Thursday, April 1, 2010

Economics for the Layman by a Layman


This is being written because it has come to my attention that the majority of people I have met and spoken to do not understand how the economics of the world works. To often we have academics use fancy rhetoric to explain what is happening in the world. This rhetoric often leads to such exclamations as “What the hell are they talking about?” I know because I often hear them using terms like macro and micro economics, Keynesian Theory, government intervention, stock market fluctuations, over valuation and on and on and on.
Economics is not hard to understand! It all relates to what companies want to sell and what the public decides to buy. It is supply and demand in its' simplest form.
If John and Betty want to buy a house and have the funds or the credit to buy a house they will buy it. We now have demand. If John and Betty want to buy a house but don't have the funds or credit they will not buy the house. In one instance they have created demand in the other they have taken it away.
When economic times are good and people are working for a fair wage and have a disposable income they are more apt to buy items that are considered luxurious, a boat, a second home, a new computer, that car they have always wanted. When people are unsure of their financial income or whether they will have a job in the near future they are more prone to put off these expenditures until a further date when times are better. When this happens companies will reduce their inventories and retrench which often leads to lay offs and business closures. And the economy spirals downwards.
In a nutshell the economy depends on the buying will of the populace, it is an emotional matter. It is how the public views their financial stability for the future. It is a psychological mindset.
The governments role in this is to create an atmosphere of euphoria to convince people that all is OK. They do this by government intervention. They can do this by using very dubious numbers and statistics, unemployment numbers, inventory growth, monetary policy, government subsidies, and the list goes on. What they are trying to do is stimulate the public that does have disposable income into believing that all is right in the playground so they go out and buy that new house or car which in turn will will stimulate a growth in inventory and possibly ignite business to expand and start hiring again. Because a working and happy public is a buying public.
And the circle continues.

Tuesday, October 7, 2008

Greed and the Unraveling of America

We can sit back and bitch and moan with what is happening in our country today and we can point fingers all over the place, but that will not help. What we are seeing is an unraveling of our financial institutions on a grand scale. This unraveling is not the fault of any one group or person but the fault of all who participated. Democrats and Republicans are both at fault as is the large corporations and the individual who bought the products from them. We all got caught up in the glare of financial freedom and became greedy.

So how do we fix the mess? Do we bail out Wall Street, the individual home owners who are trapped in the middle, or just let everything go. Before we can answer these very tough questions we must look to the past and see how we arrived at this time in history.

Sub-primes who are they and what are they?

I am not going to bore the reader with an exhaustive report on sub-primes but will attempt to give a short synopsis of what they are. Sub-primes are loans given to people with sketchy credit histories. That's it in a nutshell.

The sub-prime market did not appear overnight. There history can be traced back to the Clinton administration (or further if you want to get technical). In 1995 Clinton, Al Gore and Henry Cisnero gave support to Fannie and Freddie to include up to fifty percent of their portfolio's to the sub-prime market. So we get to a state today where Fannie and Freddies portfolio's are filled up with low quality loans. Hence the start of the meltdown because when people start to default on these loans, because they have no jobs or their pay is cut, you now have a problem.

Let's take a look at how Fannie and Freddie work to see how all this is put into action. Some people think that these two institutions actually give loans, but they don't. They act as a clearing house for the banks and actually work in the secondary market. The bank sells you the loan and then bundles your loan with others and sells them to the secondary market. Fannie and Freddie buy up these loans, which accounts for fifty percent of todays market, and then sells them to investors as bonds.


Through the nineties we saw fortunes made in stocks and real estate. Now much of this wealth was created on paper and only existed as long as everything was running smoothly and real estate and stock prices were rising. People were buying houses and watching their equity grow at amazing rates. People were buying stocks of companies that had exponential growth of their stock prices.

I had a friend at this time that had done fairly well at flipping houses and he once told me, “ Equity means nothing until you sell it!”

I had another friend in 1999 come to me to brag that he was retiring at 40. He had made a fortune buying stocks of companies that had stock prices of 100+. Even those these companies had never made a dime of profit. Today he is back in the workforce after losing everything.

Point being when the market dries up and prices start falling backwards you are left with nothing but the opportunity of holding some really bad debt. Because of the availability of cheap credit with no real accounting of whether you could afford that debt people saw dollar signs and a way of becoming millionairs.

I knew a person who took all the equity out of his home and bought four rental properties financed with interest only loans expecting to make a fortune because his Real Estate agent told him that home values would escalate from 15 to 20% annually for the next 20 years. This was in 2004, today he is facing bankrupcy and the very real possibility that he will lose everything.

When I mentioned to him that a rate of return of that nature is not possible or at the least extremely risky he choose to ignore the possibility of his failure. Greed had clouded his better judgement.

Was it only his greed that drove the market? I don't think so! We had a lot of people involved here. The Mortgage officer that gave him the loans even though he was not qualified, the Real Estate agent who promised a return that was not in line with reality, the Politician who was asleep at the wheel, and the news agency that did not do anything to expose the trouble that lay ahead. All was rosey in the United States of America.

What They Aren't Talking About
(coming soon)

Monday, September 15, 2008

Deals for Votes or Good Times, Bad Times

We are now in the midst of a tumultuous election year. The biggest question many have is; who should get our vote? The problem is; what do the candidates stand for? The confusion is; how do we find out what they stand for? The reality is; we will not really know until the winner takes office.

Like many other elections each candidate is making Deals for Votes. Through this whole process, if you watch closely, one finds out that positions are softened or changed depending upon what the polls say. Backroom handshakes are made for support. Quiet lobby efforts are negotiated secretly in the dark enclosures of each candidate. What the American public is shown is only what each candidate wants us to know. You need to ask yourself, is the news media manipulating public opinion or it is the other way around and the candidates manipulating the media? The reality is, we may never know until it is to late.

When we look at the United States today we sae a country in turmoil. Business meltdowns, Real Estate quagmires, bank failures, mounting troop losses overseas, mounting debt by the U.S., job losses, it goes on and on and on. Yet, the leaders in this are supposedly the best of the best. Graduates from Harvard, Yale, MIT, Stanford........ It leads me to wonder; what do they teach in our hallowed halls of education? Certainly it does not teach common sense.

I roll over in my sleep and wake with a start with a nagging question in my head; do the leaders of our country truly know what they are doing or are they just shooting darts in the wind hoping they land in the right place?

In the last 25 years we have gone through good times, bad times, extremely bad times and extremely good times. But yet, we never seem to learn the lessons they present to us. I forget where I read it or who wrote it, "If you do not learn from your past failures you are doomed to repeat them in the future".

In the early 2000's we had a momentous reversal in the stock market that wiped out many. This reversal was bound to happen since the run up in the stock market was based on nothing but greed. When greed is your password to wealth sooner or later that greed turns to fear, and all is lost. But instead of learning from this failure, what do we do? We turn around and base the same principle to, greed and fear, the Real Estate market and we all know how that turned out.

My point in all of this is that our esteemed government and business leaders sat on their collective asses and watched it happen.

We are a society of short term thinkers. (What happened yesterday is of no concern to me). Businesses think of short term results to satisfy their share holders Government thinks of how many policies can they institute in their short political life spans to sponsor their own political initiatives. So nobody is thinking what the country will look like in 10, 15, 20, 25, years from now.

This by no means lets the citizenry of this great country off the hook. We also are short term thinkers. How many of us woke up at the age of 55 and realized we have done nothing for our retirement or our kids college education?

So what do the candidates stand for? What are their visions for the long term future? How are they going to accomplish their goals? And how do we hold them accountable?

I recently had the pleasure of speaking to a gentleman that told me he was voting for Obama two weeks later he told me he was voting for McCain. I was confused so I asked him what he was basing his decision on. And lo and behold he was basing his decisions on 5 minute soundbites put out by the campaigners.

My theory is; they will say anything to get the job if it means getting your vote!

Vote wisely and with as much knowledge that you can find!

Sunday, July 8, 2007

Reading is What it is all About

To be able to understand the Constitution we must investigate the idea's, the men and women and actions that brought it about. The beginning was not a seamless jaunt in national unity but a very contentious and argumentative session in American history.

Some wanted our national government to be subservient to states rights others wanted a strong central government with the states being held accountable to the central government. What came about was a compromise with each side thinking they had won. Points of view had become blurred and the defining of the Constitution was immediately put up for interpretation by the courts.

The men that were given the role for interpreting this document also had their points of views, blurring the edges even further. So, trying to understand the Constitution means we must try to understand the people who lived in that day and what was motivating their actions.

A reading of George Washington, Thomas Jefferson, Ben Franklin, John Adams, only to name a few, becomes indispensable to an understanding of the direction of the Constitution.

Only when we can understand the intent of our Founding Fathers can we know the direction the Constitution must take in todays world.

Monday, May 7, 2007

Have our Leaders Abandoned the Constitution?

In 1798 with the passage of the Alien and Sedition Acts we see the first stretching of the Constitutional fabric. This scene was played out against a backdrop of political intrigue worthy of a 21st century novel. George Washington and John Adams viewed this as a political move that had the ability to rip our young country apart.

With the advent of party politics throughout our history we are able to see the unraveling of the Constitution. Thomas Jefferson's purchase of the Louisiana Territory from Napoleon was seen as a stretch at defining the Constitution. Abraham Lincoln's suspension of the Writ of Habeas Corpus was yet another tug at the fabric. Truman's jaunt into North Korea was yet another pull at the Constitutional seams of our nation. These are only a few of the examples of the Constitutions defining moments. Through history we see many more situations where the cloth is stretched and torn. We see it in how the governing parties define minority rights, abortion, gun control, women's rights etc.

Since the beginning we have become a nation of two parties, each with their own particular ideas on how the laws of the land will be defined as brought forward in the Constitution. Each ruling party comes in with the notion that they know what's best for our country and begin the process of stacking the courts with like minded judges. This has been a process that has been going on since the birth of our nation.

One of the most important issues facing a sitting president is his/her appointments to the courts, most importantly the Supreme Court. These appointments will define the direction of the courts for many years, since a Supreme Court justice is elected for life.

Have political parties abandoned the Constitution? No, they have just elected to put judges in place that will rule in their favor as to the definition of the document.

There are many instances of the Supreme Court reversing opinions of prior courts. (please ref. In most of these cases we see a shift in the courts either to the left or the right depending on who is in the majority of the Supreme Court, liberal or conservative.

How is this supposed to be interpreted when we look at the question of whether political leaders have chosen to ignore the Constitution? Rewind to September 17, 1787 when the United States Constitution was adopted at the Constitutional Convention in Philadelphia. It was adopted not ratified on this date and would not be ratified until June 21, 1788. Between the two dates we saw political wrestling and positioning as to how the Constitution would be defined. Point; the Constitution and Bill of Rights have always been documents that were under the scope of interpretation and political leaders will always define the two too their advantage.

Many people confuse what our country is. We call ourselves a democracy, with a slant; we are a representative democracy. What that means; we elect officials to represent us in their respective capacities and hope they do what is right for us as individuals. What we do for them; we give them the power and authority to act without our consent on issues of state. The power we hold; at any given election we can vote them out of office.

The power of the vote is what holds politicians in check. If we use that power wisely and often maybe we can get back a semblance of order pertaining to the Constitution. The sadness is; our schools no longer teach the fundamentals of our Constitution. The bright spot is; we have the power to bring this back into the school system. Write to your governmental representatives and let them know how you stand.

When I think about the Constitution I always have to wonder; if our founding fathers woke from their slumber and could see what has happened to the nation they founded, what would their reactions be?

Monday, March 26, 2007

Where Do We Go From Here?

It seems we have a nation out of control today. But when we peer into the crystal ball of the past it is all relative to the times lived at those moments. I like to speak with the older generation of our society and what I find is that the events of their times were just as cataclysmic as ours of today.

What this boils down to is Point of View. When we speak of Point of View it has to be thought of in the context of time. The depression was a bitter and difficult time for those that lived it and they viewed everything taking place in the context of now. Not being able to see the future this was an earth shattering experience for most and was seen as an event to end all events. But... those hard working people came out of it.

Creating a time line of our nation we will find that we have always been confronted with events that were events to end all events. The events started for our nation long before the Revolutionary War and will continue into the future.

To be able to understand this we must become investigators of the past to find what has worked and what hasn't and than make educated guesses as to what actions to take in the future; hoping that we make the right choices.

For us to to make these judgements of the future we must know who we are as a nation and what path we are on. The Constitution and the Bill of Rights are documents that govern the orderliness of these decisions. The question is, are these documents adequate for the times? Did our founders expect us to change and add to these documents as time progressed? I remember reading a letter by Thomas Jefferson to John Adams where he pondered the idea that for a government to advance every 20 years the public must stand up and re-visit the Revolutionary Principles. Of course he said it more eloquently and I only refer to this through an imperfect memory.

When we look at our form of Government, with a critical eye, are our policies and procedures adequate for the times? Do we need to fine tune our governing documents to better reflect society today?

What can we do? Where do we go from here? Is it time to take control from the career politicians and give it back to the people? How do we do this?

In the next few weeks I will attempt to clarify some of my thoughts and possibly help guide us to some answers.

Tuesday, March 20, 2007

What Does it Mean?

In the history of the United States of America we have three defining documents that make us who we are as a nation, The Declaration of Independence, The U.S. Constitution and the Bill of Rights. Each one of these documents had very tumultuous beginnings. They came about through controversy and disagreements. Regardless of the squabbles and arguments for or against they were ratified by a majority of the states of the time which established them as the Rules of Engagement that defined us as a nation.
When we look back in history we find that certain events and individuals shaped these documents. We were a fledgling nation struggling to survive. Without the men and women who put their lives on the line we would have been nothing.
But what did these founding members have in mind when they decided to wage war against the British Empire? Was there a preconceived notion of how things would progress or did the times and events drive these men and women to create these defining documents? For that answer we must peer into history and the lives of the people. Who were they? What defined them? Where were they going? Why did they do it?
In this blog I hope to answer a few questions. What do these documents mean? How is one to interpret them? Do the times change the meaning of these documents? What is the future for us as a Nation as defined by these documents?
In the near future we have events that are forming; the first women to run for president, the first black man running for president, the rules of engagement for the declaration of wars, social security, Medicare, emigration, etc. Are we going to let these events define us as a Nation or can we, should we take control by looking back in history and finding out what the intent of the Founding Fathers and Mothers was.
I am reminded by the words of George Santayana “Those who do not remember the past are condemned to repeat it.”