Forget this N word and get the banks lending again

Let’s start with the words “zombie bank.”

Such a bank is one which has too little capitalization (assets) to operate normally such as making commercial loans, etc, but still exists in the market place.

The term came widespread when, in the 1990s, the Japanese suffered a severe financial crisis and had to pump billions into their banking system, but the banks remained still too weak to stimulate the economy. Resultingly, the Japanese economy was in decay for a decade.

By all measures, Citicorp is a zombie bank. The Federal government has poured $40 billion into Citigroup, but the stock market values Citigroup at less than that. Citigroup is still acting as a retail bank, handing customer deposits, checking accounts, etc, but the bank is not a functional commercial bank. Citigroup has approached the Obama administration for help, suggesting the government pour money in and take in exchange a 40% common stock share with voting rights in the bank.

However, in my humble opinion, a 40% stake in a zombie bank does not give the Federal government the clout it needs to bring liquidity back into the nation’s commercial banking system.

Right now, besides Citigroup, Bank of America and several other giant banks are zombie banks, lacking the assets and/or willingness to make the commercial loans get the commercial markets moving again.

So, let’s start by dropping this N word, “nationalization.”

In pure terms, nationalization means taking over and maintaining ownership of what was a non governmental asset.

Currently being discussed regarding the “zombie banks” is a take over of the banks, a sale or restructuring of the bad assets, a restructuring of the management, and a sale of the good assets into the market.

The same thing happens when a private investment company buys a failing company, pares off the failing units, and runs or sells off the viable parts.

Every Friday, the Government, in the form of the FDIC takes over failed banks, restructures the banks and sells the banks to healthy banks. This is hardly nationalization. It only makes the news when the banks being considered are the Bank of America and Citicorp.

In the 1990s, the Swedish government faced a financial crisis similar to the one we face today: deregulation had led to a real estate buying frenzy fueled by lending by banks with no real oversight of the loans. In 1991 the real estate balloon burst, the banks went into crisis, unemployment tripled.

The two Swedish political parties joined together, underwrote all bank deposits to prevent a run on the banks, told the banks to write down their assets to market value (mark to market), restructured management, and recapitalized the banks.

This cost the Swedish government approximately 4% of GDP which was reduced to 2% when it took its shareholder profit.

It is time we stop using this N word as if it were a swear or dirty word. The FDIC is taking over institutions every Friday to save what are typically small or regional banks.

This crisis and this nation will not start moving again until the banks start loaning.

And the crisis is very, very real. The Federal Open Market Committee (FOMC) of the Federal Reserve stated the following on February 24:

Given the strength of the forces currently weighing on the economy, participants generally expected that the recovery would be unusually gradual and prolonged: All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.

In my opinion, a worry about a movement to socialism is a canard and is meaningless.

The economy needs to have its banking system restored to “normal” as soon as possible, and if that means doing exactly the same as what private investment firms do: buying failing businesses, writing down the bad assets, spinning off the good assets into a new company and selling it off, then that is what the Federal Government must do with the “zombie banks.”

Peter B. Hayward

Copyright © 2009 Peter B. Hayward. All Rights Reserved

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Would you take THIS Professor’s economic advice?

The New York Times today published a piece on 2/17 by Professor Edward L Glaeser of Harvard University entitled “If you got Money, Now is the Time to Spend Some.”

The major thesis of the Glaeser piece is:

“Those Americans who borrowed too much, or are near their financial limits, should certainly cut back. … Yet there are many Americans who spent the last eight years living within their means, and have plenty of resources left. For those Americans, the ones with cash in their bank accounts, this is the time to spend. “

So what does the good professor suggest those with money do to stimulate the economy?

One suggestion is to “…buy new Cadillacs. Each car [bought] will mean a little less bailout money that we’ll have to come up with.”

Note that the professor from Harvard suggests that we encourage GM to continue to build lots of their energy profligate cars.

Glaeser didn’t suggest that “those with money” buy millions of energy efficient cars from GM, Ford or Chrysler that will save us gas and create new jobs in gas efficiency technology. No, we are to buy gas guzzlers so Congress will spend less bailout money on a company got into its own financial crisis by making cars no one wanted to buy.

The good professor also suggests that, to stimulate the economy, those with money:

“Buy things that are private and enjoy them as much as possible within a close circle of equally fortunate friends. This would be a great time to redo your master bathroom.”

Unless your “close circle of equally fortunate friends” really, really want to delight in your new Greek marble sinks, French toilets, and Italian faucets, your bathroom remodel to stimulate the economy can probably wait. (And, of course, you can always remind your fortunate friends that you would only be enriching the economies of those countries.)

Perhaps one should ask why the Professor didn’t suggest that people with money spend in such a way to support the local companies that sell the things people need, because many of those companies are on the edge of disappearing forever. Sure, the marble counter top sellers need help too, but so does your corner store, your locally owned furniture store, and the charitable organizations in your community that help the people who are direly affected by the recession.

Professor Glaeser’s other suggestion on how people with money to spend can turn the country around:

“consider becoming a more generous gift-giver. I am sure that your children, spouse, boyfriend, girlfriend, pet, has done something good that deserves a gift. Valentine’s Day was a great chance to splurge, but heck, what about a good round of Easter and Passover presents. April Fool’s Day calls for a round of humorous gifts, and May Day for a gift celebrating either spring or the Haymarket riot, depending on your political proclivities.”

Our good Harvard professor would have “those with money” get the economy back on track through buying friends gifts on odd events. Regrettably, the economy will not turn around with the purchase of trinkets or iPods but with the continuous purchase of that our fellow Americans make or sell. Gifting a pair of earrings will stimulate the economy?

What our good, highly educated, highly paid Harvard Professor is suggesting is like putting a child’s band-aid on an amputated leg. And what our Harvard Professor failed to talk about is that our national financial crisis occurred not because we have failed to buy gas guzzlers or iPods or earrings or toilet seats but because we have a banking liquidity crisis in this country not seen since the Great depression.

Banks simply do not trust those who want to borrow money.

Corporations and local businesses cannot obtain from banks the short and long term loans they need to buy the inventory and equipment to stay in business and to compete.

Most of the banks that received the first round of TARP money simply sat on it; they did not lend it out. Some banks also raised credit card fees and reduced credit limits for the very people who needed to use their cards, either those laid off, on part-time, or small businesses who use credit cards for inventory purchase.

One possible, and I stress possible reason the good Professor is off base is because he earned his PhD from the Department of Economics of the University of Chicago, a department where many professors espouse a theory termed the Chicago School of Economics . This theory eschews Keynesian Economics in favor of neoclassical economics. Three tenents of neoclassical economics are:

1. People have rational preferences among outcomes that can be identified and associated with a value.
2. Individuals maximize utility and firms maximize profits.
3. People act independently on the basis of full and relevant information.

The exponential explosion in the stock market since 1996 and in housing prices since 2002 were fostered by one tennet of neoclassical economics, the belief in unregulated markets and that “full and relevant information “was available to people in the market (housing or stock).

However, as we have seen, those beliefs was far from the truth. With deregulation came 1) mortgage agents who falsified financial data for applicants, 2) mortgage companies which did little oversight of agents and which sold off mortgages in dubious financial instruments called derivatives created by investment banks (financial instruments of which no one knew the true value), and 3) firms like GM which had a concern with maximizing short term profit by selling gas guzzlers instead of building the foundation for long term profits by designing gas stingy cars.

The bane of the Chicago School of Economics is Keynesian Economics, named after economist John Maynard Keynes. This theory holds that individuals and firms can make “micro-level” decisions that result in “aggregate macroeconomic outcomes in which the economy operates below its potential output and growth.” This is a perfect description of how we got to this recession.

A key element in Keynesian Economics is that a national depression can be turned around through 1) a lowering of interest rates which leads to more lending to more borrowing and to investment in industrial output, and 2) government investment in infrastructure that stimulates greater spending in the country’s economy.

TARP, the new the $2.5 trillion Geithner plan to straighten out the banking/lending mess, and the $787 Billion stimulus plan are examples of Keynesian Economics. These actions are more likely to stimulate the nation’s $14.3 trillion annual economy than is having “those with money” remodel a bathroom, gift an iPod, or buy a gas guzzler. Serious public consumption must follow the stimulus actions once the funds start to flow,

Perhaps the New York Times needs to read the economic pieces before they run.

(Full disclosure, I received my PhD in the same academic division as Glaeser, although not the same department (and 30 years before him). Graduate study at the University of Chicago allows students to interact fully in most divisional activities, and in the 70s, I had the opportunity to listen to, understand, and discuss ideas with many of the greats of the Chicago School of Economics such as Gary Becker, Robert Lucas, George Stigler, T. W. Schultz, Robert Fogel, and, to a much lesser extent, Milton Friedman (who had a lower opinion of students from outside his department.))

Peter B. Hayward

Copyright © 2009 Peter B. Hayward. All Rights Reserved

Follow me for daily tweets at twitter.com/pbh444 . To be notified immediately of new tweets from those you follow, you can use a PC program such as Mad Twitter, a Mac program such as Twitterrific, or for the iPhone/iTouch, many apps like Twitterific or a web based client such as Hahlo.

Media: Newsweek Finally Got It … Wrong

The New York Times reported that “Newsweek is about to begin a major change in its identity, with a new design, a much smaller and, it hopes, more affluent readership, and some shifts in content.” Newsweek is reportedly shooting for a core paid readership of 1.2 million in contrast to more than 3 million previously.

Apparently Newsweek’s goal is to move away from being a “news weekly” and to having instead an “opinionated, prescriptive or offbeat take on events.”

While this move might make sense to Newsweek because people get their fast, up to date news from the 24/7 cable networks and to a lesser extent from their newspapers. Long gone are the days when people were willing to wait a week to read about the latest battle in Congress or Khe Sahn, the latest on the stimulus plan, or on US Airways Flight 1549 crashing in the Hudson River.

But the problem for Newsweek: by going to an “opinionated, prescriptive or offbeat take on events” people have to buy into have Newsweek’s version of an opinionated approach. According the the NYtimes aticle, Newsweek is after “its best-educated, most avid consumers of news, … who have higher incomes than the average reader.”

But that role is already filled online by the Huffington Post which offers a wide range of “opinionated, prescriptive or offbeat take on events,” and for free. Ditto for Slate.com, and in print or online by Vanity Fair, The New Yorker, and Esquire.

Newsweek has a well-known brand, but its change would be like Dove soap going after the anti-bacterial hairy crowd.

With broadband, the “best-educated, most avid consumers of news, … who have higher incomes than the average reader” can have their news and opinion when they want it, where they want it, and for free, or get it from magazine that have an established brand for doing so.

My prognosis, Newsweek will be gone by 2011. The “best-educated, most avid consumers of news” are on broadband, not reading always print.

(Full disclosure, I read online the Huffington Post, Slate, the IHT, NYT, WashPost, WSJonline, and read in print Time, Newsweek, Vanity Fair, Esquire, and the New Yorker.)

Copyright © 2009 Peter B. Hayward. All Rights Reserved

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Patton Didn’t Depend on Consensus and Obama Shouldn’t Either

President Obama got to be President because he had his Mojo on, the phase from African Americans which can be interpreted in many ways, but I prefer “mastery of his game.”

Obama showed it in the campaign and brought millions of people who had never voted before along with him. He inspired them; he gave them a dream.

Then, shockingly, in July, Obama, pulled his first consensus move and voted to immunize the Telcos in their spying on Americans, something he said in the campaign he would not do. Clinton said the same and held true to her word, voting not to immunize.

The US unemployment rate for January was announced on Friday, and it had jumped to 7.6%, representing more than 11,600,000 people out of work. The actual January job loss of 598,000 jobs was the biggest loss in 34 years.

As I explained in my earlier blog, this rate is a gross understatement of those out of work. The underemployment rate of 13.9% is comprised of those who work part-time but desire full-time work and workers who have given up looking actively for work because the outlook is negligible.

But Obama continues to act as if consensus is the key to running the country.

This economic crisis is far beyond consensus.

It calls for bold leadership, and sometimes leadership is exercised alone.

As Obama famously stated a few weeks ago, “I won,” but then he acted as if American is being run by a unity government, half of which seems to want to see a return to the failed policies of the Bush years.

As I noted in my earlier blog, the Harris Poll proved decisively that Bush’s Spring 2008 stimulus payments were not used in a manner that stimulated the economy. The payments were used instead to pay down credit card debt or saved against the very real possibility that a family member would lose his or her job or have hours cut back.

The stimulus package, whether the House or the Senate version, is doomed to failure.

1) It is targeted towards the wrong issues.

2) It is far smaller than necessary (it should be, let’s say, $2 trillion).

3) It is concentrated on tax cuts or rebates, infrastructure, and support to state government programs (like Medicaid).

Why will it fail?

1) Infrastructure jobs hire highly skilled workers using high technology equipment. The word “shovel ready” is part of the sales job. Shovels imply people. Shovels were used to build the Interstate system in the 50s: 2000 people build a leg of the Maine turnpike using shovels. Hardly a shovel was used to rebuild a portion of I-295.

2) Tax cuts or rebate or credits are likely to be used as they were in Spring 2008: to pay off credit cards or to build savings. There will be no consumption spree.

3) Increasing eligibility for Medicare is a good idea, but it will not stimulate the economy. It will serve as a backstop for those millions of workers who have lost their jobs; but it will not create new jobs.

4) It is far too small. The Gross National Product of the US in 2008 was $14.3 trillion. To spend 2 trillion to get the economy back on track would not be a mistake; to spend only $800 billion is a serious mistake; if the $800 doesn’t cut it, it is gone, and it will cost much more because the economy will be further gone. Desperate times require bold actions.

Obama needs to be a leader. Saying “I won” is not enough. He has the votes. He needs to do it right the first time. We are in the fourth quarter and there is no overtime.

He needs to forget consensus. He needs to appeal directly to the American people. He needs to remind them that they voted him into office 52-48%, and that he is going to lead the country the way he sees fit. If he makes a mistake, they can vote the Republicans into Congress in 2010 or him out in 2012.

He needs to put people back to work.

The depression of the 1930s ended not because people were put to work building the national parks and painting murals on post office walls, but because the Federal government built war ships and subsidized the wages of workers in the defense industries. The more workers that were hired, the more the companies made.

Since the vast majority of jobs in America are created in small businesses, Obama needs to give a generous Federal tax credit to each small business that creates a new job and keeps that job in place for, lets say, three years.

When ordinary people are working, those people buy goods, they buy cars, they even buy houses.

Forget rebuilding schools, those school repairs can be put off until after the recession; let’s get ordinary people to work.

Small businesses are the back bone of America and we need to ensure that they prosper.

A green revolution is nice, and green energy is nice, but when your corner store has just closed because it can’t get the credit to buy inventory, something is wrong.

When a car dealership in Maine, which has never missed a payment, has to close because its bank is no longer going to lend it money to keep its cars on the lot, something is wrong.

When there are 524 job applications for six full-time and nine part-time job openings at an Oxford store, something is wrong.

The banks need to start lending to businesses again, and if they do not, the government needs to fund banks that will. This is as much a crisis of liquidity as it is of customer confidence. If it takes nationalizing the five largest banks in the US and the five largest in each state so the funds flow again, it must be done.

Obama needs to defer the dream that he ran on, he needs to step up to the plate, get his Mojo on, and spend to save the American economy. We spent billions on Iraq; let’s spend money to get America back to back to work, to get the banks lending and to get the economy working.

We can do it; this is America; we need to think bigger; and we need to jettison the naysayers.

Patton and Eisenhower did not run their armies on consensus, and Obama cannot either.

Copyright © 2009 Peter B. Hayward. All Rights Reserved

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Amazon’s Kindle 2 — is this product really necessary?

On February 9th, Amazon will announce the updated version of its hot selling ereader — the Kindle.

Unofficially dubbed the Kindle 2, the new version is supposedly more streamlined and less “klugy” than the original version. Pictures of what might be the Kindle 2 were leaked to the Boy Genius Report at the beginning of October.

The original Kindle is on the left; supposedly the Kindle 2 is on the right.

At that time, the expectation was that the Kindle 2 would be unveiled by Amazon in time for Christmas sales (if not necessarily Christmas delivery). However, on October 23, Oprah Winfrey endorsed the Kindle, and sales skyrocketed, apparently leaving Amazon with too few Kindle 1s or even 2s for the stocking.

No further pictures have leaked since October 3, and there is a suggestion that Jeff Bezos had subsequently called for a software redesign that delayed the Kindle 2 until February.

The Kindle 2 will debut at the same price as the Kindle’s current price, $359; Amazon’s website is taking orders for Kindle delivery at that price in “three to five weeks.”

But the issue that I want to address is not what the Kindle 2 will look like but rather is whether the Kindle a gadet (or toy) whose time has come and gone.

Ereaders have been around for years.

The Sony Librie EBR-1000EP in 2004 was was designed for the Japanese market; the new major inovation was the Sony Reader (PRS-700), which was introduced into the US in November 2006. It used an “epaper” surface that was not backlit (unlike a computer laptop ot terminal) and thus easy on the eyes. Amazon’s Kindle debuted a year later in November 2007 and uses the Whispernet (Sprint EVDO) to deliver books wirelessly to the device.

The problem with the Kindle is that the Kindle books are in a propriety format. Microsoft Word documents and Adobe PDFs, the formats used by most businesses, must be translated, either by the customer or by Amazon before they can be read by the Kindle.

Finally, not all new or older books are available to the Kindle. Publishers must decide whether to format new books for for the Kindle which versions then sell for less than hard cover books. Also, older books are less likely to be available for the Kindle as publishers must whether they will receive a good ROI (return on investment) if they go back into their data files and reformat them for the Kindle.

Finally, the simple fact is that the iPhone, the Blackberry, the Nokia 810 and other smart devices have bypassed the Kindle for book and text reading. Stanza and similar programs have made it possible to read books on the small screens, and one is much more likely to see people reading books (or newspapers) on the IPhone or iPod Touch than on a Kindle.

The former are multi purpose devices, while the latter are single purpose devices.

The Kindle cannot play Los Lobos, cannot show your son’s baseball pictures nor your daughter’s wedding videos, and and the Kindle can certainly not make a telephone call.

The move in technology today is to multipurpose devices, not back to single purpose devices.

Kindle’s early adopters were, in my opinion, revolutionaries whose revolution has been surpassed by the smart device.

As Van Baker, an analyst at Gartner Inc., notes in ComputerWord, “We at Gartner are struggling to see what the compelling value proposition of the Kindle is for the average consumer,”…”For the average consumer, a paperback book and a printed newspaper still work pretty good.”

Peter B. Hayward

Copyright © 2009 Peter B. Hayward. All Rights Reserved

Join me for daily tweets at twitter.com/pbh444