Two Things to Fix the Recession

There are two things needed to fix this recession.You should lobby government for the following:

1. fix housing - they need to create the bad bank, get all bad mortgages out of the banking system. This will enable banks to lend again. And then they need to peg 30 yr mortgages at 4 % to strictly qualified buyers. This will increase demand for housing as people trade up or buy their first home. When people buy a new home, they spend more money to fix it up. For others, refinancing a home will put more cash in their pockets to spend or pay off bills. In addition auto loan rates might be reduced. This will go farther to fix detroit than a stupid detroit bailout.

2. They need to significantly cut taxes to increase take home pay for Americans - perhaps for 1 or 2 years. Citizens will spend the money across a broad variety of goods and services thereby benefiting the entire economy. A tax cut provides an immediate stimulus - no need to wait for government to bid out projects and choose vendors, which can take forever.

The problem with the current stimulus is three-fold:

One - they're giving a boatload of money to states. States have huge budget gaps. The federal money will be used to close the gaps. But it will not result in any increase in spending over last year. It cannot possibly create new jobs, just keep existing ones for one more year. We'll be in the same boat one year from now.

Two - governments take forever to spend money on projects. Meanwhile we all suffer.

Three - letting the government pick winners is ridiculous. So if they choose to spend all the money on building highways and bridges - how will that help the 99% of people that don't work in construction related industries? It is an uneven distribution of spending which will not stimulate the broader economy. Centrally managed spending has always been a disaster throughout history - look at all of the failed socialist and communist states - and yet here we are heading in that direction.

California asks the Federal Government for emergency loan

cnyexpat: California asks the Federal Government for emergency loan

The credit crisis is spreading. If you read this article you will see that for the first time ever, the State of California needs to ask the Federal Government for a $ 7 Billion loan to be able to make payments to schools, payroll, and also pay unemployment benefits. The need to borrow money is normal because cash collections from taxes are uneven relative to the time payments have to be made.

Normally, state governments and municipalities borrow money in the form of short term loans from the credit markets. But the credit markets have been shutting down, no one wants to take the risk of lending money to someone else and risk not getting paid back. The interest rates on the loans that are available are sky high. Lenders are worried that California's economy may collapse and they won't get paid back. Other states are canceling plans for infrastructure projects as they can't borrow funds.

The government bailout is desperately needed to calm down the markets.

What started the rush for a bailout?

People don’t understand or remember that just 2 weeks ago, two money market funds announced that the value of investor’s principal dropped below $1 a share. Money market funds are supposed to pay interest on a fixed principal amount that is deposited. They are supposed to be the safest place to put cash besides a T-Bill or a bank savings account.

Guess what, when the news came out that the principal amount that people had invested dropped below their original amount at these two money market funds, the funds suddenly looked very risky - like a stock mutual fund. Why did this happen? - its because the government allowed Lehman Bros to fail due to bad mortgages. Those two money market funds had substantial investments in Lehman Bros loan portfolio.

A panic run started where individuals and institutions started pulling money out of what they thought were “safe” money market funds. Those money markets had to sell a lot of bonds to raise the cash for redemptions, further driving down prices of everything.

This event is the one thing that caused Secretary Paulson to put together an emergency plan overnight. To stop worldwide investors from pulling out of everything, including money market funds. Money markets are very important as they provide short term loans (30 to 270 days) of their deposits to businesses.

Folks - Forget about the fat cats. This is all about you and your financial security or lack of it.

Congress blew it on the bailout

Congratulations to you taxpayers who who were adamantly opposed to the $ 700 billion bailout. Today - the House of Reps voted against it. Immediately the stock market plunged to its biggest point loss in history (777 points on the DOW). International markets are plunging around the world. The U.S stock market has lost $1.4 TRILLION in value today - that 2X the $ 700 billion plan. If we had completed the $ 700 billion bailout, most or all of it would have been recovered and there may have even been a taxpayer profit made of up to $ 2 Trillion.

Everyone is way over-exaggerating the bailout at $700 Billion. What people don’t understand is that this money is not being spent - it is being invested in assets (loans) at fire-sale prices. These loans will be restructured and re-sold over time and taxpayers will make a profit.

We are collectively $ 1.4 Trillion poorer today. This number will increase if panic ensues. Be prepared to watch your Pension Plan fold up and not pay any benefits, your IRAs and 401Ks go to half of what they were. Be prepared for many of your insurance providers to fold up and not pay you a dime. Be prepared for your employer to stop giving you a paycheck because they can't get the short term loans and cash they need to make payroll.

The taxpayers have just shot each other in the foot. Why - because of a complete misunderstanding of how our economy works and because the media has fueled the fire of populist emotion without clearly explaining the logical conclusion of these bailouts - which are not nearly that bad. Lets just hope its not a fatal wound.

Please comment, debate and reply to this post ...

The Truth about the $ 700 billion bailout

In my opinion people are greatly over-reacting to the proposed $ 700 billion "bailout" that Congress is reviewing to save both Wall Street and Main Street. The over-reaction is largely the fault of the media which loves to hype negative headlines while not fully explaining the situation.

It is understandable for American taxpayers to be angry over what has happened on Wall Street. Make no mistake - both parties are to blame. Since the time of the Clinton administration, the Democratically controlled Congress greatly pressured institutions to enable home ownership for everyone and put significant pressure on Fannie Mae, Freddie Mac, and the financial system to accept low credit quality applicants, on the premise that rising housing prices and an improving economy would make it affordable to the homeowner. Meanwhile, the Republican controlled Congress prevented regulation from being put in place (on things such as credit default swaps) to make sure that things didn't get out of control. You definitely cannot blame this mess on just the Bush administration.

Getting on to the $ 700 billion. Folks, this is not a situation where taxpayers spend $ 700 billion and never get it back. The media makes it sounds like the money is flushed down the toilet. This is completely untrue. In fact, the government is likely to book an enormous profit on this transaction which will go a long way toward reducing our deficit.

The $ 700 billion is being used to purchase mortgage loans at a deep discount to their original value. The government may buy loans at 30 - 50 cents on the dollar and the banks that sell them to the government will take huge losses in exchange for the cash from the government. Most of these loans are actually being repaid. The government will restructure the mortgage payments of those who are unable to make the payments. They can easily do this and not lose money because they did not pay full price for the loan. Another factor in its favor is time, the government does not have the quarterly earnings pressure that banks have. As the economy improves and housing stabilizes and increases in value, and as more borrowers consistently make payments, the value of these mortgages will soar. As other institutions see that the government bought these assets at a deep discount, and that many of the loans have been restructured to be payable, there will be a great demand to buy them from the government. The Feds will sell the loans to these buyers at a tremendous profit, with estimates that the taxpayer will profit in the range of $ 700 billion to $ 2 trillion. Yes- thats right - $ 2 Trillion. We could use that right about now.

And the worst case scenario is that the government doesn't make a profit. How much of a loss do you think it would take? Since they bought these assets at a steep discount, probably no more than $ 50 - 70 billion. Thats much less than we spend in Iraq in one year.

The one thing that is extremely uncomfortable is that according to capitalist theory, governments should not interfere with markets - they shouldn't invest in them or take over businesses. Normally this is true, but in the case of a crisis that has the potential to impoverish virtually all Americans, radical action is necessary.

There is huge upside and negligible downside here. Yet taxpayers are deceived into thinking that they are spending $ 700 B. Stupid, irresponsible media. They are not spending it, they are investing it! And if they don't do it they will see all of their investments, including money market funds, head towards zero really fast. Implications - no spending money, no retirement, and also no more work...

Trading stocks at the Market Open

Sometimes you discover a stock overnight that you would really like to own. Perhaps there was good news that you expect will cause it to go higher. Many people will place a market order to buy the stock the next day. If this order is placed, it will go into a queue of orders to buy that stock at 9:30 AM EST the next morning. All of the overnight buy at market orders accumulate so that the next day at the open there is often huge demand to buy the stock. Since the pent up overnight demand is so high, people that want to sell the stock can demand much higher prices. Thus the stock will open at a very high price and climb higher until all of the overnight demand is exhausted. When you place an order to buy at market you have no control over what price you will pay as the price climbs higher. Often times the price will then decline as the buying demand is exhausted, so you will not have gotten the stock at the best price.

A better strategy is to wait until 10:30 AM to place an order to buy the stock. Placing a market order at 10:30 AM is safer than at the open. By 10:30 the demand will have stabilized. It is also safer to place a market order with a stock that trades in high volumes each day and has a small bid / ask spread. It is usually preferable to place a limit order rather than a market order so that you know what price you will pay, but market orders are fine when the bid ask spread is small and the trading volumes are high in a stock (1 million shares or more per day).

The US Dollar and international currencies

The world's most common currency / monetary unit is the US dollar. I would define "most common" to mean most widely accepted form of currency. Many goods are priced internationally in dollars - for example oil is priced in US dollars even though most of it is produced outside of the US.

Some would argue that different currencies in the world don't matter and that we should just have one common form of currency, and that would simplify things. However, this cannot work, because when the U.S or any country controls its own currency, it can control the money supply and interest rates within its country. Using a single global currency would cause sovereign countries to give up control over interest rates and therefore they would be unable to fight inflation or grow their economies as needed.

There are many countries in the world that have eliminated their own currencies and just use US dollars (for instance Panama). This is because those countries could not keep inflation under control and stabilize their currencies or their economies, so they have tied their economic stability to the US Federal Reserve and its decisions. For many smaller non-economically powerful nations, this is very beneficial because it removes the ability of their governments to just print money and create massive inflation.

How FOREX Currency Exchange works

How are FOREX currency exchange rates and prices determined? On the foreign currency exchange markets, currencies are always traded in pairs relative to each other. For example the US Dollar (symbol USD) and Japanese Yen (symbol JPY) trade as a pair called the USD/JPY. Forex transactions are quoted in pairs because you are buying one currency while selling another. The price of the USD/JPY shows how many of the second currency (JPY or Japanese Yen) can be bought with one unit of the first currency (e.g. one US Dollar). So if the USD/JPY is quoted as bid 119.85, ask 119.89 it means you can buy 119.89 yen for one dollar or sell 1 dollar for 119.85.

The price level for any currency pair is not set by mutual agreement between countries. This is completely incorrect. Price levels are determined strictly strictly by supply and demand for one currency relative to another in the huge international interbank market. This is a market for huge international institutions and corporations to convert currencies from one form to another. For example an American company selling goods in Japan may eventually want to convert the Japanese Yen that they earned into dollars so that they can pay their American stockholders dividends in dollars or to invest in a new plant in the US. Financial institutions trading currencies on interbank may also speculate on the direction that currency prices will move based on political news or world economic news. The more that these institutions want to convert other currencies to dollars, the stronger the dollar will get, and its price relative to another currency will rise due to the demand. The dollar will fall when the demand for dollars shrinks relative to other currencies.

On the interbank system the spread between the bid and ask is quite a bit lower than the spread that the retail investor will see. Retail investors (ordinary people), cannot trade currencies on interbank. They typically trade currencies online (on the internet) in the Off Exchange Currency Market. These are not traditional markets because there is no exchange. When you sign up to trade FOREX you are actually trading with a dealer. That dealer can set their own bid / ask spread wherever they want. So if the interbank spread is only 2 pips (e.g USD/JPY 119.86/119.88), the dealer might show a spread of 119.84 / 119.90. The dealer makes money by selling the retail investor at 119.90 and buying from the investor at 119.84. The bigger the spread, the more profit the dealer makes, and the harder it is for the investor to make money. Shop around and compare spread rates and commissions when looking to trade FOREX. Remember you are not actually trading with the whole world you're trading with a dealer. There are no regulatory rules about how much a dealer can charge.