Financial Crisis

As a small businessman, I personally started seeing the effects of the current financial crisis this past January when we had an opportunity to buy about $35,000 worth of used equipment at fire sale prices. The catch was that the deal had to be pulled together in 3 weeks. Regardless of the fact that I was able to show that the equipment would have paid for itself in energy savings alone within 2 years, and that the machines had a significantly increased capacity allowing us to expand our business, the banks were reluctant to go along on such short notice.
The bankers said that they just didn't have as much money, and they were tightening the standards all around. Even GOOD plans that were well collateralized were taking longer to process and were no longer sure things. You may not have noticed it, but last Christmas season, the retailers had less stock on their shelves. This was because they couldn't afford to carry as much merchandise. Most retailers get what it called "postdating" where they essentially get loans from banks or sometimes their suppliers to pack the stores to the gills for the busiest time of the year.
We were able to buy the equipment however by going to a leasing company for the machines, but at a significantly higher rate of interest. The math showed it still was a good deal, but its cost me a couple thousand more than it could have.

In the near future, I will have more banking needs. Our lease is up in April, and manufacturing space is really cheap right now. A building I looked at 5 years ago is going for significantly less, and I really need the space to expand the business. And I have several projects in the works that would double our size and add up to 4 new jobs. But if I can't get the capital, I have no space to put the work stations, and no money to invest in new equipment. While I can cash flow growth of about 10%, some of these projects are so big, I would need start up capital to carry the costs the 90 days from purchase order to receipt of payment.

This is what Bernanke is worrying about, mistakes of the past coming back to haunt us in the present and future. And with the way the loans have been sold, repackaged into bonds, and resold, combined with the drop in the value of the housing marked, nobody really knows how bad it is. FDIC insured banks are required to hold a certain ratio's of assets vs loans vs cash on hand. The 5 non-insured gigantic investment banks were supposed to hold to good business practice which would reflect similar numbers. Goldmen-Sachs did for the most part, Lehmann Bros. did not. Guess who is still in business. And now the banks are tightening lending, trying to get their balance sheets back into proper alignment.

There is a lot of blame to go around on the current crisis.
Predatory lenders, greedy and/or ignorant home owners, fraudulent and/or stupid financial services brokers. And nobody is happy being left with the bill. Some banks did the due diligence when authorizing loans, and came out of this all right. Many didn't.

Free Market Theory would say to let the banks fail. Free Market theory works very well for unregulated commodity markets, where you are comparing the same grades of raw material and are just looking for the lowest price. The further you get away from commodities the less well it works. The more complex a resource is, the greater the uncertainty of its value, and the more information is required to assess it. On top of that, its value will be different from one potential customer to another based on which attributes the customer needs. And some resources are needed by the community as a whole more than that of the individual investors involved. Lets take an electrical line for example. To a thief its worth the value of the copper. To the electric company its the value of the wire(more expensive than just the raw material), the cost of installation, and the loss of revenue while it is down. To us, the end user, it is worth major inconvenience, the possible loss of the contents of your freezer depending on how long it lasts, and maybe days and dollars of eating without an electric range or microwave. To a company like mine, its thousands of dollars of lost revenue, and possible irate customers.

When it comes to money flow in the economy, banks are like the power company. You can loose a few power sources and the others will take up the slack. If you loose a bunch more, especially big ones, you start getting "brown outs", the economy slows. The economy, like the power grid, can only support so many collapses. When a bank fails, businesses that borrowed money from them must quickly refinance, often at higher interest rates, or face going out of business themselves. This happens, and it costs people jobs, resulting in more foreclosures, resulting in more stress on the remaining banks etc... This is what happened in the Great Depression.

My point is this, whether or not there is a "bailout" of some sort, we are all paying the costs already. Some is seen in the devaluation of our homes or retirement assets. Some is seen in the increase in cost in unemployment on both the government and non-profit sectors and loss of tax base.

If I remember correctly, the rate of mortgage defaults has gone from 3% to about 7%. Back when I got my first mortgage in '94, banks would only make a loan that the housing costs(mortgage, property tax, homeowners insurance) would not exceed 30% of your household income. Any higher, and the family would be considered under "financial strain."
That number of homeowners who would fall under the description of "financial strain" are currently estimated at about 40% of the home owners out there. My guess is that many of these people will actually not default, but they may need to be refinanced, especially those with adjustable rate mortgages. But with the devaluation of their assets banks will be reluctant to do so.

One of my friends, Larry, works for a small regional bank. His job is to renegotiate with homeowners who are in trouble. He told me that if the homeowner works with him, and is up front right away, that they can usually work something out. Banks do not want to reposess unless they absolutely have to. But if the mortgage had been bought up by the big investment banks and bundled into one of these exotic bonds as had been done, and resold to someone else, who is the person on the ground to talk to and try and salvage the account? Do those managing the account have the authority to renegotiate?

One of the big problems that Wall street is dealing with is that nobody knows how to value these Mortgage backed securities. Batches of individual mortgages with differing terms on differing values of real estate that has all been falling at different rates depending on region, with homeowners in different states of financial health or distress, all bundled together, its enough to give any accountant a headache. Wall street looks at a security like that and says, "what is it worth?" and its book value is based on their confidence and what they are willing to pay. Guesses right now are anywhere from 22 to 60 cents on the dollar.

The problem is complex, and BIG, and will have repercussions for years to come.
I'll deal with proposes to fix it later.

As We Pray for First Frost

If you are allergic to ragweed, this is the time of year you dread. Itchy eyes and sinuses, stuffy & miserable, Sneezing uncontrollably. For me, many of the over the counter drugs only take the edge off, or they make you so drowsy that you might as well just stay in bed.

The only real relief comes with the first hard frost. Kill it off until next year.

So if you are like me, the prayers started last month. And sometime between now and mid October, the prayer might actually be answered.

Sara Palin

I'm going to jump on to the dangerous field of politics, but I'm going to first preface it with something.

I'm a rabid independent, in collage, I majored in political science and history, and worked on the Perot campaign. As such I'm a fiscal conservative, but everything else I take issue by issue and you can't peg me socially. Also, with a wife as a pastor, I will admit that a) I like strong women and b)I've seen my wife overcome a lot of sexism.

So here goes.

John McCain's choice of Sara Palin, the governor of Alaska, as his VP raises the question of what is a legitimate questioning of qualification and what is just pure sexism or other form of discrimination. Since the announcement, we've been finding out just who she is and the scandals she is involved in, which seem to be rolling out 1 to 2 a day.
I'm going to hit the headlines point by point.

1) Experience.

This is a legitimate question, with only a year and a half as governor and being mayor of a small town(Wasilla pop. 6715 from '96-'02) that isn't much executive experience compared to others candidates. To top that off, the experience hasn't been scandal free... more on that in other points.

2) She has 5 children, the youngest is 4 months old and has downs syndrome.

This is not a legitimate point of discussion, and in fact has sexist overtones. The implication from the social conservative perspective is that she should be staying at home with the children, especially the baby. Hey, what about the father staying at home? In fact, one could argue that she and her husband have lots of experience juggling things. The problem for social conservatives is that Dobson has been slamming working mothers for so long that his about face on Sara Palin is just looking like political expediency.

This is going to reignite the "mommy wars" in a way that Hillary Clinton, whose only child is long out of the house, couldn't.

3) She was a runner up for Ms. Alaska.

This again is not a legitimate issue. This plays on the dumb beauty pageant stereotype, which in itself is sexist.

4) She is a woman, and it was a tactical move by McCain to get disaffected Hillary Clinton supporters.

If it wasn't for the contentious nature of the Democratic primary, and the statement by some of the Clinton supporters that they might vote for McCain, I'd say it was an illegitimate question. But, the simple fact is that people do have prejudices which are then exploited for political gain. This is a legitimate point of discussion, but it reflects on McCain, not on Pallin. She should stand on her own merits, not her gender.

5)Troopergate.

This, as in all abuse of power accusations, are valid points of discussion, and gender doesn't come into play at all.

We don't have all the facts yet, but Pallin stands accused for abuse of power in trying to get her ex brother in law, a state trooper, fired during her sisters contentious divorce and custody battle. The Public Safety Commissioner was fired, allegedly for not firing the brother in law. There are audio tapes of Palin's assistant talking to him about it, which lends the accusation some serious credibility.

Then, to top it off, the replacement resigned in disgrace only two weeks on the job after a sexual harassment reprimand came to light(which Pallin admitted to knowing about). She then arranged a $10,000 severance package. Very suspicious.

The state legislature has contracted a private investigator to look into it so as they can recommend or reject impeachment proceedings. The report is due out October 31.

6) Her 17 year old daughter is 5 months pregnant.

Who are we criticizing? The daughter or the parent?

One could reference 1 Timothy 3:5 "For if a man know not how to rule his own house, how shall he take care of the church of God?"
Titus 1:6 is similar.
But I think that is unfair, at 17, the daughter is ultimately responsible for her own actions, and that goes for the boy involved as well.

Any person in public view, and their families under go intense scrutiny, and they are still only human. While this is a good starting point for difficult discussions with our teenage daughters and sons. I personally feel that it should have no bearing on the election, but sadly I think it will.

7) The Bridge to Nowhere.

This questions her honesty, it's fair game.
Apparently, she supported the bridge before congress refused the funds, then she retroactively was always against it.

8) Any comments on her wardrobe.

This is just plain sexist. As long as she is dressing appropriately for the venue, any micro analysis of how the color of her pantsuit works with her complexion is just plain obnoxious.

9) Her religion/church.

A candidates values are legitimate, but a persons religion should prompt clarifying questions, not be an assumption of their values.
I've known many church going people of differing faiths who do not subscribe to everything their denomination or pastor teaches, Joe Biden is a pro-choice Catholic. Also, people may say one thing, but do another. I would argue that we should look at how people live their lives, not what door they go in on Sunday morning.

There are other accusations just breaking, but I'm going to give them a day or two for confirmation purposes.

Why McCain picked her is a mystery.
There are many more qualified politicians out there, even Republican women(Kay Bailey Hutchinson comes to mind.)

How this all plays out is sure to effect the election, I personally know one vote he lost already.
In some ways she does galvanize support amongst some religious conservatives, but those that don't believe in women in authority are sure to be turned off even more.

Tactically I think it was a mistake trying to target disaffected Clinton voters. Most of them have already lined up behind Obama, and the 12% left are unlikely to share Palin's ideology. I realize its shaving percentages, but the risk of loosing core Republican base is high.

Does this all reflect on McCain's judgement? You bet. Any major decision he makes is going to reflect on him for good or ill. While you could blame those responsible for vetting Palin, the McCain campaign has already admitted that he knew about the major scandals that are now unfolding.

While McCain has picked her, it remains for the Republican party to validate her status in convention this week, but from the sound of it, the party faithful will fall in line behind their candidate. To do anything else would admit that McCain made a colossal blunder, thereby damaging him.

I guess we will see how this all blows up in the following weeks of polling and finally the election.