Email with my Dad

So my parents have a small investment in a national food chain called The Pita Pit. Its awesome food. Anyways, my dad got an email from his group's investor representative who attended the Federal Home Loan Bank (FHLB) of Seattle board meetings this past month, and here is what the reps summary of the current economic outlook:

We heard directly from several national expert economists – with more good than bad for the general economy.

The summary that I would conclude from the various speeches and meetings is this:

10. The recession may have indeed bottomed out in March – and recovery has actually begun

11. However, lagging behind, the banking and real estate industries still have some rough times ahead

12. Residential home/condo prices in some major markets (California, Arizona, Nevada and Florida) are 50% of what they were three years ago (truly a buyers’ market)

13. The much anticipated FASB accounting rule changes in April 2009 actually became a two edged sword due to the way in which FASB ‘staff’ quietly (secretly) changed some of the other ‘standards’

14. The primary reasons for the recession were a combination of:

a. Misguided US federal monetary policy

i. too much money in the system

ii. interest rates too low

iii. and a political push to get everyone into houses even if they couldn’t afford it

b. Causing an overstock of new construction

c. Investment banking taking on too much overall risk (not just sub-prime residential)

d. Then with relatively new mark-to-market accounting rules, last August & September, over-zealous federal regulators mistakenly and too quickly ‘closed’ a few large banks

e. Causing and followed by global PANIC! [aka RECESSION]

f. The panic was far worse than ‘reality’, but the panic actually made a recession take hold

g. Fortunately, the panic is now subsiding

15. One economist predicts a big bounce in the economy by this Fall (excluding housing)

16. There is a tremendous amount of money in ‘savings’ right now – if consumer confidence returns, that money will soon begin to be spent on ‘lots of stuff’

17. Inflation is bad - but ‘de-flation’ is worse

18. Post stimulus package, to avoid rebound inflation, the Fed actually has a plan to pull the excess money (trillions that they have just ‘printed’) out of the system – but not until the economy starts to definitely recover.

So So I replied back to my Dad with my comments about what was said:

That’s interesting that they think the recovery is coming soon. See my comments in red.

The summary that I would conclude from the various speeches and meetings is this:

1. The recession may have indeed bottomed out in March – and recovery has actually begun – I see some green shoots. Housing sales are starting to increase, but foreclosures are still way up. I don’t think the recovery is starting. If they call anything a bounce, watch out. Bounce means going up and coming down again. OUCH!

2. However, lagging behind, the banking and real estate industries still have some rough times ahead - Banks are getting ready to start screwing over credit card holders as more and more people who can’t pay their credit card balances start to not pay the balance. This will be another pinch for the big banks. Big banks are starting to prepare for this by proposing to take away perks that cardholders who are paying like to have. So higher interest rates and cash back bonuses might go away really quick.

3. Residential home/condo prices in some major markets (California, Arizona, Nevada and Florida) are 50% of what they were three years ago (truly a buyers’ market) – oh, that’s what we really need, another housing bubble.

4. The much anticipated FASB accounting rule changes in April 2009 actually became a two edged sword due to the way in which FASB ‘staff’ quietly (secretly) changed some of the other ‘standards’ - this means that now the banks can essentially list their asset values to what they think they should be, not what they really are. So banks have essentially gotten it both ways. When prices are inflated, they can say the prices are mark to market, meaning they say that this is what the market says its worth. But when prices drop, the banks now get to say that prices should be higher and that the market isn’t truly giving a correct price. I wish I could live in this universe.

5. The primary reasons for the recession were a combination of:

a. Misguided US federal monetary policy

i. too much money in the system – thanks to Alan Greenspan and the past 30 years of fed policy of controlling inflation with adjusting the LIBOR rate. This sorta works until the rate hits zero, which it did last November.

ii. interest rates too low – belief that raising interest rates hurts growth.

iii. and a political push to get everyone into houses even if they couldn’t afford it - a democrat and republican platform. This idea only held water because housing values kept going up. But increases like what we have seen in the past 20 years is a house of cards. House values should not be the primary source of wealth for the middle class. Wages should be.

b. Causing an overstock of new construction

c. Investment banking taking on too much overall risk (not just sub-prime residential) – the main thing here is that you had lots of companies like AIG who were guaranteeing that the sub-prime mortgages wouldn’t go bad. These guarantees, called Credit Default Swaps were believed to be completely foolproof and wouldn’t fail under normal circumstances.

d. Then with relatively new mark-to-market accounting rules, last August & September, over-zealous federal regulators mistakenly and too quickly ‘closed’ a few large banks – which led to the term ‘too big to fail’. Loss of talent! Give them bonuses to keep the talent! Is the kind of “talent” that brought about this mess something we want to keep around? (sarcasm intended)

e. Causing and followed by global PANIC! [aka RECESSION] – the panic was because each bank owed all the other banks, and if one bank goes down, the others follow.

f. The panic was far worse than ‘reality’, but the panic actually made a recession take hold – panics are always worse than reality, but that is human nature. I think the recession was coming anyways, because the house of cards had already collapsed. To pretend otherwise is misguided.

g. Fortunately, the panic is now subsiding – sure, because the banks have started to remember that the OWN Washington and can apply the right pressure to get what they want. They nuked the amendment to allow bankruptcy judges to modify 1^st mortgages, and got the congress to delay the credit card rules tightening to July of next year.

6. One economist predicts a big bounce in the economy by this Fall (excluding housing) – bounces mean stuff has to come down again, right?

7. There is a tremendous amount of money in ‘savings’ right now – if consumer confidence returns, that money will soon begin to be spent on ‘lots of stuff’ – oh great. That’s not a good thing. Our economy is based on consumption. This recession has shown that we’ve been consuming far too much. The government seems to be convinced that if we can get things back to how they were in 2006, everything will be fine. That is BS. The point is that we shouldn’t be hoping that people blow their savings on more crap. That isn’t good. That is what got us into this in the first place. If you want consumption to increase, why not increase wages for workers? That solves lots of problems. Wages go up, people save more, but they can also spend more. The banks can use the money in savings to invest. You can tax workers more too, and it won’t be so bad because hey, I’ve got a raise coming to offset the tax increase. We’ve tried trickle-down for the past 30 years. Didn’t work out so well. Let’s try a trickle-up. Things should go back to how they were in the 1960s, when banking was boring but the economy was growing and wages were increasing.

8. Inflation is bad - but ‘de-flation’ is worse – yup, and with all the money the fed is flooding into the economy the setting is primed for some serious deflation

9. Post stimulus package, to avoid rebound inflation, the Fed actually has a plan to pull the excess money (trillions that they have just ‘printed’) out of the system – but not until the economy starts to definitely recover - more of that so-called ‘transparency’ from the Obama team? No thanks! How will they get the money out? Buy it back? Forgive loans made to the banks? It’s not going to be pretty. Taxes will go up (which I support) because my son’s going to be really hurting here in 50 years. I think the economy will recover, but it has to recover in a way that is fundamentally different from what it was the past 30 years. Too much money is getting sucked up at the top by people who, as this recession has borne out, don’t deserve it at all. But the way to get the money out of the top is not to tax it, but increase the wages of the workers who are actually doing to work. It’s not a coincidence that the last time the top earners were earning a disproportionate amount of all the money was in 1929. How that happens is something I don’t know.

This makes me sound like I hate capitalism. I don’t. But I do think that the current Wall Street form is a sure way to ruin for all be a very few. What do you think about all this? I’d love to have a discussion with you about it this weekend.