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Editor's note: This item has been updated and reposted. The Planet Money podcast returns on Friday, Jan. 2.
What a year, right? Planet Money launched on Sept. 7, 2008, just as the federal government unveiled plans for taking over Fannie Mae and Freddie Mac. But never mind four months of crisis.
The National Bureau of Economic Research now says we've been living through a recession since December 2007. I'm trying to remember the moment when I first got worried, when things didn't feel right. I still think it was the day this fall when I took two apples out for family breakfast instead of the usual three -- even though our household income was essentially unchanged.
Drop your own first hints of trouble in the comments, please.
We've wrestled this year with the question of where all the money went, and we're bound to wrestle with it some more in 2009. But here, at least, is one answer to how much money went away. From Bloomberg:
It has been a year of record misery: the largest bankruptcy, bank failure and Ponzi scheme in U.S. history; $720 billion in writedowns and losses by financial institutions; $30.1 trillion in market valuation wiped out.
From Baseline Scenario, home of Simon Johnson and James Kwak, comes a tutorial on the Federal Reserve and interest rates. Johnson, you might remember, walked us through the mechanics for a podcast this month.
I spent the two weeks before Christmas traveling through Egypt, which is experiencing a sharp downturn in tourism. On a Nile cruise, our 128-cabin boat was only at about half capacity. Our tour guide, Hatem, told us he is working less and worries that it's only going to get worse. Hatem and his financee, also a tour guide, are even thinking of postponing their upcoming wedding.
Satyajit Das, our favorite expert in credit default swaps, sent this for your New Year's Eve enjoyment:
"Shell-shocked investors are coming to terms with the financial carnage of 2008. The value of investments fell to such depths that investors needed specialised diving equipment just to find what anything was worth.
If you're looking for a party game to play tonight, Kevin Kallaugher, who used to be the political cartoonist for the Baltimore Sun newspaper (back when newspapers had budgets for such things), has crafted one for our times.
"Our board game pits players against each other and encourages them to pick on the weakest, kick opponents when they are down and generally manifest all the characteristics that bring success in the financial world."
It's in the holiday edition of The Economist, but if you cancelled your subscription in these hard times, it's free here.
Portfolio has assembled its list of the year's top business blunders. The list includes the likely suspects: Societe Generale, Jerry Yang, and Bernie Madoff. Along with a few I'd just plain forgotten about. My personal favorite -- the executives from the big three automakers taking private jets to Washington to ask for a bailout. David Kestenbaum asked David Cole, from the Center of Automotive Research, about this decision back in November, his rationale -- security.
When Martin Sullivan, the former president and CEO of AIG, appeared before Congress this year, he blamed a seemingly arcane accounting rule for contributing to his company's woes: The "mark-to-market" rule that requires companies to value their assets at what they would sell for in the marketplace, even if they weren't planning to sell them for a while.
Banks had also been complaining about mark-to-market, saying it made their balance sheets look worse than they were.
But a new report by the Securities and Exchange Commission now says the mark-to-market rules "did not appear to play a meaningful role in bank failures occurring during 2008."
Congress ordered the Securities and Exchange Commission to review mark-to-market as part of the $700 billion bailout bill. The report recommends keeping the rule in place.
1962: President Kennedy talks with media mogul Rupert Murdoch (right). At left is Zell Rabin, editor of the Sydney Daily Mirror
Keystone/Hulton Archive/Getty Images
Today on Planet Money:
Stop me if you've heard this one before. An incoming president faces a downturn in the economy. He gathers the best and brightest economists, and they get to work on a stimulus program of government spending. No, we're not talking about President-elect Barack Obama. We're talking about President John F. Kennedy, whose policies author Robert J. Samuelson says ultimately backfired.
The Washington Post op-ed columnist looks at the long-range consequences of Kennedy's deficit spending. Samuelson, author of The Great Inflation and Its Aftermath, says even the smartest folks make mistakes. The worst of it, he argues, is that you sometimes need decades to see the effects.
The Bureau of Labor Statistics has released the latest figures for mass layoffs -- meaning at least 50 people from a single company opening unemployment claims in a five-week period. In November, the bureau clocked 2,328 mass layoffs -- up from 2,140 in October.
Walt in Georgia sends a story about the drop in recycling. Dawson County had already suspended collection of glass and plastic. Now it's adding paperboard to the list. Companies are cutting their purchases of recycled material, so recycling centers can't use what consumers would usually bring in. (Bonus: Chana Joffe-Walt covers the West Coast scene.)
Meanwhile, Mitch in Oregon sends a story about $3.39 billion in bailout money for American Express. The company is converting itself into a bank. Mitch takes special note of this paragraph: "American Express Chief Financial Officer Daniel Henry said in October that that company had $24 billion of debt maturing over the next 12 months. While the lender would probably have been able to pay that off, gaining access to TARP removes any concern, said [analyst Richard] Shane."
Mitch writes, "Did American Express convert to a bank just to get a $3.39 billion gift from the TARP that they didn't even need?" Technical note: The Treasury's getting stock in the deal, so it's not, strictly speaking, a gift.
Jason Adair posted this great picture to our Flickr group. He writes: "Found this on an attic door at a foreclosed home I was looking at. Needless to say, I passed on it."
The letter reads:
To whom it may concern,
I was sold this house on an "ARM" mortgage at $127,000 on March 2006. Today the mortgage company wants $98,000 from me.They tried to sell/auction the house on 10/7/08. They will try again on 11/4/08.
1) I was sold the house with faulty a/c, not working heater or cold air, just faulty fan & thermostat.
2) The foundation is not even in my little girl's "butterfly" room.
3) The pool is a pond, torn liner, no pump.
4) The garage door has fallen twice. I had it re-installed once. The garage holds up to a foot and half of water at the slightest rain.
5) The chimney is broken at the top outside.
6) The dishwasher backs up at drain. Never did work right.
7) Good luck. I invested or gave to mortgage co $60,000.00 in 3 1/2 years plus what ever they got from you.
South Korea's industrial output plunged 14.1 percent in November from a year earlier, dropping at the fastest pace in history amid growing concerns over worsening economic conditions, a government report showed Tuesday.
That's the biggest drop since 1970. If you're wondering, industrial production in the U.S. declined that month by 0.6 percent.
After several years of bouncing around in the wilds of public radio, I landed on Planet Money. Before this, I produced newscasts for member stations WNYC and WBUR, and most recently I worked as a producer on the Bryant Park Project. In my new life here, I produce the daily podcast and write for the blog. Hopefully, someday, I'll find the time to produce some great video and slideshows. One of my favorite parts of the day here is picking out the music for each day's show. I try to keep it fresh and fun, so if you have any good suggestions, give me a shout.
-- Satyajit Das says the old economic order got obliterated this year, but the new one's not yet in place. Until that happens, he argues, no one really knows what to do.
-- Bill Bernstein, neurologist and genius economic historian, has an idea. Bernstein backs a style of playing in the market called "passive index investing."
After the jump, links to books about economics by Bernstein and another smartie.
Whole lot of hollering going on about the travails of retail. The Wall Street Journal reports that analysts predict up to a quarter of all stores are having trouble and may need to declare bankruptcy.
Matthew Yglesias spins through the real implications for your local mall. The short answer is that bankruptcy might allow some stores a second life. The long answer depends on the much broader economy. "When consumer demand goes down, the first response is to discount the merchandise to make sure you can move it," Yglesias writes. "But the second response is to start stocking less inventory and operating fewer stores."
The NYT this weekend took a look at whether satellite radio can survive. CEO says yes, but my favorite line is this quote from an analyst, who wasn't so sure:
"But you don't have any unlevered, free cash flow, dude."
In a blog entry headlined "Maybe We Need a Downturn," listener Shawn Smith writes:
The other day on my bus into downtown SF, a down-and-out looking guy stepped on and asked if anyone could give him the dollar he was short on bus fare. Amazingly, five or six people stepped up to oblige, and it got me thinking about the economy. I've seen people ask for money on the bus before, but I've never seen five people leap to lend a hand. Hard times can create a kind of brotherhood.
He puts me mind of a report from the New York Times over Christmas. The paper says its annual Neediest Cases charity has received over $500,000 more than it had by this point last year. And that's not all. The number of people giving went up, too -- by 53 percent.
As we mentioned the other week, Bernard Madoff, the man who allegedly ran what could be a $50 billion Ponzi scheme, was simultaneously recording golf scores that looked too good to be true.
In particular, the scores seemed suspiciously steady, just like the returns he claimed to be earning for investors.
I asked Drew Baden, who chairs the physics department at the University of Maryland, to take a look...
Cities and states around are facing tight budgets as tax revenues drop. Maryland is looking at a $400 million shortfall, for instance.
And this isn't going to fix things, but the Baltimore Sun (my wife actually) reports that revenue from parking meters have risen 54% over the last four years, to $7 million. And that, the city says, is without raising rates. How?
New electronic meters. People tend to pay for more time than they need. And the days of pulling up and finding leftover time on the clock are gone.
Of course not everyone is happy about that. And one guy in the story found a way to save himself some money.
Folks, there's no Planet Money podcast today. We'll be back with a fresh episode on Monday.
But we do have a Planet Money indicator for you: 10. That's the number of days until the Citigroup Center's annual holiday train-a-palooza in Manhattan shuts down for good. Citigroup is in the middle of a mammoth round of cost-cutting. Depending on which employees you're talking about, the train show was worth at least a couple of salaries. Bloomberg does the numbers like this: a $45 billion government bailout and 52,000 layoffs planned at the bank, and a $240,000 savings by cutting the train show.
The exhibit has been a favorite of New York City schoolchildren, including mine. My family went to the show today, returning with the picture above and the video here. The audio's not great, but the announcer is saying, in part, that Citigroup's "situation has precluded" its sponsoring the exhibit next year.
The Belgian government on Monday night became the first national administration to fall as a direct result of events linked to the global financial crisis.
Prime Minister Yves Leterme's government coalition told King Albert ll it was resigning after accusations that his side tried to influence a court ruling against the dismantling of the Fortis financial services group. Leterme has denied any wrong doing.
"Everybody had said that he showed himself to be a true leader and a confident leader in dealing with the financial crisis," one commenter told Forbes. "He knew that and he tried to show people that he could manage a crisis. Maybe he tried too much, and tried to use too much influence, to prove it."
The video above is from 2007, but you get the idea. Snow, especially in a city like Portland, Ore., can send the whole world sliding. It's maybe not so great for the economy, either.
Mitch writes:
Here in Portland, Oregon, all the shops downtown are closed. Every authority is saying not to drive unless absolutely necessary, and people are obeying. And things in the Northwest aren't nearly as bad as in the Midwest and Northeast. I don't know about other places, but last weekend was pretty bad here, too. Given that we only had four weekends between Thanksgiving and Christmas this year, how bad is it to have any of those weekends ruined by weather like this?
After the jump, an anecdotal answer from another listener in Portland, plus a links kit courtesy of Oregonian reporter Amy Hsuan.
Never mind the empty malls of California. Ben Hall sends these photos from Copenhagen's main shopping drag. He writes:
Even though the Danes are dealing with their own version of the crisis, they have a bank bailout plan, and housing is in decline, it looked like a lot of people were buying. Things are extremely expensive here, too.
He's got a point. Just today, Reuters reports, Denmark became the first European country to declare it's in a recession since the crisis began this fall. You wouldn't know it from the photo after the jump, where you can eye a $120 lampshade that you get to assemble at home.
Instead of giving the auto companies money, why not just say everyone who buys a US car within some period of time, you will be able write the car off your taxes over the next 3 years. This would cause demand.
Your thoughts welcome in the comments, please. Mine: A tax break might stimulate demand, but there are other big problems -- starting with a lack of consumer credit and continuing with the rise in unemployment. If you don't have work, you don't usually buy a new car, tax break or no.
I have worked over my college winter break for three years at the same Christmas tree farm, and this is the first year that I have been told that the owner simple doesnt have enough business for her to hire me. I worked for a couple weeks making wreaths, but after the wreath sales peaked in early December, there werent enough trees being sold to justify having my brother and me work.
Red Hat, which sells Linux software, has announced it will make a profit that amounts to 19 or 20 cents a share. That's a couple of cents more than analysts expected. Why the happy returns? Linux is open source, meaning it uses code that people create and then turn loose for others to use. That makes it relatively cheap.
"A down economic time is relatively good for our business," CEO James Whitehurst told Bloomberg.
While I'm in the mood for hometown news, here's a bit from the Memphis Commercial Appeal. The paper has been following news that a nearby Toyota plant, to be built outside Tupelo, Miss., is now on ice indefinitely. The quote:
"You can't ask a company to build cars they can't sell," said Randy Kelley of Pontotoc, executive director of the Three Rivers Planning and Development District.
Several men in my family spent at least part of their working lives making tires in what was then the Penn Tire plant, in Tupelo, Miss. My father credits a summer spent pushing cartloads of hot tires for his decision to go to college.
That same plant now employs 1,200 people and is owned by a different company, Cooper Tire. This month, the Tupelo plant escaped with its life. Thanks to a decision from headquarters in Findlay, Ohio, its 1,200 workers will not have to spend the holidays looking into unemployment benefits.
Whatever ancestral impulse I have to cheer at the saving of a $100 million local payroll is tempered by the news from another Cooper Tire plant, in Albany, Ga.
-- Adam Davidson visits Frank Caracciolo, owner of the Universal Printing Company in Brooklyn, New York. Carcciolo says business is down, but you may be suprised at who's still buying big.
-- Listener Christopher Dael of Riverside County, Calif., says his local mall's tree looks nothing like the ones in years' past. What's up with that? (The 2006 tree is after the jump.
-- Putting off the purchase of a big flat-screen TV? You're not alone. Chana Joffe-Walt of KPLU says the decline in sales is having an unexpected -- and unwelcome -- effect on recycling.
Sylvia in Wilmington heard the podcast last week in which we called Chrysler's plans to shut down for a month a sign the economy is still contracting. She writes:
[The podcast] mentioned the one-month auto shutdown. It did NOT mention that at this time of year there is normally a 2-week shutdown, so the incremental shutdown, while bad, is not one month.
Dave writes that he and his girlfriend went shopping in San Francisco's North Bay this weekend and found an outdoor mall deserted. Where, he wondered, were the people? And what will become of the stores? He writes, "[I] feel odd about highlighting what must be a devastating time for them."
The Bespoke Investment Group charts the returns on a single dollar invested with Bernie Madoff. Let's just say it puts a new spin on vertical integration.
You asked about hedge funds. Columbia University professor Wei Jiang has delivered, with a first round of answers. We'll be posting more questions and answers in the days to come. For now....
In the last few years a number of the new names to Fortune's "Richest people" list were hedge fund managers. All of the people on the list had over $1 billion net worth. Why/how are the hedge fund managers raking in so much money? Are their earnings stable/permanent, or might they evaporate like so much other "wealth" has lately?
Good morning from the holiday crew at Planet Money. Adam and I are enjoying the peace and quiet, we think. Jonathan Kern, our genius radio editor, sends a link from the Washington Post:
The economists we talk to have been warning us about this, saying that governments might decide to protect their own factories at great risk to the world economy. Meanwhile, I woke up this morning to news I already knew, thanks to the whole Planet Money crowd: Businesses are trimming costs by slicing wages, 401k contributions, and work hours. From the New York Times:
Call it a mystery solved. We've been promising to figure out who slipped language into the $700 billion bailout that allows the federal government to buy stock in banks. Now, we deliver.
Today on Planet Money:
-- David Kestenbaum reveals all, in conversations that include lawmakers Spencer Bachus, Barney Frank and Jim Moran. It all happened on the floor of the House of Representatives. Hear the 70 seconds that may have changed the course of a nation.
-- Bonus: Why did U.S. Treasury Secretary Henry Paulson need all those M&Ms?
In his other life, NPR's esteemed science correspondent Robert Krulwich explains everything about everything for ABC News. This week Krulwich took on deflation, in an animated cartoon that we'd put right here on the blog if they'd let us. Instead, just for you and totally free, a link.
While Goldman Sachs, Morgan Stanley and Merrill Lynch, among others, have eliminated their CEOs' bonuses and cut the cash paid out to their senior-most executives, Credit Suisse has come up with an interesting third option on the bonus-or-no-bonus question: it created a pool of its worst-performing loans, the Partner Asset Facility, from which it will pay its top two ranks of managers.
'Tis the season to be buying. Retailers are slashing prices in the hopes that consumers will open their wallets, and analysts are saying now is the time to snap up stocks that have been unfairly hurt by investors' fears of the overall equity markets.
For the museum that has everything, the item of the year might be a space shuttle. Endeavor, Atlantis and Discovery are scheduled to be decommissioned by 2010, and NASA is looking to send them into the comfortable retirement that the prototype shuttle Enterprise currently enjoys. (Thanks Fast Company!)
The big news happened moments ago. President Bush announced that the government will loan automakers $17.4 billion. "The time to make hard decisions to become viable is now, or the only option will be bankruptcy," he said.
The loans have strings attached, and the companies have to come up with the restructuring plan by March 31. Note that $17.4 billion is about all that's left of the $350 billion Treasury has been authorized to spend. Time to go back for the rest of that $700 billion.
Remember we promised you we'd find out how the stock injection idea got into big bailout bill? (Adam got a mysterious late night phone call at the time telling him it was in there.) Well, we'll have the answer for you on the podcast today.
Most of the Planet Money folks are in meetings, but we'll be talking to you soon.
Listeners have been writing in this week about their experiences with falling wages. Now let's dive deeper into what those stories might mean.
Today on Planet Money:
-- A book editor in the Northeast says his company just cut his wages -- and a lot of other people's -- by five percent. He says the idea is to avoid layoffs.
-- Economist Howard Rosen of the Peterson Institute says the actual data on wages is mixed. He's more troubled by signs that the economy is still contracting, with many millions of people unemployed and major manufacturers putting everything on hold.
We're aiming to talk on the podcast today about the question of layoffs versus pay cuts. Meanwhile, I got this letter from an employer. The business has fewer than 100 workers, and to hear this person tell it, they're all about to make less.
The listener writes:
All of our board members and our outside accountant argued that we risked losing our "best" people if we cut their pay and that we were better off laying off a smaller number and keeping the rest whole.
Listener Chris, of KQED land, recommends circling back for this New York Times Magazine piece on a proposal for Guaranteed Retirement Accounts. The article begins:
This fall, millions of Americans got a nasty shock when they opened up the reports for their individual retirement accounts and 401(k) plans. With double-digit returns a thing of the past, there's an understandable nostalgia for the modest but predictable defined-benefit pensions an earlier generation of workers relied on in retirement. Now there's a proposal that revives the idea but makes it a universal, government-sponsored program.
FedEx cuts salaries--this is a *BIG* deflation deal. Economists fear wage cuts more than layoffs, because wage cuts can lead to deflation, which can be disastrous and hard to stop.
Markopolos: The guy who cracked the Madoff Ponzi scheme. It's been everywhere, not sure we have anything to add, but man, it's delicious to read this guy completely right about everything years ago, and totally ignored.
Econoblogs HATE Obama's SEC chief pick. They say she's a hack.
On Tuesday, the Federal Reserve cut its key interest rate to the lowest on record. On Wednesday, we sort through what, exactly, that means.
Today on Planet Money:
-- Simon Johnson, former chief economist of the International Monetary Fund, explains what the federal funds target rate is, why anyone would want to change, how you do that, and what it means. Bonus: He loves the reckless feel of it.
-- But listener Joel Weyrick of Iowa still wants to know: Why would the Federal Reserve set a range for the new target rate, instead of just announcing a new solid number? Is this part of a new strategy?
I was just about to publish a very short letter from a semiconductor engineer who lives in Texas. He said the plant just announced a temporary 10 percent pay cut. The engineer writes that the cut is across the board.
And then another listener sent this news, about a 10 percent pay cut at another plant, Agilent, in Santa Rosa, Calif.
We asked if you were seeing falling wages. Clearly, some people are.
Yesterday the Federal Reserve lowered its target for the federal funds rate to between zero percent and 0.25 percent. How will this affect the rate consumers pay for home and auto loans?
The latest timesink at Planet Money is LOLFed. Applying the grammar and vocabulary of LOLCats to the follies of modern finance (especially those of the Federal Reserve), it provides a rather postmodern reflection on our current state of affairs. If the jokes don't make sense because of the LOLCat terminology, get help here; if it's because of the names and faces, you're in the right place.
Yesterday we asked whether any of you are experiencing falling wages. Economist Ian Shepherdson reminded us that true deflation is a combination of falling prices and falling wages.
Check the comments on that item, if you haven't lately. What you're telling us is that you're seeing an overall drop in compensation -- but that sometimes, it's a bit disguised. David writes?
If you're like me, when you open the morning paper you skip past the national, local and business sections to the one that really matters: sports. With other news taking up so much attention, it's time to see how our beloved, beleaguered teams are doing.
I'll drop more news after the jump, but first, the banner headline. From the New York Times: Fed cuts key rate to a record low. First sentence:
The Federal Reserve entered a new era on Tuesday, lowering its benchmark interest rate virtually to zero and declaring that it would now fight the recession by pumping out vast amounts of money to businesses and consumers through an expanding array of new lending programs.
We aim to talk a lot more about this on today's podcast.
Greg Newton over at the blog NakedShorts points out that Bernard Madoff, in addition to earning suspiciously steady returns for investors, also got very, very consistent golf scores..
I had a round of emails with NPR's Mike Pesca, who thinks way faster than he can type. I'll leave the misspellings in:
The Federal Reserve cut its key interest rate to the lowest on record. Which got everyone's interest, no? Today on Planet Money:
-- Other falling numbers: U.S. housing starts and consumer prices. Ian Shepherdson, chief U.S. economist for High Frequency Economics, says the bottom is turning out to be lower than he'd expected. And then there's the question of deflation.
-- Two words: Bernard Madoff. And three words: split strike conversion. Madoff, of course, is the New York investment manager accused of running a $50 billion Ponzi scheme. Defining the split strike conversion falls to economist Perry Mehrling of Barnard College. He breaks down the complicated trades that might fuel a fund like Madoff's.
Download the podcast; or subscribe. Opening clip: Stuart Hoffman, chief economist from PNC Financial Services/AP interview. Intro music: Lil Mama meets Marnie Stern for "Absorb the Lip Gloss." Find us: Twitter/ Facebook/ Flickr.
From the next cube farm over, NPR correspondent Mike Pesca sends this:
Add the name Eliot Spitzer to the list of prominent people allegedly ripped off by Wall Street trader Bernard L. Madoff. Yesterday at Slate's holiday party Spitzer, who is writing a column for the online publication, confirmed that his family's firm had investments with a Madoff subsidiary.
For this listener question, I'm going to need your help. Alex writes:
The Washington Post has an article today about the continued drop in the CPI [Consumer Price Index]. 1.7% since the end of October. They cite a lowered cost of fuel for this. They also said that inflation was flat at 0.
. . .
Is this the new sign that we have entered a period of deflation?
The Federal Reserve has cut its target for a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession.
The central bank says it reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October.
Federal Reserve Chairman Ben Bernanke and his colleagues also pledged to use "all available tools" as they struggle to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century.
Investors expect the Federal Reserve today to slice its target for the overnight lending rate to darned near zero. If you're heading for Europe, you're looking at an exchange rate of $1.38 on the euro.
Got this from Robert Benincasa, NPR's numbers guru:
Besieged managers of food banks, social service and housing agencies coping with increased demand and dwindling funds can get a quick lesson in how the nation's philanthropic foundations might help them.
The Foundation Center has started tracking grants, loans and other help to local charities with an online interactive map, hoping to encourage the flow of money to the front lines of the economic downturn.
Last Thursday, I went to a symposium at Columbia about the causes of, and potential solutions for, the financial crisis. One of the speakers, Prof. Wei Jiang, talked about the future of hedge funds.
A number of you have asked about hedge funds, and Prof. Jiang has volunteered to answer your questions. Please post your questions in the comments section below, and I'll collect them at the end of the day and send them to her. Check back soon for the responses!
I really love your show, and I thank you for helping so much to make sense of all this. There's a common and overriding theme in your reporting, however, that has been really bothering me, and that's the idea that all this is unfair, as if someone did this to us.
The thing is, we did this. We all did this. We were greedy, we lived beyond our means for too long, and now here we are.
Demographers like to refer to my cohort as Generation X. But anymore, when we talk about our growing up, my friends and I sound like Generation Recession. We grew up in the 1970s malaise. We graduated into the early 1990s contraction. And now we're looking at a wave of layoffs just when we're hitting the prime of our careers.
Because it's on my mind, I'll start the morning headlines with a Houston Chronicle story about school kids moving because their families have hit hard times. I'm guessing I'm not the only who has so been there.
Not in the background anymore: Bernard Madoff (right) on Capitol Hill, 1993.
AP Photo
Today on Planet Money:
-- Ecuador became the first country to default in the credit crisis, though the reason may have more to do with the political of President Rafael Correa than with a lack of money.
-- New York fund manager Bernard Madoff stands accused in a $50 billion federal investment fraud that threatens to wipe out private individuals, banks and hedge funds around the world. As blogger Felix Salmon of Portfolio explains, Madoff wasn't running a hedge fund himself -- and things might have turned out better if he had been.
The Washington Post reports today the $700 billion bailout's ballyhooed limits on executive pay may be all bally and no hoo. Here you go:
[A]t the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.
Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.
We've gotten some listener questions about a relatively obscure indicator, the Baltic Dry Index. Its precipitous fall has eclipsed that of most other indices: nearly 95% in six months. What is this number and why has it plummeted?
We're aiming to talk hedge funds with Felix Salmon of Portfolio on the podcast later today. Here's a bit from him on tax implications of the Bernard Madoff affair. Salmon writes:
Let's say you're a successful businessman who has managed to earn $10 million this year, but who also had $10 million invested with Bernie Madoff. Obviously, you're not happy about seeing your savings wiped out -- but if I'm reading this WSJ article correctly, since your loss is a "theft loss", the whole thing is deductible, and you basically get to keep all your income tax-free!
The rest of the item is just as bracing, I'd say. Talking to Salmon should be a world of fun.
Michel Im took this picture while out shopping in the East Bay this weekend. The Geithner reference, of course, is to Timothy Geithner, who's up for Treasury secretary.
Many of you asked about the new $800 billion effort announced by the Federal Reserve last month to help get lending going. Questions like "$800 billion??" and "Where is this money coming from??"
-- Jay Rosen wants to know why, when the Senate spikes a rescue for U.S. automakers, Japanese stocks go down. One answer comes from Vinny Catalano, president of Blue Marble investment firm and keeper of a cool blog.
-- Automakers in Detroit say they're too big to fail. As business historian John Steele Gordon tells David Kestenbaum, we've heard that one before -- from the U.S. steel industry.
-- Last year, Adam Davidson went to Pittsburgh to see what remained of the steel industry and its workers. Also, to find out what a "cake eater" might be.
Just before he was arrested on charges of federal securities fraud Thursday, fund manager Bernard L. Madoff is alleged to have told his employees that his firm was "basically, a giant Ponzi scheme."
Vinny Catalano, president of the New York-based investment firm Blue Marble, says a Ponzi scheme involves borrowing from Peter to pay Paul. But it doesn't stop there.
Hedge fund manager Bernard L. Madoff is in a world of trouble. Madoff now stands accused of pulling investors into a Ponzi scheme -- think borrow from Peter to pay Paul, borrow from Ann to pay Peter, etc.
Meanwhile, Madoff's clients are in a world of pain.Total losses could reach $50 billion. The accounting has begun.
You've been asking for good news. We've got it, or at least what passes for it, today on Planet Money:
-- Will Aston-Reese, a money trader with Tradition Asiel Securities in New York, says he sees signs of thawing in the credit markets. He does! He does!
-- The Old Order Amish of Lancaster County, Penn., almost never use credit. The one exception is when they buy a farm, and for that they turn to Bill O'Brien. The mortgage banker says he has never lost money on an Amish deal, though he does put a thousand miles a week on his car.
After the jump, a letter from someone who's doing OK.
A new Pew poll suggests that affluent folks are cutting back even though their finances haven't really been effected yet.
"Worry is the overwhelming factor in spending cutbacks being made by more affluent consumers," the report says.
There is some good news. The survey found people are still relatively optimistic about the economy long-term, "the current psychology of bad times notwithstanding."
June 2009: That's the average date given by economists for the end of the downturn, in a new survey published by the Wall Street Journal.
Never mind that the headline is "Outlook Darkens as Recession Deepens." I'm living for that June 2009 bit, rightly or wrongly. How about this from the Journal:
"The downturn would be deeper still, in our view, were it not for an ultra-aggressive combination of monetary and fiscal stimulus that will soon move into high gear," Morgan Stanley economists Richard Berner and David Greenlaw said in a research note. "Authorities are pulling out all the stops: Quantitative easing by the Fed and the largest-ever fiscal stimulus package likely will promote stability in the economy late in 2009 and a moderate recovery in 2010."
In a recent column for Bloomberg, Michael Lewis offers his advice to a young banker thinking about leaving a well-known New York bank.
What Wall Street did so well, for so long, was to give people jobs that they could pass off to themselves as well as others as callings. Such was their exalted social and financial status: Wall Street jobs made people feel special without actually having to be special. You never really had to explain why you were doing it -- even if you should have. But really, the same rule that applies to properly functioning financial markets applies to other markets: There's a direct relationship between risk and reward. A fantastically rewarding career usually requires you to take fantastic risks. To get your seat at the table on Wall Street you may have passed through a fine filter, but you took no real risk. You were just being paid, briefly, as if you had. So which is it: job or calling?
Anyone else feeling like this banker -- considering a career change?
2 toothbrushes, 1 bag of rice, cans of food, light bulbs and car oil.
Emily Keown
Emily from Madison, Wis. wrote to tell us how the economy has affected her gift giving:
In April my husband and I made the decision to leave our jobs and move from the East Coast to the Midwest so he could go back to school for his PhD. We bought a house and imagined I would find a job without too much problem, 6 months later I have received over 110 rejection letters, I work 3 part time jobs, and do freelance work. He brings in a modest stipend from his program. We are in a place we couldn't have imagined.
A number of you have asked about the situation in South Korea, so we'll start there today. And where do we end? With job cuts in West Virginia, after the jump.
-- Amie Cohen bought a house just before the market tanked. Now back in school, she keeps up with the monthly note-- painful as it is. She asks a question shared by countless other homeowners: Should I get quit paying the mortgage and get help in the $700 billion bailout?
-- Economist Amir Sufi makes the case for homeowners staying the course if they can. Sufi likes the government's plan for helping them do that, but he can't help noticing which group gets help first.
After the jump, a listener writes about his personal response to the economic downturn.
Marshall wonders why falling housing prices are necessarily bad:
The housing boom made houses unaffordable and the prices were artificially inflated anyway. Shouldn't we all be happy that the prices are closer to their real values so that people who aren't rich are more likely actually afford houses again?
As it happens, it's not just Marshall who thinks that falling house prices might be a good thing. Analysts, economists, think tanks and even the occasional Treasury Secretary think so, too. So why are many commentators worried about falling prices?
File this under shows I'd like to do: People and businesses getting along just fine, thank you. Nicole in upstate New York writes:
I feel as if I am living in a bubble. My husband works for a successful medical device company and has been desperately trying to hire a Quality Engineer and has had very few applicants. My mother is a nursing manager for an after-hours clinic and has been trying to hire nurses and has had very few applicants. My husband has been told to expect a bonus and a raise next month.
We've been talking on Planet Money about whether layoffs are good for the economy. Today, we got a little closer case study. Citing the economic downturn, officials at NPR announced a round of 64 layoffs -- 7 percent of the workforce. The cuts include the upcoming cancellations of News and Notes and Day to Day, two shows produced out of NPR's Culver City, Calif., studios.
"This is a hard day for NPR," said Ellen Weiss, NPR's senior vice president for news. Despite the bad news on the revenue front, the on-air and online audience for NPR is up significantly, she said. "At many levels, NPR's best resources are its people. There isn't a single individual person who isn't going to feel pain today," Weiss said.
Homeless people Los Angeles stand to get an upgrade from the cardboard boxes. The LA Times reports on Christopher Raynor's new personal pod:
Until a few weeks ago, he dozed on a thin mattress in the open air. Now he beds down in a snug mobile shelter called an EDAR (short for Everyone Deserves a Roof), a covered contraption that looks like the offspring of a shopping cart and a pop-up camper.
I've updated the Planet Money glossary with three of the terms making the rounds in the past few weeks. What is a "bad bank," and why would Citigroup want to sell its assets to it? What is the difference between Chapter 7 and Chapter 11 bankruptcy?
These days are really frustrating for our graduating students in China; though we're busy delivering our CVs, the response is sort of like "a stone dropped in the sea". Literally fewer job are provided than the past few years, and particularly the application for Big 4 auditors, which is usually considered as a pretty choice for new grads, is becoming even harder.
Cassi Yost sends this picture from her local mall in Cleveland, Tenn. She writes:
Our local mall on a Saturday about 6pm ... food kiosks have closed and spaces are for lease. Barely anyone shopping, and virtually no one eating at the single food vendor. This could spell the end of our only shopping mall here in Cleveland, TN -- we may be forced to head to Chattanooga or Knoxville in days to come.
Big news today for the economy: The interest rate on a four-week Treasury bill went to zero (some say it went even lower). That means people were so frightened of putting their money into other investments that they are now willing to lend to the U.S. government money for no interest at all. They just want someplace safe.
And don't we all. Welcome to the second day of our look at the big consequences of small decisions. Today on Planet Money:
-- Ian Shepherdson, of High Frequency Economics, says this recession looks like no other downturn, at any time in history or place on the globe. Must be time to experiment.
-- Lately Noel Paterson has changed his ways. Paterson, who works for Microsoft in Washington State, switched from buying TV and game consoles in stores and started picking them up on Craigslist instead. His pre-Christmas shopping has given him a particular glimpse of the recession as it's lived out there.
WASHINGTON (AP) - Interest rates on four-week Treasury bills fell to zero Tuesday, as investors still sought the safety of government securities without any return on their investment.
That kind of says it all.
Investors are scared and feel the U.S. government is THE safest place to keep their money. That means lots of competition to buy the Treasury bills (bonds), which pushes the price up. Up so high, that in this case the government doesn't have to offer to pay any interest to get people to buy them.
Our editor here points out that back in 1981, if you lent the government money for three months' you'd get paid 14% interest.
America's most utterly gigantic sports machine is cutting league workers -- not team staffs -- by 14 percent. If the National Bureau of Economic Research hadn't already declared that we're in a recession, I'd say this news would just about do it.
The state of New Hampshire has come up a novel way to save money -- suspending jury trials. The New York Times reports:
John Broderick, the state's chief justice, said suspending trials was essential to avoid layoffs in the judicial system, which has already cut $2.7 million from its budget.The measure will save about $73,000, the monthly amount spent on stipends for jurors.
The Granite State isn't alone: "Vermont is closing its district and family courthouses a half day per week for the rest of the fiscal year to save $300,000." What's next?
Illinois Gov. Rod Blagojevich speaks to the media after visiting with workers occupying the Republic Windows and Doors factory on Dec. 8, 2008, in Chicago.
Scott Olson/Getty Images
This week, we've been looking at your responses to the tough economy, and the economy's responses to your choices. The hardship, as you've been telling us, is everywhere. Even in the indictment against Illinois Gov. Rod Blagojevich, we hear hints of the recession.
NPR's Ken Rudin took a quick look at the charges against Blagojevich, who's accused of trying to sell President-elect Barack Obama's Senate seat, and unearthed this:
The governor and his family were "financially" hurting, the wiretaps revealed. Said the gov: "I want to make money."
The website Seeking Alpha today takes on the question of whether lowering mortgage rates would help stabilize home prices and thus the economy. Short answer: Maybe.
Meanwhile, a listener named Tevya writes:
You said last week that a lower interest rate (say, 4.5%) would make you seriously consider buying a house. I hear everywhere that low interest rates are good for home buyers, but I think the reverse is true. Lower interest rates don't really "get me more house for my money," they actually end up driving the prices higher (or sustaining the already inflated prices) because all the potential buyers have access to these lower rates. Then, when the interest rates eventually go back up (which they will have to do to prevent hyper-inflation) the value of my home will come back down to earth and I'll suddenly be stuck in my house with negative equity.
Morning, everyone. Those of you who've been asking about the "uptick rule," pay particular attention to the second headline. The rest of you, bad news starts at the top and continues after the jump.
You're standing in a store, looking at a rack of jeans. You need new ones -- most of us do, sooner or later. Feeling worried or guilty or bored, you settle on later.
That small moment becomes part of the larger economic scene. Taken together, your decisions and everyone else's are reshaping the world we live in -- for better and for worse. This week, we'll be tracking the outsize consequences of small choices. (After the jump, a listener checks in with his strategy.)
Today on Planet Money:
-- Bronwen Stine of Brooklyn says money's fine at her house. So why has she -- like so many others -- cut back on spending?
-- Eric Hansen, senior vice president of Moda America, distributes clothes from Ungaro, JC de Castelbajac and DKNY. But when people stop shopping, the stores stop ordering more. This week, Hansen is selling surplus suits and assorted gimmes at sample sale downstairs from our office. Adam Davidson came back with a passel of duds, and a story.
AP reports progress in talks between automakers in Detroit and lawmakers in Washington, D.C. Democrats in Congress say the Big 3 automakers could get up to $15 billion in loans in a vote later this week.
House Speaker Nancy Pelosi says all players in the industry, from management to union workers, will have to give up something. "We call this a barbershop," Pelosi said. "Everybody's getting a haircut."
Listener Bill Hoge recommends a Time.com photo essay of his hometown, The Remains of Detroit. I have to say, I'm fascinated by the Motor City experience. Someone invite us over, will ya?
On the Friday podcast, we took up the idea that layoffs might be good for our economy -- even if they're not necessarily good for the people involved.
For now, I'll run three letters on this, two after the jump: Jaimee writes:
I was laid off not once, but twice, by the age of 30. While both were very hard on the ego, I came out of both experiences actually better off. I tried new things, new types of employment, and am now in a very steady, secure, albeit boring job. Its scary, there is no doubt. In both experiences I had responsibilities, mortgage, car payment, then COBRA on top of that, but it is a chance to re-evaluate like your definition at the top of the show eluded to. Sometimes you need to see things as an opportunity, God's way of getting out the crowbar, wedging you out of a mire and making you take a chance. Sorry to sound so Pollyanna, but it helped me a lot (once I got past the initial being p****d) to think of it this way.
I'm proud to say my home county of Rankin, Miss., has an unemployment rate of 4.4 percent -- as opposed to 7.2 across the state and 6.7 nationwide. Why? The Jackson Clarion-Ledger reports:
The county's school district is the No. 1 employer, with 3,155 staff members. The health sector, centered around River Oaks Hospital in Flowood, employs thousands more. The same can be said for the county's retail hubs in Flowood and Pearl.
"We have a great diversity of industry here," [county economic development officer Larry] Mobley said. "We're not heavy in one, so we don't necessarily experience the highs and lows of the economy."
Tell it to Detroit -- or to Elkhart County, Ind. (Side note: I'd offer a toast to Rankin County, but it's still dry.)
It is easy to see how the economy can fall into a recession, but -- looking at past recessions -- how does the economy ever get out of them? Why doesn't it stay in a contracted state forever?
This is fundamentally a question of macroeconomics, clearly one that has yet to be answered definitively. The following are a three frameworks that Ben Bernanke, Hank Paulson and Tim Geithner (as well as a horde of academics) are undoubtedly discussing.
We don't do financial advice here at Planet Money, but this story in the Times was interesting in a broader sense.
Typical advice for investing is that you should diversify. Don't buy just one type of stock. Buy different kinds, and bonds. The idea being that if stocks are plummeting, people are shifting their money somewhere else, like maybe bonds. So you lose on stocks, but you may gain on the bonds.
But in times of crisis these relationships fall apart.
Another Monday, another round of news, plus a deeper look at the Crisis from Simon Johnson's crew at Baseline Scenario. (Hat tip of the day goes to @saalon.)
From Baseline Scenario: What's causing the crisis? (Part 1, part 2)
