There are some interesting things to think about and perspectives to ponder.

• If I were a policymaker in a competing state I would probably want to take a close look at my home state and how it compares to to Texas.  I would be interested in finding ways to attract more employers and job hunters.

 

• Which came first? The chicken or the egg?  Did these employers setup shop here because of a good stock of skilled talent or whas the initial move a cost-benefit one where taxes and state provided incentives were offered?

 

• Forbes did not publish (or at least I did not see it) their data tables but I would be interested to see how each city in their list ranked in terms of transportation options.

Just last week the U.S. Department of Justice and the I.R.S reached a deal with Switzerland to get the names of 4,450 U.S. account holders who may be suspect of hiding income and assets from Uncle Sam.

And the week before that Britain and Liechtenstein inked a new tax cooperation agreement to allow British account holders the opportunity to disclose their hidden accounts.  British citizens must disclose their accounts to get some leniency for tax evasion and those who do not will be forced to move their money out of Liechtenstein and face the full consequences – back taxes, penalties and possible legal action.

These three events are not coincidental and clearly indicate a growing trend among nations to shore up badly needed tax revenues.  The question is what will happen when the global economy picks up again.  There are hundreds of millions, if not billions, of dollars at stake for countries like the United States, Britain, France, Germany and Italy.

Once the tax coffers begin to rely on an increased taxpayer participation rate it would be hard to notice any dramatic reduction.  But that is where I think we could see an eventual pullback to the traditional tax evasion scheme.  It is always that slow and gradual change that proves to be the hardest to see.  A slow but sustained effort to chip away at these new rules and agreements could be just what the banks ordered.

The motivations behind hiding assets from tax authorities can vary from the outright criminal to well justified.  For those parties that use offshore havens to sustain their criminal activities I share no sentiment with you.  Those activities include money laundering, tax evasion and fraud.

In the case of tax evasion I take additional exception, as I liken it to you living under my roof and refusing to help pay the rent.    Regardless of the extent to which one may agree or disagree with the tax code, the fact should not be lost that citizenship has its privileges AND responsibilities.  One of those responsibilities being that of helping to pay for the government that protects you, defends your way of life and makes it possible for you to create any wealth in the first place.  Grievances with tax rules should be funneled through the appropriate channels – call your senator not your offshore banker. 

If you are one of those 4,450 lucky winners on that UBS list then you might want to call your local I.R.S agent too, as the Sep. 23 deadline for disclosing those secret accounts is getting close.

The game starts you off with the fed funds rate set at 4.50%, unemployment at 4.75% and inflation at 2.14%.  I played a few times and got hit with events like energy price spikes and stimulus programs.  I lost the first two tries but on the third go-round I decided to keep the fed funds rate around 3% ahead of inflation while also keeping an eye on th unemployment rate.  I am happy to say that I got to keep my job at the end of the game.

Give it a go and see how you do.  Click here to access the game.

Fed Chairmain Game

• Should potential employers have access to your financial history?
• What relevance does one’s credit score have on employment candidacy?
• What protections have been put in place to prevent abuse?
• Who (what federal agency) is representing the interests of the candidate?
• Are employers opening themselves up to potential legal problems by making hiring decisions based on personal and confidential financial information?
• What kinds of externalities can we expect from this activity?

Lets start with the most basic question – why should potential employers have access to this information?  The most compelling argument I have seen is that potential employers can use a credit report to gauge a candidate’s decision-making abilities.  It goes like so: the likelihood that a candidate who has a history of delinquencies, collections, foreclosure or perhaps a bankruptcy will make similarly poor decisions in their professional life is higher than a candidate with a clean credit history with few or no blips. In other words, the argument says, “hey, this person has taken good care of his/her financial reputation and demonstrated responsibility over the long term”.

While I may appreciate and even agree with that claim, I cannot reconcile that argument against a more important claim – that personal financial and medical information is too sensitive to be used for anything other than what they were originally intended for – doctors need your medical record to provide health care and banks need it to decide whether they should lend you money for that car or business idea. Why did I throw in medical information? Because I consider both to be the last bastions of personal privacy afforded us by the government from prying employers, insurance companies, marketing agencies and the like.  Although HIPAA has made progress with Protected Health Information it seems that our credit history is slowly becoming a one-stop shop for anyone willing to write Experian, TransUnion or Equifax a check.

Another area of concern is what happens to this information once it is obtained by potential employers?  Who in the organization has access to this information?  In today’s world of Twitter and Facebook how long will it be before we hear about someone tweeting about a candidate’s bankruptcy?  What happens after a candidate has been hired?  Will the employer have an obligation (read unintended consequence) to disclose any of this information to other parties?

Perhaps my strongest concern for using credit reports as a way to screen job candidates is the long-term and compounding (yet to be determined) socioeconomic effect.  Hans Rossling’s enlightening presentation at the 2006 TED Conference comes to mind.  Watch it below.

What we should be cognizant of is that this is a slippery slope we have started.  I know that my car insurance provider accesses and (whether they acknowledge it or not) utilizes my credit score to determine my premiums.  Although I have yet to be asked by a potential employer for my credit report it may only be a matter of time.  What will be next?  Will credit scores be required for admission to colleges and universities? Hey, the admissions departments could argue that it would help them keep their graduation rates high.

I can imagine a situation where pervasive use of credit reports for employee screening could perpetuate a gradual segregation of those who have had the success or luck in maintaining their credit in good standing from those who have not.  I can imagine watching Hans Rossling’s presentation 10 years from now as he shows the ‘completely new world’ we live in, where those with good credit have access to every definition of economic opportunity one could conceive while those with poor credit are left to struggle for whatever remains as they descend into a self reinforcing spiral.

It has always been my opinion that GM is the embodiment of poor management, lack of vision and a stubborn proclivity to rely on excuses in the face of adversity.  The public apprehension towards bailing out the Big 3 seems to be a manifestation of the same sentiment.

What I find unfortunate is that Ford, while equally responsible for its current situation, has been more responsive to the realities of the marketplace and yet seems to be getting dragged down with GM’s bad reputation.  Ford has brought in a new CEO, it has been in the process of painful but necessary steps to restructure and it has quickly begun to adapt.  If any of these firms should be bailed out it should be Ford.  GM should be forced to restructure under Chapter 11.

What many do not seem to understand is that allowing GM to fail could be a blessing in disguise.  With the anticipated growth of the alternative energy industry (wind, solar, etc…) we will need workers to man these jobs.  Where will they come from???  Look at the unemployment rate as it stands in the midst of a considerable economic  downturn – 6.5%.

Let’s look past the trees for a moment and see the forest.  The next decade will see baby boomers leaving the job market en masse – creating an industry that caters to them in the process.  Energy will be an ever increasingly important industry that will require imagination, talent and huge amounts of capital.  There is opportunity on the horizon, but we need to recognize it and prepare ourselves for it.  Americans have always shown their ability to take a bad situation and thrive on it.  Let’s keep that tradition alive.

What I find interesting even now is how banks continue to make poor decisions that only seem to aggravate the current situation.  Only now are banks beginning to mobilize to keep families in their homes instead of putting them on the street.  Where was the foresight? Now of course we will get excuses about how much red tape must be navigated in order to take those steps, but I consider them just that – excuses.  Action requires only one real ingredient – a desire to make it so.

This ‘credit crisis’ is also a function of banks choosing to hide under a rock instead of taking a leadership role and managing the situation.  They are choosing to hoard their cash and refusing to lend it out and keep those ‘gears’ turning.  This morning I read another article showing banks’ counterproductive efforts, this time dealing with public transportation.  Banks are using technical legal language in their financial dealings with mass transit companies to require lump sum repayments – hundreds of millions of dollars – within weeks!

It feels like we are all stuck in a canoe paddling furiously against a current that is taking us directly towards a deadly waterfall.  The strongest and most capable paddlers are the banks, but unfortunately they are jumping ship en masse and forcing us to work ever harder.

Ok, let’s start with the basics:

Blowing Bubbles
Home prices on average across the U.S. have risen too fast over the last decade.  There are many factors that are attributed to this unsustainable rise.  Some include banks offering easy money to anyone with a heartbeat (or credit report), the Media portraying real estate as an easy low-risk and high reward endeavor, the Federal Reserve doling out low interest rates to banks like water, oh and lets not forget the average Jane and John Doe making poor, irresponsible and sometimes downright stupid financial decisions.

Thanks to Careless & Company mentioned above there was too much purchasing activity going on with little regard or consideration for actual value.  The end result being a market that has strayed far from its sustainable position.

What Goes Up Must Come Down
Perhaps some people are not familiar with the concept of what the media and others call a “market correction” but let me shed some light on this.  When you hear one of these talking heads or news reporters talk about a market correction they are referencing the notion that when the price of a good gets away from reality (what the market is willing to bear for that product) then the inevitable result is that price will make its way back to reality.

The reason for this is that if something gets too expensive then buyers will stop buying.  When that happens the only way to move additional product is to lower the price to make it attractive for buyers again.  Going back to the housing situation there is an apparent need for a market correction.

Home prices have departed from reality.  So what am I getting at?  Why am I complaining about these news reports?  See examples below:

From the New York Times, Click to read the article
“There were some signs that the decline has started to abate. Prices in seven regions, including Boston, Dallas and Charlotte, improved in May, some for the second straight month. Boston, for example, was up 1.05 percent in May, though values are still 6.2 percent below where they were a year prior.”

It almost sounds like the author is disappointed that prices are 6.2 percent below last year’s.  What do you expect?

From the USA Today, Click to read the article
“The steepest decline in the index is in Las Vegas, where prices were down 28.4% from a year ago. Miami is a close second, with prices down 28.3% from last year.”

Wow, now that is something I did not know; no wait, the A/C repair man told me how Las Vegas and Florida are getting hit the hardest several months ago.

I’m expecting the rates to be held while the market is doing otherwise.  Have you ever seen a spoiled child react when they get that rare rejection?  We might be seeing a market ‘fit’ sooner that later.

Gone were the days when profit was the outcome of arbitrage opportunity. The notion that a profit could only be made when you bought something for less than what the market was offering was – well too boring. There was nothing exciting about a slow and methodical process by which one would identify, analyze and invest in arbitrage opportunities. Who cared about value when you could buy something hot today and flip it tomorrow when it would be even hotter?

Today the buzzword is real estate, but the problem remains the same. This time however the experts have been replaced with shows like ‘Flip This House’ and ‘Buy Me’. Now every Jack and Jill in America is convinced that they can play the real estate game and win big.  Notice I said win big; this is because many actually believe that they will win regardless of the outcome. To make matters worse, many more Americans foolishly decided to use their personal homes as ATMs; squandering whatever equity they had to ˜upgrade” their lives.

We are beginning to see the effects of this widespread imprudence, and there is more to come for sure. The worst part of this situation is not that home prices across the nation and on average may be at inflated levels, but that their exists a precarious yet logical step towards a reconciliation or market correction i.e. losing money, lots of money.  It is estimated that America will lose about 1% of its GDP to the current real estate situation and a 20% failure rate is anticipated among sub prime lenders. Unemployment, which is around 4.4% could rise by as a much as 1%.

Overall we could see higher unemployment, slower economic growth, many Americans facing financial distress and or ruin from higher mortgage payments, and a sad reversal of home ownership across America. This is yet another example of the ˜madness of crowds’ and how this irrational behavior can and usually does lead to widespread failure.  My recommendation is that we should focus our attention now to those who are weathering this storm and perhaps even profiting from it.  The game of money is a classic zero sum game – “ someone else’s ruin is another’s success.

Now this one may be a stretch, but if you find yourself unable to make those mortgage payments because you bought a house that you cannot afford or lied on your stated income form or thought an ARM loan was the best thing since sliced bread then all you have to do is foreclose and then blame it on those evils banks.

I won’t comment on President Bush’s lack of ownership on his administration’s actions.  I don’t want to send the terrorists “mixed signals” or “embolden” them anymore.

What I will comment on is the serious lack of responsibility we as a nation are taking with so many aspects of our lives.  What happened to saying, damn I shouldn’t have done that instead of I got hurt because YOU let me?  When did it become someone else’s responsibility for your actions?  The logic behind blaming someone else for your actions is so backwards that I just can’t fathom that it should be pointed out and much less explained!

It would sound pretty absurd (and stupid) if I told my son (hypothetical son) to run across the street without looking and if he gets hit by a car then we will sue the driver.  It would also be foolhardy for me to visit an internet chat forum to get anonymous stock tips, make investment decisions based on those tips, lose my shirt, and then complain to the government that I should get my money back.

Now that I think about it, I’m rolling around in my sleep wondering who is going to sue me for breaking into my home, stealing one of my dinner forks and then shoving it into an electric socket!  I wonder if I can get some kind of ‘Stupidity’ insurance.