Wednesday, December 30, 2009

The Decade's Biggest Message

Axe the “Aughts:” Network Ecology Was Major Trend of the 00's

By John F. Wasik

There are several scenes in the spectacular new James Cameron film Avatar in which characters connect to animals and plants directly in a sort of bionic fiber-optic networking.

The connections are subtle, yet illuminate a much larger point that was missed by most commentators in reviewing the major events of the passing decade.

There was a universal trend at play in nearly every culture that drove the major trends of the decade: Network ecology. This is the knowledge that powerful networks are playing a growing role in social, natural, economic and political systems.

Let’s drop that silly euphemism extolling the decade of the “aughts,” a bland and fairly meaningless term. Instead, let’s focus on the rise of networks.

Networks are often tribal connections. Witness the insurgencies still continuing in Iraq, Iran, Pakistan, Somalia and other places where tribalism is being disrupted. This affiliation with the known and hatred of “the other” is in our genome and further enhanced through cellphones and the Internet. Al Qaeda is a stateless network that seeks to disrupt and destroy our culture, which is underpinned by a market economy. Some networks, like those of terrorists, are predicated on pure hatred and motivated by evil. Others are more benign.

Social Networks are Anti-Tribal. While guided by the inner clan in all of us, facebook friends and twitterers are often motivated by connecting with complete strangers. It no longer matters if people are in the same community or continent. We can seek affiliations through these networks to expand the message of our humanity. We still want to be linked to groups that represent who we are and what we believe.

Political Networks are More Powerful Than Ever. How is it that a not-quite one-term senator with no other federal legislative experience gets elected president of the United States? The most devastating financial crisis since 1929 certainly helped, as did disgust with eight years of ruinous governance. Yet President Obama is truly the first 21st-century candidate to have fully leveraged the power of networks. Getting his followers to email, facebook, text and call during the campaign (and beyond) was organized on a massive scale. Even his opponents have used these techniques to divert and dilute useful social legislation. Lobbies are even more powerful because they have the money and troops to build effective networks. We need global financial reform now.

Economic Networks are Not Fully Transparent. Do we really know if the financial system is safe from another collapse? No, because we don’t know who’s connected to all of the nodes of the derivatives buyers and sellers. It’s a $60 trillion unregulated market — even as I write this. This system of networks is still the most potent threat to civilization as we know it as we lunge into the second decade of the 21st century. Banks need to be separated from the buying and selling of securities (bring back Glass-Steagall). All derivatives need to be regulated and placed on exchanges. We need effective “systemic” watchdogs over the banking, bond, mortgage securities and insurance industries. These items are non-negotiable. Since every exchange and market on every continent is now linked, the next market debacle will not be like the Titanic. It will be like supertankers running aground and shutting down every major port and financial center.

We Need to Rework the Energy Network. After financial network failures, this is the most dysfunctional part of our modern life. Currently our energy network runs on fossil fuels that harm our health and hurt the planet. Oil is transported from unstable, hostile places to countries that use it as if it had no consequences. The cheapest fuel-commodity on the planet — coal — is among the most toxic, pouring mercury and carbon dioxide into our air and water every single minute of every single day. For example, one of the oldest nodes in this network — the Fisk coal-generation plan in Chicago — has been running since 1903 (and is one of the biggest sources of mercury in the Midwest). We need to tax and phase out dirty power and re-align our power network with clean energy (geothermal, solar, biomass, wind). To do this will take trillions to rebuild the electrical grid and infrastructure (see my books Audacity of Help and Merchant of Power) to channel green energy to major cities or solar power from outer space. It can be done with a carbon or consumption taxes and political and economic incentives to do it over time. Doing so as a long-term national project, it will also create millions of jobs.

Our Homes Need Bigger/More Useful Network-Connections. Anyone who has computers or other electronic devices networked at home or in the office already knows this, but we can go beyond that. Homes should be cyber-networked into the power grid to tell us where we can obtain the cheapest, greenest power and tap into it without us having to flip a switch. We should have customized information regularly uploaded to us that will help us live better lives through nutrition, social action and community involvement. Being connected to the Internet or facebook is not enough. How do we transform our homes into comprehensive network information tools (they are no longer investments)? How do we put all of that information to use? How do we take the next step and transform network ecology into a positive social and personal ecology?

We Need to Rebuild the Jobs Network. We started out the decade at roughly 4 percent unemployment. In many inner cities, it’s 20 percent to 30 percent (10 percent is a woefully understated average now). I am saddened and sickened reading stories about some person (mostly school age) shot at random on the streets of Chicago and elsewhere. People should be working instead of devolving into murderous tribal gangs. President Obama has the right idea in his “Green Deal” to bring jobs to every depressed area through the use of green technology. This is the best social ecology project we can imagine. Employ people to create useful and productive livelihoods that help the environment and their communities. They, in turn, pay taxes, buy homes, build communities and live decent lives. Let’s fund a massive jobs program. The free market won’t don this on its own. Market economics isn’t an ideology or a religion. It’s a description of chaos.

Let’s Better Organize Information Networks. While the decade was clearly dominated by Google and Facebook, we still don’t have a handle on sorting out truly useful information from noise. There’s too much of it. What’s meaningful and what’s rubbish? We need efficient tools that will give us relevant local news, health information, decent money-management advice and a host of other nuggets that are tailored to how we live and how we want to live. Look at the bestsellers of the past decade: the Harry Potter books, Malcolm Gladwell’s Tipping Point, the Twilight vampire series. These books would not have been possible without effective social networks. Teens and pre-teens are still interested in the semi-mortality of vampire networks (a sneaky metaphor for adolescence), a concept that goes back perhaps thousands of years. We still love wizard stories because we have a need for miracles and magic (even with all of this technology) and want to succeed in the cutthroat global/corporate world. Traditional ways of making things like autos, newspapers and books are being thrown out the door. We want our stories — and vocations — delivered with pertinence and a savvy understanding of what we truly need. Look for the completely customized news-mail-site. Look for the novel that’s written based on our life stories. Look for the diet book (and medication) that’s designed specifically for your health history and genome.

Let’s Understand and Heal the Natural Network. I know this will be heresy to many, but in a larger sense it doesn’t matter if global warming is caused by humanity. We are still dumping tons of poisons into our air, water and soil that have nothing to do with carbon dioxide production. Making electricity by burning fossil fuels creates acid rain and fouls waterways and poisons marine life. Mining metals dumps untold toxins into watersheds and the air. We are clearly disrupting natural systems in tens of thousands of ways. There’s only so much potable water on the planet and arable soil. If we’re looking at a population of 10 billion people in the next 30 years, we will need to make everything we do renewable and less toxic. By better understanding natural ecology, we will gain insights into cancer, heart disease, diabetes, autoimmune diseases and a host of other health maladies. We are all networked to what we eat, breath and drink. We have to stop poisoning ourselves.

What will the face of the new networked age look like? I heartily disagree that there is any one or group of symbols that are the emblems of the past decade. A Humvee, McMansion and Wall Street bonus don’t even come close to the complexity and vast power of networks. I would choose an ecosystem like a rainforest or prairie. It’s the sum of its parts and all interconnected.

Without being a spoiler, the success of the natives in Avatar relies not only on their access to their planet network, but their ability to organize each other. Let’s put down our iPhones, iPods, X Boxes, smartphones and charge cards long enough to do something useful in our communities.

You can sit in front of a computer all day long or read a book on your smartphone or ebook device and still not be better connected to the world around you. Really productive change occurs when you leverage that network.

Enter the decade of the dyrnamic Econet, a system of networks that changes things for the better on a large scale.

John F. Wasik is activist and speaker and the author of The Audacity of Help: Obama’s Economic Plan and the Remaking of America (www.audacityofhelp.net) and The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).

Monday, December 14, 2009

How Big Bucks Lobbies Sabotaged Health Care Reform

Dorgan, McConnell, Lieberman and the Money Behind the Politics

By John F. Wasik

I know what the future of America holds if health-reform isn't passed.

More people will be uninsured. Premiums will rise. More employers will either drop coverage or raise out-of-pocket costs. Self-employed folks like me will either lose coverage or pay exorbitant premiums because of chronic conditions or expensive diseases like cancer (our situation now). More people will be bankrupted. More will die because they can't afford life-saving care.

This is not the forecast of a health-care economist, a politician or even Ralph Nader. It is a guaranteed fact because of the current health-insurance business model, the aging of America and the way politics is financed.

Money, politics and health-care lobbies are in a dysfunctional marriage. It's an unholy union that isn't good for most people.

Claims are losses, in insurance lingo. As people get older and sicker they have more health issues. A vast swath of the population is overweight, underexercised and eating poorly. There's a heap of hurt coming to those who have to pay future bills, which is everyone.

As a progressive -- someone interested in a shared prosperity -- it mystifies me why the concept of a fair and affordable national health program is imperiled. We all need it. To me and many others it should be a basic human right and part of our constitution.

Yet as I explore the ecology between political financing, lobbyists and political agendas, the mystery is solved. Let's follow the money.

When Senator Byron Dorgan's (D-North Dakota) amendment finally surfaced last week to import drugs from Canada, the Senate debate melted down. Who could possibly be against allowing Americans to afford life-saving medication?

Dorgan's fellow Democrats Robert Menendez and Frank Lautenberg from New Jersey had a big problem with Dorgan. It didn't surprise anyone that they would object: New Jersey is home to more than 50 pharmaceutical companies and tens of thousands of jobs in that industry.

You could argue that the Garden State senators were protecting constituents; drug companies certainly contributed to their campaigns. An obvious connection.

There's no reason to let the Jersey solons off the hook, though. Lautenberg has a proposal to allow Canadian imports if the Department of Health and Human Services can certify every drug imported is safe. That's the equivalent of asking the Postal Service to inspect every piece of mail. Big Pharma speaks in many harsh voices.

Contributions from Big Pharma didn't appear on a list of top-20 industry donations for Dorgan, however, according to opensecrets.org, which monitors campaign financing. Lawyers, electric utilities and Wall Street, certainly, but drugmakers spread their money around elsewhere.

In rare act of political bravery, Dorgan held up the entire Senate health-care debate until he gets a vote on his amendment.

The White House would like to see Dorgan's modest proposal evaporate because it had cut some still undisclosed deal with Big Pharma earlier this year. Nearly every Republican would like the Dorgan amendment disappear to avoid going on record saying that they don't want Americans to be gouged by U.S.-based drugmakers.

Here's another case where big-money politics is completely at odds with the needs of the American people.

I know Canadian (or anywhere outside the US for that matter with national health programs) prices are cheaper because I've priced my wife's chemo-anti-nausea medicines and can save more than half on what they charge at my local pharmacy. It's the same medicine at lower, much more affordable prices. What a concept!

Let's look at a senator from a state with relatively little Big Pharma presence: Republican Mitch McConnell of Kentucky. There are five major pharmaceutical facilities in the Bluegrass State, representing a fraction of the workers that New Jersey employs.

Horse breeding is likely a much bigger industry in the Senate Minority Leader's Commonwealth. Yet drug company PACs were the single-largest contributor to McConnell in the current cycle -- some $262,785 out of a total $416,285.

Ironically, McConnell has a good reason to refuse drug company money. In 2003, the Kentucky Attorney General sued the nation's five largest drugmakers for allegedly boosting prices on drugs for that state's Medicare and Medicaid programs, overcharging them an estimated $100 million.

But McConnell's loyalty to the idea of keeping drug prices high was worth less than a half million dollars. What a bargain for Big Pharma!

What's more important to politicians than getting industry money for a campaign? Not getting it. A half-million dollars is still a lot of money in Kentucky. And it still takes tens of millions to run a successful Senate campaign, even if you're an incumbent.

Notice I haven't said a word about the even-bigger behind-the-scenes player in the health-care debate: the insurance industry. They know whatever happens, they will win big. The current House and Senate plans leave most of the private industry in place.

Insurers -- exempt from federal anti-trust laws -- will likely get even bigger with 30 to 40 million more policies to write if health-reform passes. A handful of companies dominate most states.

While Senators Patrick Leahy (D-Vermont) and Sheldon Whitehouse (D-Rhode Island), are seeking to repeal the antitrust exemption, it's largely a side issue at this point that hasn't been seriously discussed.

The House's recently passed financial reform bill does nothing to aggressively regulate insurance companies, which are monitored by much weaker state agencies.

As former Labor Secretary Robert Reich said in a recent blog:

"From the start, opponents of the public option have wanted to portray it as big government preying upon the market and private insurers as the embodiment of the market. But it's just the reverse. Private insurers are exempt from competition. As a result, they are becoming ever more powerful. And it's not just their economic power that's worrying. It's their political power, as we've learned over the last 10 months."

Finally we have Joe Lieberman, the erstwhile independent from Connecticut, home to many insurers. Over the weekend Lieberman said he wouldn't support the Senate proposal to allow people to buy into Medicare, the last gasp of introducing some competition into the mix.

It's rather anticlimactic to note that insurance money was the single-largest source of Lieberman's PAC funding. Since he's estranged from the Democrats -- although nominally part of the caucus -- he's going to hang onto every dollar coming his way.

Once again the corporate state has subverted democracy. Public-interest politics continues to be hijacked by billions in campaign dollars that flow like effluent. Everybody outside of the power circles of K Street and boardrooms suffer as a result. Can we have meaningful reform in anything without disconnecting the big bucks lobbies from campaign funding?

You can crow all you want about letting the free market create competition and keeping government out of health care. Yet when it comes to votes in the most exclusive club on earth -- the U.S. Senate -- big bucks lobbies have cornered the market.

John F. Wasik is an investigative writer and author of The Audacity of Help: Obama's Economic Plan and the Remaking of America (www.audacityofhelp.net) and The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

--

Tuesday, December 8, 2009

Copehagen Rocks for Capitalism

Yes, We Can Copenhagen!

“I love the smell of carbon dioxide in the morning. It smells like…victory.”

Have you wondered what’s going on in Copenhagen? Are the usual suspects hopelessly protesting and government officials pining for some global accord that will only protect the Maldives and Banglasesh? What’s it all about, Alfie?

It’s about capitalism. Oh, remember that nasty thing that supposedly was killed by the greed of investment bankers, real estate brokers, hedge fund managers and mortgage companies?

Yes, that thing. It’s still alive and kicking, infused with the vigor of climate change steroids. One argument is that climate change treaties and regulations will snuff economic growth wherever it’s implemented. The other side will tell you that no, climate change is good for business. Let’s start with the killjoy side.

Climate Change Will Depress Economic Growth. Well, yes, it will cost industry more to reduce carbon dioxide production. That’s bad news for coal-fired power plants, steel, cement and transportation, among many others. But it’s not a zero-sum game. More growth will be created in the Eco-Tech sector, that is, industries that clean up dirty enterprises like diesel engines or coke ovens. Ultimately, a clean-tech national policy creates jobs. For every job making solar panels, there are 8 to 10 jobs produced for workers who install them. So mandating clean energy is going to spin off capital investment and jobs on a scale we haven’t seen since the Internet boom (which is still going on by the way).

Climate Change Will Boost Economic Growth. I’m backing this horse. Once you create a market for something, capital flows to it like rain. The Obama Administration has committed$11 billion to modernize the US electrical grid. That will enable electrons generated by wind power in the Plains and solar energy from the Southwest to go to population centers. Another $8 billion in loan guarantess and tax credits are going into clean technologies. That could generate some $60 billion in investment, according the The New York Times. For every innovation in a solar cell or wind tower, jobs and opportunities are created.

Of course, the climate change agenda will be stuck on commitments to carbon reduction. Nobody really knows what is possible because we’ve never sat down at a table with everyone from China to Bolivia to hammer out such a massive agreement. I’m not saying it shouldn’t be done; it should be broken down into pieces.

1) Carbon should be taxed directly. The proceeds should go into Eco-Tech trust funds to build up clean technology infrastructures. Part of that money should go into re-training grants for displaced workers and into elementary and secondary education. This isn’t just about reducing global warming. We have to warm up everyone’s brains to the possibilities and rewards of reducing all of the garbage going into the air, water and earth.

2) Every nation needs a national renewable energy portfolio standard. I think Al Gore’s US goal is 20% from renewable energy by 2020. It’s ambitious, but doable if all levels of government from the Department of Energy to local school boards are required to reduce carbon dioxide production.

3) Every country needs green buildings and transportation. Most of the carbon dioxide generated comes from these two sectors. Implement green national building and zoning codes. Stop building developments away from public transportation and creating “spurbs” or sprawling urban areas only reachable by highways. Revise zoing codes for mixed-use development and higher-density housing. Start a massive campaign to convert buses, trains, ships and trucks to non-diesel engines — or at least clean up the emissions from those engines.

Climate change is good for business! Once the major commercial powers realize this, global climate change reforms will be as simple as eating a Danish pastry. Well, maybe not, but at least it will be a sweeter business proposition.

For more ideas, see my book The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com)

Monday, November 30, 2009

Why US Housing Collapsed

This is an interview I did with Jason Stipp of Morningstar.com based on my book "The Cul-de-Sac Syndrome:"

http://www.morningstar.com/cover/videocenter.aspx?id=317388

Sunday, November 22, 2009

An "Eye-Opening Book"

This guest blog is from "In Another Country:"

The Audacity of Help

Benito Beck is quite right--President Obama does want to transform the United States with his policies. Thomas Friedman of the New York Times laments that a political system such as ours with so much special interest money blocking up the works may actually thwart our ability to solve large global issues. Unlike Beck who seems to believe in a libertarian utopia devoted to Jesus Christ, Friedman is extolling the current Chinese system with its authoritarian capitalism. We' ve been here before, folks, when people get all weak in the knees about democracy. That's why I support Eric Holder's decision to try the 9/11 perpetrators in New York City. He matter-of-factly defended the strength of our constitutional system and our ability to deal with terrorists using our own laws.

John Wasik has written an eye-opening book about Obama's Economic Plan and the Remaking of America called The Audacity of Help. ( 2009, Bloomberg Press) Anyone watching the health care debate might sympathize with Tom Friedman's remarks since the financial forces aligned against making any reforms have been awesome. In his book Wasik outlines the basic assumptions of Obama's economic plan and analyzes what has been promised and what Congress has or has not delivered. His previous work The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream gives you some idea where he comes from. He has a keen eye of what Obama was and is trying to do with the Stimulus Plan and notes the pitfalls in stimulating a bottom-up financial recovery but sees there are not alot of alternatives.The most rewarding sections of his book concern the making of a Green, Digital Economy and the initial seed money the Administration has allotted for the development of alternative fuels and technology.

For my money, the most important speech given by President Obama was his MIT address where he outlined the transformation he envisions for the American economy. I would rank it up there with JFK's Moon speech. But that may be the problem--Obama takes a long view of our problems which he should but the short term hurt of the recession may slow if not stall the long term objectives entirely. Like Bruce Bartlett in another entry of mine, Wasik also is keen on a single-payer solution to health care, something that is off the table now. But as Wasik notes, Obama has taken on some of the most divisive issues in our political economy and contrary to his critics of the Left have stepped on alot of toes of entrenched interests. To make it to the Green Deal, Obama has to show that his stimulus package does heal the economy and help the unemployed and has made an impact on starting the transition to a more Green economy.

In a way, the whole healthcare issue is not only essential to resolve but also to build momentum for the other initiatives outlined in the book. As Wasik points out President Obama has vowed to cut the national deficit in half by the end of his term in office. While plans have been started from the first days in office to tackle this issue, President Obama will have to use his ability to explain complex problems to address frontally and fully the nature of our national debt. This will lead him into the territory of the third-rail of American politics--entitlement reform.

Social Security, Medicaid and Medicare all need funding overhauls and no recent administration has even come close to addressing this urgent issue. In addition, there is no consensus solution. Not only will the tax code have to be reformed but also the Administration must develop new revenue sources to maintain these programs at the present level just as the Baby Boomers are about to swamp them. This is the Administration's Herculean task if the American dream is going to be revived at all.

The Audacity of Help is an excellent primer on the Obama Economic Plan as well as its emphasis on the needs of people in an economic system. The format of the book lends itself well to following the different aspects of the plan and what needs to be done. The Economic Plan is ambitious and unfortunately it appears to be necessary in all its aspects. For those who want the President to fail, it is a challenge to them to present an alternative view of how to maintain and sustain the American dream.

Thursday, November 12, 2009

Merchants of Debt

This guest blog is from the Manhattan Institute's City Journal (www.city-journal.org). My Merchant of Power is referenced. It was a cautionary tale about Sam Insull, the Chicago utility baron who got swamped by overleveraged securities in 1929. More on that book at www.johnwasik.com.

Nicole Gelinas

The Bear Truth

Criminal prosecutions won’t fix finance.

11 November 2009

Yesterday, U.S. prosecutors in Brooklyn lost their criminal case against two former managers of Bear Stearns’s internal hedge funds. But the acquittals aren’t a setback for financial markets’ health; they’re a step forward. They show that the public understands that Washington can’t fix our fragile financial markets through criminal cases. It must do so through regulatory change instead.

The case was the first important criminal trial to emerge from the global financial crisis. The feds accused the two defendants, Ralph Cioffi and Matthew Tannin, of committing criminal fraud and conspiracy in 2007. According to the charges, Cioffi and Tannin talked up their mortgage-related funds to investors while freaking out about them in private. For example, in spring 2007, according to the Wall Street Journal, Cioffi fretted to his colleague that he saw “simply no way for us to make money—ever,” even as he assuaged investors’ fears. But the government’s argument didn’t fly. After the verdict, one juror even offered explicit support for the defendants, telling the New York Post that the two men had tried to save their clients’ money, not lose it. “If this was really a fraud case, they wouldn’t have worked that hard” at trying to rescue the investments, said Aram Hong, adding that she would even invest her own money with them.

Why the sympathy for rich men in suits? Just a few years ago, jurors were happy to send former Enron CEO Jeff Skilling to the clink, possibly for the rest of his life (though the Supreme Court is hearing his appeal). The charges against Skilling weren’t so different from the charges here: he had committed crimes, the government argued, partly by putting on a brave face to the public while trying futilely to deal with sudden, massive losses on impossibly complex investments. Prosecutors must have thought that jurors would be even more willing to convict now, during the worst financial and economic crisis since the Great Depression.

Instead, the jurors rebelled—and if prosecutors had looked back to history, they wouldn’t have been surprised. Nearly eight decades ago, Samuel Insull, a Chicago utility titan, became a public face for the excesses of the twenties. As John F. Wasik has chronicled, Insull used cheap, easy money to create an impossible tower of debt securities on top of stock securities and stock securities on top of debt securities, all based on the premise of ever-mounting profits. When profits stopped rising, the tower fell and investors lost everything.

Prosecutors tried Insull three separate times and lost each case. Why? The juries decided that Insull’s failure constituted not a crime but evidence of the systemic failure of financial capitalism to regulate itself. Putting Insull behind bars wouldn’t solve anything; he had acted rationally in an irrational world. He could borrow to the extent that he did before the Depression, for example, because regulations to rein in speculative borrowing were nearly nonexistent. He could do so largely without investors knowing about the risks that he was taking because requirements to disclose such things consistently and publicly were also nonexistent.

The prosecutors’ defeat back then didn’t prove damaging to markets or to the economy. Even as prosecutors tried Insull, policymakers in Washington understood the real task: to protect the economy from the unrestrained excesses of financial markets, largely through civil, not criminal, solutions. Regulators put in place simple, uniform rules to limit speculative borrowing, so that, for example, nobody could borrow more than half of the purchase price of a stock. Regulators also required fair public disclosure of corporate risk, as well as consistent public reporting of financial markets’ activities.

This system worked well until the eighties, when financial firms and markets began to find ways around these reasonable regulations. Financial instruments like mortgage-backed securities escaped limits on borrowing, while credit-default swaps escaped limits on borrowing and disclosure. The financial world could once again get away with what Insull and others had done in the twenties: building intricate towers of limitless debt, destined to fall. The broader economy, too, became dependent on this ever-increasing debt.

But over the past two decades, Washington persistently failed to see that a financial system that escaped its limits on debt and on disclosure was growing untenable. Instead, the government saw scandals from Michael Milken to Enron not as evidence of civil regulatory breakdown but as unique criminal cases. The public went along, distracted from the real problem by high-profile villains. Consider what the Times said after Skilling’s 2006 conviction: “We hope the jury’s verdict deters other corporate kingpins from breaking the rules.”

Today, though, the public seems to understand that regulation through prosecution won’t work. In the Bear Stearns case, the jury recognized what the Insull jury saw long ago. Cioffi and Tannin weren’t criminals, but imperfect people doing their best in a world with no reasonable constraint. When the entire financial system fails, that failure isn’t any one person’s fault. It means that there’s something wrong with the system, something that can’t be locked away in a cell.

Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of the forthcoming After the Fall: Saving Capitalism From Wall Street—and Washington.

Monday, November 9, 2009

Cash for Craters

This is a blog from Bill Dahl in which he references my "Audacity of Help" and "Cul-de-Sac Syndrome."

Cash For Craters

By Bill Dahl

The Crater – or – “Hey! —We’re Down Here!”

What are the odds of your home being struck by a meteor? Has the current extraterrestrial economic crisis in the U.S. pummeled the value of your home, your neighbor, a friend, colleague or family member? When you look at what you currently owe on your home mortgage versus the current appraised value, are you in-the-hole? As you sit in your living room, do you feel as if you are treading water in the bottom of a crater, staring up at the walls of seemingly insurmountable mortgage debt that now surrounds you?

The economic meteor that has crushed the valuations of the U.S. housing market has created an incomprehensible financial crater for millions of American households. One observer writes that this phenomenon is the result of a defiance of the natural laws of the universe.[i] The mortgage holders I am referring to have the following characteristics in common:

They have conventional mortgages, backed by VA, FHA, Freddie Mac and Fannie Mae. These are conforming borrowers.
They do not have jumbo mortgages.
They do not have “sub-prime” mortgages or those with increasing rates attached to the fine print in their adjustable ARRM’s.
These homeowners are not the ones who succumbed to the no down or interest only enticements that infected the mortgage market and the U.S. economic infrastructure.
These homeowners do not have liar loan or no income documentation mortgages.
The mortgages held by these folks are for their primary personal residence. They don’t have “second homes.”
These are homeowners who used their hard earned savings as down payments.
They relied on the legitimacy of a bonafide appraisal. They relied upon the protections afforded them under a myriad of consumer, mortgage and regulatory statutes.

These are the millions of responsible U.S. homeowners who have become the innocent victims of the horrific impact the economic meteor shower has inflicted on individuals, families, neighborhoods, communities and regions throughout this country. They are the innocent bystanders who have experienced tangible, enduring, economic collateral damage by virtue of the irresponsible actions of other individuals, institutions, and government regulatory agencies. One study reveals that: “Home price declines will have their biggest impact on prime “conforming” loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac.”[ii] These loans comprise two-thirds of mortgages, and have historically been considered mortgages granted to the most creditworthy borrowers. Translation: These are the U.S. citizens for whom the system has failed.

What is the perspective of those who are living in the bottom of these craters? Consider the following:

“Today, I can’t sell my home for what I paid for it. I’m stuck. I can’t get out.”
“I didn’t do this. I’m a victim of the irresponsible actions of others.”
“By staying here, paying my mortgage and property taxes, I am subsidizing the poor judgment of others, who have walked away from their mortgage obligations.”
“Somebody keeps digging my crater deeper…I don’t even own a shovel!”
“My American dream has been shattered — by somebody else. I feel violated, angry and helpless.”
“I didn’t step into the path of this meteor. What hit the guy next door slammed me!”
“During the rest of my lifetime, there is absolutely no way I can earn enough to get out of this hole.”

Voice from one crater dweller to another, looking up at the craters edge above her: Hey! Is that Ben Bernanke up there?

Crater Dwellers – The Numbers Are Climbing

For the third quarter of 2009, foreclosure filings in the U.S. hit an all time high up 23% over the same quarter in 2008. According to the S&P/Case-Shiller Home Price Index, average home prices in the U.S. are currently at 2003 levels, based upon data from August 2009 — down approximately 30%. Studies by The Kellogg School of Management have found that when the mortgage balance due is 10% or more than the value of the home, people begin to abandon their homes. As this crater deepens, the percentages of those who walk away from their economic cavern increases. One author notes: “Not only do abandoned homes lead to higher crime rates and lower tax revenues, they are like a cancer that spreads to neighboring homes.”[iii] Deutche Bank has forecast that the number of crater dwellers in the U.S. (those with negative equity in their primary personal residence) will rise from approximately 14 million mortgage obligors as of the first quarter of 2009 to 25 million by the first quarter of 2011. Translation: 48% of all U.S. mortgages will house crater dwellers – 41% of these folks have conforming loans. Others have suggested that at the beginning of 2009, “more than half of American homeowners owed more on their homes than they owned.”[iv]

On November 6^th 2009, the U.S. unemployment rate hit 10.2% in October 2009 — the highest figure since 1983. The consumer confidence index for October 2009 revealed that the U.S. consumer outlook has become more pessimistic about business conditions, the labor market, and prospects for future earnings. Some economists believe the growth in third quarter GDP is due primarily to stimulus incentives and will likely fade throughout 2010. The U.S. Congress appears inextricably paralyzed in their collective responsibility to muster the political will to craft a meaningful solution. Translation: U.S. households dwelling within mortgage craters don’t spend money. Strategic efforts to extricate the U.S. economy from the negative inertia/drag this reality continues to exert on the prospects for a sustainable recovery of the U.S. economy must begin in earnest. Who will take the lead in this endeavor?

“The only case for an independent central bank in a democracy is that it can take a longer view and do what is in the interest of the people in ways that elected politicians cannot.”[v]

Ben…are you listening?

The Case for Cash For Craters

Wisdom from Federal Reserve Chairman Ben Bernanke:

“The biggest risk is that we don’t have the political will, that we don’t have the commitment to solve this problem, and that we just let it continue. In which case, we can’t count on recovery.”[vi]

The contribution of cash for clunkers is now history. It’s over. Approximately 690,000 vehicles were sold for $3 billion sparing 42,000 jobs in the auto industry. Remember – These consumers received money for trading in junk – clunkers worth virtually nada, zilch, zero, zip!

Newsflash America: You cannot live in your car! My Black Lab Reggie and I spent one night in mine…it’s a memory we’d both like to forget. Trust me.

Gluskin-Sheff’s Chief Economist and Strategist David Rosenberg writes: “Even though we’re probably past the worst in the business cycle and probably even in the bear market, we’re talking about something much bigger here. The largest balance sheet in the world is the U.S. household balance sheet, and it’s contracting at a record rate. — The ratio of debt to income increased from about 35% in the early 1950s to about 65% by the mid-1960s, where it more or less stayed until the late 1980s. That’s when debt started its epic rise, hitting 100% of income in 2001 and going all the way up to 133% in 2007.”[vii]

George Ackerlof and Robert J. Shiller adroitly point out:

“To understand how economies work and how we can manage them and prosper, we must pay attention to the thought patterns that animate people’s ideas and feelings, their animal spirits. We will never really understand important economic events unless we confront the fact that their causes are largely mental in nature.” [viii] They make the case for the role of confidence, hope, fear and trust in the macroeconomic mosaic. In an earlier work, Shiller points to the unequivocal importance of the human imagination, social psychology, a sense of fairness, and the deleterious effects of resentment.[ix] The field is now referred to as behavioral economics. It is the emotional, mental and attitudinal composition of people within a culture that has now garnered the focal point for research in this arena. Why? Because the assumptions that has guided economics over the last several decades that markets and economies are rational, efficient, self-correcting, people/investors/traders/homeowners are reasonable – and that the risks are quantifiable, predictable, and that tomorrow can be inferred from yesterday — is under siege. We have learned that “uncertainty, as opposed to risk, is an indefinite condition, one that does not conform to numerical straitjackets.”[x] Translation: Economics is a social science, just like sociology or psychology or political science. It involves much of human behavior and the human condition that we cannot continue to pretend to understand. There are people; moms and dads, children, teenagers, young adults, students, bread winners, seniors, entrepreneurs, business owners, families, neighborhoods, communities, regions across this nation — treading water in the depths of these mortgage craters. The precariousness of the ongoing uncertainty currently experienced by this segment of the U.S. economy need not become an indefinite condition. The strategic plan for U.S. economic recovery must address this fiasco, or run the risk of allowing millions of impaired U.S. consumers to become casualties of exhaustion and subsequent drowning — the avoidable fate of those who are left to tread water without the resolve of passersby to come to their rescue.

The Lifeline:

The current economic crisis has prompted many to scurry to seek guidance from the economic history of this nation, particularly The Great Depression. Of course, the distinct differences between the structural complexities of the economic infrastructure during the Depression era versus today provide a convenient backdrop to rationalize away the pertinent lessons that might serve to inform our thinking today. Some have suggested that we are somehow more advanced and learned today – therefore immune to the miscalculations that contributed to the human misery suffered by millions during the Depression. Others carelessly take the position that this too shall pass. Finally, there appear to be loud voices shouting in the chambers of the U.S. Congress that we have already done too much. Yet, there is one parallel from the Depression that is particularly poignant as it pertains to the U.S. economic crisis today:

“The Great Depression was not some act of God or the result of some deep-rooted contradictions of capitalism but the direct result of a series of misjudgments by economic policy makers, some made back in the 1920’s, others after the crisis set in – by any measure the most dramatic sequence of collective blunders ever made by financial officials…authority at the Fed shifted to a group of inexperienced and ill-informed timeservers, who believed the economy would return to an even keel (emphasis is mine).”[xi]

Translation: The duly empowered failed to act as aggressively and deliberately as the reality demanded.

As Roger Lowenstein has said; Finance is poetically just; it punishes the reckless with special fervor.”[xii] Well, that’s a half-truth – particularly when the reckless wreak indisputable financial and emotional havoc on a broad segment of a strategically essential component the U.S. economic landscape. To paraphrase an oft-quoted utterance of economist John Maynard Keynes, markets can remain irrational longer than you can remain solvent. Unfortunately, this insight reflects the conundrum that millions of U.S. homeowners currently find themselves in. It’s difficult to hear the voices of those mired in the depths of a crater. Yet, we cannot continue to wander by this reality, reluctant to move toward those who remain trapped in the darkness beneath the collapse of our economic infrastructure, ignoring the necessity to move toward their cries for help. We must embrace the responsibility and become those “who are willing to open their eyes and assess the facts in the cold light of day.”[xiii]

A recent New York Times editorial has suggested, “We know that more stimulus spending and government programs are a fraught topic. But they are exactly what the country needs. It may be the only way to prevent a renewed downturn.”[xiv] The purpose of this article is to illustrate the moral imperative and economic necessity to include this impaired class of U.S. homeowners in the lifeline that has yet to be extended.

Former President Theodore Roosevelt captures the essence of the opportunity that currently awaits our embrace when he wrote:

“Until we put honor and duty first, and are willing to risk something to achieve righteousness both for ourselves and for others, we shall accomplish nothing: and we shall earn and deserve the contempt of the strong nations of mankind.”[xv]

Voice from the bottom of the crater:

“Hey! — Ben! Tim! Larry! — Sheila! — Somebody throw us a rope would ya?”

…Ben?…Tim?…Larry?…Sheila?

NOTES

[i] McDonald, Lawrence G. with Robinson , Patrick A Colossal Failure of Common Sense – The Inside Story of the Collapse of Lehman Brothers, Crown Business – an imprint of Crown Publishing Group, a division of Random House Inc. NY, NY Copyright © 2009 by Lawrence G. McDonald and Patrick Robinson, p. 77

[ii] http://www.reuters.com/article/businessNews/idUSTRE5745JP20090805

[v] Wessel, David In Fed We Trust – Ben Bernanke’s War on the Great Panic – How The Federal Reserve Became The Fourth Branch of Government, Crown Business – An Imprint of the Crown Publishing Group, a division of Random House, Inc. NY, NY Copyright © 2009 by David Wessel, p. 271

[vi] CBS News – 60 Minutes, March 15, 2009 An Interview With Ben Bernanke: http://www.cbsnews.com/stories/2009/03/12/60minutes/mainc4862191.shtml

[vii] http://www.gluskinsheff.com/

[viii] Akerlof, George A. and Shiller, Robert J. – Animal Spirits – How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism, Princeton University Press Princeton, NJ USA and Oxford, UK Copyright © 2009 by Princeton University Press, p. 55.

[ix] Shiller, Robert J. Irrational Exuberance, Broadway Books, An imprint of Crown Publishing Group, a division of Random House, Inc. New York, New York, pp. 208, 213-215.

[xiv] New York Times – Sunday November 8, 2009 – Sunday Opinion

Thursday, October 29, 2009

Refi Now Before Rates Climb

This is my Bloomberg column on how to refinance your home mortgage:

Commentary by John F. Wasik

Oct. 29 (Bloomberg) -- If you need to refinance your home mortgages, don’t wait.

It’s not time to play chicken. Lock in the best deal now. Mortgage rates have climbed over the last two weeks, according to mortgage buyer Freddie Mac of McLean, Virginia. At a 1960s- like national average of 5 percent, the 30-year rate isn’t far from its historic low of 4.78 percent, reached in April. As the economy heats up, it’s far more likely that rates will climb.

Not only can you save every month with refinancing, over the life of the loan your total interest payments drop substantially. Increased cash flow could be the single-best excuse to refinance if your total loan expenses are reasonable.

Let’s say you have a $300,000 mortgage and you are paying $1,847 a month on a 30-year, 6.25 percent loan.

You can obtain a 5.25 percent, 30-year loan and knock down your monthly payment to $1,656, according to the Bloomberg mortgage calculator. The $2,292 annual savings would do nicely in an emergency, college or retirement fund.

If you stay in your home for 30 years, then you will save almost $69,000 in interest by refinancing. On the 6.25 percent loan, you will pay about $365,000 in interest alone -- in addition to principal.

When I got a refinancing offer letter from my bank recently, I was excited. Instead of paying 6 percent on my 30- year loan, I could refinance to 5.24 percent.

Initial Offer

My monthly payment would drop from $714 per month to $572 for annual savings of more than $1,600.

I called the bank with great hope. They also offered to waive the origination, appraisal and credit-report fee.

Upon inquiring further, it became clear that not all of the loan costs were disclosed in my cheery little letter.

Total expenses would be about $3,000 and the bank would need $750 cash upfront just for an application fee.

Of course, I could add the closing costs to the loan’s principal, which my loan specialist suggested. Since I wanted to reduce my total debt, I wasn’t happy with this option.

I was peeved at paying high closing costs, since they don’t give me a bigger equity stake and have little tangible benefit. Paying $1,000 or less to refinance a mortgage is fairer.

Besides, in an age of massive automation and bank bailouts, closing costs needn’t be that high. My bank can borrow from the Federal Reserve at less than 1 percent and has received $25 billion from taxpayers. It can afford to cut borrowers some slack. I’m shopping around for a better rate and lower costs.

When It Won’t Work

With these low rates, though, only a select group of homeowners should be refinancing.

Are you facing a job transfer or plan to move within a few years? You may not be able to recoup the closing costs or realize those huge long-term interest savings. And if you don’t have much equity in the home (less than 20 percent) or below- average credit, you may pay a higher rate or not qualify at all.

What if you plan to stay for a while?

Should you consider a 15- or 20-year loan to pay it off earlier and save on total interest?

While the rates on these mortgages would be lower, the monthly payments would be higher than 30-year notes. And there would still be those nagging closing costs.

One thing that my broker didn’t pitch was a way to pay off the loan earlier without refinancing. That would save me thousands in interest costs -- without having to pay a dime of onerous closing fees.

It’s simple: Prepay principal with every monthly payment.

Hidden Truth

You could effectively turn your existing 6.25 percent, 30- year note into a 20-year mortgage by applying an extra $350 a month to principal.

Over the life of the loan, you would save almost $140,000 in interest payments alone. Even paying an additional $208.50 would save $100,000 in total interest.

If you don’t care about building equity or paying off the loan, focus on lower payments and recouping the closing costs.

Since the Federal Reserve is subsidizing these low rates by buying as much as $1.25 trillion in securities from the government-seized mortgage entities Freddie Mac and Fannie Mae, they will not last.

Market forces, inflation or a new government policy will eventually force rates up. The Fed’s purchasing is slated to end in the first quarter of next year.

Clearly this is one situation in which patience probably isn’t a virtue.

(John F. Wasik, author of “The Audacity of Help: Obama’s Economic Plan and the Remaking of America,” is a Bloomberg News columnist. The opinions expressed are his own.)

Tuesday, October 27, 2009

Mind the Infrastructure Gap

This is a piece I wrote on how much money is needed to fix up America. It originally ran on Huffington Post.

Closing The $1.5 Trillion "Fix-Up" Gap in Obama's Economic Plan

By John F. Wasik

Let's face it. America is one giant fix-up project. Bridges are crumbling. Public transportation systems are rusting. Water mains are leaking. Getting everything repaired and modernized is perhaps the largest and most expensive "honey do" list imaginable.

As I discovered in researching my new book Audacity of Help: Obama's Economic Plan and the Remaking of America (www.audacityofhelp.net), there's a large dollar gap between what was committed in the American Recovery and Reinvestment Act and what needs to be done.

While it's undeniable that the stimulus funds are slowly trickling into communities and creating jobs -- although not enough to offset the employment lost in the past year -- the actual amount of money needed is far short of what's needed. The infrastructure repair bill is estimated to be more than $1.6 trillion, according to the American Society of Civil Engineers, which published a report card on infrastructure conditions a few weeks after Obama took office. So the stimulus plan comes up about $1.5 trillion short.

What about all of those annoying barricades you see everywhere for road construction? Crumbling or inadequate roads cost American motorists some $67 billion a year or $710 per motorist -- that's just to fix the highways and bridges. We collectively lose the equivalent of 4.2 billion hours just sitting in traffic, costing the economy about $78 billion a year in terms of lost working hours (not to mention lost family time).

Are you a conscious commuter and take public transportation? Federal spending on public transportation systems lags the amount needed by about $6 billion annually. That makes the highway repair number loom even larger since nearly half of Americans don't have access to public transportation.

You don't need to go far to notice that America's skeleton has some major osteoporosis. New York's water tunnels are leaking millions of gallons of precious water. Los Angeles can never seem to get enough of this elixir of life. Chicago's ancient "El" elevated-rail system is rusting away. Just miles from the White House, suburban Maryland's 5,500-mile system of water pipes sprang a few leaks -- more than 4,000 over the past two years (252 leaks were reported just a few days before the inauguration). Nearly every municipality has something that needs to be fixed or updated.

The Obama Administration's stimulus plan set aside about $100 billion for infrastructure improvements. Of the $48 billion for all transportation projects, $27 billion of that has been allocated to the US Department of Transportation for mostly road/highway improvements.
Here's a more detailed breakdown:

*$30 billion for electrical system improvements. This money would be divided between modernizing and creating a "smart" grid, advanced battery technology and energy-department grants.

*$29 billion for public works. This covers everything from street repairs to bridge reconstruction.

*$18 billion. More funding for public works that will cover toxic waste clean-up, municipal water systems and flood prevention.

*$8.4 billion for Public Transit. Sorely needed by cities, this will help repair and upgrade public transportation systems.

*$8 billion for High-Speed Rail. This was a long-sought down payment on creating intra-state systems to reduce the reliance on air travel.

One glaring subject that Obama avoided in the campaign and early days of his presidency is how to pay for infrastructure over time and how it will dovetail with an overall strategy to address climate change. While conservative Democrats and Republications generally object to increasing the federal deficit, they also oppose taxes. Unless huge cuts are made to other large budget items -- unlikely during a recession -- the Treasury will need to sell more notes to pay for the new spending, most likely to the Chinese, Japanese and Europeans.

At a certain point, investors in our debt may decide that the the political benefits don't outweigh the paltry after-inflation returns. No one knows when that day will come, but it will happen and may shut down the debt-financing juggernaut that's keeping the world's largest economy afloat.

There may be no way of getting around the fact that gasoline taxes (or carbon-based levies on fuel, vehicles or buildings) need to be added or raised. The 18.4-cent levy on gasoline on 24.3-cent surtax on diesel fuel has been unchanged since 1993. That brought in about $39 billion in 2007. The CBO projects an economically justifiable investment of $132 billion in highways alone. Filling this funding gap will have to involve some sacrifice and extra dollars from those using the roadways. A $44 billion kitty could be created annually by boosting the fuel tax by 25 cents a gallon. The money has to come from somewhere. Plunging the nation ever further into debt and saddling future generations with it just isn't sustainable.

A national infrastructure bank or trust fund, as proposed in the 2011 budget, could become a permanent institution overseen by trustees who are independent of Congress. This entity, if managed prudently and free of political earmarking, might be able to avoid the pork-barrel process of awarding federal dollars to the well-heeled few. Until then, the first wave of federal dollars may be a short-term boost, but won't address the long-term aging of the nation's backbone.

John F. Wasik, author of "The Audacity of Help: Obama's Economic Plan and the Remaking of America," is the author of twelve books, including "The Cul-de-Sac Syndrome" and "The Merchant of Power." He speaks widely and writes a weekly Bloomberg News column that reaches readers of five continents and which earned him the 2009 Peter Lisagor award for journalism. He lives in Chicago.

For more information please visit www.audacityofhelp.net.

Tuesday, October 13, 2009

A Recent Profile

The Daily Herald, a suburban Chicago newspaper, was kind enough to profile me:

Author John Wasik stands outside his Grayslake home with his latest books.

Paul Valade | Staff Photographer

Author John Wasik draws on his suburban roots when writing his books.

Paul Valade | Staff Photographer

Author John Wasik of Grayslake looks at writing in different ways.

"Writing a column is like a sprint, you do it in a specific period of time," he said. "But writing a book is like a marathon with writing, editing and promotion."

With more than a dozen published books, Wasik's marathon has focused on a variety of consumer and economic issues, including his latest releases: "The Audacity of Help," about President Obama's economic plan and the remaking of America, and "The Cul-De-Sac Syndrome," about the sustainability of neighborhoods during the real estate downturn.

While the former newspaper reporter has worked for various publishing houses, the latest two books were under Bloomberg Press. They are available through Amazon.com, Barnes & Noble as well as other book stores.

"In some ways, John follows in the footsteps of Jessica Mitford, especially with 'Cul-De-Sac,'" said his agent Robert Shepard of Los Angeles.

Mitford, one of the famous and politically active Mitford sisters from England, hosted author dinner meetings in San Francisco many years ago that Shepard attended. Wasik had interviewed Mitford for a story and mentioned how he was looking for an agent for his books. Before she died, Mitford connected Wasik to Shepard in the late 1990s.

Still, Wasik draws much on his suburban roots for his books and has even touched on his own neighborhood in "Cul-De-Sac." That book examines what caused the housing meltdown, how sprawl and tax breaks contributed to unaffordable homes and what could happen next.

As part of his examination, he even coined the term, "spurb," or the sprawling urban area that's not conveniently located near anything, like suburbs that seemingly spring out from the middle of a corn field, he said.

His life here has helped to guide his career, like a sprint around the suburbs.

Wasik was born in South Suburban Chicago Heights and grew up in Matteson. After he married, he and his wife, Kathleen, moved to Libertyville and then to Wauconda before settling into a home in Grayslake. They're raising two daughters: Sarah, 12 and Julia, 8.

He earned a bachelor's degree in psychology at University of Illinois-Chicago, but later decided to go into journalism. He started his reporting career at the Star Publications, a weekly chain that covers the South Suburbs. He often covered mob-related activities connected to a Chicago Heights city council, he said.

He later joined Consumer Digest magazine and produced several award-winning investigative projects involving treatment of the elderly and financial fraud. That work led him to writing a column for Bloomberg News and writing books, starting in 1987.

Since then, he has won numerous awards and appeared on NBC, NPR and PBS. He's also a regular speaker around the area. He appears regularly for promotional spots, including at 7 p.m. Wednesday, Oct. 14, at Common Ground in Deerfield, and at 7:30 p.m. Tuesday, Oct. 20, at the Schaumburg Library.

Colleagues believe Wasik has the unique ability to dissect complicated financial problems and explain them in a way that makes sense to everyone.

"I really enjoy having him as a guest on my radio shows because I know we'll have fun exploring the topic of the day and I'll wind up thinking a little differently about the issue because of a point he has raised," said Ilyce Glink of Chicago, a syndicated real estate and finance columnist and commentator.

Wednesday, October 7, 2009

Green Deal Can Help Small Business

The Green Deal: Obamanomics can do more for small business

October 6th, 2009

By John F. Wasik

There’s something glamorous about a couple of bright souls in an American basement or garage. They tinker around a bit, apply their imagination and creativity to a project, and voila, they’re the next Stephen Jobs or Bill Gates, reinventing the way the world works. Are those days over? Can America still foster the culture of innovation that helped it launch the second industrial revolution, land on the moon and seed the information age? Is President Obama’s “Green Deal” going to foster this kind of growth?

Durable small companies that do everything from manufacturing forklift parts to specialty contracting have been creating the bulk of new jobs in recent years. It’s these “high-impact’’ firms that have been generating employment at a surprisingly robust pace over the past decade. As defined by the U.S. Small Business Administration, these companies generally have less than 20 employees, are 25 years old or less and represent about 3 percent of all firms.

As I discovered in researching my book The Audacity of Help: Obama’s Economic Plan and the Remaking of America, it’s the small shops, factories and firms that are producing new jobs, accounting for 33.5 percent of employment growth for firms of their size from 1994 through 2006. In contrast, during the same period, firms with 500 employees or more accounted for nearly all of the job loss in the U.S. economy. Yet the stimulus plan and budget do little for small businesses; they didn’t get the kind of cheap-credit bailout that the largest mismanaged financial institutions received.

Obama’s stimulus program will benefit specialized contractors in the building trades, alternative power and energy efficiency. While the initial plan will not be a substitute for a comprehensive climate change policy, national green building standards or a renewable energy portfolio mandate (required use of clean energy by a certain date), it will likely seed thousands of businesses and create jobs. Here’s a breakdown of the nearly $42 billion that will be made available:

$11 billion for smart-grid research and development
$6.3 billion for energy efficiency and conservation grants
$6 billion for loan guarantees for electricity generation and renewable projects such as wind and solar (bringing them online and feeding clean power into the grid)
$5 billion for weatherization assistance (for low-income residents)
$4.5 billion for making federal buildings more energy efficient
$3.4 billion for fossil energy research and development (carbon storage and “clean” coal)
$2.5 billion for energy efficiency and renewable energy research
$2 billion in grant funding for advanced batteries systems (making them lighter and store more power over time)
$1 billion for other energy efficiency programs (alternative fuel trucks and buses, smart appliances)

There’s little doubt that the stimulus package will be the largest portion of seed money ever devoted to remaking the economy in a more sustainable mold. Provided the general economy doesn’t collapse, there will be reasons to be optimistic about the green sector. Renewable energy/efficiency industry grew three times faster than the general economy in 2007.

Mostly creating jobs that can’t be outsourced, this employment boom buoys states that have already embraced alternative energy such as California, Oregon, Colorado and Washington. Ironically, the biggest consumer of solar panels is Germany, which has a long-term tax incentive program in place for residents and businesses to buy and install them. Green-collar jobs in the U.S. will never grow substantially without a comprehensive policy that funds a smart grid with net metering, a national renewable energy standard (Al Gore would like to see all electricity generated from renewable sources in 20 years), job training and national building mandates that directs owners to do energy-efficient retrofits.

While the number of new business start-ups (around 600,000 annually) will not be directly effected by the Obama plan, it may spur new growth in companies specializing in creating a green building industry. Even traditional jobs (see below) will flourish if Obamanomics funds a multi-year construction or rehabilitation or maintenance boom.

There’s one other small-business linchpin that the Obama plan leaves out: Cheap and available credit. Small businesses are still being pinched by the credit crunch. They should be able to garner interest-free loans and get the same kind of deals the big banks got during the bailout. It’s also essential that Congress pass a universal, affordable health care plan. Such a national program would immediately make small businesses more productive and profitable.

John F. Wasik, author of Audacity of Help: Obama’s Economic Plan and the Remaking of America (Bloomberg Press), is a personal finance columnist for Bloomberg News and the author of several books. Wasik has won more than 15 awards for consumer journalism including the 2008 Lisagor and several from the National Press Club. He has appeared on such national media as NBC, NPR, and PBS. He lives in Chicago. For more information, visit www.johnwasik.com.

Monday, October 5, 2009

The Monster Truth on Green Jobs

Here's a Q&A I did with Monster.com, the major jobs portal:

Stimulus Check 2009: How Will It Reshape America?

How has the Stimulus impacted American industry? And what lies ahead for future funding? Author John Wasik provides insight.

Launched with great expectation and much political debate in early 2009, the American Recovery and Reinvestment Act sought to lift up the beleaguered American economy. Five months later, that expectation was tempered by realism and a plea for patience.

As the country looks ahead to better days in 2010, the Economic Stimulus will continue to play a role in the nation’s economic recovery. What might that role – and its impact – entail? And what might a “son” of Stimulus plan include?

For answers, Monster turned to John Wasik, author of The Audacity of Help: Obama's Economic Plan and the Remaking of America.

Monster: What size businesses have most benefited from Stimulus funding?

Wasik: At this point, mostly large road and building contractors have benefited, although energy-related firms are receiving grants as well. Large to mid-sized companies seem to be doing the best.

Monster: Will this allocation evolve in the coming months?

Wasik: Yes. Some of the largest funding in medical and energy research takes months to wind its way through the process. There’s a lot of vetting to do and certainly a ton of bureaucracy.

Monster: How would you rate the government’s efforts to distribute Stimulus funding?

Wasik: Fairly good, although the government needs to disclose more on exactly who is getting the money and why.

Monster: Will the education and training programs included in the Stimulus significantly reshape the profile of the US workforce?

Wasik: No, not at this point. The new education bill that Congress is considering will have more of an impact. Sending more money (President Obama has approved $12 billion) to community colleges is key. Congress also needs to do a major overhaul of college aid. There should be more grants and less loans. The House just approved a measure to make the loan program direct, which will save billions. That’s a good first step. Tax incentives for college financing need to be consolidated and broadened if college is to become affordable for the middle class.

There aren’t enough retraining programs for President Obama’s “Green Deal” to make a difference now. They need more funding.

Monster: Will the Stimulus enable US industries to be more competitive globally?

Wasik: Yes. The Stimulus plan effectively makes the US government the largest venture capital entity in the country, especially the Department of Energy. Billions have been committed to alternative energy, new battery technology, electric cars, high-speed rail and a digital electric grid. But the Stimulus is just seed money. A sustained effort and trust fund for research and infrastructure is needed if we’re to compete long-term with the Chinese, Japanese and Europeans, who are planning decades into the future.

I would bet that any profession tied into energy research and development will do the best. There will be a pressing need for nano-technology engineers, systems analysts and integrators, auditors and intellectual property lawyers.

Monster: What areas of the economy might a “son of Stimulus” plan focus on?

Wasik: Manufacturing is still essential. The US still has considerable prowess in making things, but our expertise is in high-end products like machines that make silicon wafers. Biotechnology and nano-technology are two areas where the US has a tremendous advantage. We need to build more partnerships between research universities and Department of Energy Labs and the private sector. We could also lead the world in building technologies, building affordable, green buildings and communities.

Monster: Besides the Stimulus, how else could the government help employers successfully manage the current downturn?

Wasik: Provide more re-training programs, temporary support for lost benefits (COBRA extensions) and affordable universal health care.

Monster: How long do you project it will be before we see a steady improvement in the unemployment numbers?

Wasik: Unemployment will probably turn around early next year. There are a few wild cards, though. Interest rates need to remain relatively low, employers need to regain confidence to hire again and we definitely need a healthcare program that will cover everyone -- particularly small businesses, students and those between early retirement and Medicare. Financial reform is absolutely essential to avoid another blow-up on Wall Street. Global regulation of derivatives is needed. The housing market is still a mess as well. Congress needs to find a more effective way of shutting down foreclosures.

John F. Wasik is author of The Audacity of Help: Obama's Economic Plan and the Remaking of America and twelve other books, including The Cul-de-Sac Syndrome and The Merchant of Power. He speaks widely and writes a weekly Bloomberg News column that reaches readers of five continents and which earned him the 2009 Peter Lisagor award for journalism. He lives in Chicago.

Tuesday, September 22, 2009

New Green Age for Marketers

This is a piece that recently ran in Ad Age, the bible for the marketing business:

Exit the 'Spurbs': Life Beyond the Real Estate Bubble
John F. Wasik's Future America Has Fewer Cars, More Walkable Cities and Cheaper Homes

Posted by James B. Arndorfer on 09.22.09 @ 02:13 PM

Business leaders and social observers agree that the Great Recession has been a reset event for the American economy.

The next question: What does a post-reset world look like?

According to journalist John F. Wasik, it'll be marked by the emptying of the exurbs (or "spurbs"); people returning to cities; and the rise of environmentally friendly, affordable and energy-efficient housing.

That's the world he describes in "The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream," a book that argues that the cultural origins of the real estate bubble can be traced back hundreds of years. (Remember Thomas Jefferson's agrarian ideal from high school history?) He also explores how people have been hammered by the recent collapse and spotlights architects of cutting-edge green housing.

Will it come to pass or is this just the latest take on GM's Futurama? Impossible to say, but Mr. Wasik has good instincts: He raised concerns about the housing bubble in 2002 as a columnist for Bloomberg, one of few as the media and marketing industries fueled the buying hype. ("Nobody wanted to hear this message," he says.)

"The real estate, banking and construction industries were marketing for generations the idea that homes were investments and you should leverage as much as you can to get the home of your dreams," he said in an interview. "The marketing has been relentless on that hot button."

The housing crash means marketers need to adjust to a new reality in which consumers just can't spend the way they once did, and won't for the foreseeable future. Marketers will need to figure out how to reach people "who've had their retirement funds clobbered."

"I'm fairly confident that this is going to damage the financial aspirations of an entire generation," he said. "There's only a small segment of baby boomers that has really saved and has really enjoyed the increase in prosperity over the last 20 to 30 years. The rest of them haven't saved much at all. They were hoping on tapping home equity to bail them out and they're going to be in a lot of trouble."

Mr. Wasik expects it could take a decade for housing prices to come back -- and in some cases, they might not.

"It's going to be a Walmart world," he said, adding that some marketers have figured this out. "At my local supermarket, not only am I seeing shelf stickers everywhere saying they've cut prices, but I'm getting tons of coupons." He also was hit up repeatedly at a department store by clerks pushing credit cards with plenty of coupon incentives.

But creative marketers still can thrive. Mr. Wasik points to financial services, where he anticipates demand for structured investments that can take risk out of peoples' retirement portfolios.

"I think there are some incredible opportunities right now," he said.

It's this financial insecurity, coupled with incentives for green building, that will encourage people to leave big, inefficient homes in the spurbs (often far away from jobs) and seek affordable, energy-efficient housing. And just as the postwar sprawl of suburbia fueled cultural changes and ancillary industries (durable goods, automobiles, advertising), Mr. Wasik expects this new green world will prompt a social reset.

"I think there will be a new 'green chic,'" he said. "It will be a new status symbol to have a home that produces power and a car you can plug in."

~ ~ ~
James Arndorfer, a former Ad Age reporter, now works for MillerCoors.

Thursday, September 17, 2009

Avoid Another Meltdown

This is my latest Bloomberg News column on the anniversary of last year's financial debacle on Wall Street:

Sept. 16 (Bloomberg) -- It has been a year since the music died on Wall Street.

What have many people done to protect their life savings from events such as the collapse of the 158-year-old Lehman Brothers Holdings Inc. and the ensuing financial pandemic? Next to nothing.

Market risk can and should be pared from retirement portfolios, though millions are just as vulnerable as they were a year ago. Most people have left their dominant stock allocations untouched. The key is to add more bonds.

The conventional wisdom that the historical returns of stocks beat bonds was and is misleading. If you are retiring during or immediately after a bear market, long-term returns are irrelevant.

Consider the period after the dot-com bubble exploded. Before the meltdown, didn’t you think technology stocks were going to create a New Economy that would produce profits for decades?

The tide turned fast. Let’s take 1999 through last year. You would have lost money in large-company stocks in four of those years (2000, 2001, 2002 and 2008). What if you retired in 2003 and had most of your money in big companies?

The chances are slim that your retirement plan has access to sophisticated portfolio insurance strategies available to institutional investors.

Because options for individuals are limited, you have to buffer your portfolio with an equal mix of stocks and bonds. The single-worst year for this formula was 1931, when such an investment would have lost about 25 percent.

Bond Hedge

Compare the 1931 stock-bond mix with a 43 percent decline for an all-stock portfolio in the same year, according to Ibbotson Associates, a Chicago-based research firm.

In 2008, the 50-50 mix would have lost only about 10 percent, which was the second-worst year on record for major stocks. Had you reduced your equity portion to 30 percent and upped bonds to 70 percent, you would have been in the black -- up 3 percent.

Increasing your bond holdings is dull, though, which is why most people don’t do it during a bull market. We have built-in emotional circuits that tell us that regret from missing out on profits is far more motivating than heading for cover.

Risk analysis goes out the window when everyone is enamored of the same idea and we lose sight of what we can lose.

Quick quiz: What’s the chance of losing one quarter of your money in stocks? Very, because it has happened twice in my generation and twice in my parents’ lifetimes. It will certainly happen again.

Following the Herd

Oh, but we can’t resist what our neighbors are doing. “Animal spirits,” to cite economist John Maynard Keynes, compel us to follow the herd, even when it is headed into unsafe territory.

Let’s go back to those splendid stock returns when everyone was making money. True, in 1999, big companies were up 21 percent. As it was the end of the dot-com bubble, many investors dumped almost everything they had into equities -- and stayed put.

Buy-and-holders should have reversed course.

Those who kept a 100 percent stock allocation would have lost 9 percent, 12 percent and 22 percent respectively in the three following years. Of course, they would have been rewarded in stocks from 2003 through 2007. Then the bottom fell out again last year as the biggest stocks plummeted 37 percent.

Short-Circuit

Government policy does little to short-circuit investment myopia.

Along with automatic enrollment for individual retirement accounts for small businesses and the ability to re-invest tax refunds in savings bonds -- both recently proposed by the Obama administration -- we should be able to easily insulate our entire retirement fund.

Even though conventional bonds are part of the solution, you still face interest-rate, credit and inflation risk from holding them. When interest rates go up, you could lose principal in all but consumer price-indexed bonds. A more easily accessed, principal-guaranteed vehicle is needed.

Enter the “R” Bond, a concept under development in the halls of the U.S. government.

The Treasury Department hasn’t provided details on this bond yet. If it isn’t linked to the stock market and the principal is guaranteed, your retirement plan could buy them automatically and you could even predict how much money you would have in the future.

If the R bond survives the twisted intrigues of Washington and Wall Street, it might become one of the most useful financial products since the fixed-rate mortgage.

To understand why the R bond is important, you need only look at your 401(k) balance.

Papered Over

Sure, your funds may have recovered somewhat, but consistent 401(k) contributions tend to paper over stock-market losses since account balances are rising. The one truth that remains since the Lehman-triggered rout? The more you need to protect principal, the less market risk you should take.

It’s time for a change. Market risk gets painful really fast once you hear how much your future living standard eroded due to unnecessary market losses. That’s an oft-sung ballad that sounds harsher the older you get.

(John F. Wasik, author of “The Audacity of Help,” is a Bloomberg News columnist. The opinions expressed are his own.)

dailywombat