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/how-local-economies-benefit-from-big-sporting-events/ http://www.mint.com/blog/trends/how-local-economies-benefit-from-big-sporting-events/#comments Tue, 02 Feb 2010 22:35:03 +0000 Joshua Ritchie http://www.mint.com/blog/?p=8317 ]]>

(DaveyNin)

Local economies are historically the biggest victims of recessions. When the market takes a turn for the worst, it is local shopkeepers, restaurant owners, hotels and other merchants who feel the squeeze most personally. Accordingly, most cities are eager for any economic stimulus they can get. Over the years, one of the great economic boons to any major town or city has been major sporting events. No matter how bad the economy has been, there is nothing like a World Series, Super Bowl, or World Cup game to infuse some much-needed vitality into local markets. Many fans believe the locations of these events are an afterthought, but economically speaking, nothing could be further from the truth. During the 2009 World Series, for instance, ABC estimated that the event was “…expected to funnel some $25 million into the local economy” of Philadelphia, including “…$3 million or more directly to the city in taxes.” Given the amount of money at stake, and especially the current economic climate, a deeper examination of how local economies benefit from major sporting events seems timely.

Hotel Reservations

Among the most obvious ways a city benefits from hosting a premier sporting event is a surge in hotel reservations. Naturally, the many fans, onlookers, journalists, and friends and family of the athletes need places to stay for the duration of the event. This is true even for events like the Super Bowl, which only last one day but are purposely held in tourist-friendly areas to encourage extended stays. (This year’s Super Bowl XLIV, for example, is slated to be played in sunny Miami, Florida.) Indeed, a spike in hotel reservations is a driving force behind the intense competition that occurs between cities to host the Super Bowl. A January 2009 article from Bradenton.com predicted the economic impact of last year’s Super Bowl between the Pittsburgh Steelers and Arizona Cardinals by interviewing hotel owners in Tampa. Patti Davis, owner of Harrington House Bed & Breakfast on Anna Maria Island, confirmed that, “…it does add quite a bit to our business.” USA Today likewise predicts that fans will fill, “…an estimated 110,000 hotel rooms during the 10-day buildup” to Super Bowl XLIV, in addition to the NFL having reserved, “…the entire 433-room Westin Beach Resort in Fort Lauderdale” as its base during the event.

(Alan Light)

Hotels can benefit even more during events like the World Series, which encompass several games in a given city. Joe Broderick, a doorman for forty years at Center City’s 10,400 room Latham Hotel, spoke excitedly last fall about the, “…uptick in business only the sport’s biggest spectacle can create.” The NHL’s Stanley Cup Finals are another boon for nearby hotels, given the potential for a full seven game series. Pittsburgh’s Business Journal, for instance, reported in June 2009 that, “…a number of hotels are fully booked, including the Omni William Penn, which hosts the NHL’s management, the Renaissance Pittsburgh, with the caveat that it always sells out Tuesdays and Wednesdays anyway to business travelers, and the Westin Convention Center”, whose general manager, Tom Martini, commented, “…we would’ve been busy, but we wouldn’t have been selling out” after all 616 of his rooms were booked.

The World Cup draws immense crowds of its own. Cape Business News, for instance, cites an expected, “… influx of 3 million additional visitors to the country” who are projected to pump, “…an estimated $21.3 billion into the South African economy”, no small portion of which will go to lodgings. Naturally, hotel owners have found that they can raise rates in anticipation of these events, knowing that (within reason) fans who are dedicated enough to travel for the event will pay whatever it takes.

Restaurants & Bars

As noted earlier, most major sporting events are hosted in tourist-friendly metropolitan areas. Such areas are well-equipped to entertain the throngs of people who travel for the events before and after it takes place. One major facet of this is food and entertainment. Take a typical example of a family or a group of buddies who visits a city for two World Series games. At minimum, these people can be expected to buy four to six meals at area restaurants. And it’s not just the eating that takes place before the game that fattens a local economy’s bottom line. Arizone State University points out the, “…tabs and tips at local restaurants and taverns, and food and drink for countless house parties and block parties” that take place during the event itself (such as the Super Bowl.) The Detroit Free Press reported in 2007 that Tigers fans “spend enough money outside the stadium to make the Tigers’ pennant chase lucrative” during that year’s World Series, which led nearby franchises like Little Caesars to participate with World Series-themed sales, according to Franchising.com. RealEstateChannel.com likewise cites the boost Orlando’s local restaurants received from the Magic’s NBA Finals run in 2009. Citrus Restaurant general manager Joe O’Grady was specifically quoted as saying, “…Citrus has seen a huge increase in business for the playoff games.”

(LoveJanine)

Sports bars get an even bigger boost from their city hosting a major sporting event. Fans who can’t afford to attend often opt for the next best thing: watching on huge, flat-screen TVs with crowds of rowdy, inebriated fans. The World Series provided an apt example last year. With playoff profits “…six times bigger than usual” (according to ABC) Philly’s Cavanaugh’s Rittenhouse sports bar was hardly the only establishment pulling for the best-of-seven series to go the distance. NJ.com quoted Jack Monsousos, owner of Hamilton, New Jersey’s Publick House, as expecting, “…between 50 and 75 extra patrons during series games, which could bring a $1,000 bump in sales.” Chicago-based research firm Morningstar even opined that the Yankees’ World Series appearance “…could be better for business than the Giants’ Super Bowl run during the 2007 season.” The story is the same for World Cup soccer. The UK’s Times Online reported in December 2009 that ,”…among the biggest winners” of the projected £1.5 billion- £2 billion in expected revenue this summer “…will be pubs and clubs showing matches on big screens and off-license catering for those watching at home.” In total, “…the industry could earn more than £150 million extra for every week that England survives in the competition.”

Gentleman’s Clubs

One local beneficiary of major sporting events that seldom gets much press attention are gentleman’s clubs. Bradenton.com interviewed University of South Florida economics professor Philip Porter, who contends that ,”…the only true beneficiaries are businesses like gentleman’s clubs that cater to the predominant 18-60 year old male crowd” in his scholarly study of the economic impacts of Super Bowls. It’s not the most heartwarming of stories, but AZCentral.com concurs, citing the 43 strip clubs in Tampa’s metropolitan area and the fact that, “…the week of Super Bowl XLIII is to Tampa’s naughty nightlife what Black Friday is to America’s shopping malls.” In fact, the expected surge in adult entertainment spending even prompts local clubs to, “…audition more dancers and upgrade their interiors”, with some establishments staying open 24 hours. A dancer named Claudia, who has worked four Super Bowls and was interviewed by AZCentral, admits to making, “…as much as $2,000 a day” at previous Super Bowls – not bad for a 25 year old! The Tampa Tribune did its part to assist in 2009 by helpfully, “…adding a feature to its Web site listing the 43 strip clubs and allowing Super Bowl visitor to search for such information as the cover charge and dress code.”

(Alex Castella)

Again – with all the feel-good stories making the rounds during the Olympics, Super Bowl, World Series or World Cup, you aren’t likely to hear very much about the surge in local strip club business. But it is nevertheless a huge beneficiary of the event for as long as its participants are in the area.

Bottom Line

As we have seen, major sporting events bring more to a city than fan excitement. In addition to the thrills of game action, these events routinely funnel tens of millions of dollars – and sometimes hundreds of millions – into the surrounding area in the form of hotel reservations, bar and restaurant sales, snack and party supplies, and “adult entertainment.” Far from being incidental, the location of a major sporting event can be instrumental, which explains why cities compete intensely for the right to host one.

]]> http://www.mint.com/blog/trends/how-local-economies-benefit-from-big-sporting-events/feed/ 6 http://www.mint.com/blog/trends/the-financial-reform-bill-highlights-need-for-real-reform/ http://www.mint.com/blog/trends/the-financial-reform-bill-highlights-need-for-real-reform/#comments Mon, 14 Dec 2009 22:52:03 +0000 GE Miller http://www.mint.com/blog/?p=7544 ]]> Creation of the CFPA & More

On Friday, the House of Representatives passed the Wall Street Reform and Consumer Protection Act (aka HR Bill 4173). The vote was 223-202. If it were to pass the Senate, the bill would create the regulatory Consumer Financial Protection Agency (CFPA) in addition to other Wall Street and financial institution directed reform measures.

Republican Opposition

Obama applauded the passing of the bill, but blasted Republicans and finance lobbyists in his weekly address and on a 60 Minutes interview airing on Dec. 13 for trying to prevent reform in light of the 2008 economic collapse. Zero Republicans were in favor, (in addition to 27 Democrats who opposed the legislation). Last week, top House Republicans urged more than 100 financial industry lobbyists to work harder to defeat the bill. Lobbyists have spent more than $300 million this year trying to shut the bill down. Republicans argue that the CFPA would limit product innovation and dictate what type of loans consumers should receive in certain situations.

According the White House, as stated on
financialstability.gov, the CFPA would:

1. Provide protection against unfair credit card rate increases and late
fee traps.
2. Set guidelines for simple “Plain Vanilla” mortgage products.
3. Duties of care for mortgage brokers to avoid broker conflict of interest.
4. Ban unfair side payments from lenders to mortgage brokers.

On Executive Compensation

The bill would also oversee executive compensation practices (although not the compensation amounts). In the 60 minutes interview, Kroft asks Obama if he thinks that bailed out banks repayed TARP money just to avoid government oversight on compensation and pay. “I think that in some cases, [to be able to pay bonuses] was the motivation,” Obama responds. “Which I think tells me that the people on Wall Street still don’t get it…They’re still puzzled why it is that people are mad at the banks. Well, let’s see. You guys are drawing down 10, 20 million dollar bonuses after America went through the worst economic year…in decades and you guys caused the problem.”

Watch CBS News Videos Online

In all fairness, they do seem to get it, they just don’t seem to care.

Bittersweet Response from Consumer Groups

Some consumer groups see some benefit in the CFPA, yet argue that the bill does little to address breaking apart ‘too big to fail’ financial institutions such as Goldman Sachs and JP Morgan into pieces (to protect against systemic failure). Others note that the bill does nothing to help those in foreclosure situations or address complex derivatives, the likes of which brought down AIG. Three amendments to address derivative oversight were voted down.

Two members of the Progressive Caucus — Reps. Dennis Kucinich (D-Ohio) and Marcy Kaptur (D-Ohio) — also voted against the final legislation because they were concerned that it didn’t go far enough to help consumers.

Final Thoughts

It is very clear that financial institutions and their lobbyists have had a heavy hand in reshaping the WSRCPA to be a shadow of its former self. Sadly, it’s unclear whether the consumers and taxpayers (whom the bill was originally created for) will be better off should the bill pass the Senate in early 2010.

Perhaps the reform that we need most would come in the form of the regulation of lobbyist activity and campaign contributions. The Center for Responsive Politics found that members of the House who voted against the measure collected 70 percent more from commercial banks since 1989, on average, than those supported it. And they raised an average of 50 percent more from credit and finance companies than the bill’s supporters, the CRP found.

I vote for reforming the reformers.

For more of GE Miller’s writing, visit personal finance blog
20somethingfinance.com.

The government is telling us that the economic stimulus is working and the recession is over. But you wouldn’t know it from looking at the unemployment numbers. While we may have dodged another great depression, unemployment is at its worst since then, having fallen to 10 percent by the Fed’s own reckoning. And, while we don’t like to be the bearers of bad news, we do stand for transparency in reporting statistics. So we’ve produced an animated infographic explaining who gets to call themselves ‘officially’ unemployed, and why the government leaves out millions of jobless Americans in their often cited and repeated unemployment rate statistic. So while the economy may be recovering, it might be awhile before many Americans feel it in their wallets.

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In today’s economy, the percentage of employees across all industries who will receive a raise is down…way down.

You’re probably working harder than ever to hang onto your job and receiving less financial payback than you should. As friends and colleagues continue to get laid off or struggle with unemployment, you don’t feel justified in “pushing it” to demand the pay increase you know you deserve. You feel lucky to even have a job. You’re afraid to rock the status quo and risk being rejected, demoted, or worse, fired.

Joel Garfinkle, acclaimed career coach and author of Land Your Dream Job and four other impactful career guidance books insists that now is a better time than any to ask for your well-deserved raise.

Read on to learn why it’s necessary to negotiate a salary increase in a down economy and how to go about doing it successfully.

Why ask now?

Your fear isn’t rational

“Never in my 13 years of being a career coach, has anyone ever been fired for asking for a raise,” says Garfinkle.

In this economy, it’s difficult to predict if your boss will be financially able to grant you more pay. But Garfinkle asserts he can guarantee your boss is going to have more respect for you if you spend the time to ask for a raise. It’s this respect that’s going to differentiate you from your colleagues when it’s time for lay-offs and promotions. Asking for a raise is a crucial strategy to solidify your importance to your company and retain your job. That’s right, you’re actually less likely to be fired if you ask for a raise. How’s that for ammunition?

The art of asking

In a down economy, it’s very important to remember that your boss is under more stress now than ever. Address this by entering the salary discussion with a phrase like, “I realize the company is financially strapped more than in years past, but there are a lot of things I’ve achieved to increase our profitability. I’d like us to take a second look at my compensation together.”

Confidence

No matter where, how or when you negotiate for your raise, the most important thing to have in your arsenal is confidence. Drum it up by doing ample prep work before entering the salary conversation. Garfinkle recommends creating a list of fact-based, quantifiable data to illustrate your accomplishments. Make sure you state the financial impact each item had on the company. Here are the things to include:

1. Goals met
2. Responsibilities filled
3. Projects completed successfully
4. Problems solved
5. Experience gained
6. Expectations exceeded
7. Positive feedback and praise from colleagues and clients
8. Innovative ideas
9. Successes of your group or department

If compiling your dollars-and-cents argument hasn’t helped with complete confidence, consider these additional strategies from Garfinkle:

Know your monetary value. Human Resources departments agree that it costs them one and a half times your salary to hire a new person due to training costs. The dollar amount you’re asking for is minor in comparison to that – not to mention the hassle your superiors would face in finding someone new.

Envision your “impossible” number. One of Garfinkle’s greatest strategies for gathering confidence is to have a salary number in mind you feel you could never ask for. Structure your argument with the hard data you would need to make a case for that “impossible” amount.

Avoid emotions. Stick with numbers. Ego-driven or emotional arguments such as “My staff really responds to my leadership.” or “I deserve the raise.” are easy to refute. Facts like “I increased sales by a $3,000 dollars.” or “Under my leadership, employee turnover rate was reduced 25 percent.” are much harder to turn down.

When to start negotiating

It depends on the circumstances, but it’s customary to ask for a raise every 12 to 18 months. If you received a raise that’s too low, it’s fine to ask your boss if you can have another discussion in 4 to 6 months.

So how do you know if your salary compares to that of your industry peers? Garfinkle recommends the calculation tools on the following web sites to assess how your pay measures up: Jobnob.com, SalaryExpert.com, and the “Pay and Benefits” tab on the Bureau of Labor Statistics web site. When you know you’re not making as much as others who hold comparable positions, you can be more aggressive in asking for a raise.

Garfinkle asserts the best times to approach your boss are after you’ve completed a huge win for the company or at any time when you know that your boss is feeling good about you. Choose the least stressful time of the week for your boss: whether it’s Wednesday afternoon or after she’s met a huge deadline. If it’s appropriate in your office culture, ask your boss to meet you for coffee so you can discuss what you’ve done for the company in a low-commitment environment outside of the office.

What to expect

When you’re going in to ask for a raise, you need to be prepared for rejection. Garfinkle coaches his clients to expect rejection, so that they are ready with their retort.

Get ready for phrases like “We can’t afford it” or “No one else has gotten a raise, so why should you?”

“No” is a green light

Take an initial rejection as an invitation to pursue different avenues of negotiation. When your boss throws out her defensive “no” phrase, restate the positive points you made about yourself earlier and then calmly and compassionately ask if other perks are feasible. Extra health benefits, tuition reimbursement, work-from-home days and professional group or gym memberships are great ways for your employer to compensate you if they can’t afford to give you a raise. The money you save with extra employee benefits may seem like small potatoes compared with the raise you were gunning for, but the dollars saved will add up at the end of the year.

If you walk away with no additional compensation, make sure you set up a re-evaluation meeting in six months. Ask your boss what tangible things you can do between now and then to get a raise. Then do them.

Now that you’ve got the guidelines, asking for a raise may still seem daunting. Get started anyway! Check out the salary calculators. Envision that impossible number, and get cracking on the reasons your company should increase your pay. The bottom line is: no one’s going to give you the money you deserve, unless you ask for it and explain why you deserve it!

Yomanimus

Making money in real-estate is all about timing. Despite the fact that many people lost not only their shirts but their homes in the mortgage meltdown, real-estate has historically been considered a safe investment. But if current trends continue, there may be more bust than boom. In fact, we may never see a mortgage market as booming as it was during during the early 2000’s. In addition to the flood of new homeowners, the housing boom saw an unprecedented number of speculators acquiring multiple properties, hoping to capitalize on ever-increasing housing prices. The combined effect of all this activity was a mortgage market of tremendous size – roughly $10 trillion in residential mortgages by late 2007, which equates to nearly a quarter of the total debt market in the US. But every boom eventually busts, and since ‘07 the mortgage market has shrunk into a shell of its former self.

It should here be noted that the shrinking mortgage market is not only, or even primarily a US problem. BBC News reported in November 2008 that it was likely that, “…net new mortgage lending – gross new home loans minus repayments and redemption – would fall below zero in 2009 and see only a modest recovery in 2010.” These remarks were made following 2007 where net new mortgage lending stood at £108bn. Similarly, the UK’s Independent reported the findings of a study by Nationwide predicting that, “…the UK mortgage market will contract by 80% this year [2009],” and also that, “…house prices will fall for another 12 months.” Nationwide group development director Tony Prestedge estimated the total value of the mortgage market to be £18bn in 2008, compared with £90bn in 2007. Both estimates reach the same chilling conclusion of a drastically shrinking market.

The effects on the US market have, of course, been more prominent in the news. While the recent lowering of interest rates has spurred some activity, HousingWire.com recently reported that the number of mortgage applications filed in the week ending September 25 declined 2.8%, “…on a seasonally adjusted basis”, citing the Mortgage Bankers Association’s survey that measures total gross applications in the US. The refinancing index is also said to have decreased (albeit only by 0.8%) while the purchase index fell 6.2%. Another weekly survey, Mortgage Maxx, reached similar conclusions. After adjusting to “account for multiple submissions by the same borrower”, Mortgage Maxx found that total applications declined by 7.3% in the same week.

Casey Serin

Trouble began brewing before this year, however. According to BuilderOnline.com, 1 in 3 mortgage applicants was turned down in 2008 (a 32% denial rate) the same year that total mortgage applications were down by a third from 2007 and at less than half of 2006 levels. Even such mortgage activity as took place was largely of the government-backed variety. According to BuilderOnline, “…loans backed by the Federal Housing Administration soared to 21 percent of all loans made last year [2008] from less than 5 percent in both 2005 and 2006.”

The fallout from the housing bust has even affected tiny countries thought to be irrelevant to a crisis originating in the US. Bulgaria, for instance, saw the size of its mortgage market shrink twenty times in the first two months of 2009, according to Novinite.com. Only BNG 18 M was invested during January and February, as opposed to the BGN 355 M that was invested during the same months in 2008.

WoodleyWonderworks

All in all, the housing bust and the recession that followed have made for tough times in the mortgage market. Because mortgage-backed securities were packaged and sold to investors all over the world, what began as a US problem is very much an international problem with international repercussions. The silver lining (if there is any) may be found in the aforementioned recent lowering of loan interest rates to below 5%. As Reuters reported on October 7 2009, new mortgage applications are at a four month high. As a “tentative early indicator of sales”, these numbers may hold promise for the mortgages Nevertheless, substantial growth remains to be seen.

This second question should be just as important to you because of the ways the overall US and global economies can affect you personally, regardless of how well you’re being served on your own accounts by the financial industry. This is about keeping your job or finding a better one, access to credit for a new home or a new business, the performance of your investments, the safety of your retirement, the chance your taxes will have to bail out more companies, the level of inflation affecting your purchasing power, etc.

There has been considerable financial deregulation for several decades and ripping up the rules of the road got us into big trouble,” White House economic advisor Austan Goolsbee told MintLife in a briefing last Friday. “Now we’re pushing back against that trend in a way that is smart—not excessive—with more aggressive and robust oversight.”

Minimizing Risk

All of these variables come down to the issues of risk, reform and regulation being debated in Washington this year. After decades of deregulation and don’t-get-caught policies, the Obama Administration and Democratic lawmakers are promising a new era of adult supervision.

“We can’t protect people from losing money if they make a mistake,” he warns, but adds, “We have to have transparency, make the rules clear and get rid of unfair predatory practices.”

Goolsbee points to the need for better oversight in three ways:

1. Some risky activities are missed today because they slip between the supervision of seven different financial regulatory bodies (see below). Subprime mortgages are an example, because only one-quarter to one-third of the loans were being made by regulated deposit-taking banks. The rest were being made by unregulated finance companies.

2. Other risky activities aren’t supervised because those regulatory bodies were set up before these new practices were devised and new laws aren’t keeping up with complicated new innovations in the market. One example is credit default swaps (essentially insurance on debt, or insurance on the insurance, and so on until you don’t even know what you are insuring) which sunk Lehman Brothers and AIG and started the dominos crashing.

3. And finally, new types of financial institutions are growing to gigantic proportions, but then failing through risky activities without a way for government to step in, renegotiate contracts, or liquidate bankrupt company or customer assets when investors’ value goes to zero. For example, the FDIC can do this with banks, but the government had no legal authority to seize Lehman the same way. Without the authority to “resolve” these institutional failures, the government can only throw good money (yours) after bad (theirs).

The Great Depression demonstrated that even private institutions could become “too big to fail” and pose risks to the whole system. So what Goolsbee and the Obama Administration are looking for are ways to improve regulation to avoid those “systemic” risks. Goolsbee divides the issue of systemic regulation into twin tracks: one is how to deal with systemically important or threatening institutions; the other is how to think about emerging systemic threats in the form of new instruments. That is, watching for new financial innovations, such as derivatives trading or credit default swaps that might pose risks to more than just those that invest in them.

Goolsbee admits this is tricky. Not all financial innovations will be good, but not all have to be good for society. “You can’t ban a financial instrument because somebody might make a bad bet and lose their money,” he explains. “The point of the administration’s plan is that we should be concerned about those financial innovations that pose risks to the whole system.”

Centralized Reform

Under current laws, the financial industry is essentially supervised by seven government bodies: the Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, Federal Trade Commission, Office of the Comptroller of the Currency, and Department of Housing and Urban Development. New proposals call for consumer-related protections to be streamlined and consolidated under one umbrella at the CFPA. The Federal Reserve would continue to set monetary policy and keep responsibility for monitoring day-to-day systemic threats. Meanwhile, the administration also wants a new broad-based “systemic risk council” of financial regulators to watch for emerging or long-term systemic dangers.

“The council is designed to keep an eye on the horizon for the next thing like credit default swaps, to say ‘this is menacing to the system’ and apply higher capital requirements or assign it to be regulated according to some method,” according to Goolsbee. In other words, watching “things rising up that are not within the existing regulatory apparatus, where there is some identification that there are threats to the system, not just to the individual institution.”

“It is imperative that there be a central authority so that there is one set of standards applied across the whole marketplace,” he adds. “The president is committed to addressing issues like systemic risk and systemically important institutions. Somebody should be on them all the time, making sure they have enough capital so they can’t threaten the whole system.”

Again, Goolsbee cautions that even a forward-looking panel can’t regulate based on what every financial innovation might mean for society. You can’t require someone with a financial innovation to document how it would benefit the real economy. “For financial innovations that are brand new that are not systemically threatening in any way, it’s extremely difficult to document the impact of a specific financial product on productive behavior. I don’t know how we would put that in practice,” he explains. “How would we evaluate that? But the standard that is achievable by regulators is to ask, ‘does this product pose a systemic threat to the financial system?’”

“We have got to reestablish rules of the road that form a core of stability for the financial system. That means we can’t allow huge loopholes on anything that is fundamentally about systemic risk,” he says. “So if somebody talks about fundamentally changing rules to allow big systemic risks again that aren’t under anybody’s jurisdiction, or that can squeeze between the regulatory cracks, the president isn’t going to allow that to happen.”

The White House is calling for new “rules of the road” on three levels: protections for individual banking and credit consumers against predatory lending practices, abusive credit card terms, and unfair charges and fees; protections for individual investors against unclear terms and undisclosed risks in their portfolios; and protections for workers and taxpayers against another catastrophic economic meltdown caused by irresponsible practices.

Steve Barth has worked internationally with banks, governments and NGOs on microfinance and economic development. He blogs at Reflexions.

Photo: Plug 1

Ever driven through a neighborhood and noticed there is a bank in almost every block corner? It’s easy to spot a well developed and financially stable neighborhood by the number of banks it has. But if you take a turn into a neighborhood that’s struggling, it’s almost impossible to find a bank branch and the only ATM available is in the local bodega that charges a high fee for its use. These are the so-called unbanked or underbanked communities and it’s where a new breed of banking is surfacing. These hybrids of banks and check cashiers are popping up in under-developed areas where affordable and convenient banking services are needed to serve low-income earners.

Unbanked communities made up of people who are not part of the mainstream of banking customers are not a small group. According to a June 08 survey by The Center for Financial Services Innovation, it is estimated that 40 million US households (106 million individuals) are either underbanked or unbanked. That means that the individuals who make up this number either have only a basic checking or savings account or no bank accounts at all. 685 banks responded to the survey sent out to 1,300 banks. 53% of those who responded said that they teach financial literacy and education sessions targeted towards these communities and 25% designed marketing strategies aimed at them.

Individuals in unbanked communities are mainly immigrants, low-wage earners and minority group members who go to check-cashing facilities to cash their work checks often at high fees. Reasons for going to these high fee facilities include distrust of the banking system and the need for transparency. According to surveys, low-income wage earners looking to cash their checks feel that the best place for this transaction is a supermarket or a check cashier facility where they know the exact fees. This is in contrast to banks where there is a lack of transparency and fees are not always clearly laid out. Distrust of the banking industry has reached new highs in the wake of the financial crisis, even among those who bank with more traditional financial institutions. It seems everyone wants visibility into what’s going on with their finances these days. However, the drawback to not having a bank account is that unbanked communities are unable to build a credit history or take advantage of interest accruing accounts.

Banks that cater to these unbanked communities have been increasing over the past several years. Many banks and other organizations have realized the potential for growth and economic development by banking these underrepresented areas. For example, in 2003, Key Bank started a check cashing service in Cleveland and by the end of 2008, Wal-Mart opened 1,000 Money Centers across the U.S. Wal-Mart’s Money Centers offer a variety of services including low cost check cashing with wire transfers and utility payment services. Conventional banks such as Citibank has also taken an interest in unbanked areas and sees the potential. It partnered with the United Way of Greater Los Angeles (UWGLA) to create the UWGLA Saving for the American Dream asset- building program which helps promote economic development to low-income families by mitigating language and cultural barriers and meeting the banking needs of the these areas.

Low-income neighborhoods benefit from these new banking facilities from the services they offer such as payroll cards. These are stored- value cards issued by employers instead of paper paychecks. Like direct deposits at commercial banks, the money is deposited directly into a bank account from which the employee can use the card to withdraw money from an ATM machine. Opening a checking and savings accounts is also easier since these banks offer very low minimum balances and fees.

In addition to Key Bank, Citibank and retailers like Wal-Mart who have expanded their services to include unbanked individuals, other facilities like CheckSpring have been created solely to service these neighborhoods. CheckSpring is a development bank founded in 2007 and headquartered in Bronx, New York. The bank offers personal loans, credit building services, residential mortgages and home equity loans and lines of credit. In addition to check cashing, bill pay, money transfers and online banking, the bank serves businesses in the area with commercial lending, currency services and checking and savings accounts. Prior to the recession, many cities had major branch openings from banks like Washington Mutual, HSBC and others. However, this Bronx community had not seen a bank branch opening in the past 25 years.

The transition to becoming banked has worked well, most of the customers who come into CheckSpring for check cashing services end up opening bank accounts by enrolling in a savings clubs. The savings club later converts into a regular savings account when a certain balance requirement is reached. This is the ultimate goal of these developmental banks, to convert unbanked individuals to bank account holders.

It’s evident that more banks see the economic potential of these communities and are trying to gain market share by targeting the areas that where ignored in years past. While many banks have either expanded into these communities and new developmental banks have sprouted giving these areas an economic lift, there are still many underrepresented places without adequate banking services.

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