thought they had a comfortable retirement suddenly have nothing. Some cities face an instant financial crisis, as well as some of the most respected charities. A big problem, though, is how many foreign banks have been affected and the resulting loss of faith in the American system, especially our system of regulation.

The difference between this situation and the mortgage-backed securities meltdown is that this crisis is the result of alleged criminal activity, a giant Ponzi scheme. Wikipedia defines that as “a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from profit from any real business.” The earlier Wall Street shenanigans were at least legal, so far as we know now.

If Mr. Madoff did what he’s accused of doing, he will likely get what’s coming to him. It’s pointed out that the analysts for many of his investors should have taken the time to find out what he was doing and figure out that the deal was just too good to be true. As is typical with these situations, the stain of blame has begun its rapid spread.

But what about that international crisis of confidence? Do we in the United States have an obligation to make the foreign Madoff victims whole, or as whole as possible? Instead of letting our own banks continue to stuff the bailout funds in their vaults, maybe some of the $700 billion should be reserved for the foreign entities that have been scammed. The necessary restitution isn’t available from Mr. Madoff or those folks who should have known better, including those in our own regulatory system, if there is one.

Restoring international confidence in our economy is practically a matter of national security. We have to show the world that whatever legitimate loss is the result of the Madoff case, the United States is good for it. And then we have to get about the business of plugging the holes in our regulatory dike. That is, if we want to continue to be proud to be Americans.

There, now I’ve said it.

Redistributing Wealth

Remember the campaign – seems like a year ago now – when John McCain caught Barack Obama saying to Joe the Plumber that he wanted to “spread the wealth around”? Critics tagged Obama as a socialist.

Now we’re in desperate need of having the wealth spread around. I’m not talking about changing tax policies. I suspect there’s plenty of wealth around – it’s just not being spread. The feds gave it to the banks, but are the banks making it available to borrowers?

When you buy something, your wealth is being spread, to the vendor from whom you bought it, to the wholesaler from whom the vendor bought it, all the way back to the manufacturer or provider. But it depends how wealthy you feel. If you have a lot but you think there’s only a limited supply of whatever it is beyond your holdings, you tend to hoard. That’s subjective, of course. Some millionaires feel poor because they used to be billionaires. Poorer people might feel wealthy if they had even some of the millionaire’s shrinking pie. But if you don’t feel comfortable doing something with what you have, then no one gets ahead.

Some folks are scrambling to invest in government bonds that are giving them zero percent return. They’re too scared even to put their money under a mattress – actually, it’s the ultimate mattress, at least for now.

If the bailout plan was supposed to stimulate the economy, it’s not working. I hope someone finds out why not, and soon. Get some money into people’s hands so they can spend it.

But there are some of you out there who have plenty. I hate to sound like George Bush after 9/11, but please, if you’ve got some wealth sitting around, now’s your chance to spread it. You could actually help stimulate the economy. The government can’t seem to get the job done, but you can. It’s a great time to buy something. Cash really is king, and it would help if some of us actually got off the throne.

There, now I’ve said it.

Baby, You Can Fly My Plane

Look, it makes no difference to me how the Big Three auto bosses got to Washington. I would have been fine with it if they plane-pooled. Making a seven-hour drive from Detroit to Washington was kind of a slog. I guess that if they made the trip in hybrids, they found out how well their new products worked on a trip.

It’s satisfying to bash the auto companies. They want us to bail them out after they dragged their feet for years on developing vehicles that weren’t gasoline-dependent. Sure, they claim they started modernizing three years ago. That was only about 27 years too late.

Fine. But the current economic crisis certainly wasn’t all their fault. It wasn’t entirely the reason people aren’t buying cars. The financial services industry bears a large part of the blame, but as we’ve said in this space before, all of us enjoyed a prolonged period of avoiding reality. The auto companies were not first in line for the handouts, and the farther back you are in line, the harder time you have.

The problem is, the bailout money handed out so far to stabilize the economy has come with almost no strings. If you’re a college student, you get into financial trouble, and your parents bail you out, don’t you think they would demand to know how you were going to spend their bailout money – if they gave you any say-so at all?

I don’t think we should let the auto companies fold up. There are few things more American than the auto industry – we started it, and we should be leading it. But if any bailout money goes to the auto companies, even in the form of loans, it ought to come with serious conditions. Forcing the auto executives to drive instead of fly doesn’t accomplish anything substantive. While I’m the first to tell you that symbolism is important, it’s not substance.

There, now I’ve said it.

It's Only Money

So now we hear that the federal government is going to make 800 billion dollars more money available for bailout purposes, including 200 billion to banks and credit card companies, designed to unfreeze credit. Which means these institutions are supposed to loan us money again. The question being, will consumers want the loans, or have some of us gotten used to the idea of living with less?

So the government – meaning we -- is on the hook for trillions of dollars. Where is it coming from? The analysts tell us it’s going to be printed. If you print more money, is it worth less?

Look, I couldn’t even tell you how many zeros there are in a trillion, though by now I should know. I used to tell people I had a six-figure income, but that I wasn’t happy about where my employer put the decimal point. But if it were my job to figure all this out, I’d be on TV like all those other analysts, including the guy who won the Nobel Prize. As they say, that’s above my pay grade.

It’s all about results. It seems to me that it probably doesn’t matter if all this extra money is worth the paper it’s printed on, as long as buyers and sellers think it is.

It’s true that many of us have to be weaned off carrying excessive debt; it’s also true that financial institutions have to be prevented from giving us a fix whenever we want it. But while we’re congratulating ourselves on not buying stuff, the vendors, who are people just like us are suffering from our sudden frugality. If we don’t have a good holiday season, neither will they.

Something has to start the engine, though, and after that, something has to keep the RPM down. I think this is a soluble problem, but somebody has to do the solving, whether it’s the Bush administration or Obama’s, and I can’t blame either of them too much if there’s a false start or two. Doing nothing doesn’t seem to be an option.

So start the presses.

There, now I’ve said it.

New Rules

Many of you have likely seen Bill Maher’s feature New Rules on his HBO TV show or have read his books with the same title. It all takes off from the old comic theme, There Oughta Be a Law, which inspired one California state senator  to create a contest inviting his constituents to come up with ideas for bills to deal with problems the professional legislators have overlooked.

We’re likely to have a whole bunch of new rules to govern our financial system going forward. For those who complain, “There should have been a law,” well, look at it this way. It’s taken about a century for our motor vehicle laws to catch up to what they’re regulating. The rules usually follow the abuses.

To start with, how about the creation of a financial FDA, to which new instruments like credit default swaps could be submitted for study and testing before they’re deployed in the marketplace?

There are a number of institutions that were created following the Great Depression, like the FDIC and the Securities and Exchange Commission, which are still there helping us today. As serious as our current situation is, it would be a lot worse if we didn’t have these institutions protecting us from further harm.

Wild Wests always have to be tamed if progress is to be made. The challenge is finding a balance so that the new rules don’t stifle exuberance and innovation, but protect us all from damage. Sounds kind of like raising children.

Many of us would like government to go away, but there are times when government is needed, and it seems clear to me that this is one of them.

There, now I’ve said it.

The Only Thing We Have to Feahh.....

My head is really in the clouds today. Maybe it just seems that way because I have cotton for brains right now, just trying to get the aforementioned head around this economic mess. But I’ve been thinking a lot about faith.

For those fortunate enough to have a lot of gold holdings, why is gold valuable? Gold, believe it or not, has some spiritual qualities. Not only is it beautiful, but it doesn’t corrode or tarnish. It’s solid, and it will still be there when other metals have rusted and disintegrated – it has that feeling of eternity to it. And it’s relatively hard to find. Of course, the real value of gold to an owner is that others value it, too. People have faith in it.

It’s also interesting to see people are buying up U.S. Treasury bills as they seek a safe haven. A Treasury bill is only a piece of paper, but it’s said to be backed by the full faith and credit of the federal government. That is, of course, if you have any faith in the federal government or feel like giving it credit for anything right now.

FDR said, “The only thing we have to fear is fear itself.” How about the flip side? The only thing we can really have faith in is faith itself. When you invest in something, you have faith that it’s going to bring you a return, and when you lose that faith, you sell it. The Bible says, “Faith is the substance of things hoped for, the evidence of things not seen.”

The things that make some of us feel safe at the moment won’t save us from every calamity. If you had a brick of gold, but, as an example, were really thirsty after being lost in the desert for a week, you’d part with it in a New York minute for a drink of water, if that meant your survival. All those pieces of paper you’ve put under the mattress are worthless unless backed up by something and, as a consequence, valued by others. In some circumstances, the mattress itself may have more value than what you stuffed under it.

I’m sure you’re saying, “My life savings are on their way to being wiped out, my house is upside down, and I can’t afford the gas to get to work, so thanks a lot for this little talk.”

But the bottom line, as everyone says these days, is what you have faith in. As for me, I have faith that eventually our faith will be restored. But let’s not be surprised if we find that faith resting on something different.

There, now I’ve said it.

Enough, Already

How much is enough?

Looks like the answer to that question is in for a makeover.

A few years ago, when I was in radio news, I covered a speech by actor Edward James Olmos to an audience of high school students, and it left an indelible impression. In a lesson about human nature, Olmos told the students that he was being paid $10 million for his role in an upcoming movie. That probably sounds like chump change today -- perhaps even to him. His message to the students was, there’s never enough. “If they pay you $5, you want $10,” he said. “If it’s $100, you want $1,000. If it’s $10,000, you want a million.” The point being, there’s no such thing as “enough” when it comes to human nature. But at some point, we all have to define the word for ourselves. Typically, if we don’t come up with the right answer, life gives it to us.

A few years ago – actually about 20 now – I thought my credit card interest rate was too high and I was shopping around for something better. There was a little bank in the South that got a reputation for offering the lowest rate in the country. Problem was, you had to qualify for it, and I quickly realized that I just couldn’t  – their income standards were much too high for me. That southern bank was Wachovia.

This past week, on Jim Cramer’s Mad Money show on CNBC, he talked about the once-proud American Express, reminiscing about the time when the only cards they issued were the kind where you had to pay off your balance in full every month  -- no exceptions. When you flashed an American Express card, people knew instantly about your standing in life.

Then, Cramer said, the company started issuing credit cards – the kind you didn’t have to pay off every month, and that became a major part of their business. Of course, their business grew – but at what price? Now, he said, there is a lot of “toxic waste” on Amex’s books, and the company is a shell of its former self.

After I left radio, I went into the newspaper business. Newspaper companies were used to having dominant positions in local markets and making enormous profits, but now many are in trouble, because those profits aren’t there any more, due to fierce competition from the Web. The newspaper conglomerates whose business models are based on the traditionally huge percentages of profit are having to live with less, and because of their outstanding loans, some of them just can’t do it.

The current economic collapse is forcing huge corporations and kitchen-table budgeters alike to take a hard look at that little word enough. It’s best summed up by a line from that Oliver Stone movie Wall Street, when Charlie Sheen says to Michael Douglas, playing the ruthless Gordon Gecko, “How many yachts can you ski behind?”

There, now I’ve said it.