Financial Observations for the Modern Christian:

Financial insights from various contributors for the betterment of the Kingdom of Christ and to encourage his seekers and saints to a higher understanding of financial responsibility.

BRUCE L. MOODY
Editor & IT Consultant

GP/MANAGER BRUCE LM & ASSOCIATES LLC

"This is basically without precedent in U.S. history," Yglesias says. It's certainly without precedent in the last half-century. But unfortunately, it's part of a broad trend that is rather recent. The last two recession recoveries in America -- after the early '90s recession and the early '00s recession -- were famously jobless recoveries. That is, GDP was growing, but the job market was not. Check out this graph, that measures job loss and job growth in the last six recessions.

The recessions of '74, '80 and '81 are valleys that turn up quickly. The bottom of the job market is a trampoline. In '91 and '01, it looks more like a wide riverbed. That's what a jobless recovery looks like, with a long meandering floor during which time GDP has recovered but thousands still languish in un- and under-employment. The inability of the private sector to produce enough jobs coming out of recessions is becoming something much worse than "basically without precedent." It's becoming a trend.

---

22 SEP 2009

Wish to improve your life? Simplify your affairs...

Here are two new graphs showing shipping tracks near Rotterdam in the North Sea during calm and stormy weather. The data comes from a realtime feed from ships to coastguards. You can clearly see the lane breakdown during storms, as well as the generally more chaotic conditions.

---

9 SEP 2009

"Only dull people are bright at breakfast." Oscar Wilde

Overleveraged and concerned US consumers are engaging in a healthy repair of their personal balance sheets via less borrowing. Yet herein lays the virtuous circle rub, that for the US economy to achieve a sustainable recovery, consumers must rise to the occasion and spend. With a world economy still highly dependent on US consumers (now that emerging-market giant China has squandered its opportunity to use its massive stimulus package on more infrastructure projects),a new dilemma is evolving.

Policy remains highly accommodative (which it should be) on the assumption that the politically timed stimulus package kicks into high gear in 2010. it’s reasonable to expect that US consumers will spend, but not necessarily to the degree that the stock market anticipates. Before investors break out the champagne bottles to celebrate the return to normalcy, the investment strategy decision is whether the virtuous circle will take hold, and I believe it’s probable that some of this will come to pass. US consumers will always exercise their desire to satiate their pent up demand. However, 0.

Until then, much can go wrong. Until the employment picture brightens and wages show signs of not just stabilization but growth, and consumer credit contraction diminishes, little will better economically, all of which will likely not occur until well into 2010. The swamp’s other sinkholes -- corporate top line growth, weak pricing power, the weak US dollar, regulation in key economic sectors, further polarization in Washington, and that unknown exogenous event that seems to occur around this time of the year -- could easily depress equity markets that have priced in no margin for error.

---

27 AUG 2009

"Never put off until tomorrow what you can do the day after tomorrow." Mark Twain

Sound advice, except when it comes to tracking down money to finance your college education. If you haven't started, it's time to get going. The search requires persistence. Use the Internet, read widely on scholarships and grants, draw on the experience of friends, talk to your prospective school, and work, work, work.

"A student needs to be committed to spending a few hours each month to finding five or ten – maybe 15 – scholarships to apply for," says Lori Grandstaff, co-founder of ScholarshipExperts.com, an online search site. "Don't give up because you didn't win the first ten or even 20. If you continually turn in good applications, you have a chance to come away with scholarship?money."

Estimates of the number and value of available scholarships vary, but ScholarshipExperts.com searches 2.4 million possible awards valued at about $14 billion.

Everyone knows about scholarships awarded on academic performance or financial need, but don't overlook scholarships offered by professional or trade organizations. That includes healthcare, engineering, police, firefighters, education, computer science, social work – even the military. There are scholarships available for specific colleges and universities, including small, liberal arts schools. Check with your parents because many companies offer scholarships to employees' children. Don't overlook various contests such as the Ayn Rand Institute Essay Contests, Illustrators of the Future Contest and shamelessly promotional awards such as the Duck Brand Duct Tape Stuck at Prom Contest. The key here is to follow your passion and use your time wisely.

Start your search by punching "Free Application for Federal Student Aid" into your search engine. Read all about it and complete an application online because it's the foundation for much of the financial aid process. The government-run Web site offers key information about Federal student aid programs. Pell Grants are typically made to undergraduates and generally don't have to be repaid. The maximum award is $5,350 for the 2009-2010 academic year and is based on financial need, school costs and your status as a full or part-time student. Super-smart students should check out National Merit and National Science and Mathematics Access to Retain Talent scholarships. (The acronym is SMART, and some bureaucrat worked hard on that one.) The Academic Competitiveness Grant offers up to $750 for freshman and $1,300 for sophomores.

So the idea is clear; just get it going now.

---

17 AUG 2009

Deflation may only be bad for particularly powerful special interest groups.

It is bad for chief executives. It is easier to keep your profits rising in a mildly inflationary environment. You can just jack up your prices a bit, and you can often cut workers’ wages by stealth by holding wages steady. The banking industry, which has come to rely on inflation to make highly leveraged loans sustainable, also dislikes deflation. Likewise, it is bad for governments, which use inflation to reduce the value of their debts.

On the other hand, deflation is good news for savers, who get richer just by hanging on to their cash. And it is beneficial for consumers, who get cheaper prices. It is usually good for workers as well, as they can generally hold the value of their wages, even while prices fall.

There are winners and losers, just as there are from most economic developments. The important point is that the people who lose are more powerful than the people who gain. That might explain why we hear about the dangers of deflation, and not about its advantages. It still doesn’t make them right.

---

2 AUG 2009
Yale economist Robert Shiller on evaluating risk

---

25 JUI 2009

---

10 JUI 2009

Four Rules for Turning Your Business Into Gold
KAREN SALMANSOHN  JUL 13, 2009 8:50 AM


Be the swimming cocktail waitress of your field.

Back in college, when I was but a mere teenager, it seemed I was intuitively destined to become big in marketing. I worked one summer as a cocktail waitress at The Tamiment Resort in the Poconos.

It was a sweltering summer. Unfortunately, I had to work poolside on these blistering days. Even more unfortunately, nearly all my potential drink-buying customers were wisely cooling off within the pool - instead of lounging on the chaise lounges, where the management had positioned me to serve and make money. This surprise heat wave had created a surprise big-business problem! No money to be made. The summer heat had literally dried up my sales opportunities. Plus I personally was sweating and miserable.

My big business solution? I stripped down to my bathing suit, which was just one convenient layer beneath my standard Tamiment Resort apron uniform. Then I slipped into the pool, with tray and order pad, and side-stroked around like an energetic bar-mermaid, and took lots of drink orders.

My big money results? My customers loved the drink-ordering convenience - as well as the playful absurdity of a swimming cocktail waitress. Everyone benefited. Particularly me. I made lots of money and got a nice, refreshing swim. Plus, later in the evening at the cabaret lounge, I became known as “The Swimming Cocktail Waitress.” This new moniker served me well. Everyone wanted to order from “The Swimming Cocktail Waitress.”

There are a few Golden Touch Rules to be learned in this Swimming Cocktail Waitress story -- so let’s plunge right in…

Rule #1: No matter how bad the times, customers with money exist. Seek and snag them! During challenging times it’s essential you become a Maven of Trends and Demographics -- then brainstorm new ways you might tweak your service/product to morph in your “Swimming-Action” to get you to paying customers. Remember: Sometimes narrow focusing your skillsets/brand increases profits. So, hone in on what your Unique Selling Point is -- then sharpen that point! The more you’re remarkable, the more you’ll be marketable!

Rule #2: Don’t think about yourself as having a specific job. Think about yourself as someone who solves problems/needs/fears.
When I decided to become a teenage Swimming Cocktail Waitress, I recognized that those customers in the swimming pool were sloshing around there because they were sweaty and hot. Meaning? They’d also crave refreshment -- which no other waitress was bringing them -- because everyone viewed themselves as simply being Lounge Chair Cocktail Waitresses.

Money-Magnetizing Question: How might your presence, talent, time, and energy solve today’s customer's most basic problems/needs/fears? The bigger and more untapped the problems/needs/fears, the bigger the money earned!

Rule #3: You don’t need to work longer hours, just more fearless hours.

You’d think the day after my outing as a Teenage Swimming Cocktail Waitress I’d have created a tidal wave in that pool of swimming waitresses all dipping into my sales pond. But no, no, no. All the other waitresses were too afraid to break the rules and stand out with a Unique Selling Point. They all did exactly as instructed -- not daring to think outside the box/inside the pool -- and thereby they made a lot less money. The other waitresses let fear inter-fear with their success. 

Money Magnetizing Question: If you had limitless courage, how might you risk more so you could earn more? What are you most afraid of? Failure? Poverty? Ego-bruising? British economist John Stuart Mill had a great quote which helps risk-taking pioneers move forward past fear. He said: “Every great movement must experience three stages: ridicule, discussion, adoption.” This quote makes a valuable golden rule for success... so...

Rule #4: Be ready for your fearless ideas to undergo ridicule and discussion, before adoption.

You can be sure that when I jumped into that swimming pool with tray in hand, the first reaction was sniggers (aka: ridicule). Next came whispers (aka: discussion). Then finally those dollar-producing drink orders (adoption!).


Golden Touch Assignment

Don't let fear inter-fear with your swimming in new career waters. Write up 2 lists on a small card of: (1) Why you should feel tremendous confidence to go for your goal. (2) Why you feel passion to go for your goal. Put this card in your wallet -- where all your money is! Whenever fear strikes, strike back with your confidence-boosting and passion-boosting lists!

---

10 JUI 2009

A good article in National Geographic got me thinking not only about my own health, but also my own rules to trading and investing.  Enjoy:

The Power Nine: Secrets of long life from the world’s healthiest humans

1. Move: Find ways to stay active
2. Plan de Vida: Discover your purpose in life
3. Downshift: Take a break
4. 80% Rule: Don’t overheat
5. Plant Power: Choose greens
6. Red Wine: A glass a day
7. Belong: Stay social
8. Beliefs: Get ritualistic
9. Your Tribe: Family Matters

---

Insight: US property market central to economy
By Gillian Tett
Published: July 9 2009 18:38 | Last updated: July 9 2009 18:38

A couple of weeks ago I visited West Virginia, USA, where some friends of mine run a small real estate business. As we sat in their yard on a balmy summer evening, I heard how realtors in this pretty, small town had been devastated by the housing crash.
So far my own friends have dodged the worst with canny financial footwork. And they cheerfully insist that the town can survive the wider damage, as long as prices stabilise or rise. “But if prices fall further, it will be terrible,” one realtor declared – before insisting “we really don’t think that’s likely. Nothing can keep going down for that long.”

Is that assumption justified? That is the $6,000bn dollar question, not just for West Virginia, but the wider financial system. After all, it was a turn in the US property market that triggered the financial crisis. And while many other financial disasters have since followed, the state of the US property market remains crucial to the banking world as a whole.
For not only does the health of the US consumer – and thus economy – remain tied to housing, but western bank balance sheets are tightly tangled up with property too. Most notably, America’s largest banks, such as Bank of America, JPMorgan and Citi, continue to hold a vast quantities of residential and commercial property loans on their books, in addition to all those loans that they previously repackaged as bonds, and sold on. So do numerous small banks.

And while the prices of mortgage-linked bonds have already slumped to reflect house price falls, the value of many tangible loans have not been fully marked down, because they are lodged in hold-to-maturity books – and the banks do not believe that prices will continue to fall. Indeed, in the town that I visited in West Virginia, some local bankers are refusing to sell foreclosed properties, because they think prices will soon rise. Thus, if prices fall instead, it can only mean one thing: yet more bank pain.
So will US property prices stabilise? Not if you believe a startling presentation I saw this week from a large, global financial group. This particular bunch of analysts – who have done a remarkably good job at predicting the credit crisis during the past four years – are currently warning their clients to expect a peak-to-trough fall in US residential prices of more than 40 per cent in this cycle.
The good news is that in some US regions, prices have already fallen so sharply – often by more 30 per cent – that property is already very affordable, relative to incomes and on a historical basis.

But the bad news is that houses are not yet cheap enough to prevent more price falls. On the contrary, this particular team of analysts thinks that when the problems of excess house inventory and rising unemployment are added into the model, average US house prices will still fall by another 14 per cent in the next few years – on top of the declines seen so far.
That headline figure conceals some startling regional discrepancies. Colorado is reckoned to be through the worst. In New York, though, the pain has barely started. Prices there are projected to decline by another 30 per cent or so. Taken as a whole, these projections imply that about 25m households in America end up in negative equity.
This projection is gloomier than those made by the US government and many large US banks. But the 25m number is currently being echoed by other investment groups, such as Pimco. If it turns out to be correct, it raises two crucial questions. One is the degree to which the western banking system could face a secondary round of real estate losses (particularly as these analysts are even more alarmed about the commercial property outlook than the residential sector.)

But the second fascinating question is what further house prices falls might do to consumer psychology. America has never experienced negative equity on this scale before. Thus nobody is entirely sure how households might respond. Will they default en masse? Will voters become so angry that they demand more populist public bail-outs of the housing sector (or financial reform)? Will consumers cut spending further?
Or will households instead act like my friends in West Virginia – namely shrug their shoulders and display that all-American sense of optimism and resilience, and just assume that somehow things will work out in the end (or that President Obama will ride to the rescue somehow?)
Frankly, I am unsure. But it is clear it will be difficult for the Obama administration to stave off any looming price falls, given the variegated nature of the mortgage market and rising debt. That, in turn, leaves me feeling it is too early to believe “green shoots” could presage a full blown recovery anytime soon – either in the verdant pastures of West Virginia, or anywhere else linked to the US mortgage world.

gillian.tett@ft.com
Copyright The Financial Times Limited 2009

---

---

26 JUN 2009

10 Ways to Improve Your Small Business

Scott Reeves Minyanville 2009

You’ve got only a few arrows in your quiver -- and they’re expensive -- so make each shot count. Target your audience and tailor your message as needed to individual customers. Don’t shoot blindly, figuring you’ll hit something, because that something is likely to be your foot.
Here are some steps you can take to institute an effective, low-cost marketing program:

1. Use email rather than snail mail.

Email is faster, cheaper, and you can zap your messages directly to good prospects, meeting the needs and tastes of different customers. Be honest: When was the last time you opened an envelope sent bulk rate that screamed, “Do not destroy!”?

2. Keep your email messages short.

This is truly a case where less is more. Old-time newspaper editors were on to something when they told cub reporters, “Write short, tight, and sweet.”

3. Respect your customers.

Have a point, and get to it -- immediately. Remember that your customers’ time is valuable and you’re one of many competing for it. Make your messages compelling and cut the blather.

4. Be distinctive.

Your customers almost certainly get lots of unsolicited emails each day, so you’ve got to stand out. Make good use of your company’s logo. An email’s subject line will make or break your campaign. Think of it as a headline on a news story -- you want to grab readers' attention and compel them to click. “Big controversy breaks out at Board of Solid Waste Management” won’t cut it.

5. Sell answers.

Offer your customers a way to save money or do their jobs better, or entice them with goods or services they need and can afford. Underscore the return your customers will receive by buying from you.

6. Say thanks.

No need to get sappy or put it in iambic pentameter, but be sure to include a line thanking your customers for their business.

7. Provide contact information.

Make it easy for customers to find you. A marketing program, even a clever one, is worthless if the customer doesn’t know how to find you. Put your contact information under your company’s logo and at the end of the message. Include walk-in address, mailing address, email address, and phone number, as well as key words for any discounts or promotions.

8. Work with your customers.

Remember that they face the same crunch you do. Consider selling in smaller-than-normal lots to keep the cash flowing, or letting your best customers pay an agreed-upon amount within 30 days and the balance within 60. You’ll also get noticed if you can fill orders or contracts quickly. With luck, speed will reduce your overhead.

9. Work, work, work.

Remember that profit is your reward for providing vital goods or services to your customers. Unlike a frou-frou restaurant where the gratuity is tacked on to the bill no matter how surly or incompetent the waiter, you’ve got to continually earn the trust of your customers with good prices and good service.

10. Listen to your customers.

You’re not the phone company before deregulation introduced competition to the sector, so be responsive to complaints and suggestions. Routine bitching from loonies is part of the psychic cost of doing business, but always keep the customer's perspective in mind.

---

26 JUN 2009

Paul Tudor Jones - Failure Speech June 2009

---

18 JUN 2009

Seven Things Small-Business Owners Can Do to Survive the Downturn


Faced with rising defaults, some banks may add small-business-loan payment history to a borrower’s consumer-credit file.

The US Small Business Administration requires borrowers to personally guarantee loans. Fair enough -- especially during good times. But professional debts may become personal during the recession.

Troubled business loans could hammer the personal credit score of some entrepreneurs --driving up the cost of existing credit and future loans, or limiting prospects for a mortgage on a new house.

Business Week reports that Capital One (COF) plans to report business loans to the major consumer credit bureaus, including Equifax (EFX), starting next month. The bank has reported small-business loans to the Small Business Financial Exchange, a business credit bureau, since 2007.

Here’s 7 things small-business owners facing a cash crunch need to do:

1. Review the terms of your loan: Determine your bank’s current practice regarding business loans and credit reporting. Ask if it will change in the future. And keep it simple: Remember that your personal or business credit rating won’t be hurt if you’re current on payments. Genius, eh? But many borrowers overlook this basic point.

2. Don’t panic: Most lenders still don’t report business loans to the consumer credit bureaus unless the borrower is delinquent, says the credit-scoring company FICO (FIC).

3. If you’re headed for trouble: Call your bank, alert your loan officer to the impending problem, and make every effort to stay current with your payments. Banks are feeling the squeeze too, and most will work with you to avert default -- especially if you’ve been a good customer for years. You may be able to extend payments, but you may pay a higher interest rate.

4. Put it in writing: Send letters detailing your financial situation to your bank. State what you're doing to keep the loan current, and re-state for the record any changes in terms you and your bank have agreed to. Build a record and keep a file.

5. Avoid bankruptcy, if possible: Though bankruptcy allows businesses or individuals to reorganize their finances, some abuse personal bankruptcy by using it as a convenient way to avoid paying some of their debt, giving the process its stigma. Bankruptcy isn’t the end of the world: If you file for bankruptcy, you'll get credit again, but it’s likely to be from sub-prime lenders at high rates. In any case, personal bankruptcy means you’ll spend years rebuilding your credit score.

6. Get an attorney: You can file the paperwork yourself, but you can easily overlook a minor point that could cause problems in the future. While bankruptcy is routine, it’s wise to consult an experienced attorney if you plan to seek protection from creditors. If you’re married, both spouses may not have to file for bankruptcy. It’s common for one spouse to have significant debt in his or her name only. Consult with your attorney to try rearranging debt and constructing a credible recovery plan to pay this thing off without bankruptcy.

7. Be Proactive: Avoid this mess, as a strong repayment history is the best way to avoid future credit problems.

---

10 JUN 2009

Former labor secretary Robert Reich, for one, thinks the deficit hawks are all worked up over nothing: "We ought to temper our worries by understanding the larger context," he says, noting debt pulled the U.S. out of the Great Depression, and has spurred unprecedented growth over the past 75 years.

---

7 JUN 2009

China influence to grow faster than most expect: Soros
Sun Jun 7, 2009 7:44am EDT
 
By Edmund Klamann
SHANGHAI (Reuters) - Financier George Soros said on Sunday that China's global influence is set to grow faster than most people expect, with its isolation from the global financial system and a heavy state role in banking aiding a relatively swift economic recovery. He reiterated his cautious views regarding the surge in global stock markets, although he said it may have further to go given liquidity in the markets and that many investors are still sitting on the sidelines.

"In many ways, Chinese banking has benefited from being isolated from the rest of the world and is in better shape than the international banking system," he told an audience at Shanghai's Fudan University.

China's extensive capital controls have helped to shield its financial institutions from the worst of the global financial crisis.

"The influence of the state is also greater. So when the government says 'lend', banks lend," Soros added. "This puts China in a better position to recover from the recession and that is in fact what has happened."

New loans by Chinese banks surged to record levels in the first quarter, spurring optimism over recovery prospects for the world's third-largest economy.

"China is going to be a positive force in the world and the market, and as a consequence, its power and influence are likely to grow. Personally, I believe it's going to grow faster than most people currently expect," Soros said. He acknowledged that some doubts remain over China's economic recovery, however, noting data such as a continued fall in electricity consumption. He also noted that China's aggressive 4 trillion yuan ($586 billion) economic stimulus program, announced last year, had bolstered the economy.

"If that program proves inadequate, it is in a position to apply additional stimulus. China is also in a position to foster a revival of its exports by extending credit and investing abroad," he said. He reiterated his view that because China's economy is only one-quarter the size of the U.S. economy, it cannot replace the American consumer as the motor of the global economy, so global growth will be slower than in the past.
He sounded a more upbeat note for China's asset markets than for global markets overall, where he remained wary.

"I'm pretty cautious. Even though I've said prices are cheap, I'm not so optimistic as to put all my money into stocks or assets because I think that the outlook is fairly uncertain. "I do, however, think that the Chinese economy is a promising economy. I think here it is more a matter of finding the right assets rather than saying that I'm not interested in investing."

Asked if the recent climb in global stock markets was a bear market rally, he said: "It may have further to go because there is a lot of liquidity, a lot of investors are on the sidelines. If the market keeps on going up, more of them may decide to join in. You never know how far the rally goes. But I certainly don't think we are at the beginning of a big bull market worldwide."

($1=6.832 Yuan)
(Editing by Jason Neely)


© Thomson Reuters 2009 All rights reserved

---

1 JUN 2009

Weathering the Storm
Failure destroys some people. Others rise from the ashes, only to come back stronger. A guide to surviving tough times.

By: Bruce Grierson

In September of 2008, Philip Schultz, a humble and plainspoken fellow, crossed the hardwood floor and slid in behind a temporary lectern in the Center for Well-Being at The Ross School in East Hampton. It was commencement day for the eighth-grade class. Some students recognized Schultz, who was giving the address, as the father of eighth-grader Eli. He was a local poet.
Schultz told the students he hadn't learned to read until he was 11. By then, he'd been held back a grade and was a permanent member of what the other kids called the "dummy class." Teachers just didn't know what to do with a kid like Phil Schultz—who, it turned out, was dyslexic. When a teacher asked him what he wanted to do with his life and Schultz said he wanted to be a writer, the teacher laughed. "I wasn't insulted," Schultz recalls. "I understood it was a funny thing to hear from someone who hated to read and couldn't write a simple English sentence."
Schultz' punishment for being a dummy was exile to shameful outsiderdom within a class moving forward. And that's exactly the kind of experience from which writers are made. Within "the loneliness of having so little expected of me, and the pain of being overlooked and forgotten," as he put it to the assembly, was time for careful attention to his interior life. All a writer really needs are the self-knowledge to decipher his feelings, the judgment to recognize the original ones, and the courage to make them public. It's a job open to anybody—even dyslexics. And so Schultz steamed ahead toward the one career for which others thought he was the most ill-suited—poetry.
Cut to 2007. A working poet now, Schultz realized that almost everything he wrote was about failure. Failure was his clay. He was writing about his dad—a drunkard who'd been a lousy parent and a worse provider—but he was also tapping the part of himself that felt like a failure. Schultz had aimed to be a novelist, but couldn't pull it off. Alongside the very personal poems about his father, a long poem took shape about a character who walked other, more successful, people's dogs.
The voltage that shot through the plainspoken language was unlike anything Schultz had produced. He called the collection, simply, Failure. On its cover: a bent nail in a board. Last year, it won the Pulitzer Prize.
These days, failure—what Schultz calls "the great American taboo"—has bubbled to the surface just about everywhere. Few people can escape the feeling they're giving up ground. The global financial crisis has produced the sort of circumstances playwright Arthur Miller warned every generation must face—the sort that mints Willy Lomans.
The recession has brought a sense of siege, and within it, the collective emotional tone of the whole world seems to cycle. More than 4 million workers have been laid off since the recession began. On a single day in January, 70,000 people were laid off, and another 50,000 or 60,000 lost their jobs on each of the 10 days that followed. The rage spilled into the streets in 10 countries.
One day, we may look back on this period as "a time when the gods changed," to paraphrase James Michener, a moment when a convergence of big scares rattled people's beliefs about basic things: Am I safe? Who can I trust? Is there anything I can do? And how, given everything that has happened, should I live? It no longer seems possible to avoid failing simply by being conscientious and working hard—the formula our parents, and their parents, took to the bank.
There are failures and there are Failures, but the differences between bankruptcy and financial diminishment, divorce and marital strife, spiritual crisis and anomie are distinctions of degree, not kind. And they are connected. Woe in one sphere strains the seams of others. It's not pretty. And that's why failure is something you wouldn't wish on your least agreeable relative.
Or would you?
A theory is gaining momentum that looks at failure differently. Failure, it says, is at worst a mixed blessing: It hurts, but can pay off in the form of learning and growth and wisdom. Some psychologists, like the University of Virginia's Jonathan Haidt, go even further, arguing that adversity, setbacks, and even trauma may actually be necessary for people to be happy, successful, and fulfilled. "Post-traumatic growth," it's sometimes called. Its observers are building a solid foundation under the anecdotes about wildly successful people who credit their accomplishments to earlier failures that pushed them to the edge of the abyss.
Last fall, J.K. Rowling described to a Harvard grad class a perfect storm of failure—broken marriage, disapproval from her parents, poverty that bordered on homelessness—that sent her back to her first dream of writing because she had nothing left to lose. "Failure stripped away everything inessential," she said. "It taught me things about myself I could have learned no other way."
Apple founder Steve Jobs describes three apparent setbacks—dropping out of college, being fired from the company he founded, and being diagnosed with cancer—that ultimately proved portals to a better life. Each forced him to step back and gain perspective, to see the long view of his life. "I have failed over and over and over again, and that is why I succeed," said Michael Jordan—as did Oprah, Walt Disney, Henry Ford, Winston Churchill, and Thomas Edison, in slightly different words. Indeed, so oft-repeated is the trope that we lose sight of how strange it is.
We do know that learning is error-driven—probably as a result of the brain trying to be efficient. Failures grab our attention. So many things happen the way we expect them to that mistakes register disproportionately. We're forced to integrate that new information. Researchers have found that the more wildly wrong our prediction was, the quicker we learn. The brain, you might say, feeds on failure. We are acutely sensitive to negative feedback, and this "negativity bias" drives learning, at least from teenagehood on up.
Paul MacCready, Jr., the famed aeronautical engineer who died in 2007, understood the practical value of failure, and very consciously built his success on it. Vying for the Kremer Prize for the world's first human-powered airplane, he designed his airplane to crash well—to protect the pilot and be quickly repairable, so he could crash, and learn, again. MacCready not only expected to fail, he actually depended on failure as necessary grist for the mill. (It worked: He won the prize.) For MacCready, failure had became an implicit part of the scientific method. Which of course it is. The term "trial and success" isn't much heard, because it doesn't make sense.
"An occasional failure in life is extremely important information," Haidt says. "When you look at stories of great leaders, they almost all had major setbacks. That was the concern I had with Obama. I now think he'll make a great president—but the fact that he really hasn't had any major failures in his life means that he may not be as tempered, as challenged, as hardened."
If you don't get the kind of information failure provides, you'll end up with unrealistic expectations for yourself, explains Haidt. You could wind up in a position where failure, which has gathered under cover of darkness, reveals itself all at once.
We should hope, then, for exposure to failure, early and often. The sociologist Glen Elder proposed that there is a sensitive period for growth—late teens through early 30s—during which failures are most beneficial. Such a pattern seems to promote the trait sometimes called equanimity. We learn that trauma is survivable, so we don't plunge too deeply following setbacks. Nor, conversely, do we soar too high on our successes. Some businesses in Silicon Valley and on Wall Street make a point of hiring ex-pro athletes to their staffs. It's not just that their high profile draws business. It's because athletes are master compartmentalizers. "We needed people who could perform and not get emotionally attached to losses," a Chicago oil trader told the New York Times, explaining why the firm likes jocks on the trading floor, particularly in ugly economic times like these. Buddhists call such equanimity upekkhaa. The image is of a rider easy in the saddle. Nothing can so surprise her—either for good or ill—that she'll be knocked off.
One way to help keep life's slings and arrows from knocking you off course is to ensure your life is multidimensional, says Stephen Berglas, a California psychologist and personal coach. That way, a setback in any one area won't mean in your mind that you're a failure categorically. Call it spreading your risk across your emotional portfolio—or adding another leg to the furniture for balance, says Berglas.
Failure—especially public failure—stirs some of the most potent social emotions we have: humiliation, guilt, shame. Guilt—which occurs when you chalk up a failure to something you did—can be beneficial. Shame, on the other hand—which is present when you attribute failure to something you are—casts a generalized depressive pall on you that's harder to face, let alone fix, notes Richard Robins, director of the Personality, Self and Emotion Laboratory at the University of California at Davis.
That may explain why, though writer Sascha Rothchild's rejection from Yale felt shameful and made her depressed, getting divorced after just a year of marriage didn't seem as personal. "It seemed that the two of us tried this thing and it didn't work out," says Rothchild. "It was our fault. We weren't working out together—that doesn't mean either of us is a bad person." The guilt left behind in the tailing pond of a failed marriage was actually productive. It made her deconstruct in minute detail what might have been done differently. (The result was a forthcoming memoir sardonically titled How to Get Divorced By 30.)
Failure has implications for our development as whole people, fulfilled and purposeful. It can initiate a search for meaning, a shift from pursuing the kinds of happiness that flare briefly to the kinds of happiness that endure. Suppose you've just gone broke. A wicked hit registers in the "work and success" dimension of your life. But the psychic immune system has a strategy for such a loss. There are four basic dimensions of our lives, says Robert Emmons, a psychologist at the University of California at Davis. There is achievement, community, spirituality, and legacy. When one dimension fails us—we lose "achievement," say, when we're laid off—the remaining three get stronger.
Achievement is a big one in America—disproportionately valued, and often conflated with material success. But other dimensions actually have a potentially higher payoff. We easily habituate to material things, and they quickly stop making us happy. But these other less tangible values, a number of researchers have found, don't lose their happiness-making punch—at least not as much.
And so the once-autonomous striver, bulletproof and bowling alone, is forced to throw that old life over the side and start making other connections. A new unifying principle coalesces around some "higher purpose," and damned if the new life doesn't feel like an upgrade. Thus does failure lead, roundabout, to happiness. "London and Chicago seized the opportunities provided by their great fires to remake themselves into grander and more coherent cities," Haidt writes in The Happiness Hypothesis. "People sometimes seize such opportunities, too, rebuilding beautifully those parts of their lives and life stories that they could never have torn down voluntarily."
Everyone gets laid low by failure sometimes, however briefly. The real difference between people who pull themselves out somehow versus the people who do not, says Susan Nolen-Hoeksema, a psychologist at Yale, is that some slip into "rumination"—a spiral of morbid self-involvement that's extremely difficult to shake. But what separates the ruminators from the resilients? Why is it that the same set of circumstances that drives one person deeper into the mud makes another stronger? Is there just a kind of native temperament, a Donald Trump-ish optimism some psychologists have described as "enthusiasm and persistence in the face of setbacks"—something that helps some people find the kernel of good inside the bad and profit from it—that's either in play or isn't? How can we learn, as Samuel Beckett put it, to "fail better"?
"Failing better" boils down to three things. It's a matter of controlling our emotions, adjusting our thinking, and recalibrating our beliefs about ourselves and what we can do in the world.
"Chess is a game of failure," says Bruce Pandolfini, an American chess master known for his work teaching young chess players. (Sir Ben Kingsley played him in Searching for Bobby Fischer.) "At the beginning, you lose—a lot. The kids who are going to succeed are the ones who learn to stand it. A lot of young players find losing so devastating they never adapt, never learn to metabolize that failure and to not take it personally. But good players lose and then put the game behind them emotionally."
Pandolfini teaches his students this calming sense of perspective. The present moment is laid out against the past. What you see is compared to your memories of what you've seen—and mastered—before. What you have in the end is a kind of coherent story. He calls it chess instruction, but really, it works with anything. In fact, it's not so different from the way writing down your feelings in a journal helps you process failure and move on, a phenomenon demonstrated by James Pennebaker, a psychologist at the University of Texas.
Teachers, studies reveal, can foster resiliency among students, creating students who don't flinch from failure but actually welcome it as a learning opportunity. People have one of two belief systems about how intelligence works, says Carol Dweck, a psychologist at Stanford. We think intelligence is either "fixed" or "malleable." In other words, we're pretty much as smart and good and competent as we're going to get, or else we're a work in progress, and the way forward is up.
People who believe intelligence is fixed are less resilient. If you don't believe you can learn anything from your mistakes, you won't welcome failure with open arms.
But students who are taught that the brain is plastic and that they can become smarter and more competent—that the brain grows, like a muscle, when you work it hard—show a spike in grades and enjoy school more. Because they're less afraid to fail, they succeed more.
How much failure is too much? Bubble-wrapping kids to shield them from failing does them no favors. Without that trial-and-error learning from gradual exposure to risk, kids become vulnerable to anxiety disorders, says Michael Liebowitz, a psychiatrist at Columbia University. But at the other extreme, exposure to repeated and relentless failure can crush the spirit of even a resilient kid. A parent's job, then, is to create a kind of sweet spot of exposure to failure.
"There's a bleeding edge of where we have to push ourselves—it can't be too far in front of us," says Michael Ungar, head of the International Resilience Project at Dalhousie University. "You can't just say to a kid, go learn to swim on your own. But you can take them through the process gradually. Let them see what buoyancy feels like, let them have little moments of mild distress where everything is then immediately okay—manageable risk. This is how we learn to solve problems, and receive an inoculation against major stressors. But there is a little bit of a cult of self-esteem that short-changes it all."
Failure can't help us if we're oblivious to it. And yet. There's something deeply sympathetic, and not a little familiar, in repeat failure. So often are our rehabilitations short-lived. Despite our best intentions, our mightiest resolve, we find ourselves endlessly repeating earlier failures.
But the great payoff in failing is it gives us another chance, as Alex Trebek encourages his Jeopardy contestants who risk everything and crash down to zero to "start building." To begin again from scratch is itself part of the American script.
In this sense, failing well amounts to taking a weird kind of pride not just in the potential positive consequences of failure but in the failure itself—the awful, agreeable humanity of it. Failure drives us out of our caves and into the world of Other People, that plane where happiness is less perishable.
After Failure was published, Philip Schultz couldn't help notice the strong reactions other people had to it—the "triggering mechanism" of the word itself, as if it was a private shame or fear everyone had, and were grateful for having the entree to talk about.
"It's interesting how many people are coming up to me and talking about their relationship with failure," he says. "Everyone thinks they're a failure. The only people who don't are the ones who really are." —Bruce Grierson

NINE ways to fail better
Some people learn from failure and bounce back stronger. for others, failure destroys them. Be one of the ones who rise from the ashes.
1. Lighten up Most people who bounce back from setbacks have a sense of humor. They know when they're taking things—and themselves—too seriously. We're often so paralyzed by fear of failure that we "self-handicap," sabotaging ourselves by putting an impediment in the way, says personal coach Steven Berglas. Because, hey, if something prevented you from trying your best, you can't be said to have failed, right?
"I'll die if I don't win the Olympics," Berglas sometimes hears from his clients. "Really?" he replies. "On the court? Or will you die of shame?" OK, they acknowledge, they didn't really mean die. But now there's a fissure in their anxiety through which the ridiculousness can seep in. It's hard to find the funny in the fine grain. Humor is about stepping back for fresh perspective. We assume that's something we're born with, but we can become better at seeing the lighter side by sheer exposure to that way of thinking. And it does take the edge off of failure. After all, an embarrassment today makes for an entertaining story tomorrow.
2. Join the club Misery loves company. Just look at the growth of Web-based support groups like "15,000,000 Recession-Touched People" (on Facebook) and Global Depression Support Group (on meetup.com).
There's real value in commiseration. When Montrealer Sylvain Henry started a Facebook support group called "Recession Survivors" after being laid off from a software company, the group became a lightning rod for pain and blame. "You've gotta blame someone, right?" Henry says. "Whose fault is this?" People vented about the lost house, the failed marriage. It was cathartic.
Then something happened. "People vented themselves out," Henry says. "After that came another impulse: Let's do something about this." The members began posting productive hints, little money-saving tips about budget-friendly cookie recipes or how to throw a good garage sale. The site transformed into a clearinghouse of resourceful coping strategies for hard times. Call it Failing Better: the Open-Source Edition.
3. Feel guilt, not shame The difference between guilt and shame is the reason we assign as to why failure occurs, notes Richard Robins, a psychologist at the University of California at Davis. Guilt says it's "something I did." But shame means feeling failure occurred because of "something I am"—in which case, you expect failure and don't act to avoid it.
But the cycle of learned helplessness can be broken. Instead of thinking "I'm a failure," think "I'm a good person who made a mistake I can learn from." If your story about failure is, "It's all my fault," you might need to practice looking outward and ask yourself, "What other things—things that aren't about me—might have caused this negative event?"
On the other hand, if your story is, "It's never about me," you may need to seek out some aspects of the problem you can do something about. Because let's face it, you do mess up—everyone does. In which case you need to own the failure, see what you can learn from it, and move on.
4. Cultivate optimism Of the seven learnable skills of resilience—emotion awareness, impulse control, multiperspective thinking, empathy, the belief that you can solve your own problems, taking appropriate risks, and optimism—the most important is optimism, says Karen Reivich, a psychologist at the University of Pennsylvania. "There is nothing either good or bad but thinking makes it so," said Hamlet, and indeed, paying attention to the positive infuses the world with hope—and creates a climate in which failure loses its sting.
The key to resilience is thinking more flexibly and learning to increase your array of options. The psychologist Martin Seligman advocates disputation, in which you think of your mind as a courtroom where negative thoughts are instantly put on trial.
You can rebut these thoughts, and you should. Now you're acting as your own defense counsel, throwing at the court every bit of evidence you can think of to prove the belief is flawed. The bad thought is no longer a lock, and it dies amid the doubt.
5. Ask not what the world can do for you... Getting fired and left without savings or health-care coverage is rough, but for some, it carries an unexpected message: "Now you are free." Free to do something more meaningful with your life—like volunteering overseas. If you don't have to earn money right away, ask yourself: How can you be of service to others?
The sales manager of a Portland, Oregon radio station, Margaret Evans was let go unexpectedly in late September. As she researched new jobs and grad schools, it occurred to her that getting laid off was a kind of gift. She'd always intended to do service work. "This was my chance to make it happen," she says.
The tumblers aligned, and by December she'd signed on as a volunteer at an orphanage in Belize, through a Florida-based charity called Dream Center International. Travel, live cheaply, and do good for people who genuinely need it: not a bad recipe. "This turned out to be the best thing that could have happened to me," she says.
6. Scale down your expectations for yourself When we succeed, we tend to just ratchet up our expectations for ourselves and not get a lot of pleasure out of it. But when we fail, it's much harder to ratchet down our expectations for ourselves. "That might be what failing well is," says psychologist Jonathan Haidt. "A willingness to lower our sights when that's realistically required."
Gilbert Brim begins his book Ambition with the story of his father in rural Connecticut: or rather, his father's windowbox. As a young man his father took pride in maintaining the forest on the whole property, but eventually that task became impossible. So as he grew older and weaker, he reduced the range and scope, until he was content just to tend the flowers in his windowbox, albeit to the same standards of excellence. If failure is about failing to meet goals you set for yourself, then one way to avoid failing is to revise those now-outdated goals. That way, instead of failing on a stage you once mastered, you're still succeeding on a more modest stage.
7. Harness the Bridget Jones Effect Keeping a journal can help you cope with failure. Jamie Pennebaker, a psychologist at the University of Texas, studied middle-aged engineers who'd lost their jobs. Those who wrestled with their feelings about the trauma through journaling were far more likely to find reemployment. It wasn't simply the tension-relieving "catharsis" of getting their feelings out. Nor was it that they were more motivated to get out there and pound the pavement—they didn't receive more phone calls, make more contacts, or send out more letters.
Rather, writing helps create meaning—finding coherence and building a personal story that lassos all the question marks hanging in the air and making sense of them. Writing about their feelings forced them to come to terms with getting laid off. It also boosted their social skills—making them more likeable, less vindictive, and better able to get on with things. They were less wrapped up in their past. They could listen better and were more optimistic and less hostile.
8. Don't blame yourself Self-blame is corrosive. Research on kids raised amid domestic violence, abuse, or maternal depression shows that self-blame can trigger or worsen depression. Attribution errors—blaming yourself for the bad things that happen to you—are probably the biggest reason people metabolize failure badly. Attribution has a potent effect on depression—the more you blame yourself for problems, the more depressed you grow. And it's a vicious circle—the more depressed you are, the more you blame yourself. By contrast, children who understand that such negative life circumstances are outside their control are not as vulnerable, notes Stanford psychologist Carol Dweck.
9. Act! Failure is an opportunity to change course. Seize it.

Psychology Today Magazine, May/Jun 2009
Last Reviewed 4 May 2009
Article ID: 4823

---

01 JUN 2009

Front page of the NY Times: See the shameful behavior of banks — one of the primary causes of the entire crisis — using bailout money to pay lobbyists to maintain the regulatory status quo.

Its yet another reason for why they should have been put into bankruptcy once they became insolvent.

So far, the Obama administration approach to bailouts has been to keep running Bush Economic term III. They have been far too kind (genteel even) showering taxpayer monies  on the incompetents and fools who drove their firms over the abyss. Indeed, its all but impossible to see where the largesse of the Bush bailout policies ends and the Obama bailout policies begins.

If today were November 2012, I would not vote for this team. As far as the banking sector is concerned, this gang is no different than the knaves and dolts who came before. It is more of the same irresponsible, expensive and reckless policy that preceded them.

-Barry Ritholtz

---

24 MAY 2009

Federal Reserve Chairman, Ben S. Bernanke, addressed graduates at the the 2009 commencement of the Boston College School of Law on Friday:

"I am very pleased to have the opportunity to address the graduates of the Boston College Law School today. I realized with some chagrin that this is the third year in a row that I have given a commencement address here in the First Federal Reserve District, which is headquartered at the Federal Reserve Bank of Boston. This part of the country certainly has a remarkable number of fine universities. I will have to make it up to the other 11 Districts somehow.
Along those lines, last spring I was nearby in Cambridge, speaking at Harvard University's Class Day. The speaker at the main event, the Harvard graduation the next day, was J. K. Rowling, author of the Harry Potter books. Before my remarks, the student who introduced me took note of the fact that the senior class had chosen as their speakers Ben Bernanke and J. K. Rowling, or, as he put it, "two of the great masters of children's fantasy fiction." I will say that I am perfectly happy to be associated, even in such a tenuous way, with Ms. Rowling, who has done more for children's literacy than any government program I know of.
I get a number of invitations to speak at commencements, which I find a bit puzzling. A practitioner, like me, of the dismal science of economics--and it is even more dismal than usual these days--is not usually the first choice for providing inspiration and uplift. I will do my best, though, and in that spirit I will take a more personal perspective than usual in my remarks today. The business reporters should go get coffee or something, because I am not going to say anything about the markets or monetary policy.
Instead, I'd like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality.
As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve.
With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect.
In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.
In planning our own individual lives, we all have a strong psychological need to believe that we can control, or at least anticipate, much of what will happen to us. But the social and physical environments in which we live, and indeed, we ourselves, are complex systems, if you will, subject to diverse and unforeseen influences. Scientists and mathematicians have discussed the so-called butterfly effect, which holds that, in a sufficiently complex system, a small cause--the flapping of a butterfly's wings in Brazil--might conceivably have a disproportionately large effect--a typhoon in the Pacific.
All this is to put a scientific gloss on what you probably know from everyday life or from reading good literature: Life is much less predictable than we would wish. As John Lennon once said, "Life is what happens to you while you are busy making other plans."
Our lack of control over what happens to us might be grounds for an attitude of resignation or fatalism, but I would urge you to take a very different lesson. You may have limited control over the challenges and opportunities you will face, or the good fortune and trials that you will experience. You have considerably more control, however, over how well prepared and open you are, personally and professionally, to make the most of the opportunities that life provides you.
Any time that you challenge yourself to undertake something worthwhile but difficult, a little out of your comfort zone--or any time that you put yourself in a position that challenges your preconceived sense of your own limits--you increase your capacity to make the most of the unexpected opportunities with which you will inevitably be presented. Or, to borrow another aphorism, this one from Louis Pasteur: "Chance favors the prepared mind."
When I look back at my own life, at least from one perspective, I see a sequence of accidents and unforeseeable events. I grew up in a small town in South Carolina and went to the public schools there. My father and my uncle were the town pharmacists, and my mother, who had been a teacher, worked part-time in the store. I was a good student in high school and expected to go to college, but I didn't see myself going very far from home, and I had little notion of what I wanted to do in the future.
Chance intervened, however, as it so often does. I had a slightly older friend named Ken Manning, whom I knew because his family shopped regularly at our drugstore. Ken's story is quite interesting, and a bit improbable, in itself. An African American, raised in a small Southern town during the days of racial segregation, Ken nevertheless found his way to Harvard for both a B.A. and a Ph.D., and he is now a professor at MIT, not too far from here. Needless to say, he is an exceptional individual, in his character and determination as well as his remarkable intellectual gifts.
Anyway, for reasons that have never been entirely clear to me, Ken made it his personal mission to get me to come to Harvard also. I had never even considered such a possibility--where was Harvard, exactly? Up North, I thought--but Ken's example and arguments were persuasive, and I was (finally) persuaded. Fortunately, I got in. It probably helped that Harvard was not at the time getting lots of applications from South Carolina.
We all have moments we will never forget. One of mine occurred when I entered Harvard Yard for the first time, a 17-year-old freshman. It was late on Saturday night, I had had a grueling trip, and as I entered the Yard, I put down my two suitcases with a thump. I looked around at the historic old brick buildings, covered with ivy. Parties were going on, students were calling to each other across the Yard, stereos were blasting out of dorm windows. I took in the scene, so foreign to my experience, and I said to myself, "What have I done?"
At some level, I really had no idea what I had done, or what the consequences would be. All I knew was that I had chosen to abandon the known and comfortable for the unknown and challenging. But for me, at least, the expansion of horizons was exactly what I needed at that time in my life. I suspect that, for many of you, matriculation at the Boston College law school represented something similar--a leap into the unknown and new, with consequences and opportunities that you could hardly have guessed in advance.
But, in some important ways, leaving the known and comfortable was exactly the point of the exercise. Each of you is a different person than you were three years ago, not only more knowledgeable in the law, but also possessing a greater understanding of who you are--your weaknesses and strengths, your goals and aspirations. You will be learning more about the fundamental question of who you really are for the rest of your life.
After I arrived at college, unpredictable factors continued to shape my future. In college I chose to major in economics as a compromise between math and English, and because a senior economics professor liked a paper I wrote and offered me a summer job. In graduate school at MIT, I became interested in monetary and financial history when a professor gave me several books to read on the subject. I found historical accounts of financial crises particularly fascinating. I determined that I would learn more about the causes of financial crises, their effects on economic performance, and methods of addressing them. Little did I realize then how relevant that subject would become one day. Later I met my wife Anna, to whom I have been married now for 31 years, on a blind date.
After finishing graduate school, I began a career as an economics professor and researcher. I pursued my interests from graduate school by delving deeply into the causes of the Great Depression of the 1930s, along with many other topics in macroeconomics, monetary policy, and finance. During my time as a professor, I tried to resist the powerful forces pushing scholars to greater and greater specialization and instead did my best to keep as broad a perspective as possible. I read outside my field. I did empirical research, studied history, wrote theoretical papers, and established connections, usually in a research or advisory role, with the Fed and other central banks.
In the spring of 2002, I was asked by the Administration whether I might be interested in being appointed to the Federal Reserve's Board of Governors. I was not at all sure that I wanted to take the time from teaching and research. But this was soon after 9/11, and I felt keenly that I owed my country my service. Moreover, I told myself, the experience would be useful for my research when I returned to my post at Princeton. I decided to take a two-year leave to go to Washington. Well, once again, so much for foresight. I have now been in Washington nearly seven years, serving first as a Fed governor, then chairman of the President's Council of Economic Advisers. In the fall of 2005, President Bush appointed me to be Chairman of the Fed, effective with the retirement of Alan Greenspan at the end of January 2006.
You will not be surprised to hear that events since January 2006 have not been precisely as I anticipated, either.
My colleague, Bank of England Governor Mervyn King, has said that the object of central banks should be to make monetary policy as boring as possible. Unfortunately, by that metric we have not been successful. The financial crisis that began in August 2007 is the most severe since the Great Depression, and it has been the principal cause of the global recession that began last fall. Battling that crisis and trying to mitigate its effect on the U.S. and global economies has dominated my waking hours now for some 21 months. My colleagues at the Fed and I have been called on to take many tough decisions, including adopting extraordinary and unprecedented policy measures to address the crisis.
I think you will agree that the chain of events that began with my decision to go far from home for college and has culminated--so far--with the role I am playing today in U.S. economic policymaking is so unlikely that we could have safely ruled it out of consideration. Nevertheless, of course, it happened. Although I never could have prepared in advance for the specific events of the past 21 months, I believe that my efforts throughout my life to expand my horizons and to keep a broad perspective--for example, to study and write about economic and financial history, as well as more conventional topics in macroeconomics and monetary economics--have helped me better meet the challenges that have come my way.
At the same time, because I appreciate the role of chance and contingency in human events, I try to be appropriately realistic about my own capabilities. I know there is much that I don't know. I consequently try to be attentive to all points of view, to work collaboratively, and to involve as many smart people in policy decisions as possible.
Fortunately, my colleagues and the staff at the Federal Reserve are outstanding. And indeed, many of them have demonstrated their own breadth and flexibility, moving well beyond their previous training and experience to tackle a wide range of novel and daunting issues, usually with great success.
Law is like economics in that, although it has its own esoterica known only to initiates, it is at bottom a craft whose value lies primarily in its practical application. You cannot know today what problems or challenges you will face in the course of your professional lives. Thus, I hope that, even as you continue to acquire expertise in specific and sometimes narrow aspects of the law, you will continue to maintain a broad perspective and willingness, indeed an eagerness, to expand the range of your knowledge and experience.
I have spoken a bit about the economic and financial challenges that we face. How do these challenges bear on the prospects of the graduates of 2009? The economic situation is a trying one, as you know. We are in a recession, and the labor market is weak. Many of you may not have gotten the job you wanted; some may have had offers rescinded or the start of employment delayed. I do not minimize those constraints and disappointments in any way. Restoring economic prosperity and maximizing economic opportunity are the central focus of our efforts at the Fed.
Nevertheless, you are in some ways very lucky. You have been trained in a field, law, that is exceptionally broad in its compass. At the Federal Reserve, lawyers are involved in every aspect of our policies and operations--not just because they know the legal niceties, but because they possess analytical tools that bear on almost any problem.
In law school you have honed your skills in reasoning, reading, and writing. Many of you have work experience or bring backgrounds to bear ranging from history to political science to the humanities to science. There will always be a need for people with your abilities and talents.
So, my advice to you is to stay optimistic. Things usually have a way of working out. My second piece of advice is to be flexible, even adventurous as you begin your careers. As I have tried to illustrate today, you are much less able than you think to foresee how your life, both professional and personal, will play out.
The world changes too fast, and too many accidents and unpredictable events occur. It will pay, therefore, to be creative and open-minded as you search for and consider professional opportunities. Look most carefully at those options that will give you a chance to learn new things, explore new areas, and grow as a person. Think of every job as a potential investment in yourself. Will it prepare your mind for the opportunities that chance will provide?
You are lucky also to be living and studying in the United States. There is a lot of pessimistic talk now about the future of America's economy and its role in the world. Such talk accompanies every period of economic weakness. The United States endured a decade-long Great Depression and returned to prosperity and global leadership.
When I graduated from college in 1975, and from graduate school in 1979, the economy was sputtering, gas prices and inflation were high, and pessimism--malaise, President Carter called it--was rampant. The U.S. economy subsequently entered more than two decades of growth and prosperity. The economy will recover--it has too many fundamental strengths to be kept down for too long--and the mood will brighten.
This is not to ignore real challenges. Our society is aging, implying higher health-care costs and fiscal burdens. We need to save more as a country, to reduce global imbalances in saving and investment, and to set the stage for continued growth. Our educational system is strong in some areas, including our university system, but does not serve everyone equally well, contributing to slower growth and greater income disparities. In the diverse capacities for which your training has prepared you, many of you will play a vital role in addressing these problems, both in the public and private spheres.
I conclude with congratulations to the graduates, your families, and friends. You have worked hard and accomplished much. You have a great deal to look forward to, as many interesting and gratifying opportunities await you. I hope that as you enter or re-enter the working world, you make sure to stay flexible and open-minded and to learn whenever you can. That's the best way to deal with the unpredictabilities that are inherent in life. I wish you the best of luck, with the proviso that luck is what you make of it.
And perhaps you will advise next year's class to invite J. K. Rowling."

---

8 MAY 2009

US belatedly learns lesson from Japan
By Gillian Tett
Published: May 8 2009 18:47 | Last updated: May 8 2009 18:47

In recent months, Japan’s sorry banking history has provided the world with plenty of reasons to worry about America. Now, however, it might offer a crumb of comfort, too.
The reason? In part, it lies with those stress tests that Washington has just conducted on its largest 19 banks.
During most of the past two years, the American leadership has been in a state of procrastination and denial in relation to its banking woes: first it tried to pretend that the financial woes were not too serious, since they were “contained”. Then it insisted that free market pressures would be enough to force the banks to come clean about their mess – without the need for the government to act.
In reality, the Americans were not at all unusual in taking that stance: when Japan’s banks first became plagued with bad loans in the early 1990s, the government in Tokyo took an identical stance – and continued denying the scale of woes for almost a decade.
But precisely because the Japanese were such past masters of procrastination – and learnt the hard way what that can do – they have been quietly dubious about much of what Washington has said about the banking woes in the past two years.
As long ago as the autumn of 2007, for example, Daisuke Kotegawa, a canny former financial bureaucrat who was central to Japan’s own banking clean up, pointed out to me that what was missing from the American debate was any effort to conduct an audit of Western banks.
For Kotegawa is convinced that it was only when the Japanese government finally went into its banks and did a thorough, independent review of their operations – and then published the collective bad loan estimate and forced the banks to plug any capital gaps – that the Tokyo financial dramas started to heal.
The point is: if you let banks themselves count their bad loans, not only are they apt to lie – but investors will disbelieve anything they say, even if they do tell the truth. “What is needed [to solve the credit crisis] is not [just] cash but wiping out widespread mistrust,” Kotegawa observed back then.
Now, at last, it would seem that men such as Tim Geithner are finally – belatedly – learning that lesson too (and Mr Geithner is a man who knows this Japanese tale only too well since he worked there himself in the 1990s).
You can argue at length about whether the stress tests are completely “correct” or not. But what is undisputable is that they have taken place in a fairly thorough manner. In a world that has been marked by cognitive fog, in other words, investors now have something tangible to cling to. At last, there is a sense that someone is in charge – and a bottomless pit might not be so bottomless after all.
That is potentially very important for sentiment. Back in the 1990s, when Japan’s government was procrastinating and fudging, there seemed to be no limit to just how big the estimates of bad loan numbers could become: they started the decade at around $50bn, but then rose to over $1,000bn (and Goldman Sachs even slated in $2,000bn, which back then seemed unimaginably large).
But when the Japanese finally performed their own versions of a stress test, those ever-rising projections suddenly stopped growing, not least because confidence started to return – and the wider economy picked up. These days, economists now guess that Japanese credit losses were actually around $800bn – which is very large, but less frightening than $2,000bn.
There is, of course, no guarantee that America can repeat exactly that trick. One crucial difference is that men such as Kotegawa only had the Japanese banks to worry about. Mr Geithner does not share that luxury: irrespective of whether he has measured bad loans at American banks correctly, who knows what is sitting in European banks now?
Nor does America have the luxury of sitting in a world where there are other export markets that are booming – a sharp contrast to Japan, which started to enjoy an economic uplift when Chinese demand boomed soon after it reformed its banks.
Moreover, another reason for feeling cautious is that the slant of American policy still appears to be more focused on avoiding damaging bank collapses rather than trying to build truly vibrant institutions that could lend money again. Simply removing the patient from the critical list, in other words, does not make him truly healthy again – let alone ensure that the economy will properly heal. Recapitalisation is a necessary not sufficient condition for recovery, as the history of Japan shows.
Yet, even with those caveats, the fact that the stress tests have now taken place is certainly reason to cheer. The only crying shame is that it took such a ridiculously long time for the American administration to listen to that lesson from Japan – while many of Mr Geithner’s counterparts in Europe continue to ignore it, even today.
gillian.tett@ft.com
Copyright The Financial Times Limited 2009

---

4 MAY 2009

---

27 APR 2009

Musings on Structural Challenges to the Financial System

One thing that has me troubled about the financial mess is the degree to which the powers that be are wedded to a system that is clearly broken. In part, that results from financial capture of the government apparatus by the banking industry. But an equally sticky problem is the attachment to a rather recent vision of how the financial system works. And that in turn is oddly reminiscent of destructive patterns in the Great Depression.

If you go back to 1980, the world of finance was very different, The Federal Reserve was considerably larger than any single bank. On balance sheet lending was the norm. Banking was most decidedly not sexy, unless you were Ciitbank, which loved to innovate and push regulatory limits, even though lots of banks then became free riders on its pioneering.

No one in 1980 (outside of MBA programs and certain parts of New York City) knew what an investment banker was. If you used that term with most middle or upper middle class Americans, they would assume it was some sort of glorified stockbroker.

To make a very long story short, securitization changed all that. Banks saw their lunch eaten by investment banks as they were increasingly disintermediated. By 2006, only 15% of the non farm, non-financial credit was via the banking system. What Timothy Geithner called "market based credit" became the norm.

The problem is, as we know, as the model didn't develop as much as devolve. There have been massive information losses. Much of sound banking credit processes has been replaced by sophistry, such as score based credit models that have been demonstrated to perform badly, incomplete loan files (so no one has enough borrower G2 to do updates and triage for mods), a reliance on ratings and hedging in place of credit analysis, even a mortgage registry service that only reduces transparency. And the very worst element is that securiitzation vehicles make debt restructuring, a key element to resolving a financial crisis, well nigh impossible.

And securitization was and remains the epicenter of the crisis. Gillian Tett of the Financial Times tells us:
What is imploding though is the securitisation world. If you exclude agency-backed bonds, in 2006 banks issued about $1,800bn of securities backed by mortgages, credit cards and other debts. Last year, though, a mere $200bn of bonds were sold in markets, and this year market issuance is minimal.

Now as we have said, some shrinkage is necessary. Too many people borrowed too much.

Yet there has been absolutely nothing in the way of seeing whether the model can be fixed, or scrapped. John Dizard suggested last year that central bankers expected the world would revert to more on-balance sheet intermediation, but that would entail even more equity in the banking system than the amount needed to plug the loss holes. And the Treasury and Fed actions, of creating a myriad of guarantees and special facilities, instead says that they are trying to put in place a government backed securitization process (witness in particular how Fannie and Freddie pretty much are the mortgage market these days) in place of its formerly private version.

But the lack of any thought, much the less action, on the securitization front is troubling. And I suspect no real fix is possible.



It's surprising nothing has been done on the rating agency front. That's a contained element. many good proposals have been made, yet not a peep from anyone in authority. If small fry like them can't be reformed, clearly nothing serious is in the offing.

But ex the rating agencies, it would seem at least two things would need to happen, and even then I am not sure either would be sufficient.

One line of thought is that more of the intermediaries need to have some skin in the game by retaining paper they originate, rate, or sell.

But the reason that securitization beat out lending was that it was cheaper. And the big cost of banks holding loans was equity and FDIC insurance. The more players along the food chain have to retain some of the deal, the less favorable the economics, since they will have to put up some equity to support the assets they keep. Some securitization deals might still work even with a higher level of expense, but the market would be smaller.

But of course, that assumes the players do bona fide keep a long position. What's to prevent them from hedging their credit risk? And if they do that, we are back to square zero in terms of fixing incentives.

Problem two: I have heard no serious suggestions as what restrictions to impose on securitization vehicles and servicers going forward to facilitate mods. One problem now is that deep enough mods aren't being offered (principal reductions have a much higher success rate). Probably more important, mods, just like the lousy credit decisions that helped create this mess, are being done via decision rules using simple borrower metrics rather than case by case assessment. The US has suffered falls in housing values in individual markets in the past that were as severe as the national declines we are witnessing now. I keep hearing from old style bankers that mods were always viewed as the better solution if you has a borrower with some ability to make payments. But they also made those assessments individually and with a knowledge of the community (as in stability of various local employers).

But again, would the securitization model work if you incurred the extra costs to do things right, as in better borrower assessment at the outset, establishment of good loan files (I hear repeatedly that servicers seldom have any good borrower documentation), and required investors to pay the costs needed to do mods? Again, by increasing costs, it would mean fewer deals would "work" from an economic standpoint.

So I would surmise that even if securitization were reformed, the market would indeed be considerably smaller. Paul Volcker thought we needed to roll the clock back and go to more traditional bank lending. It is pretty clear that the rest of Team Obama is not on that page and wants to restore the brave new world of fancy finance ASAP. But I don't see how we get there, save waiting ten years for memories of the problems of this period to fade and the bad practices to start all over again.

Which brings me to the Depression. There are many theories of why it spiraled downward, but the one I find most persuasive was that it was the result of the efforts to restore the gold standard in the mid 1920s (worsened by France pegging the franc too low and accumulating massive gold reserves). The key observation from works by scholars of that era like Peter Temin is that the banking and political leaders of that day felt restoring the gold standard was pro stability, and perhaps even more telling, they were virtually unable to imagine a world without it.

Our paradigm is quite different, but many of the key actors seem hopelessly anchored by it. And I worry that like the Depression, we will have to see it break down completely before we can start to rework it in significant ways.

---

24 APR 2009

Finger of blame points to shadow banking’s implosion
By Gillian Tett
Published: April 23 2009 19:59 | Last updated: April 23 2009 19:59

These days, banker-bashing is a popular sport for politicians of all stripes. For not only are the banks being blamed for unleashing financial disaster – while paying the bankers fat bonuses – they are also being blamed for slashing loans in a way that is now triggering a recession.
But is that perception really right? If you take a look at some recent research produced by Citigroup, it might seem not. For if Citi data are correct, the real source of the current credit crunch is not a collapse in bank loans, but the implosion of the shadow banking world.
And that in turn provokes a wider question: namely whether there is anything that policymakers could, or should, be doing now to revive the activities that were once performed by those peculiar shadow banks.

The numbers highlight the scale of the challenge. According to Citi (which has crunched its own figures and those of Dealogic), almost $1,500bn worth of new corporate loans were issued across the global financial system in 2008. That was well down from 2007, when more than $2,000bn of loans were made.

But the loan total last year was similar to that seen in 2006, and twice the scale of activity in 2004. Moreover, when non-financial loans are measured, an even more notable pattern crops up: at the end of last year, the volume of non-financial corporate loans was still growing at an annual rate of 10 per cent in both the US and Europe. That was well below the 20 per cent expansion seen in Europe before the peak of the boom, and in some sectors new bank-lending has tumbled. But those figures do not point to a credit drought. After all, from 2002-2004, loans to non-financial companies in the US shrank at an annual rate of more than 5 per cent.
What is imploding though is the securitisation world. If you exclude agency-backed bonds, in 2006 banks issued about $1,800bn of securities backed by mortgages, credit cards and other debts. Last year, though, a mere $200bn of bonds were sold in markets, and this year market issuance is minimal.

Indeed, the only group really acquiring repackaged debt now are western central banks, which have taken huge volumes of securities on to their own books (and away from the market), as part of their liquidity-injection measures.
So far this pattern has prompted relatively little wider political debate. After all, before the summer of 2007, most non-bankers had no idea that a shadow banking world even existed.
But the longer that this drought continues, the bigger the policy issues become. After all, no politician wants to see the government buying mortgage-backed bonds forever; but nobody really believes that traditional, old-fashioned lending can take up all the slack. So either the system needs to find a way to restart securitisation or we face a world where credit will remain a highly rationed commodity for a long time to come.

Is there any answer? This week the UK government made one attempt to break the impasse by unveiling a scheme to provide state guarantees for some mortgage-backed bonds (the idea, as my colleague Paul J Davies explains, is to prod the banks into repackaging such debt again). In America, officials are playing around with similar ideas. One concept being mooted, for example, is that the Federal Deposit Insurance Corporation should help troubled banks securitise a swathe of assets.
On both sides of the Atlantic, industry leaders are also drawing up plans to make the securitisation process much more transparent, and thus, hopefully, more credible to future investors. Another idea is to impose a so-called “5 per cent rule”. This would force banks that issue securities to retain at least 5 per cent of them on their own books, to ensure they have a vested interest in monitoring the creditworthiness of end borrowers.

On paper many of those ideas look sensible. And if they are all implemented, they might eventually enable the securitisation market to return to life, albeit on a more sober scale. But “eventually” is the key word here: right now, most parts of the securitisation market are all but dead. The longer that politicians wail about the supposed “failure of banks to lend”, while ignoring the bigger source of the credit crunch, the harder it will be to wean the system away from government support.
gillian.tett@ft.com

---

20 APR 2009

---

12 APR 2009
Relax. The marriage needn't flounder on the personal finance rocks if you discuss each other's response to money and learn how to accommodate it.

"Money is only a tool," says Diane McCurdy, a financial planner and author of How Much is Enough? Balancing Today's Needs with Tomorrow's Retirement Goals. "We give money its emotions – fear, envy, greed."

Attitudes toward money are so deeply embedded that they seem to be part of our DNA.

McCurdy says there are four basic attitudes toward money:
 
Saver: It's a snap for savers to build a large savings account on a modest salary. Savers are well-organized and would rather kiss a cow than buy impulsively. They avoid risk. For these folks, a savings account is more than money set aside for a rainy day – it's contentment approaching a Zen state. The downside: Savers often see saving as an end in itself and fail to use their money wisely. They can be too conservative and avoid investments that would make their money grow faster and free them to follow their muse.

Spender: Spenders see no use for money unless it's flying out of their wallet. Why bother with a dusty savings account when you can spend right up to the last nickel to create fun and status with the latest gizmo, a flashy car or stylish clothes? Spenders can be overly generous, dropping big bucks on a mid-week meal with friends and buying lavish gifts for their sweetie. Don't confuse spenders with compulsive shoppers who blow out their credit cards, can't breathe unless they're at the mall and often have closets filled with unopened boxes of stuff. That's a problem for a psychiatrist – not a financial planner.

Builder: Think Richard Branson of Virgin Atlantic, Bill Gates of Microsoft (MSFT) or other hard driving entrepreneurs who see money as the means to turn their dreams into reality. Remember: Gates dresses like an undergraduate because he's always thinking about the next step in his company. The downside: Some builders are close to maniacal in pursuit of their dream and overlook the basics of money management. Smart builders therefore hire top managers.

Giver: These folks volunteer for a cause they believe in and donate generously. They may feel money is a sin, or close to it, and that giving it away is the best way to handle that icky green stuff. They also get a kick out of making others happy or doing good deeds. A few may buy extravagant gifts for friends, typically things they'd never get for themselves. While intending no harm, givers may hurt their children by failing to teach them the value of money and the basics of personal finance.
Such views of money lead to different conclusions on how to use it. Savers typically see themselves as the adult in the relationship while spenders tend to view themselves as providing the needed spark to the marriage. Savers, the typical spender believes, are hopeless fuddy-duddies who don't know how to have fun and would probably raise Constitutional objections to the whole idea of kicking up their heels.

---

---

1 DECEMBER 2008

Twenty things I didn’t know before I worked as a debt counsellor
By David Gaffney. Illustration by Joe McClaren
Published: November 21 2008 11:14 | Last updated: November 21 2008 11:14

1 You wouldn’t put all your soup in a basket, so don’t put all your debts in one

One easy payment, the ads say, as if a little light tidying were the solution to chaotic debt problems. Faced with insurmountable multiple debt, most people try to borrow their way out. This is like mending a leaking bucket by joining up all the little holes to make one big hole. Repeat this several times until you realise it doesn’t work.

2 In multiple debt land, time is geological

When I told my first client I would offer 31 pence a month off a debt of £12,000, she gasped. It would take 3,225 years to pay it off. “Don’t worry,” I said cheerfully. “Just think about it as being in debt for the rest of your life. Be positive: governments will fall, continents will shift, cities will crumble and be rebuilt, but your debts will remain standing throughout.” This, it turned out, was an insensitive way to explain the situation to my client. My bedside manner improved over the years.

3 It is legally permissible to laugh at bailiffs and drop milk bottles on their heads from upstairs

There’s case law to prove this. Bailiff law is like vampire lore. Bailiffs can come into the house only if invited over the threshold. Once inside they take an inventory of goods that they can return to remove. The courts can leave a bailiff on your premises to check you don’t move anything. This is called close possession and a bailiff has to provide his own flask and sandwiches. Bailiffs are not allowed to take away “wearing apparel in use”, so balance your plasma TV on your head and say it’s a hat. In one case, a landlord gained entry to a flat by jigsawing a hole through the floor from below. This was held to be lawful entry.

4 Debtors are expected to roll cigarettes from the hair of their dead pets

A bailiff hammering on your door doesn’t usually encourage you to stop smoking, but if you include fags in your financial statement, creditors will be as angry as if you were employing two personal pastry chefs and a private pole dancer. Creditors dislike lots of things, mainly things that you spend money on instead of giving it to them, things like pets and costly middle-class pastimes such as horse-tasting, dance-upuncture or aromabingo – anything that makes them think that you are having fun while they sit up at night writing your nightclub bills into a fat ledger.

5 The principles of debt counselling are that there are no principles

The debt counselling method is to maximise income, sort out emergencies like disconnection and eviction, then contact non-priority creditors – the credit cards, catalogues and door-to-door loan companies. Non-priority creditors don’t like debt counsellors. No one likes to be anyone’s non-priority. The technical way to describe the relationship between your client and his non-priority creditors is “F*** ’em, look after yourself, they’ll survive.”

6 It’s sometimes a good idea to borrow money off one card to pay another

This can work for a short time but never works for long. It’s like trying to stand still by running down the up-escalator at the exact same speed as it rolls in the opposite direction. You can do it for a while if you get the timing right, but it takes a lot of concentration and energy, and in the end it’s easier to get off and stand still.

7 Multiple debt problems can be fun

Most of my clients were cheerful optimists who lived life to the full. This meant that it wasn’t at all unpleasant to sit down with a succession of debtors and talk about sorting out their problems – there was laughter and joy sometimes.

8 You have to pay a fee to go bankrupt

It costs more than £200 – and the court won’t accept a credit card.

9 People who sell Christmas hampers door-to-door are not your best friends

Before I was a debt counsellor I thought a brimming Christmas hamper was a sign of great luxury and abundance. But I discovered that door-to-door peddlers of this sort of thing also deliver extortionate loans at annual rates of over 100 per cent. And, although these companies aren’t illegal loan sharks who decorate their walls with your kneecaps, they can be very persuasive and like to come up your path on giro day.

10 A giant magnet with Acme written on the side clamped on to your meter won’t reduce your fuel bills in the end

But plugging into the street lamppost supply might help. I met a client who had learnt how to fiddle her electricity token meter by fitting a Benson & Hedges cigarette packet into the slot (other brands are available, but it’s the metallic coating, you see) and striking the end with a gas cooker igniter. This sent an electric surge through the meter and added loads of credit. She showed her neighbours and it was free power all round until the electricity company found out. When I visited she had car batteries running the lights, and a power lead snaked out of her window into her neighbour’s house for the heating. Back in the days of coin meters I had a client who used to make 50 pence pieces out of ice; when the inspector opened up his machine it was always empty, except for a damp patch. But if you steal fuel, your supplier will estimate how much they think you stole and charge you for it.

11 County court judges like debtors more than they like solicitors from the bank

The average county court judge hates solicitors but loves normal members of the public like you. This is because he used to be a solicitor but he’s never been a normal member of the public, so to him you are exotic. And it is usually a he. A judge will find every way he can to humiliate the solicitor. Take advantage of this by pointing out grammatical errors in the solicitor’s papers. Never wear a suit to court – the judge will ask you with a friendly smirk whether it was from Next Directory, which is one of your debts (Next Directory is always one of your debts). One of my clients wore the mascot outfit of his local football team to his hearing as evidence of the extra job he’d taken on.

12 Credit companies want you to owe them money. They like it. It makes them happy

As long as you aren’t really poor, this is how credit companies make their money. Creditors like people to be in debt. More interest, more charges. But they don’t like it if you take liberties and pay nothing at all. Their ideal customer is someone who borrows regularly, messes up now and again to incur a few penalties, but has enough dying aunties to pay it all off.

13 You can buy stuff on credit – as much as you like – and they can’t take it back

In the old days we had hire-purchase, or HP, also known as the never-never, or the drip. HP was invented so Edwardians could buy sewing machines, pianos and moustache wax. Nowadays, you just use shop credit or plastic and the stuff is yours. In fact you can buy stuff and sell it to pay off your other debts (though beware of this – if you go bankrupt, it will be considered an offence and you could go to prison).

14 A garnishee order does not involve salad

A garnishee order means a creditor can take money out of your bank account. They find out about your bank accounts by ordering you to attend court for an oral examination. This is not like what happened to Dustin Hoffman in Marathon Man. Nevertheless, the best way of avoiding this is not to go. If you don’t go, and you keep not going, when they get round to it they will hire a van and call on all the houses of all the people who haven’t turned up for stuff in the past, arrest them and take them down to court. The best way to avoid this happening leads me to the next point.

15 Never be available at home to personal or telephone callers

If credit companies can’t get hold of you, they give up. The statute of limitation says that if a creditor has been out of contact for six years, a debt can’t be enforced. This means you should never reply to a letter. Ignore them all. Treat ’em mean and it doesn’t keep ’em keen – they just lose interest. By the way, this does not apply to all debts – check with an adviser first because...

16 You can lose your house if you don’t pay

I know your house is no palace, with its built-in foot spa and Uncle Joe’s Liver Pills painted on the gable end, but these people have no taste.

17 The quiet ones are the worst

Beware those creditors who send measured and polite threats – they probably mean it. The louder and more persistent the threats, the more desperate the creditor is and the weaker his position. One creditor was so desperate for leverage he acquired an office on a street called High Court and wrote these words in red at the top of every letter. When one of these desperate creditors rings you, tell them they are being put on hold and play the piano accordion down the phone. Piano accordions are available by credit agreement at most large music stores.

18 Your local council hates sending people to prison for not paying council tax, so you can take them to the edge on this one, just for fun

But some creditors are tough. The Inland Revenue is Uma Thurman out of Kill Bill. If you don’t pay them ahead of everyone else, they will shove a hand down your throat and yank out your heart. They are taught this by martial arts experts and it is performed under medical supervision. It plays no role in getting people to repay their tax debts, they just like how it feels.

19 If someone rings you up and says they want to hire a bouncy castle and you agree to hire them a bouncy castle even though you know nothing about bouncy castles and you then continue to trade as the bouncy castle hire man who used to live at your address, and who turns out to owe lots of money in back taxes and VAT and who, to all intents and purposes, you have now become, you will end up in court for fraud.

This happened.

20 Life is beyond some people’s means

A debtor is someone who hasn’t got enough money for the lifestyle he or she chooses. Most frequently this is a lifestyle most people call normal life – like having a phone, a telly, some clothes, heating the house and running the water. What should we do, kill them all?

David Gaffney worked as a debt counsellor for 12 years in Manchester and Birmingham. His comic thriller about multiple debt problems, ‘Never Never’, is out now

Copyright The Financial Times Limited 2008

---

The Problems of Deleveraging
1.2 Million Jobs and Counting
Be Careful of Geeks Bearing Recovery Data
Back to 1982
New York, Birthdays, and Moving


In general, we consider it a good thing to save money and to "owe no man anything save love." But what happens when a debt-happy society wakes up and decides that saving is a good thing for everybody? What happens when banks and hedge funds decide (or are forced) to reduce their debt? What happens when businesses of all sizes find it harder to get loans to operate?

In this week's letter we discuss "The Great Unwind," that process of deleveraging that we are now in the midst of. We also explore some recent economic data on the economy. It's a lot of ground to cover, so let's jump right in.

1.2 Million Jobs and Counting

The unemployment numbers came out today and they were ugly. October showed a loss of 240,000 jobs. But the really bad part was the negative revision to August and September, by a further loss of 179,000. As I have written in the letter numerous times, downward revisions in a slowing economy are the rule. Unemployment estimates are largely based on recent past performance. There is no way the models can catch a change in the overall trend. All the statisticians can do is go back and modify the data as hard information becomes available.

What the data shows is that the economy has lost 1.2 million jobs since December, with over half of those losses in the last three months as the problems from the recession accelerate. While two-thirds of the losses are in manufacturing and goods production, the service economy is also starting to show signs of strain. One in five lost jobs are from the retail sector.

Philippa Dunne of The Liscio Report writes: "A stunning fact: yearly job losses in private services, 0.4%, now match the worst of the 1982 recession and exceed the worst of 1975; once upon a time, the service sector wasn't very cyclical. Now it is."

Just as disturbing is the jump in the unemployment rate. It leaped to 6.5%, far above even the most dismal of expectations. For reasons we will go into below, it is likely we will see another 1 million jobs lost over the next year, with the unemployment rate headed up as high as 8%. There are now ten million unemployed Americans. You have to go back to 1982 and a double-dip recession to find an 8% unemployment rate. Very few people under 50 remember what that is like.

Look at the chart below. Notice how swiftly unemployment rises during a recession and continues to rise even after the recession is over. Since I do not think the current recession will be over until the third quarter of next year, we could see unemployment continue to rise for the next 8-10 months. At least, I hope it doesn't last longer.

Be Careful of Geeks Bearing Recovery Data

Before we look at how weak the economic numbers were from both the manufacturing and service sector surveys, let me cover an important point about recessions. You are going to hear all sorts of analysts (including sometimes even this humble analyst!) quote statistics that in general sound like: "Since the end of WWII average recessions have lasted X months, and thus we are almost through the current one, so buy what I am selling." Or the ever popular "Stocks tend to find the bottom in the middle of a recession, so now is the time to buy."

There will be lots of variations that all assume that past performance is somehow indicative of future results. And such an assumption is a prescription for investment pain.

First, there are not enough data points about recessions between the end of WWII and now to have any statistical meaning. I count 11 recessions since WWII. In what other human endeavor would we use just 11 data points and then decide to bet our hard-earned money? While average data can have meaning and give some grounds for comparison, it should be treated with heavy levels of skepticism when used as an argument for investing with conviction.

Let me tell you what we do know. Each and every recession is different from all the others and in different ways. That stands to reason, as the background economic environment was different for each one. The '70s and '80s were subject to serious levels of inflation. The recession at the beginning of this decade saw fears of deflation. Some happen with a strong dollar and some with a weaker dollar.

This recession is the result of serious bubbles in the housing and credit markets imploding. It is not the result of excess inventory or overinvestment in manufacturing capacity. As I have written numerous times, these excesses took years to build up and will take at least 2.5-3 years to correct. We are 15 months into the correction process. That is unlike any other recession we have experienced. So be careful in your use of comparisons based on historical averages.

One more point: since we do not know how long this recession will last, nor do what the results will be from further stimulus packages and hidden surprises, it is a mug's game to try and pick a bottom in the stock market based on some theoretical halfway point of this recession. You are going to hear over and over that markets anticipate the recovery about six months in advance. Given that this may be a very long and slow recovery that could be quarters away, be very cautious when you hear some bullish commentator using that "anticipation" rhetoric.

And with that said, let me now turn and look at some comparisons with past recessions that do offer some insight. By looking at how severe this recession is compared to previous ones, we can glean some idea of the level of problems we face now.

Back to 1982

The Institute for Supply Management released their October survey this week, and it was a shocker, helping send the Dow down by 10% in two days. It showed much more weakness than expected. This survey is collected from a large number of manufacturing firms. The ISM then makes an index of the data. For instance, if 60% of the reporting companies see new orders rising, then that would yield an index number of 60 for new orders. Anything below 50 shows negative growth. Below 40 shows a serious recession

The overall manufacturing number came in at a very weak 38.9. We are now down to levels not seen since September 1982. (Chart courtesy of Paul Kasriel and Northern Trust)

The internal data was even worse. New orders fells to 32, suggesting further weakness in the manufacturing world. Backlog of orders was 29. New export orders, a source of growth in recent months, fell from 52 to 41, a rather large drop for a single month. This shows the rest of the world is beginning to slow down as well. Boding poorly for employment, only 43% of companies reported that they were planning to add additional employees.

Nowhere was that illustrated more than in the auto sector. Last year sales were running at about 17 million new cars a year. Last month's annualized rate was 10.5 million, the lowest level since 1983. And a recovery might not be in sight for several years.

There is now about one car in the US for every person of driving age. An article in the Financial Times estimates that an extra 1.5 million cars a year have been purchased due to cheap financing, rebates, etc. If consumers decided they did not need more than one car, which would imply a flat growth rate, sales could drop by 3.5 million cars a year from the pre-crisis levels, which means Detroit would have a lot of spare capacity even after an economic recovery.

Further, I remember buying a car as a young man and not expecting it to last more than 80,000 miles before it needed major work or replacing. I now drive a 4-year-old Cadillac Escalade (I am a Texan, after all!) and it has 65,000 miles. I have a friend with an identical car that has 270,000 miles on it, and it is still running fine. My car could easily last me another four years, as could the cars of many people who bought new ones in recent years.

Basically, automobile manufacturers, in their drive to sell as much as possible, "brought forward" future sales of cars and, as a side effect, put lots of still quite good used cars on the road. New car sales are likely to be depressed for some time. It is somewhat like the housing problem. There is just too much inventory on the road that will have to be worked through. When Detroit gives me a real reason to buy another car, like an electric-powered vehicle, I will. And a lot of Americans, with a need to save money for retirement, are going to feel the same way.

As noted above, it seems that the service sector is now cyclical. The ISM Non-Manufacturing Survey results show broad-based weakness. The headline composite index dropped to 44.4 in October from 50.2 in September. This is the lowest in the 11-year history of this index. Indexes tracking new orders and employment also fell sharply, to 45 and 42 respectfully.

The data shows that we are sadly not yet close to the end of this recession. It is going to be a long slow Muddle Through Recovery. Do not expect a typical V-shaped recovery.

The Problems of Deleveraging

There is a quite humorous series of quote about the demise of the American consumer, starting with a Fed chairman in 1954 and going through one after another major financial figure in the ensuing decades. They have all been wrong. Predicting that the American consumer will change his profligate ways has not been a recipe for forecasting accuracy. This time, it may be different. Not because US consumers really wants to change, but that they may be forced to.

Look at the explosion of consumer debt (credit cards, auto loans, bank loans) over the last 20 years, rising to $2.6 trillion. Household debt, including mortgages, skyrocketed from 47% of personal income in 1959 to 117% in the fourth quarter of 2007. And from 25% of GDP in the first quarter of 1952 to 98%. (Gary Shilling)

Let's look at some numbers. Since 1 January, 2008, owners of stocks of US corporations have suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. (Losses in other countries have averaged about 40%.) Homeowners will soon see their equity down by as much as $8 trillion, and those losses are likely to increase.

As highlighted here repeatedly, mortgage equity withdrawals counted for a full 3% of annual GDP growth in the period from 2002-2007. MEWs have fallen by 95%, and are falling again this quarter. Credit card debt is being reigned in. In fact, as the chart below shows, bankers are not surprisingly tightening lending standards to consumers, and raising their rates. (Again, from Haver Analytics, courtesy of Northern Trust)

Much of US GDP growth has been fueled by debt. And that debt is now going to be much harder to get, as equity in both houses and stocks has fallen precipitously.

Further, as detailed last week, US consumers are clearly cutting back. The retail sales figures that came out this week are dismal. J.C. Penney stores are down 13% year over year! At Nordstrom's, one of my favorite stores, sales are down almost 16% (six months ago they were growing at 10%!). Sales at major discounter Costco were down 1%. The Gap, The Limited, Target - store after store is down. Limited Brand sales are down by 70% from October of last year. All this does not bode well for Christmas sales. (Thanks to Greg Weldon of www.weldononline.com for that data.)

Remember how I talked about how auto manufacturers had cannibalized future sales? Credit cards have allowed many retailers to do the same. Money that goes to cut down credit card debt is money not spent today.

Consumers leveraged their way to higher levels of consumption, and now are going to be forced to reduce that leverage. Many others are going to see the need to increase savings to shore up retirement funds. People (and not just in the US, but throughout Europe) have learned that a home is not an investment.

Hedge funds are also being forced to de-lever. While for most styles of hedge funds, leverage was not all that high (an average of about 1.4 times equity), large redemptions, especially by funds of funds, are forcing sales of all types of assets, but in particular stocks. As an aside, this selling is not over. Mutual funds are seeing large withdrawals, and are also selling.

Large banks are being forced to reduce credit lines in order to shore up capital, as they must deal with subprime debt and other mortgage-related problems. Smaller banks are just now starting to deal with losses on commercial loans due to the economic downturn. That means that they will have to reduce their loan portfolios to meet capital requirements.

This is happening all over the world. Whole countries are imploding. Iceland? What were they thinking? Italian sovereign debt is now suspect, calling into question their ability to meet their deficits.

Just as consumers used debt to buy "stuff" they wanted now, so did businesses, banks, and governments. It powered a huge global growth boom. The Great Unwind will have the opposite affect, softening demand and weakening spending and growth. What leveraging did for growth, deleveraging will take back. It is likely to be a long, Muddle Through trip.

The IMF now projects that the developed world will slow by a collective 1% next year, dragging world growth close to zero. The export growth that has been powered by a cheap US dollar is destined to slow as world demand falls.

The good news? Oil prices are likely to fall even more, which will free up some money to be used in other ways. The ISM data showed that prices paid are falling, making inflation less likely. The US government deficit, under Democratic control, is likely to be $2 trillion in 2009, a staggering number to be sure. Without the pressure of inflation, and with the threat of outright deflation, it may even be that such a deficit can be managed. In the short term, this massive debt will provide a stimulus, lessening the effects of a deep recession.

The sad thing is that our children will be saddled with the debt for a very long time. Hopefully we spend it on things like infrastructure, which will be of some use to them, rather than on an endless stream of consumer stimulus packages that simply add to current debt.

As investors, businesses, and employers/employees, we will have to deal with the outcome of a major resetting of consumer spending. Unemployment will rise. Whatever stimulus package is enacted will mostly be used to draw down debt, and not actually spent. Businesses all over the world are going to have to rethink their growth plans to the extent that they were based on ever-rising US consumer spending. Earnings are going to be under real challenge in most industries. This is going to become more obvious as time goes by, and is going to challenge whatever bear market rally can be mounted.

All is not gloom and doom. The last major recession and problem period, in the '70s, saw a number of new businesses start and prosper (Microsoft, Apple, Intel, etc.). Businesses that have access to capital are going to be able to take market share and come out of this recession in much better shape. It is just a recession, after all, and will end. But I would suggest keeping your powder dry and being nimble. There are opportunities which will arise, as they do in every downturn. Just don't expect this recession to be like any past recession. Make your plans accordingly.

Make a note. I showed a chart a few months ago which illustrated that imports were falling, even as the trade deficit was not. This was because of the high price of oil. Oil at that time accounted for two-thirds of the trade deficit. When they tally the trade deficit for November in a few months, I think everyone will be surprised at how much the trade deficit has fallen.

This is something we will discuss in a future letter, as a lower trade deficit means there will be fewer dollars to buy US debt, just at a time when US debt will explode. That means that US citizens must save and buy that debt, or the Fed will have to monetize it, or rates will have to rise to attract capital. These are somewhat counterintuitive concepts and need explaining. But not this week. It is time to hit the send button.

Have a great week.

Your trying to figure out how to grow his business in this recession analyst,

John Mauldin
John@frontlinethoughts.com

---

---

A good resume touts your talent and lands a job interview.

Think of your resume as an advertisement for yourself. But a resume that isn’t a winner is a sinner and you’ll never get in the door. Remember: Simple mistakes can kill your prospects.

“Many students don’t realize that a resume is one of the most important documents they’ll ever prepare,” says Jack Rayman, Director of Career Services at Penn State University. “Some students think they can throw a resume together in 15 or 20 minutes.”

As part of a study, Rayman says his office prepared a set of resumes with intentional spelling and grammatical errors and passed them on to campus recruiters from major companies. Without fail, the resumes with minor errors were rejected, regardless of the mock student’s internships, course of study and grade point average.

Moral: Check and double check your resume because presentation counts. Then have a friend read it over.

“A little thing like subject-verb disagreement will kill your chances,” Rayman says.

A winning resume is concise and well-written. Keep it to one page if you’re just out of school.

A solid resume is more than just a summary of your experience. It demands the attention of a prospective employer and sells you as a top prospect. Your pitch: This is what I can do for you.

Right under your name and contact information, a good resume should include a brief summary of your education, experience and strengths.

Three to six crisp sentences will do the job. Use the active voice. Keep it short and tight. No buzzwords or semicolons. Kill most adjectives and adverbs with a shovel. Never refer to yourself in the third person because it’s silly and pretentious.

As a recent graduate, employers don’t expect you to have a lot of experience. Include internships, but remember employers are betting on your potential to perform at a high level - not your limited track record in your field.

At a job interview, the prospective employer seeks to answer basic questions: Can the applicant fit into the corporate culture? What does the applicant bring to the table? You got the interview because the employer believes you can handle the job. Now, you must convince the interviewer that you’re the right person for the job.

Major corporations such as Intel (INTC), Microsoft (MSFT), Hewlett-Packard (HPQ) and General Electric (GE) are flooded with resumes. Many companies electronically scan stacks of applications looking for key words. If you’re applying to a major company, dig out the key words in your field -- programmer, copy writer, Web designer, for example -- and use them to boost your chances of getting picked up in the computer scan. But don’t let this degenerate into jargon because an experienced person with a finely tuned blather detector will read your resume in round two.

Don’t mix the professional with the personal. There’s no reason to include marital status, church affiliation or political persuasion on your resume. Include relevant extracurricular activities, but don’t note that you like kittens, hiking and Mozart, because who doesn’t?

This should be a no-brainer, but apparently some recent grads don’t think: Never lie on a resume. You can bet that the personnel office or an outside agency will check your degree and other qualifications.

A resume isn’t a legal document so the only penalty for fibbing is not getting the job. However, a job application is a legal document and that’s why many personnel offices ask you to copy key information from your resume onto the company’s form. Lying on the company’s job application will get you fired if discovered after you’ve gotten the job.

Here are five things you need to know about writing a resume that will get you noticed:

Contact Information:
 
At the top of the page, include your name, home address, phone number with area code and email address. This should be obvious, but some first efforts bury the information. Prospective employers don’t have time to hunt for the basics.

Typeface:

You can’t go wrong with 12- or 14-point Times New Roman. Avoid cutesy fonts and don’t use too many fonts because you want your resume to be crisp, clean and easy to read. Use bold or bold italics for section headers.

Be Positive:

Don’t knock your school, internships or anything else. A good resume is a sales tool designed to sell your talent and get a job interview. A sour tone will kill your chances.
Play It Straight:

Keep in mind that prospective employers aren’t flower children seeking blithe spirits for a far-out time. They’re in business to make money. Employers seek bright, talented and diligent people - make sure your talent comes through in your resume. Can the smarty pants attitude.

Presentation Counts:

Use a heavy, off-white paper. Avoid red, pink, lime green or anything that’s hard to read and makes you look frivolous. Prepare an electronic version that can be emailed as an attachment or sent in PDF format. Run the spellchecker. Then have an eagle-eyed friend proofread your resume. A typo or using the wrong word is the surest way to kill your chances.

“We suggest that our students come to the career center and have someone review their resume on the spot,” Rayman says. “It’s important to have several people go over your work before sending it to a prospective employer.”

---

IF YOU AND YOUR partner are like most couples, chances are, you fight about money. Numerous studies have shown that money is the No. 1 reason why couples argue — and many of the recently divorced say those battles were the main reason why they untied the knot.

While anyone will tell you that talking about money is the first step in resolving problems, talk alone won't do the trick.

In fact, a recent study commissioned by SmartMoney magazine and Redbook found that more than 70% of couples talk about money on a weekly basis. So what's the problem? "Most of us don't know how to talk about money," says Mary Claire Allvine, a certified financial planner (CFP) and co-author of "The Family CFO: The Couple's Business Plan for Love and Money."

"People tend to be emotional and reactive about money, not strategic," she says.

When emotions run high, people tend to make fiscal mistakes. Allvine's solution: Approach family finances as if you were running a business. "If you put a business metaphor into the picture, you'd be surprised how much more methodical people are."

And so, to help make your next state-of-the-financial-union meeting run smoothly, we've assembled a collection of the six most common mistakes couples make when handling money issues, along with some advice on how to correct them. Do yourself a favor: Make sure all board members review this before you talk.

1. Merging the Finances
The Wrong Approach: United we stand, divided we bank.
The Right Approach: It's yours, mine and ours.

One of the first issues newlyweds face is how to handle their finances. "Couples struggle about this one," says Ruth Hayden, author of "For Richer, Not Poorer: The Money Book for Couples." Should you merge everything you have and earn into one joint account, or should you maintain individual accounts and open a joint one for household expenses?

SmartMoney magazine's survey found that the majority of couples (64%) put all of their money in joint accounts, while 14% kept everything in separate accounts, and 18% had both. "Married couples should try different ways of handling the money to see what works for them," says Ginita Wall, CFP and co-founder of the Women's Institute for Financial Education.

For many newlyweds, the right choice may be somewhere in the middle. "You should have some autonomy money, I should have some autonomy money, and we need to learn how to practice being a couple together with our money," says Hayden.

The advice is different when one spouse enters the marriage with a high debt load. (See our next point below.) But assuming you both have a clean bill of fiscal health, finding a way to blend finances comfortably without feeling like big brother is watching every financial move you make can dramatically cut down on fights. Over time — once kids and mortgages come into play — many couples find that merging all their finances is simply easier. But unless you're both comfortable with the idea, there's no need to rush things.

2. Dealing With Debt
The Wrong Approach: Your debt will ruin us; you must find a way to pay it off.
The Right Approach: It's our debt: Let's decide how to pay it off together.

Of all the issues that spark a fight, debt ranked No. 1 for most (37%) of SmartMoney's survey respondents. "That's one of the places where couples have most disagreement," says Hayden. Couples often don't see eye to eye on how much debt is too much and which kind of debt is bad.

Compounding the problem: in many cases, one spouse enters the marriage with a lot more debt than the other. "We saw that more frequently than we anticipated when we began interviewing couples [for our book]," says Allvine. "It's almost unavoidable. Even if you manage to get to your 20s or 30s without debt, you hook up with a partner who's in debt."

What to do in situations like that? Like it or not, once you're married, your spouse's debts can become your problem. Granted, you're not legally responsible for the credit-card balances ran up before you got married, or for any loans opened in your spouse's name alone — provided you keep your finances completely separate. (Unfortunately, all bets are off should you get divorced. For more on that, click here). But even with separate finances, your spouse's credit score will affect your ability to get joint credit. "It's a public [credit reporting] system, and what you do will absolutely affect the other," says Hayden.

For those couples not yet married, it may be worthwhile to think about a prenup, just to make sure that assets that one spouse brings into a marriage will always be protected from the other spouse's creditors.

But those who've already tied the knot should find a way to pay down the debts as quickly as possible, and without any late payments.

3. Keeping Spending in Check
The Wrong Approach: I'm a saver and you're a spender. That's the problem.
The Right Approach: We both spend, but on different things. Let's budget.

Your husband keeps nagging at you that you spend too much — but then comes home one day with a huge smile and — surprise! — a 70-inch flat-screen plasma TV. He happily explains how he sealed the "terrific" deal. You're definitely not impressed.

Sound familiar? Spending is the second most common reason why couples fight, according to SmartMoney's survey. What usually happens, explains Hayden, is that one spouse gets labeled the "spender" and is blamed for skimming all the money out the checkbook. In most cases, however, that's not accurate. "Studies show that men and women spend the same, they just spend differently," she says. Women usually take care of most of the family's daily expenses: the groceries, the bills, clothes for the family — while men spend on large purchases like plasma TVs, cars or computers. "If you counted up your money, you would be spending about the same," Hayden says. "But because you spend so differently, the perception is different."

The solution here is to identify the real problem, Hayden says — namely, that you're both spending money on a tight budget. Then sit down and decide how much money you'll allocate to the "dailyness" of life, and how much to save for the big purchases. "What we're trying to do is get the 'Surprise!' out of it," she says.

4. Investing Wisely
The Wrong Approach: You're a risk-taker, I'm risk-averse. Hands off our retirement savings.
The Right Approach: Let's think in time frames and take as much risk as our goals allow.

SmartMoney's survey showed that when it comes to investing, men are more willing to take financial risk than their wives (62% for men vs. 19% for women). But fighting about how much risk to take with your investments based on how you feel about risk doesn't do much good. Rather, sit down and talk about your investment goals and time frames, says Christine Larson, co-author of "The Family CFO". "You could be completely risk-averse with money you need for next year, but you can be a huge risk-taker with money you're saving for retirement," she says. If that doesn't work for you, seek the help of a broker or a financial planner.

Whatever your investment choices, review your investments together at least once a year and make sure that, overall, your portfolios balance each other out, suggests Wall. "I have one couple — they're in their 70s. She likes to take risks and it scares him to death, so they do invest themselves separately," says Wall. "We let her take risk with part of the money, but not all of the money."

5. Keeping Money Secrets
The Wrong Approach: What my spouse doesn't know will never hurt him/her.
The Right Approach: Big financial secrets can ruin a marriage.

Among Hayden's clients is a family that first came to see her when the wife found out that her husband had lost a lot of money trading commodities. The real problem? She didn't know his little secret. "It got them in horrible trouble!" Hayden says. "He's very steady, he's a fabulous doctor, he's a great dad...but he had this other part of him that's pure gambler, and it almost brought the marriage down."

Will you be shocked to hear that most couples do keep money secrets from each other? While secret trading or gambling may not be that common, our survey saw 36% of men and 40% of women confess that they had at one time or another lied to their spouse about the price of something they bought. "It's the most common secret," says Wall.

Is it a big problem? Depends on how you deal with it. "Most people also lie to themselves about what they're spending, just as they lie to themselves about how much they're eating," says "The Family CFO" author Allvine. And let's face it, if your wife saved up the extra $100 for her "only $30" Givenchy scarf from her monthly mad money, it's not that big a deal. But if your spouse has been squirreling away thousands of dollars, it may be time to seek the help of a family finance professional. "If this happened in a company," Allvine says, "they'd call it embezzlement."

6. Emergency Planning
The Wrong Approach: We're fine. We don't need to worry about money.
The Right Approach: Anything could happen. Let's plan for emergencies.

Even if you have a great career, earn a comfortable living and don't have to worry about debt, you could find yourself woefully unprepared for an emergency. "Couples today are under so much stress that anything could tip them," says Hayden. An unexpected pink slip, an accident, illness — anything could throw you off track if you don't have an emergency savings account.

"With the couples we interviewed, we found a tendency to panic [in an unexpected emergency] that could lead to the wrong decisions," says Larson.

Bottom line? All couples should have an emergency stash of three to six months' worth of living expenses held in a safe place, like a money-market fund or gold. Simply knowing it's there can reduce stress, since you know you're not walking a fine line between comfort and catastrophe.

---

4 APR 2008

5 Retirement Maxims

Human beings, it is said, are distinguished from our animal cousins (no slur against the in-laws intended) by our ability to plan ahead. While that may be true, it's difficult enough for most of us to plan anything just six months ahead, like summer vacation. So how on earth are we supposed to deal with something in the distant future -- like retirement?

In an effort to kick-start your retirement plans, we'll take a cue from the animal kingdom's "fight or flight" mentality and scare you into action: If you don't do something right now to assure your retirement, you'll end up living in an alley fighting the stray cats for your dinner.

Now that we've raised your hackles, let's use that surge of adrenaline to your advantage. As you know, retirement brings on a set of extremely complicated decisions -- many of them all at once. However, when it comes to The Eternal Truths About Retirement (I'm going to see about patenting that title), the rules are pretty simple. Below, on this single page in cyberspace, are the five retirement truths that will prepare you for the future when it turns inexorably into the present.

1. This isn't your parents' retirement.

Think back about 30 years. Individual retirement accounts (IRAs) were just being created. There were no such things as 401(k)s. Gasoline was free. (Or at least it seems that way in hindsight.) Older folks relied on the proverbial three-legged stool to prop them up in their golden years: Social Security, pension checks, and savings. Retirement didn't last too long because life expectancies didn't go far beyond the age of 70. The average male didn't even make it that far.

Your retirement will be very different. You will live longer, and you'll have a more active (read: expensive) lifestyle. Your parents may have survived on 70% of their pre-retirement income (perhaps you've heard this common rule of thumb?). But that's probably not enough for you.

2. No one's got your back. Sorry 'bout that.

If you put your retirement on that proverbial three-legged stool, there's a good chance it's going to collapse. Why? Let's do a little structural engineering and see how each "leg" is holding up.

Social Security: As of 2004, the average annual Social Security retirement benefit is approximately $11,000. In other words, retirees cannot live on Social Security alone. And don't expect that to change. As the baby boomers retire and put a strain on Social Security, benefits will have to be cut or taxes raised. For those in or near retirement, your benefits are pretty safe. (See? We don't have it out for the in-laws at all.) For the younger crowd, don't count on receiving all of the benefit estimated in the statement sent to you by the Social Security Administration every year, three months before your birthday.

Defined-benefit plans (a.k.a. traditional pensions): The amount you'll receive from a traditional pension depends, first of all, on whether you work for a company that offers one. Most of us don't. In fact, only 20% of Americans have such a benefit, down from 40% in 1975. If you are among the lucky one in five, the benefit you'll receive is based on your salary and the number of years you worked for that employer. Since we've become a mobile workforce, many people don't stay in a plan long enough to accrue significant benefits. The average annual defined-benefit payout is less than $10,000. Plus -- unlike Social Security benefits -- most benefits aren't adjusted for inflation over the years.

Savings: Of the three legs that may prop up your retirement, your personal savings are what you have the most control over. So while two out of three of those stool legs have some pretty serious cracks, this leg is as strong as you want to make it. Thd good news is that this one decision -- to save or not to save -- will have the biggest impact on the quality of your post-work life.

3. It's never too early -- or too late -- to warm up your nest egg.

You can brag all you want to your son-in-law about that 34-inch waistline you maintained through your 30-year high school reunion. Photographic proof is all you need to keep that young whippersnapper in line.

Same with savings scenarios. We can yammer all we want about the factors that affect the size of your nest egg. Instead, we'll regale you with a few pictures.


Even though each person invested the same amount of money, they have significantly different amounts at retirement. For example, Investor A began investing $5,000 a year when she was 25 years old and stopped when she was 35. For the next 30 years, she didn't contribute any more money and she didn't withdraw any money. She just left the account alone.

Investor B, on the other hand, waited until he was 35 years old and contributed $5,000 a year until he was 45. As you can see, that difference of a decade is substantial. At retirement, Investor A has $422,5671 more than Investor B -- over twice as much. In fact, each investor in the chart above has more than twice as much as the person who started 10 years later (except for Investor D, of course, but she's a lot better off starting at age 55 than someone who waited until age 65).

As you can see, three things -- that are completely under your control -- can have a sizable impact on your retirement kitty: 1) how much you invest, 2) the rate of return you earn on your investments, and 3) the number of years those investments have to grow. No matter your age, the sooner you start, the more money -- and options -- you'll have.

4. There's really only one place your retirement savings should go.

While we've got our calculators out, let's take a look at various investments' average annual returns from 1926-2003 (source: Ibbotson Associates):
• Treasury bills: 3.7%
• Intermediate-term Treasury bonds: 5.4%
• Large-cap stocks: 10.42%
• Small-cap stocks: 12.7%

If investments squared off in a basketball game, stocks would be Michael Jordan and bonds would be Michael Jackson. In other words, stocks beat the pants off of bonds. But not without drawbacks. I often get questions from early retirees (55-year-old whippersnappers, for instance) who wonder if 50% of their investments should be in bonds. Phooey.

Market risk (the chance you will lose money) and reward (the chance that your investments will head skyward) travel hand-in-hand in the daily marketplace. The greater the risk, the greater will be the potential return for taking that risk. Equally true is the potential for loss, which quite handily explains why taking that risk should pay a greater reward. By and large, however, risk is pretty much a short-term phenomenon. That's particularly true in the stock market, which many regard as a quite risky investment.

Fools recognize that the stock market shifts every day, sometimes sharply downward. That can be absolutely gut-wrenching when it occurs. Heck, from 2000 to 2002, many people lost more than half their life savings in the market. But history shows us that the inexorable pressure on the stock market is upward. The biggest bang for our buck will be found in stocks.

According to Jeremy Siegel's Stocks for the Long Run, for every rolling five-year investing period from 1802 to 2002 (i.e., 1802-1807, 1803-1808, etc.), stocks outperformed bonds 80% of the time. Stocks beat bonds for 90% of the rolling 10-year periods, and essentially 100% of the rolling 30-year periods. For holding periods of 17 years or more, stocks have always beaten inflation, a claim bonds can't make.

Think now about your retirement. When will it occur -- 20 years from now, five years, tomorrow? If you're close to it, or are already retired, how long must the money last? Now think about your retirement investments. Is the bulk of your money positioned for long-term growth (read: stocks) or short-term stability and income (read: bonds and bills)? The mix you have in these instruments is something you must decide for yourself.

After all, you're the one who has to sleep at night. Recognize, though, that investing for retirement is a long-term goal. Hence, you truly want to shoot for the best growth in your investments that you can get. That won't be found in bonds or bills over the long haul. If you elect to keep most of your money there, almost assuredly in retirement you will be eating Beanie Weenies instead of sushi.

5. When Uncle Sam (or your boss) gives you an inch, take a mile.

As we approach the end of our room in cyberspace (we did promise all the retirement truths you need to know on a single page, after all), we come to our last revelation. It is, quite simply, this:

Be greedy.

As the number of defined-benefit plans has declined, the number of defined-contribution plans -- e.g., 401(k)s, 403(b)s, and 457s -- has increased. Your contributions to such a plan lower your taxable income dollar for dollar, so you immediately cut your income tax bill. (Be greedy!) Plus, the investments grow tax-deferred -- i.e., you don't pay taxes on the growth and income until you make withdrawals in retirement -- leaving more of your money to compound through the years. (Take it! Take it!) As a third bonus, your boss might pay you to save by matching your contributions. For example, the company might add 50 cents to your account for every dollar you sock away. (Freebies! Grab! Grab!)

So, now you know. These five truths about retirement should help clear your mind; why not take a few moments more, get a pencil and paper and jot down some ideas to take action toward securing your future...today.

---

20 FEB 2008

5 Steps to Fixing Your Credit Score

If a low credit score is limiting your ability to get a car or home loan, there are five basic steps you need to take to raise it.

The process isn't complicated, but requires the basics of discipline and common sense. Remember: There are no immediate fixes and repairing the damage takes time.

"You've got to stop digging the hole before you can get out," says Gail Cunningham, Vice President for Business Relations at Consumer Credit Counseling Service of Dallas. "You've got to freeze your spending. It won't get better tomorrow unless you do something today."

Start by cutting up unsolicited credit card offers that arrive in the mail. Accepting similar deals allows you to run up large balances on several cards and transferring the balances to one card doesn't reduce the amount owed. Worse, the low introductory interest rate on a new card is likely to encourage more spending.

But don't cut up all your current credit cards. There's no need to conduct all transactions in cash. Creditors tend to view someone with no credit cards as a higher risk than someone who has managed a few cards well.

One major bank credit card and one oil company credit card should be enough. Use a debit card when possible because there's a direct link between spending and your bank account.

Leave your credit card at home when you visit the mall. This will eliminate impulse buying. If there's something you need – not just want -- it will be in the store tomorrow.

These steps should stop you from digging yourself into a deeper hole. Here's what you've got to do to rebuild your credit:

Step 1: Get your credit report.

Federal law requires the three major credit bureaus to provide consumers with one free copy of their report each year. To download and print a copy from Equifax, TransUnion and Experian, click to www.annualcreditreport.com, the official Web site for free reports.

Step 2: Pay your bills on time.

You've probably overlooked this basic point in the past – that's one reason why your credit rating stinks. Remember that late payments – or worse, collections – drag down your credit score. So, build a record of timely payments. The longer you make scheduled payments on time, the higher your score. While a good sign for potential creditors, paying an account that's been turned over to a collection agency in full won't remove it from your credit report for seven years.

Step 3: Keep your credit card balances low.

Revolving credit can be seductive and misusing it can be a hammer on your credit score. Potential creditors check how much outstanding debt you carry so pay off existing debt as quickly as possible.

Don't open new accounts in an effort to boost your available credit. Creditors want to know how long your accounts have been open. So, opening a slew of new accounts won't improve your standing and will make you look like a bad risk.

Step 4: Learn from your mistakes.

Oddly, once you're on the comeback trail, you'll find it's easier to err because your finances are in better shape. It's much like dieting – mints look manageable after losing 25 or 30 pounds.

It shouldn't be hard to figure out what you did wrong in the past to damage your credit rating. It should be unambiguous what you need to do to avoid similar flubs in the future.

The trick is putting the theory into practice. That requires changing your spending habits and your attitude about saving. To do that, ask yourself a basic question: Do you want credit to work for you in lower rates for a home or car loan or do you want to be a slave to your credit cards, never quite catching up to the balance due?

Step 5: Write a budget – and stick to it.

Your budget doesn't have to be fancy, but should include the basics: Rent, groceries, car payment, maintenance, clothes – and savings.

Keep track of what you spend. You don't have to crank up the spreadsheets – a notebook will do. Label the left half of the page "income" and the right half "expenses." This will help keep spending in line. If you don't know what you spend each month on movies and eating out, your hand-written account will soon provide the answer.

Open a savings account and set aside a pre-determined amount each month. This will force you to cut spending, and that's just what you need to do as you rebuild your credit rating.

Saving is basic to sound personal finance. Some financial planners say 10% to 20% of gross family income should be stashed in savings. Others suggest saving enough to cover household expenses for three to six months.

"If you're hiding purchases from your spouse and having the bills sent to a Post Office box, it's time to talk to a credit counselor," Cunningham said. "Debt follows you everywhere – it's there when you wake up in the middle of the night and it affects your performance at work and damages your ability to be a good parent."

---

16 JAN 2008

5 Questions Answered About Your Child's Allowance


If you’re a parent, you’ve wrestled with the allowance beast. How much should we give? What age should we start? What expenses should it cover? These issues are worth tackling as early as you can. Kids learn valuable life skills from making money decisions, starting as soon as they can identify coins and count change.

And there’s something in it for you, too, as a parent, beyond serving up mere lessons in personal finance. The sooner your kids can stick to a budget the sooner you can stop playing ATM every time they walk out the door. This is especially irksome in the teen years, when their list of “needs” grows exponentially and includes things you’d rather not know about—like underwear from Victoria’s Secret and dozens of on-demand viewings of American Pie.


Why give allowance?

The idea isn’t just to break free from the routine of having to dig every time your kids want something. Budgeting is a critical life skill, one your kids must become adept at before trekking off to college where they will be swamped with credit card offers. Evidence suggests that as many kids drop out of college due to debt-related stress as from academic struggles. Kids who learn to budget in high school have fewer credit problems as adults.

Teaching budgeting skills is a critical parental role, and no method is more efficient than setting an allowance; make it clear what that money is to be used for, and stick to your guns. Cold reality hits your child when they have run out of money before Saturday night, when the other kids are going to the movies. This usually doesn’t happen more than once or twice before your child starts to seriously plan.


Should they work for it?

There’s a lot of debate on this issue. Certainly, tying allowance to chores teaches a life lesson—that you only get paid when you’ve done your job. But, to me, chores are about another life lesson—that you must contribute some effort to be fully engaged in any community, from your family to your school to a club or your faith group. Allowance is about teaching money management skills. If you dock your kids because they didn’t take out the trash, you deprive them of that lesson.


When should you start?

First grade, give or take a year. Kids at this age don’t need much. But you can help them get in the habit of spending, saving and, yes, giving to charity. They’ll grow to understand the power of money and all that it can do.


How much?

Some experts say the dollar amount, paid weekly, should equal the child’s age. That’s a good place to start. But this really depends on what you expect them to do with the money, and clearly by the time they are in high school they’ll need more if they are paying for clothes, gas, and X-box 360s. You should give enough for them to plan for near-term and long-term purchases and still have enough to go to the movies and offer something to charity.


How should they be paid?

Young kids should be given cash once a week. By high school they should have their own checking account and/or prepaid card that gets automatically replenished weekly or bi-weekly. By college, if you are still paying allowance, it should be once per semester.

Pre-paid cards are especially useful for teens, who buy so much stuff online today that they need to be able to transfer money electronically. But cards like Allow (Mastercard) and Upside (Visa) come with startup charges, and monthly maintenance and reload fees. If you’re dealing in small amounts, they are probably too expensive. Instead, open a checking account in your child’s name but linked to your own so you can make easy transfers. Get your child an ATM card, but make sure the account does not permit overdrafts. Your children will be on their own, and you’ll be out of ATM business.

More on this later...