| LAGUNA BEACH OCTOBER 19, 2010 VOLUME XVI |
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News & Views
Debt Buyers & Sellers Resource
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Editor's Message
There has been a flurry of activity in the past 45 days that affects the Debt Collection Industry at the micro scale, and the country at the macro. The larger context is what prompted Gary to delve into the proposed National Budget that has not yet been approved by Congress. What he gleaned from his analysis of the data is very interesting and he covers that in the first of a 2 part series entitled "Boy Are We Screwed!". (only kidding) It's really entitled 'The Federal Budget: Taxes, Debt and the GDP". This article is a synthesis of budgetary data and therefore not for the faint of heart, but we found the information utterly fascinating.
Gary has found some discrepancies in the official charge-off numbers in "Credit Card Charge-offs". We also talk about how the role of the banks has changed since the economic crisis began in 2008, in "The Bank Identity Crisis" and Jill takes another look at the consequences of prolonged unemployment in "The Collateral Damage of Unemployment". We also highlight some good pieces from Inside ARM recently in "Keeping Our Eye on the Ball" and comment on some of the issues that should remain on our radar as we face the onslaught of criticism that is launching yet more legislation. This issue is a little later this month because we held it for the new charge-off information released on 10/15.
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The Federal Budget: Taxes, Debt and the GDP-Part 1
By Gary Baker
Each month as we develop articles for Crescent Bay Financial - News & Views, we try to push the envelope a little further, and this month's lead article is no exception. We recently read the book Aftershock by David Wiedemer, Robert Wiedemer and Cindy Spitzer, and more recently watched a great panel discussion hosted by AEI (American Enterprise Institute) that featured Nouriel Roubini, Chris Whalen and four other experts, wherein each made a presentation on the post-bubble economy. Reflecting on the material presented, we were motivated to look more closely into the US Government Budget and the National Debt. Even though the material is generally beyond the scope of what we typically report on, it is relevant to us all, and going through this exercise we uncovered some very important information which we would like to share.
In our effort to separate the truth from propaganda and political sound-bites, we found that finding reliable information on budgetary data was a real chore, particularly data that was verifiable. We did accomplish what we set out to do, however, and have included our source at the conclusion of the article for independent confirmation. Why do we emphasize verification? The answer is very simple. The numbers are scary, and unless we change our course of spending more than we have, and truly begin really growing our economy, and make numerous other adjustments including the way special interests groups drive our politics, we will pass on to our grandchildren a situation that is so untenable, the system can only collapse.
The Federal Debt
The first chart in our series shows the Federal Debt compared to the Gross National Product (GDP) and includes all federal revenues (Total Tax Receipts) and the interest being paid on the National debt. (Budgetary data is expressed in several ways and comparisons to the GDP are generally always provided.) The numbers are expressed in trillions of dollars. Note how the Total Debt has skyrocketed since the beginning of 2008. It is expected to cross above the Gross Domestic Product for the first time since the government has been reporting data in this way. Note also the sharp incline for both the total debt and GDP. The GDP is not growing anywhere near as fast as the projections in these graphs indicate. (GDP accuracy will be discussed in the next issue.)
Important Note: None of the information presented in the following graphs and sets of data obtained from the Federal budget includes the new Health Care Bill, which will have a significant impact on the estimated numbers.
The Total Tax Receipts include all revenues that are received, or projected to be received by the U.S. Government, such as individual and business taxes, excise taxes, social security and other retirement receipts. The numbers from 2010 to 2014 are government estimates only. Note that the Total Tax Receipts expected for this period calls for almost doubling the tax revenues. Interest payments are separated into two categories in the budget and include both net and gross interest payments. The Gross Interest Payment on the National Debt is the total amount paid in interest. Yet the Net Interest Payment is more often used in the budget and is the number commonly presented in many economic documents, making the overall picture look better. Since the U.S. Government owns a great deal of the Treasury Bills and other financial instruments, the interest revenues which are generated from these instruments is used to offset the interest on the National Debt, and the amount not covered from these interest earnings is the Net InterestPayment recorded, which comes from the general fund. So, the Gross Interest Payment numbers appear to be the true interest cost on the National Debt. If we did not have the debt and still owned the Treasury bills, the income from these notes could be used for other purposes.
National Expenditures and Gross Receipts
The next chart displays the Total Expenditures relative to the Total Tax Receipts, and also shows the breakdown of Payments for Individuals, National Defense and Interest. There was a brief period between 1998 and 2002 when the Total Tax Receipts exceeded the Total Expenditures. In 2008 the Payments to Individuals alone, exceed the Total Tax Revenues generated for the US Government. This is clearly a huge part of the budget! The Payments to Individuals include Social Security, Medicare and all other forms of payments to individual citizens and are not likely to be under-projected. The Total Tax Receipts are generally based on the health and growth of the overall economy, as expressed in the GDP, and it is interesting to see that is projected to rise faster and higher (dashed green line) than any time in the past 60 years. This appears to be an unrealistic scenario as we will discuss later.
National Defense spending is projected to be less than the Interest Payments on the National debt within just a few years. What surprised us about this data was the National Defense spending compared to the Payments to Individuals. The ratio between these two categories was about 3:1 in 2007, with Defense spending $550 billion and payment to Individuals at $1.6 trillion, the same year. In 2014, the budget shows Defense spending at $684 billion and Payments to Individuals $2.8 trillion, almost doubling the 2007 figure in eight years with the ratio between the two categories at over 4:1.
Comparison of Expenditures to Total Tax Receipts
Deficit spending is not a new budget phenomenon as can be seen in the following chart. Since the Government began their modern system of tracking budgetary data in 1960, there have only been two periods of time where the Federal Government did not spend more than the Total Tax Revenues received. Since about 1970, Payments to Individuals has been the single largest Government expenditure. The Total Tax Receipts are shown as the dashed black line at 100%. Note that the sharp decline starting in 2010 for the Total Federal Outlay and Payments to Individuals, optimistically assumes a very large increase in the GDP which would significantly increase the Total Tax Receipts.
Source: Federal Reserve web site
The Gross Interest Payments on the National Debt are shown climbing to about 25% of the Total Tax Receipts, within the next few years. But we need to remember that the Interest Payments on the National Debt, are currently being financed at record low interest rates of 0.45% in 2009 for five year Treasury bills. It's scary to think about what will happen when interest rates go up, as they did in the 1980's when the five year Treasury Bills carried an effective rate which peaked in 1981 at 14.25%.
Comparing the Federal Debt and Total Tax Receipts
The following chart is very disturbing. As mentioned earlier the budget uses the GDP as one of the methods of expressing data in the historic budget. When we look at the total Federal Debt expressed as a percentage of the GDP, we can see in the following chart that by about 2012, the Federal debt will exceed the total GDP of the entire nation. Tax revenues, which have varied between 15 to 20% over the past 50 years when expressed in a percentage of GDP, have been fairly consistent. The flattening out of the debt starting in 2010 is again based on a rapidly rising GDP, not a reduction in the debt.
Interest Payments as % GDP and the Green Line
The following chart is my favorite of all those that we have developed. The amount of interest being paid is expressed as a percentage of the GDP and shows both the gross and net interest payments. This chart is interesting because it reflects what we might call the minimum payment due. As the debt has increased, the actual payments on the debt have decreased as a result of lower interest rates. If we had continued paying the same amount in interest payments, (say 10% of GDP like we were paying in the mid 1980's) with the lower interest rates, we would have been reducing the debt (or at least slowing down the rise of the debt). When interest goes higher, we will be paying far more to retire the debt.
The green line represents the year over year change in the GDP. This number was not provided in the budget but was quite simple to calculate. The number is important in two ways. One, it clearly shows how deep the trough was following the 2008 meltdown. But second, and far more important than almost any other data point in these graphs, is the projection being made about the growth rate of the GDP. The projection calls for moving from a minus 1% to a positive 6% growth, a net change of 7% in less than 3 years. As you can see by the chart, at no there time in the past 50 years have we grown the economy 7% in any growth cycle. Furthermore, the periods of large growth in the GDP have occurred at times when the starting point was already at 5% or more. We have never had a period of GDP growth exceeding 4% when our starting point was below 5%.
This information is particularly critical when we consider that the revenues the US Government relies on in the way of taxes, is almost totally derived from the production output or GDP. When the Gross Domestic Product does not grow, new taxes are not being developed and the shortfall is replaced with new debt. These overly optimistic expectations of growth in the GDP are included in all parts of the Federal Budget.
Even if the Government's overly optimistic picture of growing the GDP was accurate, and new tax revenues were generated, Congress has still committed to spending far more than is generated in revenues. If growth in the GDP for the near term is more like the 1% that many economists believe, payments to individuals alone, without military, interest etc., will likely exceed the total tax revenues.
Components of the Federal Budget
The federal budget is summarized into several super categories. The receipts are the sources of income which are generated in taxes and fees. The following table is a composition of several tables in the budget and covers the years from 2007 through 2014.
Revenues From All Sources
Individual income taxes are expected to rise due to both tax increases as well as growth in the GDP which would bring more workers contributing taxes. These new workers and increased taxes account for the increase in Social Security and other social insurance receipts. The borrowed money in orange is the difference between the revenues in this chart, and expenses in the chart that follows. Again, these numbers do not include the Health Care Bill voted into law this year. The Receipts Detail below, comes from the directly from the Federal budget, and is summarized in these major categories. This includes information from Tables 2.1, 2.4 and 2.5.
Receipts Detail
Expenses All Categories
The expenses shown in the chart below are from Table 3.1 directly from the Federal Budget. The large expense in 2009 under the Physical Resources portion of the budget was a one time change which is distorting the graph and was allocated to housing credit. The Defense budget is relatively flat over this 7 year period, but payments to individuals have increased significantly. With the baby boomers starting to retire, more demand will be placed on the Human resources category. By 2014, payments to individuals will be almost $2.7 trillion. (This is equal to $385 for every person on the planet as of 10-12-10)
Interest payments on the debt (net interest), is expected to reach $460 billion in 2014, assuming that the GDP does grow as expected which provides the new tax revenues, and that interest is the same as in 2010. This is double the interest payments on the National debt in 2007.
Expenses
Difference Between Receipts and Expenses
The table above shows the difference between the total receipts and Expenses as shown in the previous tables. This is the National debt each year between 2007 and 2014 and the source of the orange band on the US Government Revenues chart above.
Interest Rates
The portion of the Federal budget required for making interest payments on the National debt is directly tied to the interest rate. It is therefore helpful to understand that the current rates for 10 Year Treasuries, which are currently less than 3%, are lower than any time in the past 25 years. The 3 month Treasuries, which can be seen in better detail on the bottom chart, are currently less than 0.5%. When interest rates increase, the percentage of the budget allocated to making interest only payments, will also increase. These charts were from the St. Louis Fed.
Summary
The next issue will focus on the specifics of the GDP and look at unemployment, spending and savings activities as they relate to the GDP. By that time we should have the 3rd quarter economic data available, which we can include. The current trend in the GDP, based on the first 2 quarter results of 2010, is dropping rapidly, and the new data will either confirm this trend or give us an indication of other changes.
Our objective in this article was to provide data that was both accurate and easy to read. We hope you will see the trends and understand that the revenues being generated through taxes, do not support the current or future level of spending shown in these budgets. Creating overly optimistic growth projections and using these numbers to support even higher levels of spending is not responsible government. Real GDP growth was less than 2% in the 2nd quarter on an annualized basis, far short of the estimates that were used to calculate the revenues used in the budget where this data was obtained.
Finally, it is very important to convey the following information: Please note that Congress "deemed" the FY2011 budget (as part of the "War Supplement Bill"), meaning that the Presidential Budget Proposal for 2011 was completely thrown out by Congress, so we have no budget for 2011. What we have is essentially a "continuing resolution", meaning that Congress can continue spending without the guidelines of a budget. This is irresponsible.
The Source of the Data
The data utilized in the preparation of the graphs in this article were obtained from the Office of Management and Budget and bear the seal of the Executive Office of the President of the United States. The document is titled Historical Tables Budget of the U.S. Government - Fiscal Year 2010. The document introduction begins: A New Era of Responsibility: Renewing America's Promise, and contains the Budget Message of the President, information on the President's priorities, and budget overviews organized by agency. This document was published on February 26, 2009.
Since publication of this initial volume, the Administration has produced updated budget estimates based on new technical and other information. The following volumes are based on those new estimates, and updated summary tables were published in the following volume. Updated Summary Tables, May, 2009, Budget of the United States Government, Fiscal Year 2010 contains a set of summary tables updated and expanded from the February FY 2010 President's Budget overview. The budget is presented in a pdf format and can be downloaded.
Each entry in the charts in this article corresponds to a table number in the budget, and the page numbers have been included for reference. The data sets in some of the entries are calculations based on the information in the budget.
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Double Dip, or Rebound?
On October 6th, a panel of economic and financial experts discuss the topic "Living in the Post-Bubble World: What's Next?" in an event hosted by AEI (American Enterprise Institute). Each speaker had about 15 minutes to present their assessment of the crisis at this time in history and what should be done about it. Nouriel Roubini's and Chris Whalen's presentations are each a "must see". They are speaker #3 and #4 beginning at 49:25 minutes into the tape.
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Credit Card Charge-offs
By Gary Baker
Charge-offs declined for all major issuers except for Capital One in September, according to the latest numbers issued on Friday from the leading banks. All major issuers are below 10% charge-off rates for the first time since February 2009 based on the monthly data.
Unemployment rates, held steady at 9.6% for the standard U-3 reporting, and climbed to 17.1% on the U-6 report, which is a more accurate gauge of the unemployment.
The Quarterly Credit Card Charge-off Report
The quarterly charge-off picture looks bleak for the credit card industry. The chart below was generated from quarterly bank data obtained from www.bankregdata.com, and the numbers revealed a very different picture for credit card charge-offs than the monthly estimates previously reported by the banks above. Bank of America, Chase and Capital One all show charge-off rates higher than 12% through the 2nd quarter of 2010. This discrepancy brings into question the accuracy of the monthly reporting by the banks.
The total Charge-offs in Dollars for last 11 Quarters is shown in the chart below. We typically do not see this data from the major banks. Chase, Bank of America and Citibank have each written off more than $4 billion per quarter in 2010. (The data for American Express and Discover was not available before 2009-Q1) The total amount of credit card charge-offs by the three largest banks in the past 36 months is $20.7 billion for Citibank, $24.6 billion for Bank of America and $24.4 billion for Chase. Total charge-offs for all banks is $116.9 billion for the 36 month period ending 2010-Q2 according to the data obtained from Bank Reg Data. These figures differ substantially with those published elsewhere. For instance, the Card Hub website shows the credit card charge-offs at $53.5 billion for 2008, $81.6 billion for 2009 and $42.4 billion for the first two quarters of 2010 which equals $177.5 billion for a 30 month period.
These major differences in numbers frustrate meaningful evaluations of the banks financial picture. Some of the differences is due to way banks report information and what is picked up by the data providers. Diving through the quarterly reports of the major banks is never an easy or straight forward process because they report differently in the SEC filings. But a $60 billion dollar difference on the charge-off amount clearly represents more than a few rounding errors.
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Banking Identity Crisis
By Jill Benshoof
The Chaos of Crisis
The TARP Program officially ended in late September and despite proclamations by the Obama Administration that it successfully stabilized the financial sector and laid the foundation for recovery, rumors of fraud are still circulating. The program was widely criticized almost immediately as the controversial bank bailouts reportedly ended up in the pockets of Wall Street elites as bonuses, and, as people learned later, in the hands of foreign investors. An official investigation as to how the money was spent has already begun. Last week Treasury Secretary Tim Geitner issued a summary in Sunday's (10/3/10) Washington Post on the "Five Myths About TARP", addressing the criticisms and debunking their validity. Most of the current criticism from economists implies that the bailout wasn't enough, that it just delayed the inevitable. More importantly, the bailout psychology ignores the structural problems in the system, which, unless addressed, will just amplify the fallout later. Chris Whalen, of Institutional Risk Analytics, says that by kicking the can down the road", 2008 will look like a "cakewalk" compared to what is coming in 2011.
Though it will remain unclear whether the program truly did what was intended until after the audit, festering anger and resentment towards the government and banking institutions continues to increase, almost to the boiling point. The perception that Banks have been riding out the financial blizzard on the backs of taxpayers, remains strong. Indeed, with banks investing their capital heavily in the stock market over the past year instead of in lending, it only confirms their elitist attitude, which appears to be devoid any real concern for the welfare of their growing body of customers who are struggling to stay afloat. What is missing is even the slightest sign that the banks understand that they have a broader responsibility to the public than other institutions, and that their role in the recovery is critical. Their failure to face reality and reduce principal on mortgages, which currently reflect the inflated property values of an artificial market, is a prime example. Not only are they directly responsible for a great deal of misery in the country right now, Banks are contributing significantly to our long, protracted economic instability and are directly undermining our ability to recover. It is difficult not to conclude that they are directly responsible for a great deal of misery in the country right now. Government officials have exacerbated the problem by treating banks as a protected class, by rewarding them for wrong doing, by not pushing for principal reduction, and by fostering a climate that encourages delays and wheel spinning in resolving these issues through "extend and pretend"[1] policies, like the HAMP[2] program.
And if TARP wasn't enough to make your blood boil, according to Chris Whalen, the Zero-interest Fed policy is effectively taking nearly $1trillion out of taxpayers pockets annually (individual and corporate) and funneling it into banks as subsidies. In other words, the government is still putting all their effort into propping up the banks at the expense of Taxpayers. Disturbingly, that $1trillion does not even come close to offsetting the losses that commercial banks face in the massive number of foreclosures that are coming down the pike. The "Foreclosuregate" fiasco now threatens to stall that process. While official sources estimate that the banks have charged off 45% of all delinquent CREs (Commercial Real Estate), that picture may be skewed. Banks have been much more lenient in loan modifications with CREs than for residential loans, which some feel is masking the real extent of the CRE bubble. ManyLoan Mods which have been extended on inflated values are still vulnerable to failure and it is estimated that as many as 2/3 of those are really underwater. Laurie Goodman, noted Mortgage Strategist with Amherst Securities, estimates that we are only 25% of the way through the foreclosure process.
Mr. Whalen further states that the troubles that banks face in providing proper documentation of mortgages that were bundled and sold multiple times, has distracted politicians and the media from focusing on the real problem. Whalen says: "House Speaker Nancy Pelosi (D-CA) and all of the other politicians clamouring for inquiries of bad home foreclosures are simply playing to their ill-informed audience. Neither Pelosi, most members of Congress nor the vast majority of Americans understand that the real crime by the Big Five banks is not the failure to perfect the loan documents on a mortgage a decade ago, but the active steps being taken today to prevent millions of American households from exercising their contractual right to refinance their mortgages when interest rates fall."
He goes on to say: "Instead of suing American Express (AXP), the Department of Justice should be suing the Big Five[3] for anti-trust violations, price fixing and criminal RICO. Until the blockade erected by Fannie Mae and Freddie Mac to prevent refinancing of performing mortgages is removed, Fed monetary policy will be stymied and no amount of QE[4] will be effective in stabilizing much less re-inflating the U.S. economy." He accuses the banks of running a Cartel!
Shah Gilani writes that the Mortgagegate "robo-signing of foreclosure documents is just the tip of the iceberg" that threatens to undermine the fragile hold we have on recovery. As always, when this kind of impropriety is uncovered, there is more to the story. The fact that the deceit may have involved false notarizations of millions of documents spread over every State, pales in comparison to the fraud that may have occurred earlier in the loan registration process.
When the banks first started packaging mortgages as securities, they needed a vehicle to accelerate that process, and MERS was born. MERS, Mortgage Electronic Registration Systems, is a company created by the big banking institutions to expedite the bundling, securitizing and repackaging of loans into "mortgage-backed securities" that could be traded on the open market. It appears that the legal land-title process that had historically assured title and proper ownership was short-circuited. By doing so, banks were able to avoid paying billions of dollars in State Registration fees, which saved them money, yet they profited even more by charging their own fees! MERS is now facing class-action lawsuits and civil-racketeering suits that have the potential of paralyzing the bank/mortgage/foreclosure system for many years.
Changing Paradigms (Too Many Hats)
While it is hard to see the forest when you are standing at the foot of a Giant Sequoia looking straight up, what is emerging from the ashes of the financial chaos of the past 2 years is very interesting. With bonuses and free money from the Fed to invest where they want, it might appear that the banks are having their cake and eating it too. Yet, the truth is they are headed for a catastrophe. Lawsuits aside, losses have been at record levels and in trying to stem the tide of defaults and protect themselves from risk, there has been a major shift in how the banking business is operating. Overwhelmed by debt, banks are plagued with inefficiencies as they have effectively reinvented themselves to become investors, collectors and virtual REITS[5]. This has necessitated massive restructuring.
In addition, what has emerged is 2 separate classes of bank - the Too Big To Fail (TBTF) banks and the rest. The Obama Administration's team of Wall Street "friendlies" have opted to protect the banking elite by finessing regulations that favor them over smaller banks and do nothing to address real structural change in the system. In addition they have thwarted any moves to break up TBTF banks, thus "strengthening the self-perpetuating oligarchy which dominates the political system to protect its own wealth and power." This means that the TBTF banks have a built-in, government sanctioned, competitive edge over their smaller competition that is in direct conflict with the free market system, and which will only result in the expansion of the larger banks. With the Big Five bank assets totaling 60% of GDP it is likely that they will continue to have disproportionate influence over government policy in the future, unless they are broken up. TARP restrictions that gave oversight authority to government, served only to blur the line between the banking world and the government all the more. In effect, they are one! The banks know that the government is their insurance policy, so there is no degree of accountability, which disturbingly makes the likelihood of more fraud quite plausible.
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Sadly, it is the smaller banks that have traditionally lent to small business, which has comprised about half the economy and half the jobs in this country. Due to their heavy investment in CREs, small banks are currently very vulnerable. It bears emphasizing that the most important vehicle for economic recovery right now is the most vulnerable to collapse. At this point the focus of smaller banks is on survival, not on lending.
Conclusion
The system is broken, and, it didn't get that way on its own! It had a lot of help - help from the government and help from the banks. In all honesty, it would be wise for us to admit that neither is TBTF, simply because they already have failed. And it's pretty obvious that both are floundering right now just to prop each other up and maintain the allusion that someone is in control to guide us out of this mess. There is a simple solution to the problem... and that is for government and the banks to rethink their mission and get back to their basic functions in their purest form. They have both become too complex in that the machinery that moves today's economy is too big, too expensive, too slow, and too shady.
Imagine what it would do for morale if the purpose of government was not to create work and endless special interest legislation for the self-serving Congressmen, but it was to actually serve the people, honestly and fairly without political posturing! The bureaucracy is top heavy and costly because it tries to do too much, for too many by micro-managing every aspect of our lives. What if truth, became a cherished value again, that we deemed more important than political correctness. And imagine if that the role of banks was to actually provide a safe haven for our money and to lend - yes, to lend to the people for homes and businesses. And then all of us could get back to having jobs and living the American dream.
[1] Policies that delay foreclosures, allowing banks to carry the full value of defaults on their books longer, make unhealthy banks appear healthy. Most experts agree that anything that slows the pace of foreclosures is a bad thing for recovery. It creates more uncertainty in an already frail system. Charge-offs clear the way to new lending.
[2] The Home Affordable Modification Program has a dismal rate of success. Proponents say that at least it helped smooth out the shock to the economy, if only by confusing the process.
[3] Fannie, Freddie, BofA, Wells Fargo and Chase
[4] Quantitative Easing - the term applying to the increase in the money supply by the Federal Reserve, invoked when normal methods of monetary control have failed.
[5] REIT - Real Estate Investment Trust
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The Secret of OZ
There is an excellent YouTube video on bankers, the Gold Standard and our current debt crisis, that is a must see for everyone. Extensive research went into the making of this feature length documentary that is sure to bust some of the myths that you have long held dear about the Gold Standard. How does L. Frank Baum fit into the picture? Set aside some time to check this out.
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The Collateral Damage of Unemployment
By Jill Benshoof
Rose Colored Glasses
As the recession limps painfully along, and Debt Collectors await the slightest glimmer of an increase in returns, there are few things more likely to stall that outcome than the high unemployment rate. It is important to clarify that the 9.6% figure released by the government and reported in the media paints a deceptively rosy picture. It understates the reality by a considerable margin and is a good example of how anyone can make the "statistics" show what they want. The 9.6%, which is the U-3 number put out by the Bureau of Labor Statistics, has, over time, come to exclude several other important statistics that used to be part of the official figure. The U-6, at 17.1%, is closer to the real unemployment number, includes what the government refers to as those "marginally attached to the labor force", such as people who work part time but would like to work full time, and those that may have just given up looking. From what we have been able to determine, neither one picks up the category of unemployed people whose long term unemployment payments have expired. According to James Dale Davidson, they simply drop off the charts. Nor does it include the sector of people who don't qualify because they own their own businesses and were never therefore laid off. This is why most sources believe that the true unemployment number is even higher than the U-6, perhaps even as high as 22%. Furthermore Mr. Davidson states that the Obama Administration has, by slight of hand, reduced the "Civilian Labor Force Participation Rate", which had held steady for the past 20 years, arbitrarily subtracting millions from the labor force to make the numbers even more favorable.
Miscalculating
If the government thought that the stimulus would increase lending and spark the economy, that has certainly not yet been the case. In fact, the results have been quite the contrary, according to the NY Times on October 3rd. While the banks have been paying off foreign investors and maintaining unusually high reserves, large companies like Microsoft that also have access to cheap money, are borrowing like crazy, issuing bonds, and then "stockpiling the cash until the economy improves". Common sense would suggest that the best way to create jobs is to encourage private business growth in the "real world"since businesses with less that 100 employees have traditionally been the largest creators of jobs. Yet most of the government "incentives" for small business, under closer scrutiny, are outweighed by disincentives, in the way of new regulatory restrictions with potential associated fees and costs of doing business, and tax increases, some hidden within the pages of complex legislation, like the Healthcare Bill. It is likely that these costs will not only dampen business growth, but will ultimately be passed on to the consumer, further slowing the economy and affecting national morale.
Leading Indicator
Traditionally unemployment is considered a lagging indicator, confirming the health of the economy after events that caused the change have transpired. In periods of recession where unemployment is short-lived, the consumer base remains in tact and recovery is typically fast and strong. But, after 21months, Mohamed El Erian, of Pimco notes that unemployment has taken on new meaning. It is now "much more than a lagging indicator...it is a signal of future pressures on consumption, housing and the country's safety net." It therefore has become a leading indicator, reflecting where the economy is going, and not strictly where it has been.
The Repercussions
One of the dangers of a protracted high rate of unemployment is that it undermines public confidence which further aggravates the recovery. Skills become rusty and ongoing programs that provide continuity, like employee training, are interrupted, both of which prolong the slowdown and impact future productivity. It also puts added stress on government budgets, particularly social services programs like unemployment benefits, which are already dangerously depleted. Historically, prolonged unemployment also causes societies to become more inwardly oriented as it becomes the driving force of public policy making.
For the unemployed, the psychological impact is devastating, not unlike a death in the family. Personal confidence is undermined, when previously successful people from an industry that has been slammed by circumstances, find themselves unable to get traction in the job market. And when proactive efforts to bombard the internet with resumes, elicit no response, - not even a "thanks for your interest" auto-reply, depression sets in, not to mention panic and survival instincts are tested to the limits. Over time, particularly as savings are depleted, Allan Schwartz, Ph.D. says optimism gives way to a sense if hopelessness and helplessness that breeds clinical depression manifested by anxiety, insomnia, lower self-esteem, substance abuse and even domestic violence. Sadly, they need, but can't afford professional help. If a person is lucky enough to find a job, they have often had to settle for something considerably below their previous level of training and experience.
Conclusion
In the economic bedlam that has characterized the past 2 years, it's easy to miss the clear link between A) the lofty goal of "homeownership-for-everyone-regardless-of-qualifications" and B) 30 million unemployed today. Well meaning politicians created a vision that everyone bought off on! The path from lower lending standards to delinquencies, to defaults, to foreclosures seems, in retrospect, so obvious, yet Congress, multiple administrations, Wall Street, banking institutions, savvy investors, Bernanke, Greenspan and many economic experts; they all grossly miscalculated the damage that this social experiment could have.
There were a number of economists who had sent out early warnings, and among them was Thomas Sowell. Sowell comments on the misplaced public outcry against the markets, in his article "Homeownership and Unemployment". The knee jerk response, of course, is for greater regulation, which disregards the fact that it was government intervention that started the landslide in the first place. Thomas points out that "Everything is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others."
While we are now living with the repercussions of earlier decisions by our leaders, it is hard not to observe that the people who created the mess and the people who benefitted from it are not the ones paying the price. It is time to begin holding the people we elect accountable.
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FYI
Inside ARM says that the FTC reports that 23% of Identity Theft cases are discovered by collectors. If you missed it, they issued a special edition, The Complaints Issue, in September, which is a compilation of many of their best articles on the subject. It's really worth clicking on the black, running Infographic which puts industry complaints in perspective. It contains such nuggets as, "Collectors make an estimated 4 billion contacts every year and of these only 88,190 consumers complained; that's the equivalent of an ant crawling up the Empire State Building."
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Keeping Our Eye On The Ball
By Jill Benshoof
Inside ARM Awakens With a New Mission
Debt Collectors are about as popular as incumbents these days, and on the heals of our efforts to offer suggestions on ways to improve our public image in recent months, "one-two" punches to the Debt Collection Industry last month left some disheartened. Picking up the banner, and worth bringing to your attention, were some great articles in Inside ARM responding to the onslaught of negative press, airing the issues, challenging wrong perceptions, and offering ideas to help promote a more positive image for the Industry.
One of the most exasperating stories was a piece called "Take Time to Stand Up for our Industry", (A) by Michael Lamm, on David Ramsey, the syndicated radio personality who advises people on how to beat debt. Ramsey, a self-proclaimed expert, regularly demonizes Debt Collectors, calling them the "scum" of the earth. While any compassionate person can relate to, and sympathize with, debtors who have been ill-treated, as an Industry we go to great lengths to treat customers with dignity and respect and to obey the law. In watching his spot, one might note that Ramsey could himself benefit from the extensive, courtesy training that reputable Collection Agencies put their employees through.
In a very thoughtful and respectful written rebuttal attempting to set the record straight, Mike Varrichio, President of Global Acceptance Credit, was rudely dismissed by Ramsey, who used the airwaves as his bully pulpit, to imply repeatedly that Mr. Varrichio was a liar. No doubt Ramsey has come across some pretty bad cases in the years he's been helping debtors, yet it is clear that his perspective has been shaped by his very limited context, which is a little like that of the criminal attorney, who has developed a low opinion of human nature after having spent a lifetime hanging out with psychopaths.
The fact is, his venomous generalities do not agree with the statistics in the FTC 2010 Report (see Promoting the Positive Side, News and Views Vol 14). While each and every misdeed in our industry is well documented to the point of neon headlines, the statistics confirm that these transgressions are but a minuscule fraction in the overall picture of collection activity, and not at all representative of the industry at large. So, Ramsey is dead wrong in his repeated accusations - to the point of slander. Free country, free speech, right? Well, it is irresponsible from someone in the position of reaching and influencing large numbers of people on radio and TV. While Mr. Ramsey's bias is understandable, to represent yourself as an authority, and only tell one side of the story is indeed irresponsible. To become more credible, Mr. Ramsey should do a little more due diligence on what happens in the other 99.99779% of collection calls[1]. But that is clearly not in his interest. The truth does not sell.
A Reality Check
Even so, these disparagers do us a valuable service as Jerry Ashton points out in "Those Who Complain---What a Blessing". He asks us to put aside our defensive inclinations and view consumer complaints as important feedback for our survival in a changing world. In giving ourselves a reality check it is important to remind ourselves that we are perceived by most of the world as bullies who kick others when they are down. It's worth pointing out that in the Jewish Torah, humiliation is nearly as criminal as murder. The courtesy of respect for others seems to be rare in our society these days and in reflecting how important it once was in the Japanese culture, it might be a great model to strive for. Wouldn't it be something to over the next decade see our industry become the poster child of how to treat others under very difficult circumstances?
[1] According to the FTC 2010 Report 88,190 complaints out of 4 billion calls.
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The Loan Buyers Group was formed to allow smaller Debt Buyers and Collection Agencies to work together to purchase National files of charged-off debt. The group also partners with larger Debt Buyers for larger portfolio acquisitions. For information on how what we do and how to join, visit our new Website at www.loanbuyersgroup.com. Join us on Linked-In .com/Search Groups/"Loan Buyers Group: National Debt Buyers".
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