People are so nervous about banks failing and their money being unavailable that the Fed has already raised the limits on FDIC insurance for account holders to $250,000 per person. And if you’ve already read my other article on the subject, you remember that what is actually covered, is a lot more than it appears at first.

This hasn’t completely stemmed the tide of people pulling money out of banks and ‘hiding it under the mattress’ (in some cases the literal truth!). This is taking money out of circulation that the banks vitally need right now to help them feel safe enough to start lending money again. It’s a vicious cycle; Banks don’t lend because they’re afraid that they won’t be paid back, so people not getting loans fear the bank is about to go under and pull money out of the bank. Which in turn, causes the bank to hoard it’s money, and,.. not make loans. Around and around we go, where it stops? Nobody knows.

Rumors, Innuendos, and Heresay

Now, in order to regain the trust of the people, and to allay the banks’ fears of losses (at least some of them) the White House is considering removing FDIC insurance limits for individual account holders altogether. This is a bold move that follows a similar measure by some of the EU countries. This move would hopefully inject some confidence into a very scared and panicking market, kind of like a tranquilizer for a raging animal.

The nice thing, is that it would be virtually cost-free for the government to do this! Since we’re so used to the multi-billion dollar bailouts, a relatively inexpensive fix is a welcome change. The existing FDIC insurance is paid for by the banks through insurance premiums, just like any other insurance. Eliminating the limits will raise the premiums a bit, but not nearly enough to counter all the good this move will do.

Carry this Through

If you think about it, the FDIC has quite a bit of funds already, and since they’re backed by the Fed, they already have a virtually limitless supply of money if it truly comes to that. It would take a large percentage of the banks across the United States to fail all at once, something we’ve never seen yet, even during the Great Depression, in order to seriously dent the reserves already available. Moving from $250k to no limit basically includes a few of the richer people in the world, and a LOT more small/medium businesses. These are exactly the kind of accounts that need to be covered, to stabilize the economy.

I hope that this becomes more than just a rumor in days to come. It would be one of the few GOOD things to come out of this debacle in the market. If the White House and the president can get in gear and enact this, it might be the ’stimulus’ we’ve been looking for.

WaMu has been ailing for quite a while now, what with the overall financial woes of Wall Street. It also had a significant amount of mortgage loans that have ended up as lead weights around it’s neck. Add to this the loss of over 95% of it’s stock price in recent months, and according to the Office of Thrift Supervision, a loss of more than 6 billion dollars recorded in the last three quarters, and WaMu was on rocky grounds.

The last two nails in the coffin however were

Consumer Confidence fell – Since September 15th, investors had lost faith in WaMu, and withdrew 16.7 billion in assets from the banking giant. This comes out to 9% of total deposits held at the institution, all in a matter of a few weeks.

Downgrade in Rating – Last night, WaMu’s ‘trustworthiness’ rating was reduced, making it a certainty that the savings and loan wouldn’t be able to get additional credit or funding from other banks. Without the additional funding, it became clear to the FDIC that WaMu wouldn’t be able to ‘right the ship’ and stepped in.

Going to the Highest Bidder

After the Fed stepped in, banking assets of the now-defunct institution were auctioned off/sold to JPMorgan/Chase. The same JPMorgan/Chase that bought Bear Stearns earler this year. This purchase gives JPMorgan an additional 2200 bank branches in the western United States, an area that previously had very few JPMorgan branches. JPMorgan has gotten quite a deal out of the WaMu hardship, 2200 new branches, and now with locations across the U.S. Even in the worst storms, there are silver linings.

But What About the Investors?

So what about the account holders and credit card users of WaMu? What’s this ‘change in the guard’ mean? Pretty much nothing. Come meet the new boss, same as the old boss. Hope you guessed my name.

There should be no discernable differences (for the time being) now that JPMorgan has taken over the banking parts of WaMu. I expect that there will be some re-shufffling, and a re-naming (maybe) in the future, but for the time being, everything is status quo. The mortgage and loans division of WaMu still might have some serious re-work ahead though.

For more information, see This Bizjournal Article

We’ve entered that tough spot now where the stimulus check money is pretty much gone, and any second stimulus check is likely to materialize after the presidential election. So what do we do for the next few months?

Weathering the Storm

Some good news is that the price of crude oil has dropped about $30/barrel over the last month or so. That being caused by many Americans cutting back on travel, planning out their routes better, and switching to more fuel-efficient vehicles and modes of transportation. Supply and Demand is forcing the prices back down somewhat.

The bad news (somewhat bad) is that there’s not much more the American public can do to lower the fuel demand. People still have to get to work and back, and trading in your gas-guzzling SUV for a more gas-efficient small car or hybrid is becoming more difficult, if not downright impossible.

Housing continues to be a key economic sticking point, as expected. New housing starts are significantly down for the month, while the median price of homes has dropped ~8% from a year ago. Foreclosures are continuing at a steady pace, and it doesn’t appear that lenders are taking the government’s ’suggestion’ about re-working the loans (and taking a partial loss) too seriously yet.

A Ray of Sunshine

But even with all that, it still seems like things aren’t quite as bad as everyone predicted. It’s tight for families with low incomes, and those that have seriously overextended themselves, but it’s survivable so far.

The financial sector keeps putting out reports of losses, but many of them are ‘less than expected’. Which in a weird way, gives the Market some confidence. I guess if you expected to lose $20 Billion, and only lost $12 Billion, that can be construed as a ‘good thing’ (if you squint hard).

I Can See Clearly Now, the Rain Has Gone

No grand prognostications here, I will say that once we DO finish out this recession, I’m betting that the overall health of the economy is going to be better. The weaker companies and industries are going to either close, consolidate, or be bought by stronger, more well-run competitors, and the ones left standing will be more ready and able to compete on a world-wide playing field, if they aren’t already.

Kind of a Darwin Award for business. Just hope my company is one of the survivors.

What do you think of the current economy? Leave us a message and let us know!

With all the economists running around with little or no idea what to do about the situation, you can imagine what the person on the street is thinking at the moment. There’s a whole laundry list of bad news going around right now with no end in sight.

• Rising gas and food prices
• Lowering interest rates on savings accounts
• The Subprime Bubble still bubbling along
• The 5th largest American Investment bank (Bear Stearns) all but folding because of a run on it’s funds.
• Fears of inflation circling around (mainly because of the Rising gas and food prices)
• The Dollar, on life support against foreign currencies.
• Dropping investment in Treasury Bills by countries abroad (because of the weak dollar)
• The price of postage stamps going up
• Cats and dogs living in sin.

It’S The End of the World!

What I Worry About

As bad as things are getting, I’m not so worried about many of these things. Some of the things I’m up in arms about recently;

Fed Backing Bear Stearns $30 Billion Subprime Mortgages – As part of the bailout of Bear Stearns, the Federal Reserve guaranteed the huge amount of sub-prime mortgage loans that are a large part of the Bear lending portfolio. That bails out Bear, but puts the risks on the American people.

A Quick FED Lesson

The Federal Reserve, through it’s lending of money to banks, makes billions of dollars per year in profit. Much of that money goes into operating the Fed itself, but any leftover money at the end of the year goes into the Treasury to off-set costs outside the Fed (normally covered by taxes).

This means that if the Fed is required to ‘cover’ the loans that go into default, that extra revenue won’t be available. Which means that it will have to be replaced by regular taxes, taxes from you and I.

By the Fed covering the loans, the risk has been shifted from Bear Stearns, to the U.S. people instead.

Money going Out from the FED, but Not Getting Loaned Out – The FED can only lower the rate it loans money to banks on, it doesn’t have any say on whether the banks then pass on that savings to the end recipient of the loans. In fact, that’s not happening at the moment. One of the major problems I see is that the banks and lending institutions are actually increasing lending requirements for loans. While that isn’t bad really (it keeps more sub-prime loans from being made to people that obviously can’t qualify) it’s causing a credit crunch that is only worsening the situation. If people and businesses can’t get working capital, the gears of industry start to grind to a halt.

On-going Short-sightedness of Businesses – For years now, businesses have focused on the short-term goal of increasing revenue, at the expense of developing career paths for their employees. The thought has been ‘why train someone that is only going to leave?’

This is causing a marked decrease in technical college graduates and in people that want to pursue highly technical careers. If there are no entry-level jobs, there is no way to gain experience to perform the higher paying careers later on.

Add to this, the on-going pushback against H-1b visas, and the United States is facing a shortage of talent and brains that is only going to accelerate, as older, skilled employees retire. The U.S. is losing (if it hasn’t already lost) it’s technological edge to up-and-coming countries willing to train and develop their workers. Maintaining our standard of living is going to be impossible in a few years, unless we either re-invent ourselves, or make a concerted effort to compete on the world markets again.

Increases in Energy Prices, and the Effects on the Environment – With fuel prices soaring (Delta airlines is talking about getting rid of a majority of their employees and cutting back on flights because of the HUGE increase in jet fuel, just as an example) there is a ‘ripple-effect’ going throughout the industry that is sucking huge amounts of money out of everyone’s pockets. As energy costs increase, everything else ALSO increases (transportation costs, production costs, etc).

I see two things that could come out of this.

1. Stagflation – A stagnant economy with huge increases in the price of commodities, due to the on-going extra cost associated with gas and energy. If consumer spending goes down, while costs go up, it’s not going to be pretty.
2. Environmental Damage – If the government and businesses take an aggressive approach to finding more sources of energy, there are going to be environmental impacts. As alternative sources of energy become cost effective (Shale-oil, use of ‘dirty’ coal, etc) the impact to the environment is going to be felt worldwide. As-is, we’re not doing enough to reverse the damage we’ve ALREADY done, much less any additional damage.

All Right Chicken Little, the Sky IS Falling, So What?

Unfortunately, there’s not a lot us little people can do on an individual basis to change any of this. Large banks are not going to listen to individuals, and the government is concerned with EVERYONE not just individual investors. It hurts, but it’s the storm we’re in.

What I Plan on Doing – Even with the economic incentive package from the government, I’m not betting things are going to be all beer and skittles anytime soon, so here’s my list of To-Do’s that I’m going to concentrate on.

• Increase the Emergency Fund (to at least 6 months)
• Put the Retirement contributions on hold (I can increase them by a huge amount later in the year if things start looking better)
• Pay down consumer credit card debt. (The less bills you have to pay, the farther your money goes).
• Work hard and keep the job secure (businesses are going to be looking to cut costs, and poor workers are the first to hit the streets).
• Don’t Panic. Even at it’s longest, this economic storm should only be a few years. I’ve weathered through similar in the past, and been less prepared. At least now the media has given lots of warning of things going bad.

Not to sound negative, this whole article is more a cautionary tale than a "The World is About to End" sermon. I think things are going to get worse before they get better, but they will get better.

Do you have any steps you’re taking to get ready for weathering the economic storm?? We’d like to hear about them.

Other sources of interest

Fed Cuts Rate Again @ DebtFREE-Revolution

While this wasn’t unexpected, it does show that the Fed is taking the downturn in the U.S. economy seriously.

The Fed said that the rate cuts taken to date should promote ‘moderate growth over time.’

The Fed uses the prime lending rate as a a modifier to the economy, to try to control either the an out-of-control heating up of the economy, or an economy that looks to be in a downturn. Guess which they’re trying to prevent?

The Rough Patch

This is just a long line in a series of dominos that started with the Subprime problems.

1. Banks make cheap loans to people that are borderline acceptable for large home loans.
2. House prices go up and the cheap money from the Fed continues to fuel cheap loans for more mortgages.
3. Lather, rinse, repeat.

Now that many of the Adjustable Rate Mortgages are starting to ‘adjust’, there is a surge of foreclosures that is causing a ripple effect on the economy. Banks are having to take back houses, and are losing revenue from the loans that are no longer being paid. That equates to less profit for the banks, and less working capital, as more money is tied up in real estate.

It seems like almost a weekly event where some large bank or mortgage company is reporting multi-million dollar losses or write-offs. The Bank of America acquisition of Countrywide Mortgage is a risky long-term venture in hopes that the surge of home mortgage foreclosures will level off and decrease, and that the economy (and the mortgage industry) will get back in swing.

Unfortunately, it doesn’t look like it’s going to happen quickly. Along with the decrease (the fastest rate decrease in the last 20 years), the Fed is making sounds indicating that another cut may be in the making for either the March 18 or April 29/30 Fed meetings. Or, should  Fed Chairman Bernanke feel it’s necessary, there might be another mid-course change.

Light at the End of the Tunnel

While cutting the rate is a stimulus to the economy, it doesn’t guarantee that it’s going to make everything all bright and shiny immediately. The Dow still closed down 37 points after the cut, indicating that there are still quite a few with some hesitation that the economy is leveling off.

Admittedly 37 points is trivial compared to the DJIA’s level of 12500, but as an indicator, it could mean people are still nervous.

To us little guys, it only means that our bank savings rates take a hit again.

There are still quite a few indicators that the economy overall is healthy, if a little sluggish, so weathering through the sure-to-come ups and downs of the market is the recommendation of the day.

Do you have any comments on the recent Fed rate cut?? Let us know by leaving a comment.