(futureatlas.com)

Mobile banking has been a blessing to anyone who values quick, painless money management. Here in the United States, the ability to check account balances and transfer money via mobile phone has reduced the need to bank at physical branches (never a fun task), or even sit in front of a computer. However, in emerging economies, mobile banking means something far more profound. While mobile banking is chiefly a matter of convenience in the developed world, for emerging economies it is increasingly the difference between banking or not banking at all. In our previous article on the future of mobile finance, Mint discovered that 36% of the people in India, for instance, “…earn less than Rs 5,000 a month [and] own a mobile phone, but do not have a bank account.”

Similar situations are found in other developing markets. TMCNet predicted in November 2008 that “…will grow at nearly 7 percent annually through 2013 and will exceed $200 billion by that time” and furthermore that “…the growth will be driven by emerging markets in nations such as Brazil, Russia, India and China, and on the continent of Africa.” Indeed, TMCNet continues, “…collectively, emerging markets will compose about 60 percent of the market share in 2013.” Gavin Krugel, director of mobile banking strategy at the GSM Association, goes a step further, claiming that, “…one billion consumers in the world have a mobile phone but no access to a bank account.” What is lacking in these countries are not mobile phones, but – until recently – mobile banking technology tailored to their unique needs and circumstances. Luckily, the mobile banking scene in developing markets is rapidly beginning to take shape.

Today, we’ll take a closer look at what mobile banking (in its advancing state) means for the developed world, both in the short term and down the road.

Helping The Poor

(whiteafrican)

One promising aspects of mobile banking is its potential to help the poor in developing nations. As noted earlier, the impoverished state of many of these nations is such that the average citizen has little or no access to real banking services. India, with its 36% of citizens earning less than Rs 5,000 a month and lacking a bank account, offers one example, but it is hardly the only example. GlobalEnvision.com cites The Consultative Group to Assist the Poor, which estimates that, “…80 percent of people in least developed countries are unbanked.” The Jakarta Globe makes mention of people in, “…rural and remote areas” of Afghanistan, Asia and Africa who can now “…get paid, send remittances or settle their bills” using mobile banking technology.

Thanks to such services, it has never been easier for citizens of an impoverished nation to receive money from friends or relatives in developed countries (which are often frequent transactions among these parties.) Even bill paying has long been cumbersome chore in many emerging markets. While those in the U.S. can pay with one click of a mouse (or even one tap on an iPhone screen), the Jakarta Globe reports a far more involved process in parts of Africa, where Fundamo regional executive Reg Stewart says, “…it takes one day to pay one bill” because Africans must, “…physically go to the bank, then you must queue, a long queue.”

Similar stories abound in just about every emerging market one can name. Simple money management tasks that are routinely taken for granted in the developed world often require painstaking effort elsewhere. Needless to say, such burdens make it difficult for the poor to participate in the economy or improve their own prospects in any meaningful way. Mobile banking technology has the potential to be trans-formative in this regard by expanding the sphere of opportunity of anyone who uses it.

Stronger Economic Growth

(woodleywonderworks)

The spread of mobile banking in developing countries has the potential to be the proverbial rising tide that lifts all boats. GlobalEnvision goes on to quote Jeremy Leach of FinMark Trust, who claims, “…what we’re finding from the evidence from economists is that actually greater access to financial services improves economic growth.” Nor is it at all difficult to understand why this would be so. It only stands to reason that when thousands (indeed, sometimes millions) of a nation’s citizens can only participate in the economy with physical currency, it will be difficult for the broader economy of that nation to grow with any regularity. In fact, this is a central focus of Hernando de Soto’s eye-opening book The Mystery of Capital.

The main reason, “…why capitalism triumphs in the west and fails everywhere else”, according to de Soto, is not corruption, insufficient compassion from developed countries or lack of entrepreneurship in developing ones. Far from it, as de Soto observes “…the inhabitants of these countries possess talent, enthusiasm and an astonishing ability to wring a profit out of practically nothing.” Astonishingly, de Soto states, “…if the U.S. hiked its foreign aid budget to the level recommended by the U.N. – 0.7% of national income – it would take more than 150 years to transfer to the world’s poor resources equal to those they already possess.” Rather, the missing link in many developing lands is a clearly defined property rights system and financial infrastructure. Lacking such a system, individuals cannot easily get loans by pledging their homes as collateral, for instance (since their ownership and creditworthiness are not officially recorded.) They are therefore left to rely on less advantageous sources of borrowing or, more often, simply not borrowing at all.

While mobile banking alone cannot create the, “…formal, unified property system” de Soto argues is essential to lasting prosperity, it is a bold step in the right direction. As ForeignPolicy.com explains, “…now, anyone with access to a cell phone has a place to keep his or her savings without needing a traditional bank account.” If a nation’s citizens can receive payments from remote senders, take out loans, and build a credit history using little more than the mobile phones they already have, there will be far less standing in the way of their playing larger economic roles.

Reduced Corruption

(futureatlas.com)

While corruption is not the sole cause of poverty in emerging markets, it is undoubtedly a large one. Interestingly, however, mobile banking has already displayed its potential to reduce corruption in the nations that adopt its use. The Jakarta Globe relayed a hopeful anecdote from Afghanistan, whose national police are paying its officers using services from Roshan as part of a test to limit corruption. It works as follows. Every month, Jakarta Globe reports, “…officers receive a text message in the language they prefer informing them that they have received their salaries.” Because, “…a lot of them are illiterate and cannot read”, voice mail alerts are also dispensed containing the same information. Once a text or voice confirmation has been received, officers are then able to collect their pay from an authorized Roshan agent. But the benefit is not simply, as Jakarta Globe says, “…that police officers don’t have to carry cash anymore” and can now “…send their money home, buy items, and take hwatever cash they want from an agent, or to store for the future.”

What the Roshan system has done is help ensure that officers who were being scammed out of their full salary get all the money they were promised. According to Zahir Jhoja (Roshan’s head of mobile commerce), corruption in officer pay was substantial and widespread, with many officers reporting being “…very surprised that they earn so much money.” Prior to Roshan, when payments were made in cash and nothing was documented, the very same officers, “…were receiving 25 to 30 percent less” every week, according to Jhoja.

The implications are clear. Much of the corruption in the developing world persists because of manual payment processes run by corrupt people. Such a system opens the door to bribery and all manner of dishonesty and fraud. Automated mobile systems like Roshan’s, however, offer streamlining that makes it more difficult for unscrupulous individuals to game the system.

Recap

To recap, we have learned that mobile banking has much to offer the world’s emerging markets. Chiefly, the ability to tie a bank account, investment portfolio or credit report to a mobile phone empowers poor people (many of whom have never participated in a formal banking system.) Consequently, these people are better positioned than ever before to increase their standards of living via easier access to debt financing and other financial services. Finally, mobile banking is displaying the early potential to discourage certain types of corruption that are rampant in developing nations. All told, there is much to look forward to with respect to mobile banking technology in the world’s emerging markets.

Got credit card debt? If so, good news: the card issuer can no longer hike your interest rate without warning or raise rates on an existing balance. They have to send your bill at least 21 days before it’s due (up from 14 days). And each bill has to show how long it will take to pay off the balance if you make the minimum payment–and how much you’ll pay in interest if you do that. Call it the credit card equivalent of the Surgeon General’s warning.

These reforms–and many others–are due to a single new law, the Credit CARD Act, which came into effect last month. Great! Who hasn’t been surprised by one or more of these practices?

“This new law is good, and it does stop a lot of bad things,” says Kathleen Day of the Center for Responsible Lending, a consumer watchdog group which published a handy guide to the new law. “But it doesn’t stop everything, and you know they’re going to find new ways around it.”

Why do the card issuers play these games? It’s not because they’re jerks and like watching you suffer. (That’s a side benefit.) They do it to make money. Take away these revenue streams, and the card companies aren’t going to roll over. Right now they’re rubbing their hands together and coming up with new schemes.

Let’s be like the writers on 24 who sit around coming up with hypothetical terrorist attacks, and figure out what the credit card issuers are going do next.

A crackdown on deadbeats

A deadbeat dad is one who never pays his child support on time. But to a credit card issuer, a deadbeat is just the opposite: a customer who always pays on time and therefore never pays any interest.

Interest is the single biggest chunk of credit card profits. The card issuers have always done their best to turn deadbeats into debtors. Got a pesky customer who always pays on time? Make sure their bill arrives a few days before it’s due, then, when they pay late, slap a 30 percent penalty APR on their entire balance.

The CARD Act makes it harder to pull this maneuver off: they have to send you the bill earlier, and you have to be 60 days late before they can jack your APR. But you can still blow it the old-fashioned way: occasionally pay less than the balance due.

“The house is making a bet that you will not live up to your intentions,” says Chris Farrell, author of The New Frugality and economics editor at American Public Media’s weekly radio show Marketplace Money. “If you will pay it off at the end of the month, and you can pay it off at the end of the month, and you actually have that discipline, it’s a really good deal. The strategy doesn’t work if it turns out you do it every other month.”

If you do show steely discipline and pay in full consistently, the card issuer is now likely to reward you by lowering your credit limit or canceling your account. Happy trails.

Here, have some rewards

That’s not to say that reward cards are going away. In order to explain why credit card issuers love reward cards, I have to use a term that will make many of you close your browser in disgust. It’s not dirty, it’s boring: interchange fees. Although, when you think about it, it does sound kind of dirty.

When you swipe your card for a $100 purchase at Urban Outfitters, the store doesn’t receive the full amount. A few pennies go to Visa (or MasterCard or Amex). A much larger chunk, 1 to 3 percent, goes to the bank that issued the credit card. This is the interchange fee.

The interchange fee isn’t the same on all transactions. It depends on a lot of factors, one of which is whether you’re using a reward card: reward cards carry higher interchange fees.

So, thanks to the CARD Act, you’ll be receiving more junk mail advertising reward cards (especially if you have a high FICO score). They’re a great deal for the banks: higher interchange fees; reward cardholders charge more than the average person, to maximize the reward; and a significant percent of the rewards go unredeemed. Got some useless air miles sitting around? Join the zero-mile-high club.

Oh, they’ll surely be hiking interchange fees, too. And since merchants aren’t allowed to charge customers extra for using a credit card, everyone will pay more–even cash customers.

Fees, fees, fees

“People are going to see many more fees,” says Kathleen Day. Here are a few favorites:

• Annual fees. The classic, and more popular than ever–especially for cardholders with low FICO scores.
• Inactivity fees. Some banks charge you an annual fee for not using your card or not using it enough. Damned if you do, et cetera.
• International exchange fees. As the New York Times reports, card companies charge up to 3 percent every time you make an international purchase–even if the purchase is in US dollars.

Payday…for the banks

Subprime mortgages are over. Credit card profits are down, thanks to debt-wary consumers and new laws. Even overdraft fees, a bank’s bread and butter, will be curtailed later this year. What’s a poor bank to do?

How about payday lending? As BusinessWeek reports:

Banks including Cincinnati-based Fifth Third Bancorp, San Francisco-based Wells Fargo & Co., the fourth-largest U.S. bank, and U.S. Bancorp, based in Minneapolis, are already making such loans, usually from $100 to $500, at annual rates of 120 percent if repaid in 30 days. They’re known as “checking advance products.” That puts them in competition with so-called payday loan stores.

Lovely.

Opt out

In short, the CARD Act is good news, but credit card issuers still want to stick their hands far enough into your pockets to untie your shoes. What to do?

“Reward companies that provide a good service at a good price, and don’t do business with the ones who don’t,” says Farrell. “I hope credit unions and community development banks, which offer credit card products that are pretty simple and straightforward, take market share away” from the big banks. My credit union offers a simple, no-fee credit card at a competitive rate, but I don’t actually carry it. I did, however, sign up for their overdraft line of credit. If I ever were to need emergency cash–up to $1000–I can dip into the line of credit at a fixed 8.9 percent APR using my debit card. There’s no additional overdraft charge. (I’ve never used it.) The watchword with credit cards is the same as it ever was: check your statement for surprises and your back for knives.

(Aaron Escobar ♦ (the spaniard)™)

For much of its history, offshore banking has been seen first and foremost as an avoidance maneuver. Countless action and mystery movies depict Swiss bank accounts as places for villains to hide ill-gotten fortunes. Indeed, one need not rely on movies for evidence of offshore banks housing shady activities. Offshore bank accounts have been used to hide the profits for everything from drug sales to arms dealing to bribes – not to mention tax evasion schemes. But today, offshore banking is much more than a haven for underhanded financial shell games. Increasingly, legitimate businesses and individuals are finding it more advantageous than ever to utilize offshore banks for the privacy, flexibility and accessibility that they offer. With identity theft and bogus lawsuits as prevalent as ever, it’s plain to see why people take comfort in storing assets overseas – especially in countries where banks pride themselves on being loyal to customers first, and governments second. Swiss banks, for instance, are famous for refusing to cooperate with all but the most serious and unavoidable of government snooping. Such secrecy protects not just devious crooks, but innocent citizens with legitimate reasons to keep prying eyes out of their finances.

Today, we’ll take a deeper look at offshore banking – including its key advantages, what it offers to different types of people and several nations known for protecting the assets and identities of their foreign depositors.

Privacy

(Anonymous9000)

Arguably most compelling benefit of offshore banking is, and always has been, privacy. The advantages of bank account privacy to criminals are too obvious to require elaboration here. However, privacy also has its advantages to completely honest, fair-dealing people and businesses. For one thing, the United States is currently the most litigious society that has ever existed. Sixwise.com cites a study from the Economic Journal showing that, “…Americans spend more on civil litigation than any other industrialized country.” The American Bar Association reported in 2006 that, “…there are over 1 million lawyers in the United States” – more per capita than any other country. Nor are all of those lawyers sitting around idly in their offices, as Sixwise states that the number of civil suits filed increased by 12% from 1993-2002 alone. Frivolous lawsuits are a big part of the problem and, “…are said to cost the United States $200 billion a year, according to Congressman Terry Everett.” Unlike in many European countries, the losers of American civil suits are not generally required to pay the winner’s legal fees. Within that kind of legal climate, simply possessing significant assets can be enough to make you the target of a lawsuit. Given such overwhelming incentives to sue, high net worth individuals often find it to their benefit to conceal some or all of their assets overseas. While it is relatively simple for lawyers to run asset checks on bank accounts residing in the United States, many offshore banks are far less transparent.

Despite a recent agreement to cooperate with US tax authorities, Swiss banks are still quite secretive. A recent BusinessWeek story reveals that while Swiss banks cooperate with investigations of tax fraud (a criminal matter), they will not turn over documents or the identities of account holders for civil matters (private lawsuits.) It’s tough to beat that kind of privacy when it comes to shielding assets from frivolous lawyers and lawsuits. Such people will not even know that you have an account, much less whether or how much money is inside.

Flexibility

(cliff1066™)

Another attractive benefit of offshore banking is the flexibility that it can offer. This is particularly true for traveling or international businesspeople, many of whom come to find it difficult or costly to run an international operation from a domestic, neighborhood bank account. Accepting payments in foreign currencies, for instance, often triggers hefty fees when those payments are received into American bank accounts. If you or your business regularly transacts in one or a handful of foreign countries, it quickly makes sense to simply set up accounts in those countries, rather than incurring fees by redundantly shuttling money overseas and back again. Best of all, it is usually not even necessary to visit the country in which you wish to set up the account. Belize.com, a website set up to attract customers to Belize’s offshore banks, states that, “…you can simply bank from wherever in the world you live, via a secure Internet connection, secure e-mail, post or telephone.” Many offshore banks in Belize even provide ATM cards that can be used in your home country. To its credit, Belize also promises ,”…near hermetic confidentiality” to its offshore banking clients. Additionally, many offshore banks provide 24 hour call centers whose operatives speak your native language and are available to you regardless of time zone differences. Clearly, flexibility is a compelling reason to bank offshore.

Hedging Against Political Risk

(srqpix)

A somewhat overlooked advantage to offshore banking is the partial hedge it provides against political risk. As Offshore-Fox.com wisely points out, “…assets held domestically are subject to political and social risks that you cannot control.” These risks are broad and innumerable in possibilities, including the risk that your government, “…may suddenly raise taxes to fund a failing economic experiment.” Recently, the federal government has taken a larger authoritative role in the banking and financial sector than at any time in US history. While it isn’t certain that their actions will adversely affect your domestic bank holdings, the risk is unquestionably there. Inflation is another looming danger with the potential to eat away at domestically held bank assets. In his article on inflation, John T. Reed recalls that, “…President Roosevelt issued Executive Order 6102 that required all Americans to turn in gold to the Federal Reserve bank for $20.67 per ounce—a below-market price—by 5/31/33.” Failure to comply with Roosevelt’s order resulted in, “…a fine of $164,000 in today’s dollars and/or a prison sentence.”

There have also been laws such as Regulation Q, which was instituted in 1933 to limit the interest rates that US banks could pay their depositors. The current financial crisis, again, has triggered massive new interventions into private finance whose implications (good or bad) for domestic depositors are not yet clear. It is easy to shrug off such risks as remote possibilities that seem unlikely to ever occur. However, when hundreds of thousands (or even millions) of dollars are at stake, high net worth individuals often prefer to hedge against political risk when doing so is cost-effective. Offshore banking is one of several ways to do that with respect to their assets. Indeed, QWealthReport.com’s article on myths about offshore banking reports that, “…most people who bank offshore these days are not evading taxes” – as is commonly assumed – but are instead seeking, “…protection against political risk factors”, among other things.

Recap

Essentially, the most compelling advantages of offshore banking are privacy, flexibility, and protection from political risk. Conservative or high net worth individuals can often keep assets under the radar of frivolous lawyers by storing them in offshore accounts. Businesspeople with nothing whatsoever to hide can nonetheless benefit from the tremendous flexibility and cost savings (in eliminated fees) that banking overseas can offer. Finally, citizens from all walks of life can utilize offshore banking as a partial hedge against political and social uncertainty by ensuring that at least the money they keep overseas will not be harmed by adverse laws or regulations. To be sure, offshore banking has come a long way from being the sole province of criminals and con-men.

(tenaciousme)

A statement we frequently hear from economic analysts is that America needs a “strong dollar.” And most of the time, the non-economically savvy segment of the population blankly nods in agreement. Lacking a deep understanding of why a strong dollar is beneficial (or even what a strong dollar means), most people nevertheless prefer a strong dollar to a weak one. However, the words “strong” and “weak” are the source of much confusion on this issue. In virtually every other area of life, strength is categorically, universally preferred to weakness. Using such language to describe fluctuations in the value of a currency invests emotional meaning into the situation, implying that a strong dollar is always preferable. In fact, the strong dollar/weak dollar debate is more complicated than it initially seems to be. Most experts, for instance, agree that a strong dollar (as commonly defined) is better in a normal, prosperous economy. Yet the very same experts – with data and convincing arguments – contend that a “weak” dollar can actually accelerate recovery from a recession, such as the one we find ourselves in today. Naturally, both of these positions require a firm grasp of both what a strong and weak dollar actually means, and why each of them lead to different outcomes depending on the state of the economy.

Today, we’ll address the strong dollar/weak dollar debate into perspective and explain what each of them means for you.

Strong & Weak Dollars Defined

For those who are not already aware, let’s define what a strong dollar actually means. Very simply, a strong dollar is one that, “…can be increased for a large or growing amount of foreign currency”, according to InvestorWords.com. Typically, a strong dollar is seen as a good thing because it means American citizens and businesses can get more foreign goods and services for the same amount of money. An American citizen could bring $1,000 to France, for example, and buy more there than she could here. This matters because imports are usually paid for in the currency of the country doing the importing. Consequently, America as a whole tends to import far more goods and services than it exports for however long the dollar is stronger than the currencies of the nations we trade with.

(Photos8.com)

A weak dollar, as you may have gathered, is one that, “…can be exchanged for only a small or decreasing amount of foreign currency.” A weak dollar is usually seen as a bad thing because it does not stretch as far internationally as it once did. Indeed, the opposite is true: foreign currencies buy more of our goods and services than we can buy of theirs. But while imports are usually purchased using the importing nation’s currency, exports are paid for in the currencies of the exporting country. Therefore, a weak dollar has the ability to change the entire flow of trade that occurs when the dollar is strong. When the dollar is weak, America as a whole tends to export more goods and services than it imports.

Why They Matter to You

From the above discussion, it may look like a strong dollar is always most desirable. But as we alluded to earlier, many experts disagree with that conclusion. A case in point is Bob McTeer of DailyMarkets.com. “If I had to choose with no qualifications”, McTeer writes, “…I’d choose the strong dollar.” Among his reasons are the fact that a strong dollar “…benefits consumers by holding down the price of imports and keeps the pressure on producers and exporters to keep costs down and productivity up.” McTeer also wisely points out that a strong dollar attracts foreign investment more readily. In the long term, he concludes, “…a strong dollar is good for our standard of living.” During a recession, however, McTeer’s analysis changes.

While a naturally stronger dollar (that is, a dollar whose value rises because demand for American imports rises) is still beneficial, a dollar made stronger by political fiat and interference can actually slow an economic recovery by, “…reducing demand for our exports relative to our demand for imports.” The consequences are potentially disastrous as far as recovery is concerned. The deficit of trade that results from our artificially strong dollar can “…divert demand to our trading partners”, thereby diminishing demand for American products and services at a time when that is, by definition, the very thing we need for a true recovery. Of course, McTeer concedes that being in favor of a “weak” dollar (even within certain tightly circumscribed conditions and circumstances), “…still doesn’t seem right” to many observers. To think about the issue and the forces at work more clearly, he suggests substituting the word “competitive” for “weak”, which eliminates the negative emotional connotation.

(kevindooley)

MSNBC also reported in February 2010 that a resurgent US dollar could be, “…the latest threat to recovery” from the current recession. While the dollar, “…surged to an 8-month high against the euro, and is also rising against other major currencies”, that could actually, “…hurt exports, which are big contributors to the US economy right now.”As a direct result, American businesses will pay more to sell their products overseas while, “…imports here will be cheaper – good for consumers, but bad for businesses.” The Peterson Institute for International Economics (a nonpartisan research group) breaks it down even more specifically. For every 1% increase in the value of the dollar – averaged against major foreign currencies – US exports are reduced by, “…about $20 billion annually”, which, “…destroys some 150,000 jobs.” Like Bob Mcteer, MSNBC agrees that supporting a weak (or competitive) dollar may not intuitively feel right, but that during a recession, stronger does not necessarily mean better.

The Takeaway

To recap, we have learned that “strong” and “weak” dollars are not categorically good or bad for America as a whole. Certain segments of the economy are hurt or helped by either, depending on whether we are in a recession or not. Furthermore, during recessions, a strong case can be made that a “weak” dollar provides a needed boost to the sagging economy by promoting increased exports of our goods to other countries. Largely, the words “strong” and “weak” obscure the deeper meaning of the issue, which is whether (and when) it is better for our currency to be worth more or less than foreign currencies.

The government will tell you that we are coming out of recession and economic recovery is right around the corner. Since the mortgage meltdown could be considered the root cause of the economic downturn, it’s helpful to look at the current housing market to get a sense of whether the recovery is hitting close to home. As prices have continued to drop in cities across the nation, the number of home sales has been increasing in many areas. Especially profound was the dramatic percentage increase year-over-year between Q3 and Q4 in total properties sold. Our latest map may not be able to tell you when to buy and when to sell but it will give you some strong data with which to make an informed decision.

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<a href="http://www.mint.com/blog/wp-content/uploads/2010/02/MNT-HOME-SALES-R6.png"><img src="http://www.mint.com/blog/wp-content/uploads/2010/02/MNT-HOME-SALES-R6.png" alt="MNT-HOME-SALES-R6" title="MNT-HOME-SALES-R6" width="918" height="1726" class="alignnone size-full wp-image-8702" /></a><br /><a href="http://www.mint.com/">Budgeting</a> – Mint.com

(Epicharmus)

Regardless of one’s opinion on Ben Bernanke, there is no denying the extraordinary impact he has had on the Federal Reserve since taking over as Chairman in 2006. A case can be made that the very nature and scope of the Fed has changed under Bernanke’s stewardship. Originally envisioned as a politically neutral institution meant to contain systemic risks and head off banking panics, the Federal Reserve has taken a considerably more “hands-on” role in the economy of late. It began in March 2008 with the fire sale of Bear Stearns to J.P. Morgan Chase – a maneuver largely engineered by Bernanke in conjunction with then-Treasury Secretary Hank Paulson. The Fed’s response to the recession continued with a $182 billion rescue of troubled financial services firm AIG, characterized by the Huffington Post as a, “…backdoor bailout” due to a lack of transparency about its execution. Wikipedia also reveals troubling testimony from Kentucky Senator Jim Bunning, who, “…said on CNBC that he had seen documents which show Bernanke overruled recommendations from his staff in bailing out AIG.” Even more significant than how AIG’s bailout was executed, however, is the pretext it created for future bailouts and government takeovers – including the TAARP program. Furthermore, the Fed’s initial responses to the recession were hardly the last of its politically consequential changes. By August, Bloomberg observed that Chairman Bernanke had, “…led the biggest expansion of the central bank’s power in its 95-year history.”

In a relatively short period of time, the Federal Reserve has morphed from a supposedly independent entity to one which actively takes sides in shaping economic outcomes of particular firms and industries. It has become, more than ever before, a political institution. Below, we’ll examine how the 2,100 employee Federal Reserve has changed since Bernanke took office, what’s ahead, and what it means for the American people.

More Political Power

(cliff1066™)

As alluded earlier, the political power of the Federal Reserve has increased substantially during Bernanke’s tenure at the helm. It began in earnest at the outset of the fall 2008 financial meltdown, when Bernanke took a lead role in the government’s bailouts of Bear Stearns and AIG. As a longtime scholar of the Great Depression, Bernanke was well aware of the systemic risks posed by the failure of such integral financial institutions. However, much suspicion has arisen regarding the clandestine exercise of its power. Bloomberg News reporters had to file a Freedom of Information Act request in summer 2009 after the Fed, “…refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs” instituted to ameliorate the financial crisis. While the Federal Reserve argued that revealing the recipients would harm their competitive positions, Manhattan Chief U.S. District Judge Loretta Preska ruled instead that the Fed had, “…improperly withheld agency records” and ordered it to overturn hundreds of pages of reports requested by Bloomberg. Among the facts that came to light around the time of this ruling were how “…The Fed’s balance sheet about doubled after lending standards were relaxed” following the collapse of Lehman Brothers. This marked a quiet but foundational change in the scope of the Fed’s activities. Prior to 2009, the Federal Reserve was not permitted to purchase non-government securities or to hold them as assets. However, during Bernanke’s aggressive new campaign to relieve banks of toxic assets, “…Fed assets rose 2.3 percent to $2.06 trillion” by the week ending August 19, 2009 – an increase up made almost entirely of private, mortgage-backed securities. Regardless of the merits or demerits of the Fed owning these particular securities, what matters from an institutional standpoint is that the Fed can now own private securities – a major departure from long-standing precedent.

Nor was purchasing non-government securities the only power Bernanke sought to bestow upon the Federal Reserve. In March 2009, Brady Dennis of the Washington Post reported that Bernanke had ,”…pressured Congress to give the federal government unprecedented new power” to take over distressed financial firms deemed to be essential to the overall financial system. Citing the, “…1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs” that could have followed a failed AIG, Bernanke argued passionately for permitting the federal government to seize insurers and financial services firms, “…the way that the Federal Deposit Insurance Corp. can take over banks.” The Los Angeles Times likewise spoke of, “…the increased power of the complex and mysterious Fed” in October 2009. Despite, “…more than two-thirds of the House of Representatives” lending their legislative support to, “…a bill that would subject the central bank to increased congressional oversight through expanded audits”, Bernanke was intransigent in defending the, “…major new role” he and the Obama Administration had in mind for the Fed – specifically, “…supervising large financial institutions that pose a risk to the entire economy.” Such a role means the Fed would cease being merely an entity concerned with setting interest rates and become, essentially, an all-purpose financial regulatory agency.

That said, politicians from both ends of the political spectrum have begun mobilizing against the greater concentration of power in Federal Reserve hands. In addition to the aforementioned House bill, the LA Times notes that, “…a key senator” was pushing to …”strip the Fed of its authority to regulate banks” due to its lax oversight in the years and months leading up to the meltdown. Jaret Seiberg, a financial policy analyst with Concept Capital’s Washington Research Group, also opined that the Fed was encountering “…unprecedented opposition on Capitol Hill” in its quest for greater regulatory powers. What the Fed does have is the unwavering support of President Obama, who recently granted Bernanke a second term as Chairman.

Enhancing Moral Hazard

(danperry.com)

One of the foundational purposes of the Federal Reserve was promoting overall financial stability. However, a growing strain of opinion holds that the Fed (under Bernanke’s leadership) has actually increased the likelihood of moral hazard and financial irresponsibility. As far back as October 2008, SeekingAlpha.com published a reader e-mail about the lack of a bailout for Lehman Brothers – a decision Bernanke was instrumental in making. The e-mail pointed out that, “…a lack of a Lehman bailout only reduces moral hazard if investors think it is a preview of future actions.” But because the non-bailout was roundly questioned and considered a mistake, it actually, “…makes a bailout for the next major financial institution more likely.” In other words, because most analysts and experts outside of the Federal Reserve and Treasury Department believed bailing out Lehman was necessary to avert systemic failure, the decision not to do so actually made moral hazard more likely. Sure enough, SeekingAlpha notes, “…no further failures could be allowed” after Lehman went under, and, “…indeed, one of the main functions of the TARP bill was to make government bailouts much easier.”

The non-bailout of Lehman Brothers was not the only way in which the Federal Reserve enhanced the risks of moral hazard. In January 2010, ZeroHedge.com revealed that Goldman Sachs was actually willing to, “…tear up AIG’s derivative contracts”, and essentially, “…take a haircut” on the losses incurred by doing so. Had this been done, the need for a federal bailout of AIG would have been greatly diminished, if not completely eliminated. As ZeroHedge astutely observes, the Federal Reserve Bank of New York ,”…not only did not save US taxpayers’ money, but in fact ended up costing money” because they, “…funded the marginal difference between par and whatever discount would have been applicable to the contract tear down” that Goldman Sachs proposed a month prior. Admittedly, the full details of this story have yet to emerge, as have the long-term consequences of the various bailouts and non-bailouts. What is known currently is that Ben Bernanke, in his role as Fed Chairman, put the central bank in a position to actually enhance the very risks of moral hazard that it is institutionally mandated to discourage.

The Future

It remains to be seen whether the Federal Reserve will actually get all of the new regulatory power that Chairman Bernanke and President Obama are seeking. Even more uncertain is whether an avowedly independent entity can carry out its duties while also meting out regulatory discipline. Project Syndicate opines that, “…only with great difficulty” is it possible to, “…maintain a rigorously independent chairman when it comes to interest rates” (the historical role of the Fed), “…and a tightly accountable chairman when he is making regulatory decisions” (the new role desired by Bernanke and Obama.) Ironically, it is feasible that the continued expansion of Federal Reserve power could actually create new risks, aside from the risks that prompted the expansion in the first place. This being the case, Project Syndicate continues, President Obama, “…should not draw the conclusion that arguments about the Fed’s accountability have gone away with Bernanke’s confirmation.” Congressman Ron Paul, for instance, has repeatedly agitated for a full audit of the Fed’s activities – opposed by Bernanke on the grounds that it would be, “…highly destructive to the stability of the financial system, the dollar and our national economic situation.” Regardless, as the Federal Reserve grows in size and scope, the eyes of citizens and lawmakers will remain increasingly fixed on its activities.

How many zeroes are in 690 billion? Most of us need to write it out, just to make sure we’ve got our numbers straight. President Obama can probably tell you in his sleep. He’s presiding over a $690 billion trade deficit, the largest in the history of the United States, both as a number (that’s ten zeroes, by the way) and as a percentage of our country’s GDP (that’s 5%). Our latest infographic takes a look at deficit spending through the decades.

A trade deficit occurs when a country imports more goods and services than it exports. In the United States, imports have been out-sizing exports since the 1980s. In fact, the last time we produced a trade surplus was in 1975, with President Gerald Ford in residence at the White House. Ever since, our country has been living beyond its means, and the debt is steadily mounting.

Sound familiar? Many blamed the current economic crisis on the fact that millions of Americans spent more than they earned. Perhaps it’s in our genes.

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(James Buck)

Last July, we examined the California budget crisis, explaining the state’s massive $26.3 billion budget deficit as a result of borrowing against anticipated future revenue to meet current budget requirements. In one sense, such behavior is understandable from a political perspective. To reside in California (and particularly to own a home there) between 2002-2006 was to ride a gravy train like few others in American history. Already the world’s eighth largest economy in isolation, California’s robust market soared even higher on the wings of artificially inflated home prices. In his penetrating book The Housing Boom and Bust, economist Thomas Sowell writes that, “…at the height of the housing boom in 2005, the top ten areas with the biggest home price increases over the last five years were all in California” – this despite the fact that, “…California home prices were once very similar to home prices in the rest of the nation.” Various factors (”open space” laws and land use restrictions foremost among them) are offered as explanations, but for our purposes, suffice it to say that the eye-popping increase in home prices triggered an unprecedented wave of consumer borrowing. After all, when home prices rise at a rate of $2,000 per day (as they did in San Mateo county during March 2005), why not upgrade the kitchen or buy a new car? Needless to say, all of this economic activity sent tax receipts skyrocketing, prompting the state and municipal governments to increase their own spending.

But what went up has come down in a big way for California. With the ugly realities of what caused the budget crisis squared away, most Californians want to know what the fallout means for them personally.

Closed Parks

(docentjoyce)

A major repercussion of California’s budgetary woes has been the precarious fate of state parks. In May 2009, for instance, ABC News reported that Governor Arnold Schwarzenegger had proposed, “…closing up to 220 state parks” to help reduce the deficit, “…including popular attractions for millions of visitors each year, such as a park that is home to some of the tallest trees on earth.” According to Schwarzenegger, the closings would eliminate $70 million in park spending through June 30, 2010, after which “…another $143.4 million would be saved the following fiscal year by keeping the parks closed.” Such cuts would leave enough to run only 59 of California’s 229 state parks. While conservationists are fighting to keep these parks open (the UK’s Guardian quotes Tim Gibbs of the National Parks Conservation Association as saying, “…it’s almost as if they are shooting themselves in the foot”) it is looking increasingly likely that at least a significant percentage of the parks Schwarzenegger proposes closing will indeed close. The effects of this on Californians are twofold. For one, it likely means layoffs for most or all of those who work at the parks in question. Tour guides, park rangers, food and beverage staffs and maintenance crews would all presumably be out of work, at least for so long as the parks were closed. Given the number of parks in jeopardy of being closed, these workers are in danger of becoming a substantial addition to California’s ranks of unemployed.

Second is the fact that Californians will be unable to visit or use these parks in any way. The state has a rich legacy of outdoor beauty, and if the Guardian is correct in reporting the proposal could deprive citizens of 80% of state nature reserves, it represents a a serious blow to that legacy.

Furloughs, Fewer Holidays & Layoffs of State Employees

(milesghem)

In Connecticut or Rhode Island, the effects of a budget crisis on state employees might be negligible. But in a state as big as California, state employees comprise a significant chunk of the overall population. And regrettably, the story has not been a positive one for CA state employees since the budget crisis got into full swing. It began with Governor Schwarzenegger’s December 2009 executive order mandating the adoption of, “…a plan to implement a furlough of represented state employees and supervisors for two days per month, regardless of funding source. ” By July 2009, that had increased to three days out of the month, good for a savings of $1.3 billion according to the New York Times – which is roughly equivalent to a 15% pay reduction. Schwarzenegger also proposed eliminating the Columbus Day and Lincoln’s Birthday holidays, and changing overtime pay rules so that leave time would no longer be compensated by the state.

Outright layoffs have also occured and been proposed. CapitolWeekly.com reported on January 7 2010 that state employees are, “…likely to continue to feel the squeeze” as the Governor prepares his 2010-11 state budget. The mandatory furlough system (which affects 201,000 state workers presently) could be replaced in the new budget, substituting “…layoffs and a 5% pay cut” in their place. Californians will no doubt be keeping a close eye on the budget Governor Schwarzenegger ultimately signs, particularly as regards its effect on the state’s many employees, their work hours, benefits and salaries/wages.

Slashed Education Funding

(A.V. Lawn Service & Landscaping)

State education funding has also taken a severe hit in the aftermath of the budget crisis. Reporting in depth on the specifics of the state budget passed in July 2009, the New York Times revealed that “…the K-12 education budget, which also includes community colleges, lost $6.1 billion from its roughly $58 billion base.” On top of that, “…higher education took a $2 billion hit.” Given the importance of education to any state, it’s not difficult to imagine the negative impact these cuts may engender. PublicRadio.org, for instance, quotes California Superintendent of Public Instruction Jack O’Connell as saying, “…it’s the students of color, students who are poor, students who are learning English, or coping with learning disabilities, who need the most assistance. And equal cuts across the school, or across a school district, will be inequitably felt by them.” O’Connell speaks for many in California who fear that layoffs and the resulting larger class sizes will equate to inferior class experiences for students.

Layoffs have also been prevalent at state universities. The blog LayoffTracker stated that University of California, for instance was, “…looking at cutting salaries for all faculty and staff by 8 percent as one option in reducing an expected $800 million funding shortfall” as recently as last June. This and similar cuts around the state prompted universities to raise their tuition, which in turn prompted outrage from the public. Time Magazine reported in November 2009 that,”…University of California regents voted this week to increase tuition a whopping 32% to more than $10,000 annually — a three-fold increase in a decade.” The result was unbridled mayhem. Remarking on the protests that followed, Time recalls that “…about 2,000 students from the 10-campus system confronted riot police, shouted slogans and blocked building exits” in something reminiscent of “… a scene out of the angry 1960’s.”

Time also interviewed students about the impact of education budget cuts on them personally. UCLA sophomore Chimela Okwandy said, “…some of my friends wont be here next quarter” before concluding that ,”…before it was a question of how smart you were. Now, it’s do you have enough money to pay for school.” Outgoing California State University System chair Jeff Bleich goes even further, claiming that, “…California is on the verge of destroying the system [of higher education] that once made this state great” and insisting that, “…for every dollar the state invests in a CSU student, it receives $4.41 in return.”

The Takeaway

Californians from all walks of life have and will continue to experience hardships as a result of the budget crisis. Indeed, everyone from casual nature lovers to state employees to professors and students (and their parents) seem to be shouldering burdens from the fallout. One hopes that California tightening its belt and paying off its debts will be a precursor to economic recovery – sooner rather than later – and perhaps lead future generations of politicians to be more prudent during booms like the one between 2002-2006.

]]> http://www.mint.com/blog/trends/california-budget-crisis-2/feed/ 13 http://www.mint.com/blog/trends/flower-power-a-look-at-februarys-booming-floral-economy/ http://www.mint.com/blog/trends/flower-power-a-look-at-februarys-booming-floral-economy/#comments Fri, 12 Feb 2010 19:51:30 +0000 Ross Crooks http://www.mint.com/blog/?p=8506 ]]>

With Valentine’s Day around the corner, love is in the air and solicitations from flower companies are flooding your inbox. While most significant others would prefer to receive flowers year-round, there’s no question that the month of February is the flower industry’s favorite time of the year. And Valentines Day isn’t just for hopeless romantics. As we’ve seen, all this spending can be a boon to the economy at large.

Our latest infographic takes a look at February’s Booming Floral Economy and is based on the aggregate data from over one million Mint.com users, a representative sampling of US consumers.

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Not too shabby for a day’s work, and it’s not even his best year. According to NRF research, spending for Valentine’s Day peaked around 17 billion in 2008, when the average expression of love cost a whopping $123 per person. Since 2009, consumers have been seeking more economical ways to show their loved ones they care. (Total Valentine’s Day spending for 2009 was estimated at $14.7 billion, or $102.50 per person.)

Nonetheless, our battered economy could surely use the financial stimulation.

Wondering where people are putting all those heartfelt dollars and how all this consumerism is affecting the economy? Here is a brief rundown:

Candy

According to the NRF survey, candy will remain a popular item among consumers with 47.2% planning on purchasing candy for their valentines this year. Valentine’s Day candy sales generally account for about 4% of total yearly candy revenue according to the National Confection’s Association. Industry sales estimates for the week of Valentine’s Day in 2009 topped $448 million.

Flowers

According to the Society of American Florists, Valentine’s Day is considered the busiest holiday for fresh flower sales, accounting for 40% of annual revenue. But with Valentine’s Day falling on Sunday, florists are expecting lackluster business. The NRF reports that 35.6% of consumers are still planning to buy flowers this year, and according to the industry research firm IBIS World, total flower sales should hover around $1.35 billion.

Cards

Credit: http://www.flickr.com/photos/mlehet/100261919/

Greeting cards remain a Valentine’s Day favorite for consumers with 54.9% of those surveyed by the NRF stating that they are planning to buy them this year. According to Hallmark Research, Valentine’s Day is the second most popular time for sending greeting cards (Christmas takes the top spot), and according to IBISWorld, total greeting card sales for 2010 are estimated at $784.30 million.

Other Gifts

The weeks preceding Valentines Day generally bring a spike in jewelry sales. But all indications suggest that this year the sales of jewelry items will be sluggish as consumers continue to hold back on spending. Of those surveyed by the NRF, 15.5% of consumers will be purchasing jewelry (down from 16%), while clothing and other accessories will be sought by approximately14.4%. IBISWorld projects about $1,308 billion and $1.31 billion in sales respectively.

Eating Out

This year, 35.6% surveyed by the NRF are planning to celebrate the holiday weekend by eating out. According to IBISWorld, since Valentine’s Day comes out on Sunday, the number of consumer dollars spent on dining out is expected to increase from last year to roughly $7.86 billion.

Romantic Getaways

Photo: http://www.flickr.com/photos/photon_de/3289196475/

The holiday weekend should also see an increase in travel and local romantic getaways. IBISWorld projects Valentine’s Day travel to generate some $2.05 billion.

Other Purchases

Aside from these categories, Valentine’s Day is sure to drum up business for those who sell party favors. The sales of electronics should also see an increase as well as the sales of movie tickets.

And now a couple of things to make you go “hmmmm”…

Treats for Your Pets

According to the NRF’s survey, the average person will be spending $3.27 on their four-legged companions. Huh? No comment.

Spyware and Surveillance Equipment

Last year, USA Today reported that the demand for tracking devices and private investigators surges around Valentine’s Day as suspicious individuals try to catch their spouse’s infidelity. Whoa, way too much to comment on…

How will you be spending those Valentine’s Day dollars this year?

How Valentine’s Day Helps the Economy provided by fastupfront.com.