•  What are you doing to support your personal bailout plan?  Saving a little money, cutting back on the unnecessary, eating out less, all of the above?  An article today suggested the following:

1. Don't co-sign a loan.

2. Be wary of taking on new debt

3. Don't take your job for granted

4. Don't take unwarranted risk looking for higher returns.

•  Certain congressional members are requesting that TALF be extended.  In the same breath the Senate requests that they be informed who the Federal Reserve is helping with the TALF program.  If I were a senator I might have made that inquiry and expected an answer before requesting extension...

•  The International Monetary Fund (IMF) says that it would be better for Federal Reserve if “certain assets” were transferred to the Treasury.  Of course, why not foist the worthless junk on the back of the US taxpayer?  Why would the banks want it?

•  This past Sunday evening our friends, Jane and Phil, hosted a small get together at Wolftrap where we were entertained by Hall and Oates.  The weather held and we had a grand time.

•  Late in the last adminstration, Henry Paulson, former head of Goldman Sachs, implemented the very divisive TARP bailout of the banks.  And now Secretary Geithner must cut the budget deficit, now that the banks have theirs.  Milton Friedman and his Chicago School's style of economic austerity is alive and well.  In the words of a not so famous actor turned president, “Here we go again”.  The financial institutions eat at the main table ($700 billion) and the taxpayer is left to grab what they can out in the alley ($3 billion in the cash-for-clunkers).

Seems lopsided to us. 

Mancur Olson, the American economist, in his books (The Logic of Collective Action and The Rise and Decline of Nations), speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying.  The policies result in benefits for the coalitions and its members but large costs borne by the rest of population.  Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralyzing the economic system causing inevitable and irretrievable economic decline.

Government attempts to deal with the problems of the financial system, especially in the US, Great Britain and other countries, may illustrate Olson’s thesis.  Active, well-funded lobbying efforts and "regulatory capture" impede necessary changes to the financial system.  For example, the Center for Public Integrity reports that the top 25 subprime mortgage originators, with most linked to large US banks (or investment banks), spent around $380 million in lobbying costs and political contributions (The Economist, May 9, 2009).

"We must beware of those who burn with zeal but are not endowed with much sense."
               Pope John XXIII's words at the start of the Second Vatican Council

•  Today, the headlines herald the profit made from the $700 billion Paulson / Bernanke bailout last fall during the Bush administration.  We got $4 billion.

The New York Times, citing its own analysis is claiming the equivalent of a 15% annual return.  $4 billion is only 4% of $100 billion.  Even if we received the funds 6 months after doling them out the return would only double to 8% annually.  But, we are considering capital of $700 billion.  That doesn't compute and I see no explanation how the return was calculated.

•  Most importantly, the Financial Times reports the privately owned Federal Reserve made a profit of $14 billion.  The Fed makes 3.5 x more than than US taxpayer with US Government capital and no one is jumping up and down??!?

•  Where can a small business owner or entrepreneur still get a 90% loan-to cost commercial property financing to buy or build their company's facilities?  Here, of course.  You can skip the rent payment and own your company's commercial real estate with as little as a 10% investment while preserving capital.

This may be one of the Best Kept Secrets to Wealth Creation for small business owners.

•  While the Federal Reserve can provide unlimited liquidity to the system, ultimately it is a bank's borrowers who determine solvency.

Yes, a liquidity crisis was averted, but the credit crisis continues.  And there is little Mr. Bernanke can do about that.  Liquidity can be provided but there is no way to directly increase credit demand.  It just happens when it's right.

•  More criticism on Bernanke's reappointment to the Fed: Morgan Stanley's Stephen Roach said (via the Financial Times): “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure.  Maybe the patient needs a new doctor.”  Maybe the patient needs a new system.

Bill King of The King Report suggested the stock market's rising reaction to a “thank God it’s not Larry Summers” rally.

•  We are currently developing a presentation for those young at heart and young in age.  It will be a basic finance presentation for our teenagers and those of us of other ages who feel they need a refresher.  Right now, the topics will include reconciling checking accounts, options for saving, using credit wisely and a review of our banking system.  If you or one of your children would like to be made aware of the schedule please write us and you will be put on our notification list.

By all accounts, the cash for clunker deal was a huge success.  Somewhere over 700,000 new vehicles were sold as a result of the program.  Granted, some of those cars would have been traded in and new ones bought regardless of the clunker credit available.

The beneficiaries were those buyers who got the $4,500 credit and the car companies.  In July, Toyota (TM), reported a 33% increase in sales, followed by Chrysler at 30%, Honda (HMC) up 14%, General Motors (GMGMQ) up 8% and Ford (F) up 7%.

Some of these manufacturers may have to ramp up production to restock their inventories.  This move would also help the suppliers in the car production food chain.

But, the world's largest automaker, Toyota, tells a different story.  As noted by Scott Reeves in Minyanville:

The company plans to suspend a compact car production line in Japan for at least a year, the Wall Street Journal reports.  That may be ominous because buyers typically turn to small, fuel-efficient cars in an economic downturn.

The production line halt would be a first for Toyota.  In the past, the company slowed production by reducing shifts or cutting production days.

This hits on a theme we've been following for some time.  At the end of a credit cycle blowout you can't stimulate credit demand with credit availability, no mater how cheap it is.  The cash for clunkers program results may not be an accurate measuring stick for consumer confidence and demand.  The cutbacks at Toyota may reflect future consumer appetites for demand and consumption more accurately.

Hate to be the downer but, we got to call it as we see it.

Yes, we have no web cam.  Our daughter left for James Madison University this past weekend and alas, she had the web cam on her laptop.  My computer is more than capable but, it is pre-web cam standard equipment issue.  ML is scheduled to get a new laptop soon so if I can get a few minutes on that... Videos will resume soon in any event.

Home prices are reported up 1.4% in Case-Shiller's model for the 2^nd month in a row.  The quarterly index is down 14.9% year over year.  Guess which number the players in the market paid attention to?  The human mind has a tendency to hear what it wants and disregard the rest.

"Unemployment looks like a bad indicator for the housing market," Shiller said.  He's seeing "conflicting signals" in the housing market.

Contrary to the Case-Shiller numbers were the Federal Housing Finance Agency (FHFA) (regulators of Fannie Mae, Freddie Mac and 12 Federal Home Loan Banks) which said prices fell 0.7% in the 2^nd quarter.  It did report a June's rise of 0.5%, the 2^nd month in a row.

What does it all mean?  I wouldn't throw caution to the wind.  But, if you don't own a home and have the ability and time horizon to own one, the incentives such as the first time buyer tax credit are huge.

Are we ever going back to the 2005-2006 market?  Not likely anytime soon.

"In the 2005-2006 period, it was in the throes of a credit cycle blowout... where it took more than $5 of new credit to produce one stinkin' extra dollar of output.  Consumers had to borrow $100, in other words, in order for the GDP to go up $20.  It was a period of madness that couldn't possibly be sustained... and now, can't possibly be revived.  Who's going to invest in another condo development in Florida now?  Who's going to buy derivative debt at 2006 prices?  Who's going to build another factory in China to produce more things for American consumers who can't pay for them?"
                                Bill Bonner   The Daily Reckoning

One of my favorite banks for disdain, Bank of America is in hot water for authorizing Merrill Lynch bonuses to be paid while reporting to shareholders that no bonuses would be paid without consent.  Bonuses totaling $3.6 billion were paid.  How does a company do that when they lost more than 7 times that much or $27.6 billion?  Oh, that's right... they got taxpayer money.  The banks got bailed out while we got bent over.

What would have happened if a bank “too big to fail” had failed?  Would the world have come to an end?  We doubt it.  Would there be an adjustment period with some discomfort?  Probably.  There definitely would have been less bankers on your favorite golf course.

Yet, there are plenty of small, community banks such as one of my favorites, MainStreet Bank, that would have picked up the slack to whatever degree possible.

"Mortgages aren’t ethical documents, they’re legal contracts.  The typical residential mortgage for an owner-occupied home gives the borrower 2 options: pay on time and in full, and keep paper title to the house and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or stop making payments, and hand the keys back to the lender.

“Morality and ethics don't even enter the equation.  Both options are perfectly legal for the borrower, and the only criteria should be business-based.  All the ethics you need are contained within the 4 corners of the pages of the mortgage contract.

“Indeed, the ethical thing to do is for each borrower who’s underwater to look without blinders at their family's financial situation -- not just now, but over the long term.

- a friendly neighborhood anonymous East Bay realtor/lawyer: as quoted in, “Why We're Better Off with Falling Home Prices”.

I especially enjoyed the comment that we are all essentially losers since we bailed the banks out from the bad loans they made.  Privatizing the profits and socializing the losses.

If you are currently underwater with your mortgage, have concerns about the current housing market or where it may be in the future read this article.  It's the B side of the disc and not what you're hearing in the popular media.

One of the reasons that people find it so hard to exercise good business judgment is that we are “predictably irrational”.  So much so, that our tendencies towards such action are used against us as Paul Farrell describes in “25 habits of predictably irrational 'nudgees'”:

“How do they do it?  By using your profile against you.  With it, this conspiracy can manipulate your brain.  They know who you are, your preferences, behavior, likes and dislikes.  They data-mine your credit-card purchases, voting patterns, retail sales, credit scores, telephone calls, polls, portfolio allocations -- this conspiracy knows what you're going to do before you do it.  Its quants and behaviorists know how to write target-market profiles, dynamic equations and quantitative algorithms to anticipate your next moves, well before you know your next move.”

That all may sound like some grand conspiracy theory but I have marketing companies approach me everyday with the hope of selling me just that kind of information about “selected borrowers”.  Be forewarned.

Take a look at this article to see how your behavior may be setting you up to be “nudged”.  It's not so much what you invest in as how you react to any stimuli regarding the outcome.  If you are having problems with this aspect of your life you may be well served by getting "coached".

This morning an article was prophesying why the FHA would be the next Fannie Mae.

“Herein lies the problem.  The FHA’s standard insurance program today is notoriously lax.  It backs low down payment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud.  Sound familiar?  This is called subprime lending -- the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.

“On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices.  It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days.  The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007 -- meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory.  The IG says the FHA may need a 'Congressional appropriation intervention to make up the shortfall.' "

The reason this article captured my attention was the title: “Why It's Time to Abolish the Fed”.  With this being the second day of a Fed meeting when the 2:15 announcement is all everyone speaks of I thought this might be interesting.

I am not disappointed.  Now that the Fed is proposing new oversight and regulators the question is asked “would regulation have prevented the crisis?”  How many people wrote memos to the SEC about Bernie Madoff?  Hey, the rules were there, they were just ignored or not enforced.

There was just too much optimism built into expectations.  Even though it was staring them right in the face 18 months ago, Bernanke and company thought housing would rebound in 2008.  Could the same thing happen to FHA?  Why wouldn't it?  The risk of doing the business is squarely on the tax payers shoulders while the big financial money center lenders profit.  Privatize the profits and socialize the losses.

Instead of a new plan for regulation we should plan for the phase-out of the Federal Reserve and it's fractional reserve lending.  For an organization that was supposed to stop the boom and bust cycles it hasn't been effective except to center more power amongst fewer decision makers.

What do you think?

•  It is worth noting that this web site is provided to me as free service by the company that hosts our www.MetFund.com site.  Now, I can offer you a Free web site also.  The web hosting company, a la Mode, has graciously extended it's offer to our clients, firends and associates.  If you have been considering a new web site or an adjunct to an already existing one this may be a good no obligation opportunity to try it out.  Call or write me and we can review the details.

•  In the category of hard to believe, I recently heard that FDA allows food labels to say 0% trans fat if it has less than a 0.5 gram per serving.  When did 0 ever = 0.5?  And if it's per serving and that size can be manipulated by the manufacturer, couldn't the whole process be manipulated?  What's happened to full disclosure?

•  Loan modifications are now a big, non supervised business.  Many borrowers initially pursue the modification on their own only to sign on with a modification company after meeting with their lenders' initial resistance.  If you continue to pursue the modification on your own, be prepared.  It takes nerves of steel, the patience of Mother Teresa and extreme persistence.  But you can do it...  If it's too much, call us.

•  Has the balance of your loan exceeded the value of your home?  There's now an option that allows homeowners who are “upside-down” to refinance at a small premium to normal market rates.  Fannie Mae's refi plus program will allow new loans up to 125% of the appraised value.  This has been saving many people from serious problems.

•  With the start of school right around the corner, many parents are considering how to pay the ever increasing tuition bill.  As I find myself in that position, I have been studying all the options.  Call me or drop us a line to tell us how you are dealing with tuition problem.