U.S. Employment Numbers Worst Since 1983; Social Security Takes A Hit From Discouraged Early Retirees; FDIC Seeks To Recapitalize In Wake Of Nearly 100 Bank Failures In 2009
When the AdViewGlobal (AVG) autosurf — now failed — was in prelaunch phase in December 2008, it positioned itself as an offshore cure for what ails the U.S. and world economies.
Less than two years earlier, promoters of the AdSurfDaily autosurf — which has close ties to AVG — implied that the individual surf accounts of ASD members were insured by the FDIC and that ASD provided “shelter” from the FTC and the SEC.
ASD’s assets were seized by the U.S. Secret Service in August 2008, amid allegations of wire-fraud, money-laundering and selling unregistered securities via a Ponzi scheme. Only months later AVG began its ignoble task of encouraging members to move cash offshore and permit it to be managed by unknowns, thus separating participants from even more wealth.
The result was a colossal failure AVG announced in June, before it disabled its forum to prevent members from asking uncomfortable questions. AVG even threatened members who shared the news with copyright-infringement lawsuits. Indeed, AVG went from a much ballyhooed cure to a thuggish disease that attacked its own participants in only weeks.
Neither ASD nor AVG created any new wealth or cured anything. About the only thing the surfs managed to do was siphon wealth from one group and transfer it to another, all during a time a global recession was rearing its ugly head and putting jobs and lifetimes of hard work in harm’s way.
The U.S. economy shed 263,000 jobs in September, and the unemployment rate edged up to 9.8 percent, the Labor Department said yesterday.
Unemployment virtually has doubled since December 2007. The number of persons looking for work now totals 15.1 million, and the unemployment rate is the highest since June 1983.
When discouraged workers and workers who’ve accepted part-time jobs in the absence of full-time employment are factored into the numbers, the so-called “real” unemployment rate is 17 percent. The number could be distorted — meaning the true employment numbers could be masked to a degree — because older workers separated from their jobs have been applying for Social Security, rather than continuing their struggle to find work when the odds are against them.
The Social Security Administration told Bloomberg News that it had expected an increase of 315,000 applications for the one-year period ending Sept 30, but instead received 465,000, an increase of 150,000 applications.
Meanwhile, regulators seized three more U.S. banks yesterday, bringing the year-to-date total to 98. Because the FDICÂ is close to operating in the red, the agency is in the process of recapitalizing and has proposed a plan that would force banks to pay insurance premiums early to protect customer deposits, rather than pass along the cost of the recapitalization to taxpayers.
“First and foremost, bank customers should know that their insured deposits have and always will be 100 percent safe, no matter what,” said FDIC Chairman Sheila Bair. “This commitment to depositors is absolute. The decision today (Sept. 29) is really about how and when the industry fulfills its obligation to the insurance fund. It’s clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem. In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer.”
At risk, however, are banking profits when the industry already is struggling, but the FDIC insists that “banks overall have enough liquid assets to make the proposed prepayment.”
U.S. regulators have not confronted a challenge of this magnitude since the late 1980s and early 1990s, when the savings and loan industry recorded 745 failures, in no small part due to fraud, mismanagement and regulatory laxity.
Here is the bank-failure list so far in 2009:
Per the FDIC website, as of 10/1/09, the FDIC has 8,124 member institutions. It also has over $13 trillion in insured deposits.
It’s liquid funds available to pay out amount to a bit more about $10 billion at this time. It’s asking for a $45 billion prepayment.
$45 billion divided by 8,124 is $5.5 million per institution. Of course CitiBank is larger than Joe’s FDIC Insured Bank so they will “pre-pay” more but any notion that the FDIC can just pass along $45 billion to “them” so “we” won’t notice is silly. The money has to come from somewhere.
This is assuming that “we are at the bottom”. With a million jobs being lost every 4 months, I doubt all the shoes have dropped. There are simply too many people at the back end of their unemployment eligibility and too many homes working their way through foreclosure for a quick rebound, in my opinion.
But what do I know? I found the notion of housing appreciating by 15% – 20% per year and the headlong dive into interest only mortgages while wages were increasing by 3% per year to be unsustainable.
I really wish they would not sell this as painless and routine. Weary taxpayers, you bet. But the pre-payment won’t come out of the bonuses of the CEO’s.
Excellent analyis DB. You are almost certainly right that the money will not be coming out of the CEO’s pockets. Not much of an argument for self-regulation is it?
Hi d_b,
The FDIC is in a sort of lose-lose situation here: If it borrowed the money it needs from banks, it could find itself in the awkward position of being a customer of a bank that may need assistance later.
If it got the money from the U.S. Treasury, the move undoubtedly would be seen as another taxpayer-funded bailout, which would inject a huge dose of politics into an agency that is supposed to be independent and largely supposed to derive its funding from the banking industry.
So, it looks that the agency is acknowledging the political realities and seeks to collect on premiums three years in advance from the banks. This could place a drag on profits as banks are trying to recover, but removes the problems of the FDIC being a banking customer itself and also the author of a taxpayer funded solution.
There are no easy solutions here because the illness is severe; the options come down to choosing among radical surgery, radiation bombardment and chemotherapy — and the FDIC seems to have chosen to send the banks a bill payable up front for the the chemotherapy option. The hope is that the patient is strong enough to withstand a strategic injection of poison to eradicate the major threat — without killing off too many healthy cells.
Regards,
Patrick
Patrick,
I am in 100% agreement with you. If the FDIC draws on its $500 billion line of credit at the Fed, it looks like another bailout with the Fed printing money. If the FDIC goes to Congress, it’s another bailout added to the Federal debt. They have chosen to bill up front, fair enough. The healthy banks should be able to handle it…this time. Bank is a four letter word at this time. But the money is coming out of depositors’ pockets in the form of fees. Fees or taxes, it’s still our pocket.
If the FDIC defaults on the expectation of 100% guaranteed deposits, we are all screwed. Lending comes to a halt and the lucky ones that run to the banks when they still have cash. It’s just the notion that the FDIC is socking to to the banks and protecting taxpayers that is a bit disingenuous.
Notice the full court press in talking up the recovery when we are still losing a million jobs every 4 months.
Well, the other shoe is about to drop. While much has been made out of the sub-prime mortgages that came due in late 08 and 09, the majority do not come due until 2010. If you think repossesions are up now, just wait, and the so-called stimulus program for this segment of the market won’t make a dent in those who cannot re-finance or pay these mortgages.
Throw in unemployment will be over 10% won’t help either. Actually the real number is about 13% right now due to those how gave up trying to find work, and have taken early social security. Which has put a strain on the already debt-riddedn social security system. To add to the misery index, count in those that have given up on full-time work, and now are doing part-time work to try to make ends meet, and you have a crisis that will extend through 2010.
Don’t you just love all this good news?
I was thinking that for the 90% who still have a job, things may not be too bad. Food, fuel and mortgage rates are lower than 12/18 months ago, so some people have more disposable income.
Today someone told me about a friend of theirs who works for Merrill Lynch. Merrill Lynch survived only because it was bought by BoA, and one third of the money it got from the Fed TARP bailout went on bonuses. This person was complaining that they had only got a 2% pay rise this year. Apparently, a 2% rise is not enough to live on these days.
I wonder how many of the 90% who still have a job, but don’t work in one of the industries that got a bailout got a pay rise? I didn’t last year & I don’t expect to get one this year. Maybe I earn such a vast amount on money that I don’t need a 2% rise? Or maybe people who work for banks are somewhat disconnected from reality and addicted to raises by clockwork?
It has been commented by more than one economic observer that the bonus culture in the banking system for short term results is one that sets bank employees apart from teachers, engineers, scientists and other valuable professional members of our society. It implies a superiority and a greater value of their work over the rest of the professionals which has, combined with the power that brings, been at the root of the lack of self regulation in that sector that is behind the present crisis.
An end to this unwarrented practice might well be a good beginning to a real perspective towards the role played by the financial sector.
Hi Tony,
You’ve pointed out one of the hidden dangers: the limited growth that exists could be wiped out by a spike in fuel prices, which would cause food prices to rise because of higher delivery costs that would get passed along to the consumer.
Here’s a story I’ve used to illustrate the point.
For a long time I paid $2.19 for a three-pound box of spaghetti. When fuel prices began to rise steadily, so did the price of spaghetti. When fuel prices were at their highest point in the United States last summer, the box of spaghetti had risen from $2.19 to $3.99.
A friend of mine is in the wholesale produce business and has driven a heavy truck to the docks for 50 years. He carefully inspects the merchandise, buys in large quantities and delivers the best and the freshest vegetables and fruit to his customers, most of whom are restaurateurs.
His costs effectively doubled — for his truck and the merchandise. Those costs were passed as much a practical to the restaurants, which were confronting their own double-whammy: higher food costs at a time fewer consumers were eating out because of their own pocketbook issues.
Profitability just gets eroded under these conditions, which pushes up the unemployment rate.
On another matter of economics . . .
Print, in general, is in a crisis. Condé Nast shuttered four titles yesterday, including Gourmet, which had been published since 1941. Also shuttered were Modern Bride, Elegant Bride and Cookie, the parenting magazine.
This came on the heels of the Reader’s Digest bankruptcy and the bankruptcies of other prominent titles.
The New York Times, citing figures from the Media Industry Newsletter,reported that Condé Nast lost 8,000 ad pages in the past year and that Gourmet suffered a 43-percent hit.
Advertisers have less money to spend, in part owing to the state of the economy, and also owing to the plain fact there is another bulldog to feed with the emergence of the Internet.
On a side note, Condé Nast has become the latest famous publishing company NOT to try to cure its problems by starting an autosurf, despite the surf “industry’s” assurances that:
(a) Surfs are the byproduct of genius and cure all economic ills.
(b) Surfs are an exciting, legal way to “advertise.”
(c) Only the smartest people understand these things.
What the surfs have not been able to explain is why Google and Condé Nast and Reader’s Digest and the Seattle Post-Intelligencer and Twitter — and ANY other company that has enviable website traffic — have not started surfs aimed at gathering up all the money in the known universe and knocking amateur competitors such as ASD for a loop.
Me? I figure it’s because they have some scruples and wouldn’t even consider leveraging their strengths and all their in-house talent on both the editorial and advertising sides to compete in the Ponzi market and crush their fellow Ponzi competitors.
Google has BILLIONS of dollars of cash. It could run a surf legally by paying out $1.25 for every $1 it takes in until it made itself involvent.
I’m figuring its stockholders would storm the boardroom if Google ever announced that it was going to take 50 percent of its income and redistribute it until such a time that its advertisers received 100 percent of their ad spend back, plus a profit of 25 percent.
And I’m figuring that Google stockholders might actually try to have management committed to a hospital facility if management trotted out the “flexible” business plan argument and “rebates aren’t guaranteed,” perhaps especially if Google’s memo was signed, “Google Management Team.”
Patrick
I read recently that an “industry expert” (Hah! What do they know?) predicted oil at about $63 next year. So it’s possible that fuel prices could be stable. Except that governments of any flavour need to raise taxes, and they like to add a few pence to petrol/diesel. I think the threat to any growth will be where higher taxes are applied and how that filters down.
Your friend who drives a truck – is it diesel or petrol? I guess it’s diesel. Some diesels will run on vegetable oil, and if your friend knows restaurants he may have a supply for used oil. I’m not sure what the law is in the US, but in the UK, if someone uses less than a certain amount per year, they can run a vehicle on veggie oil and pay less tax.
Hi Tony,
Very courteous of you to share these thoughts, Tony. I’ll mention it to my friend.
Thank you.
Regards,
Patrick