My Two Cents - "Observations of 2007"

01/03/2008

Someone pretty smart once said that you can learn an awful lot about people from what you see in their garbage. The past three days, I have put that assertion to the test in my daily walk around my Eastern Pennsylvania suburbia. Maybe I should lovingly call it the ‘trash can index’ or something apropos. The logic behind this is that things come in boxes, and boxes are generally discarded. Well, tomorrow is trash day and it is pretty easy to see who got what and how much just by looking at the trash cans. Some are overstuffed with piles of boxes, food trays and empty beverage containers littering the street next to the cans. Others are more modest. One thing I noticed immediately is that the families who were putting in pools this past summer had large quantities of boxes outside for pickup tonight. Most of the rest weren’t far behind. The American Shopper is far from dead. My regrets to commentators and observers alike who have been calling this shopping season the end of American consumerism. It is alive and well. What is happening now certainly constitutes a bear market in common sense, but not one in spending exuberance. I’d be curious as to what others of you have seen in terms of the trash can index in your neighborhoods. Judging from what I’ve seen, it is hard to guess that we are in the middle of a financial crisis.

For the past 12 months, you’ve heard my thoughts on these and other issues. As we close up shop on 2007 and look ahead, I’d like to highlight some of the thoughts you’ve shared with me.

As Joan B. so eloquently wrote in a recent email:

“Today people have to ask themselves who/what they are. In the eyes of the media and corporations we have become consumers.  Not citizens, not constituents, but consumers.  We are counted on to buy not only what we do need, but what we don't need.  Life was very good growing up in the 60's without cell phones and IPODS.  And I know for a fact that had there been cell phones and IPODS I would not have been an owner of one such device.  Consuming has become sexy and as a 52 year old woman who is pretty hip I can say I am totally insulted by the media and corporations that are counting on my stupidity to buy their product or buy into what they are espousing.  I wonder what people would think or do if they understood this. How sad that the "Breaking News" headlines this past week was the kid sister of Britney being pregnant.  Perhaps we should be writing to our news stations are asking them why they are insulting us with non-events.”

Pete from California wrote about his concerns with the financial markets:

“I've spent the last month trying to figure out how to preserve the value of the funds in my 401K. Bottom line ... is that I don't see a viable option to avoid losses (at least not for the company -sponsored part of the plan).

* 20% of the money market fund is tied to mortgage-based assets
* 32% of the bond-index fund is tied to "MBS pass-through"
* Most of the stock funds are US-domestic and susceptible to a significant drop if the US market tanks in a recession
*  There's only one international equity fund ... who knows how well that will do.

Bottom line ... Americans are going to lose a BUNCH of money in their retirement funds as this credit crisis gets bigger.  I'm amazed that so many people are still complacent about this - I guess they aren't doing enough independent analysis.”

Joe wrote recently:

“As we observe the unfolding crisis, a financial crisis we can only guess the severity of, the extent of the trauma that will be inflicted upon this country, and whether the cures prescribed by bureaucratic experts will further toxify the system - My hope, like yours, is that as the process of detoxification kicks in it will lead to, as you describe, a collective reevaluation of "the very fabric of our conceptions of fairness, equity and ethics" - and a more enlightened sense of how economics affects each and everyone of us, and the potential it has for a creative and positive future.”

I continue to be enlightened by the fact that there are folks paying attention to what is going on. These people and countless others who have written in clearly have a sense that there are going to be some difficult times ahead. I think that in looking back, 2007 has given us many clues in terms to how the powers that be will deal with this financial crisis and some of the themes that have emerged:

1. Central Banks are willing to destroy their currencies to keep up appearances. This phenomenon is not limited to America alone. This constitutes a steel trap for those investors who thought that just selling their Dollars in exchange for Euros would save them. The most important message that any one can get from reading this column is that all paper currencies will eventually return to their intrinsic value: nothing. While it may be possible to use different currencies as lily pads on a pond, don’t count on being able to sit on any one in particular for too long unless you brought your swimsuit.
2. Consumers in America will not be bailed out, but the banks will. Think about it. What good does locking a subprime rate do for the borrower? It doesn’t change the fact that the mortgage remains underwater. It only ensures that they will continue to make payments a while longer. This does nothing for the borrower, but helps out the bank. The oft-hyped bailout plan is an affront to common sense and will be an abysmal failure in terms of the average homeowner.
3. Central Bank created inflation only ‘helps’ if people are willing to take on additional credit and loans. Is there a guarantee this will happen? While my trash can index indicates this may be the case, there is no guarantee as to how long it will last or the degree to which it will occur. Clearly, if the Central Banks are using wanton monetary creation, the situation is in a precarious state. Look for confirmation of this in the message pushed by the media, government officials and Wall Street figures alike.

Mike from Oregon drove the point home in a recent forum posting:

"Greenspan, Bernanke, Bush, Paulson & Friends are Central Planners. Their plan is not in the best interest of the little guy. Their plan is not a little-guy bailout. Their plan is a banker-buddy bailout.

Here's the deal, and you won't hear it from the Central Planners:

For 75 years there has been numerous Central Planner programs to encourage house building and house ownership. Too many houses have been built and sold for too much money.

Who should be most concerned about this? Banker Buddies have loaned close to 100% on these houses. How much equity does Little Guy have in these houses? 0%. Who has a problem? Banker Buddies.

The best thing for us Little Guys is to say "No Thanks." to any Central Planner bailout scheme.

Banker Buddies are the victims of Central Planner's housing stimulus plans, in progress over the last 75 years. The free market was subverted and market signal were muted. As a result, Banker Buddies and builders misread market signals and built too many, too big, and too luxurious houses.

And now Greenspan supports a plan for us Little Guys to buy all of this? At current prices??

This is Our Plan, Alan Greenspan: No bail outs. The prices will fall. The market, made up of all us little guys, Will Tell You what this overbuilt market is worth. Your banker buddies will take losses, and rightly so. To cut their losses, they might even have to sell their houses to Little Guys who have been foreclosed upon.

You see, Alan Greenspan, transactions must be beneficial to buyer and seller. Loans have to be beneficial to lender and borrower. And the cost of bailouts can't be placed on the Little Guys back while telling him it is good for him."

Clearly, portions of America are wide awake while others are fast asleep. As my trash can index portends, the sooner we see sparse scraps at the curbside, the closer to a solution we will be. Is 2008 the year we get things turned around? While the optimist in me says hopefully, the realist says we've got a ways to go.

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.