Obamanomics: Restoring Faith and Currency

Trouble for American Consumer is building and the perfect storm threatens our tenuous economy. 

DEEP RECESSION LOOMS WITHOUT FUNDAMENTAL CHANGE IN OUR POLITICS AND ECONOMIC POLICIES

The inevitable outcome was always the same: eventually we would hit the the top, like in any Ponzi scheme. 

Consumers, who maxed out their credit cards, and maxed out their borrowing on their homes, and maxed out on their purchasing power which has declined significantly over the same 25 year period, and who are vastly unemployed or underemployed (further decreasing their wages and purchasing power), and maxed out their borrowing from consumer finance, and even maxed out their short-term borrowing through pay day lending and overdraft privileges and eliminated their savings plans, have reached the point where (1) they can’t buy anymore “stuff” and (2) they don’t want to. 

The end result is that we have spent ourselves and our country into a hole, diminished our standing in the world, and we continue to insult the world by asserting a dominance that was once real, but isn’t anymore. And the world is telling us as politely as possible to shove it. 

The strength of the Euro, the movement amongst the oil producing countries to create a unitary currency for the Gulf countries and other trends around the globe all spell the same thing: everyone is looking for an alternative to the U.S. dollar and an alternative to the U.S. altogether. We have brought ourselves and the world to neither peace nor prosperity, and neither security nor safety. 

Asian inflation which is gearing up to be as bad as we have seen in any emerging economy is starting to hit wholesale prices. Rising costs due to rampant and growing inflation in countries that had before been “cheap” producers is hitting hard on products purchased here in the U.S. 

Add to that the more or less daily devaluation of the dollar and the effect is multiplied. Add to that mixture the further devaluation of the dollar caused by the mortgage meltdown where central bankers are converting their dollar reserves to Euros and the effect is further increased.

The headlines in most papers is the end of the free ride we had for a long time where the dollar was king and we could purchase imports more cheaply because dollars were in great demand. 

Our headline here is that we are headed for the deepest recession since the greatest depression. 

The reasons are many but all fairly simple. The United States converted from being a nation of production to a nation of consumption. The final nail in the coffin of this unfortunate conversion was the advent of credit cards — not at their inception — and the high interest rates that were institutionalized during the double digit prime rate days 25 years ago. The theory was that the credit card companies were under hardship because it cost them more to get capital to lend than they could get under usury laws, once you factored in defaults and the extremely high interest rates that the issuers had to pay. But when rates went back down to modest figures of around 7% prime rate from highs of 22% credit card companies were allowed to keep their rates at 21-22% and eventually raised those rates to as high as 35%. Adding insult, the issuers now have fee schedules that add to the absurd payments. 

This “free money” craze coupled with stupendous profits earned by credit card issuers caused a huge but temporary surge in consumer sending encouraged by government, business and lenders. Everyone liked it because for consumers they were getting more “stuff”, for government they could claim better economic performance, and for credit card companies, they had a stranglehold on an economy that was now addicted to credit card and home equity loan consumer spending. As with the mortgage meltdown, nobody thought it through. 

Our economy became addicted to, dependent on and under the control of consumer spending, which up till now has accounted for around 70% of our entire economy.

The inevitable outcome was always the same: eventually we would hit the the top, like in any Ponzi scheme. Consumers, who maxed out their credit cards, and maxed out their borrowing on their homes, and maxed out on their purchasing power which has declined significantly over the same 25 year period, and who are vastly unemployed or underemployed further decreasing their wages and purchasing power, and maxed out their borrowing from consumer finance, and even maxed out their short-term borrowing through pay day lending and overdraft privileges and eliminated their savings plans, have reached the point where (1) they can’t buy anymore “stuff” and (2) they don’t want to.

Alan Greenspan is now defending his record of relying on the marketplace to work things out. Free market ideologies, like the one Greenspan relied on, are like all other theories in economics. They seem to work for a while and then they don’t. Ideology does not govern how people act. People act as they choose to and the way they choose is based upon mostly subjective factors at the time of their decision. That is a lot messier than the neat and clean theories and policies, indexes and measurements that have been used in determining economic policy, foreign policy, and domestic agendas for decades. 

The underlying flaw in all currently used economic theory is that people are not theoretical. They are real and they are complex. 

This is not a new observation. Plenty of brilliant analysts and thinkers have known this for thousands of years. Just look at some of the most recent contributions from Rothbard and von Mises and you’ll see that the idea that human motivation and human thought process as the real issue has been around for a very long time, well understood, and pointing toward policy mechanisms that were based in reality rather than the mythical world where everyone behaves according to the “plan.” 

The problem is that economics and politics are inseparable — like time and space. You cannot define one without reference to the other. And in politics, the goal is to get elected and stay in power. You are playing to an audience with precious little time to get the finer points of economics, personal finance and monetary policy. 

People are too busy trying to make ends meet, getting the kids off to school and after-school activities, and working a two-income family schedule with increasingly longer working hours. Up until now, buying “stuff” has been a recreational outlet and they had the “free money” to do it. Now they can’t even pay the “minimum payment” without borrowing more and they can’t borrow more.

You don’t get elected giving people bad news — especially the news that things will get worse before they get better. So politicians create agencies to give them reports, indexes, median incomes, and unemployment data that provides them a reference point from which to pontificate about things these “leaders” actually know nothing about. They create slogans and “programs” that will never happen to give the potential voter a reason for putting them or keeping them in office. 

The end result is that we have spent ourselves and our country into a hole, diminished our standing in the world, and we continue to insult the world by asserting a dominance that was once real, but isn’t anymore. And the world is telling us as politely as possible to shove it. The strength of the Euro, the movement amongst the oil producing countries to create a unitary currency for the Gulf countries and other trends around the globe all spell the same thing: everyone is looking for an alternative to the U.S. dollar and an alternative to the U.S. altogether. We have brought ourselves and the world to neither peace nor prosperity, and neither security nor safety. 

WHAT DO WE DO? BITE THE BULLET, GIVE UP IDEOLOGY AND GET REAL

If you want to stop the mortgage and credit crisis, go with Barney Frank’s plan which takes blame out of the equation and simply stops the worst from happening. It gives everyone an opportunity to recover and it is the only way to do it — taking everyone’s interest into account rather than one group over another. 

If you want to stop foreclosures and evictions, change the rules of civil procedure in each state and in federal bankruptcy court that enables cram-down procedures and mediated results that allow for the same outcome as Barney Frank’s plan. Home values were inflated far beyond fair market value. Everyone should share in the loss and everyone should share in the potential recovery. 

If you want to stop the health care crisis and the economic nightmare created for our citizens, take insurance out of the equation, wind down the current system and move relentlessly toward a single payer system that pays medical service providers well, does not subject them to liability for bad results, and gives them incentives to get their patients healthier. That is what other countries do and what we should do here. 

Eliminate the restrictions on so-called “alternative care.” Those protocols have been around a lot longer than allopathic medicine. End the hegemony of allopathic medicine, provide incentives for preventative lifestyles and care, and the costs of health care will drop like a stone while the prospects for a longer, productive, happier life will rise. Reinstate the basic pledge “First do no harm.”

If you want to create a country with solid economic foundation, we need savings. To create savings, people must have the financial resources to cover their expenses and set aside money for the future. Take credit card debt and other forms of predatory lending off the table. Change the “no end in sight” vision to a light at the end of the tunnel. Stop telling people to spend money when you know they don’t have it. All you are doing is making things worse when you could be leading them out of the darkness.

If you want an economy that has solid prospects and good earnings potential for its citizens and the country as a whole, change the direction of innovation from getting our own people to part with their money to buy “Stuff” and make innovation work to produce things the rest of the world values. In other words shift back from the consumer driven economy to production. The products might be the same, similar or entirely different as before. 

BRING BACK UNIONS: Stop trying to minimize costs and start working to maximize revenues. Anyone can eliminate their costs by simply going out of business. A business is worthless without growth and strength in the marketplace. By eliminating our production capacity, we have effectively relinquished our sovereignty. Have government intervene wherever necessary to prevent dominance that results in imbalance — encourage the start-up of new small businesses and create a level playing field for them to compete. 

If you want to reassert America’s place in the world give the world a reason to respect and honor us besides our military power. Raw power is a transient commodity. Eventually it ends. If you want to retain sovereignty over our economic affairs and avoid becoming a satellite of China or a junior member of the European Union then demonstrate the power of the American worker and the attractiveness of living and working here. 

If you want communities to prosper allow community banks and credit unions the same access to providing financial services as the megabanks, where centralization has shifted local deposits into faraway investments of dubious value to anyone. State and Federal programs should be deposited into local banks rather than national or international combines. The infrastructure already exists without any changes required to enable this to happen. What is necessary is for State regulatory authority to become more active and more focussed on their own State’s economy.

As the song goes, these are a few of my favorite things. What are yours?

VISA Fraud Costing New Stockholders and Consumers Billions of Dollars

The media and lazy stock analysts have failed to read what was right in front of them. Visa faces some challenging times and in-fighting between the stockholders, the junior financial institutions members and stockholders on the one hand, and the handful of controlling mega-banks on the other hand. The prospects of government anti-trust units and private actions against VISA and other networks has never been higher. It’s not the first time and it won’t the the last.

ATM Fraud and Anti-Competitive Practices

When will the media and analysts report that Visa et al are foregoing $180 million per year in profit for the sole purpose of keeping a death grip on potential competition from small financial institutions, exposing the gaping hole in the “service” offering of a few large financial institutions that control Visa policies? 

This is costing Visa shareholders at least a couple of billion dollars, and restricting the prospects of the company in the global economy. 

It is also costing the American consumers who use ATMs a whopping $5 billion per year in EXCESS fees. And it is costing the American Economy something on the order of $75 billion in revenues to small business owners, in addition to the billions in profits that small financial institutions should be making, and the resulting impact of restricting the ability of small institutions to invest money locally (for lack of deposits they could otherwise attract).

Visa and MasterCard, and NYCE, and STAR and Pulse, are all networks that are essentially controlled directly or indirectly by just a few large financial institutions for the benefit of themselves and contrary to the interests of their junior member financial institutions, the customers of smaller financial institutions, small merchants, artificially inflating costs to the operators of the terminals, the customers/cardholders that use the terminals and depressing their own revenues at the expense of what are now public shareholders.

These institutions have been using the networks to force small financial institutions to use their services (community banks and credit unions), while using their “rule-making authority” (largely regarded as quasi governmental, even though it isn’t), to make sure the smaller banks and credit unions can’t compete on a level playing field in providing ATM convenience. 

The ATM “Scrip” terminal, which performs all ATM functions and allows the merchant to fund the withdrawal from his cash drawer, is a very inexpensive, simple and small-footprint way of extending the reach of small banks and credit unions into stores and other locations that are more convenient to customers, at lower cost to the bank and the customer, and which would enhance sales at smaller merchants. 

It’s use at about 25,000 “off the radar” locations in the United States and hundreds of thousands of locations around the world also increases the volume of transactions, revenues and profit at the network level, so why wouldn’t the networks promote it? Instead they changed their policy in 1997 and have ever since been aggressively publishing bulletins containing “rules” prohibiting ATM Scrip Terminals and threatening banks with $10,000 fines per day. 

The networks enforce this policy through intimidation, and have aggressively adopted policies inhibiting fair competition between their controlling large financial institution, on the one hand —  and all the rest of the depository institutions in the country who would compete with them for deposits and loans customers if they could offer convenient low-cost or no-cost ATM access. 

This puts VISA and other network squarely in the cross hairs of DOJ and private actions for anti-competitive practices (hardly the first time they were accused of that).  

By adopting policies that are plainly contrary to its own business model in order to benefit a few large institutions VISA has decreased its revenues and profits and now threatens to decrease its prospect for maintaining or expanding market share, because the rest of the world is going toward ATM Scrip Terminals. 

Beginning in April 1997, these policies were adopted, after previously allowing, even welcoming the ATM Scrip terminal into the world of ATM convenience. The networks began systematically putting hundreds of companies and processors out of business who allow the scrip terminal to operate. 

By the way, CU24, a credit union network, NYCE and other networks expressly permit “scrip” terminals but do not promote them.  Others don’t exclude it but actively make it difficult for anyone to operate ATM Scrip terminals. The average U.S. surcharge for ATM Scrip is now under $1.00. The average ATM surcharge for the big machines is around $3.00 now. Hence the larger financial institutions, whose death grip on the system prevents smaller institutions from competing with them, are picking up $3 per transactions for those few customers of community banks and credit unions while offering free ATM service to their own customers. The small banks and credit unions can do the same thing but are prevented from doing so by the “rules” of the networks. 

These networks, including Visa with all of its other potholes, have passed rules against it. It is simply a contrived barrier to entry into the ATM convenience model, and all the resulting benefits of getting new customers, depositors and loans prospects.  

It is a barrier to small banks and credit unions who could put out 20  ATM Scrip terminals at a total cost of $20,000 into 20 locations closer to the work and homes of its customers. The networks, particularly VISA, require the small financial institution to invest their $20,000 into One machine which of course presents no competition at all to BOA, Chase etc. 

20 machines strategically placed by each small financial institution would present an intolerable competitive problem for the large banks, so they have squelched it. The cost of that policy now extends, as a result of the VISA IPO, from the financial services marketplace, to investors in Visa equities, who will be deprived of seeing their company’s revenues and profits artificially restricted by a policy that has nothing to do with the business of their company and everything to do with the business of third parties whose interests are antithetical to the interests of Visa’s business model.

Instead of carrying and operating costs of perhaps $200 per year for 20 ATM scrip terminals, small financial institutions face the daunting prospect of paying around $12,000 per month! This is a figure that would all but obliterate those smaller institutions that are profitable and would create solvency problems in credit unions.  

Thus they are required to restrict their ATM presence to one or two terminals when they could be placing dozens if not hundreds out in the competitive geographic area, producing millions of transactions, and substantial revenues to Visa et al. 

How many transactions? The answer is that back in 1997, there were nearly 13 million ATM Scrip transactions per month in the U.S. alone. Now the figure is under 1 million, and that is “sub rosa”. Allowing for the continuation of what had been meteoric growth of the ATM Scrip business, the number of transactions could today could easily exceed 200 million per month. Allowing 8 cents as the revenue of the network for each of these transactions means that Visa et al are foregoing total revenues of at least $16 million per month, most of which is profit. 

Thus somewhere around $180 million in net profit before taxes is being diverted from the networks (mostly VISA) to the benefit of third parties whose business directly benefits from these policies.

Requiring the use of big bulky, machines with vaults, cash dispensers, and other bells and whistles increases the operating cost, cash management, and insurance costs to hundreds of dollars per month, from what would be about $10 per year for the smaller “scrip” terminal. 

How will these networks explain to their member banks and now their shareholders why they are restricting electronic access to depository accounts (which is, after all, their business) and thus eliminating large revenue opportunities and profit on the bottom line? 

And if they do not change their “rules,” then the prospect of other networks or direct agreements between processor, banks and merchants becomes more likely, particularly in view of the fact that the “scrip” terminal is the dominant player in all emerging markets around the world. 

Will stockholders be pleased to learn that Visa profits and market share are shrinking because of the interests of a few large customers in the U.S. domestic banking business?