Kimberly G. wrote to us after hearing our interview with Columbia economist and former economic adviser to the Bush administration, Glenn Hubbard. She writes:
I wanted to comment that the challenges of bringing this "Marshall Plan" approach to Africa (Or at least to Kenya, and I would guess many other African countries as well) are not small. When I was living and working in Kenya, I grew more and more frustrated at the lack of progress in the "war against poverty" there. Despite the positive relationship between the US and Kenya and the millions of dollars poured into Kenya by the US Government via many of the NGOs that my friends and I worked with -- too much money never seemed to reach those who needed it most, as Hubbard and Duggan's book recognizes.
Indeed, despite the aid, we often saw no progress at all, or progress in the wrong direction. Having personally struggled to navigate the treacherous waters of the Kenya justice system, I can testify of the complacency and corruption of the government at all levels. It's almost impossible to get anything done without paying bribes! When Kenya erupted in political turmoil at the end of 2007, I wonder if it was due more to the economic disenfranchisement of the poor that was blamed on tribal tension, than actual tribal tension. Lines for food were formed by the poor of all tribes, while the government leaders discussed the prospects of peace in posh safari lodges.
As a practicing neurologist in private practice, I have many thoughts related to the current health care debate, and I decided to write to you about the most recent podcast, on "the price of MRI". I am Japanese and graduated medical school, and trained in Japan at Kyoto University. I then moved to New York City in the late 90's, and trained as a neurologist at New York Hospital/Cornell Presbyterian Medical Center and the National Institute of Health (NIH). I now have a private practice in Honolulu, Hawaii.
As a neurologist, I order many MRIs every day. I am frequently enticed by the multiple free standing MRI centers, to order scans at their facility. They offer free pastries for the staff, holiday gifts, and free lunch/dinners. They also have state of the art machine (3T vs 1.5T), ability to do new protocols, movie goggles while patients are getting there scan, spa quality changing room, bathrooms and sometimes water and cookies for the patient while they wait. However, I still order most of my MRIs through the medical center where I practice, or few other facilities, based on what you did not talk about, and that is quality of the "reading" (i.e. radiologist's input).
I am a physician and avid planet money listener. I have been interested in your recent shows covering health care including your recent episode about fee for service medicine. You guys have touched on, but not really fleshed out, an interesting and important consequence of the fee-for-service and RVU system: all of that lobbying you talked about had significant results. Certain types of doctors are now paid vastly more than others. The discrepancies do not correlate with degree of expertise, amount of education/training (which varies for different sub-specialties), complexity of decision making, degree of illness of patients.
Rather, it is driven by the fact that 1) certain things are easier than others to measure (ie "procedures" as opposed to decision-making) and 2) certain sub specialties apparently had better lobbyists than others (so a colonoscopy is really well reimbursed while a similar procedure called a bronchoscopy is not). This in practice means that specialties that are procedure-oriented are more lucrative. Hence, a dermatologist can make a ton of money by doing many small biopsies in his or her office every day. These are easy, very low risk, arguably unnecessary in many cases, and quite lucrative. Similarly, other specialties such as radiology (especially interventional radiology), ophthalmology, cardiology (especially electrophysiology and interventional cardiology), and a variety of others are extremely well-paid while others, which are arguably more important to patients-at-large and just as difficult (such as primary care) are generally poorly reimbursed.
There are incentives to do procedures and the incentives are largely set by medicare reimbursement levels and therefore political. This system really needs to change to correct these incentives if we want to fix health care.
In your Elinor Ostrom podcast, you asked for examples of communities bucking the "tragedy of the commons" through the most local kind of action, and I've got one. I'm working with a group of small businesses in a walkable L.A.neighborhood who are using exactly this principal with parking.
Now, because L.A., like most cities in North America, still has a suburban-oriented parking code, buildings in older walkable neighborhoods have no way of providing all the on-site parking our zoning codes require. As a result, businesses that want to locate in these areas usually the sort of independent shops and restaurants urban people love -- are forced to go through 1-2 year approvals processes before they get their permits, while 7-Elevens, Taco Bells and shopping malls get their plans stamped over the counter, simply because they satisfy the zoning requirements for lots of dedicated on-site parking
Erik Filkorn, a town selectman in Vermont who appeared on a Planet Money podcast in February, writes:
I had an interesting experience with a hospital recently. I got a bill for $8,000 for some surgeries for my son. I waited a month to see if Blue Cross would take a bite out of it. They didn't. Then my wife lost her job and waiting another month seemed prudent or necessary anyway.
Finally, I called them and asked if I could divide the payments over two months and they said, "Yes, but if you can pay today, I can take 30% off." Needless to say, I went for it.
Next day, I decided to see if the anesthesiologists would be similarly sympathetic. No such luck.
I am a graduate student in Chinese history currently here in China for what will be a year doing research for my Ph.D. I very much agree with Kishore Mahbubani's observation that the Western (esp. American) media seems employ a "self-congratulatory discourse" that exaggerates the shortcomings of China and its competitive disadvantages vis-a-vis the U.S. In most cases, I know there is no malicious or conspiratorial intent behind the rhetoric. I am no apologist for the current regime; nor am I ignorant of the economic, political, social, and environmental problems China faces. I think the issues your show and others raise are real, and I also think that Chinese society itself would benefit from a more open and free discussion of the multitude of problems China faces.
I listened to podcast #101 about health care economics. I am a physician, OB/GYN in Upstate NY, and I feel you are missing the key facts in your health care coverage. In today's podcast you ask: "why do doctors and hospitals bill for high dollar amounts when they know practically no one pays this amount?" Your guest from Aetna says he doesn't know.
The answer is -- our contracts state we will receive the agreed upon amount or up to 75 percent of our fees, whatever is less. Therefore, in order for doctors to receive the maximum amount for our services under contract, we have to bill for a much higher amount. It is entirely driven by the health insurance contract. I would like to reduce my fees for uninsured, underinsured patients, but I risk the insurance companies challenging our fee schedule and reducing our payments.
I agree it is crazy, but we are relatively powerless to change it. The contracts are not negotiated. They are offered as a take it or leave it offer, unless you are the only specialist in your community and you can force a negotiation.
After hearing Monday's podcast about medical billing, Dave Goldberg, a physics professor at Drexel University writes:
I enjoy your show every week, but Monday's episode, in particular, hit on something that's been bothering me for a while. While I understand the hospitals' motivations for charging a lower price to a particular insurance company than an individual, I don't understand why the federal government can't or won't introduce a law saying that medical services can't be charged at a different rate for different customers.
It seems like this would almost be a panacea. Much of the ruinous cost of being uninsured would be at least partially ameliorated. For that matter, the barrier to entry that allows individual regional insurance companies to enjoy a near-monopoly would be greatly reduced.
Why hasn't anyone floated such an idea?
The only objection I could think of is that both insurance companies and Medicare would end up having to pay somewhat more, since in essence they are being subsidized by individuals paying more for the same services.
I work as a reference librarian at a public library in Lorain, Ohio, located about 30 minutes due west from Cleveland. Lorain is a smaller version of the Rust Belt cities you've all heard about: Cleveland, Youngstown, Buffalo, Toledo, Detroit. Lorain once made ships -- George Steinbrenner of Yankees fame (or infamy) owned the local shipyard -- cars (Fords), and the steel that went into them. Lorain no longer makes cars or ships things. One of the two steel mills is on "warm idle" (mill lingo for the cooling of the blast furnace used for making bar steel), which means that about two-thirds of its 1,000 employees are on indefinite layoff.
The recession of the early 1980s hit here hard and really never went away. The official county unemployment rate hovers around 10 percent and foreclosures are a huge problem as elsewhere in Ohio.
Last Thursday, my library held a "recession resources fair" to help people find out how they could perhaps better "survive" in the current economy.
Yesterday, we went to eat at Red Robin, my son's fave restaurant, where he always has the Clucks and Fries (chicken tenders and french fries). Red Robin is a Seattle chain, with a large part of its business marketed for kids. It welcomes birthday parties, where the waiters sing its unique birthday song, and it has the Red Robin in costume -- who, just like Chuckie Cheese, scares the bejesus out of the little kids. My youngest daughter, who these days is sometimes a kid and sometimes an adult when it comes to menus, got a kid's menu. You know, with word puzzles, tic-tac-toe layouts, mazes, and figures to color in. It used to come with a pack of 4 crayons -- red, blue, yellow and green. Yesterday it had a pack of two -- red and blue.
Ryan Bird writes that he's Canadian, so he's used to the ideal and the reality of government--provided universal health care. Now Bird lives in Taiwan, where he loves the system:
There are no waiting lines, as one can visit a specialist without a recommendation. There is one billing department, so bureaucracy is minimal. Everything is on smart cards, so the doctor knows what's up with you and the government keeps an eye out for abuse (privacy concerns, but Taiwanese give away information about themselves all the time, and they prefer the benefits). And the fact no one will ever go broke for health care, as a visit to any doctor never costs more than $6US. Stop at the dentist to get your wisdom teeth removed? $3US. Popping into a dermatologist to get a growth removed? $3US. Need a hearing test to make sure that your ears are OK after the fireworks festival? $3US. (I include these examples because they are actual costs that I've had or a friend has had.)
David Kestenbaum continued his coverage of the information gap in health care Tuesday on All Things Considered.
Meanwhile, Andy Wardlaw, a TV editor from the land of KPCC and KCRW, writes:
When I read the New Yorker article you linked to about doctors' success in fighting cystic fibrosis, I got pretty angry. Doctors' success rates aren't recorded and compared? So how is there competition in the marketplace? It seems doctors must largely earn their business based on their bedside manner, not their medical results, so long as their medical results aren't miserable.
Matthew Kime, a freelance photographer and Web designer in Brooklyn, bought health insurance coverage through a freelancers collective. Kime writes from WNYC land:
I consider myself someone young and healthy so I didn't see a point in buying the expensive plans that most people are used to. I did a lot math. To come out ahead, I'd have to go to the doctor about once a month. In a given year, I'm unlikely to go to the doctor at all.
The plan itself is very simple. Under $10k, nothing is covered. I consider to be bankruptcy protection rather than healthcare. However, I do get the negotiated rate for services and that's where things get weird.
Eventually I did make use of the plan. About a year ago I was hit by a car while riding my bike. Thankfully I walked away from the accident.
Michael Green, from Minnesota Public Radio land, describes himself as an Obama supporter and no fan of the "public option" for health insurance. Green argues there's a better way to create competition than having the government start its own insurance plan. He writes:
Since I always enjoy your analogies on the program, I'll start with my own from the healthcare realm. My mother currently takes about ten different medications a day for a variety of reasons. When I asked her to walk me through why she takes each pill, it turned out that only a few were for true underlying medical needs. The rest were to counteract a side effect of the first few and some were to counteract the side effects of each other. I feel like the public option is in the later category.
I think the underlying issue that we are trying to address is lack of competition. So this begs the question "Why isn't there more competition in health care?" Since we are supposed to be in a free market, I'd turn the question and ask "What's broken such that there isn't NATURALLY more competition in health care?"
The mezzanine of Bumrungrad Hospital in Bangkok. (Kate Raynes-Goldie/Flickr)
David M. writes:
I am an expat American architect living and working in Bangkok, Thailand. I have been following the US health care debate closely. Bangkok happens to have some of the best private hospitals in the region, and patients fly here from all over the world for excellent treatment at affordable costs.
I happened to go with a friend last evening to the top hospital for "health care tourists" in Bangkok called Bumrungrad. The place felt like a stylish luxury boutique hotel, literally. Starbucks on 2 floors, Au Bon Pain, state of the art everything, etc. US and UK trained physicians.
Given the recent interest in the health care debate, I thought someone might be interested in a position I held: Refunds Analyst. I worked in a medical billing office for a series of radiology clinics, and my entire workday, every day, was spent looking through the billing system for accounts listed as "overpaid", and then determining why the accounts were listed as overpaid. I would then take the proper steps to remove the credit balance, either by correcting a typo, sending a refund to the insurer, or on the really good days, refunding a patient.
This could at times be an alarming position, given that it allowed me to see how many people failed to understand their Explanations of Benefits (EoBs) - including insurers and those being paid. The most common causes of overpayment were entry error, duplicate payments from one carrier, and conflicts between insurance carriers regarding which is the primary/secondary carrier.
I just finished listening to your podcast for Friday, Sept. 11 and felt compelled to comment. It struck me as very out of character for you to uncritically accept the WSJ thesis that co-pays are a beneficial cost containment mechanism for the insurance companies and the evil pharma company copay cards undermine that altruistic effort
For full disclosure, I'm a lawyer for a biotech company and have spent a fair amount of time over the last several years drafting the fine print for co-pay cards and similar programs for several companies. I don't think that necessarily biases me, but you be the judge.
In contrast to the WSJ thesis, my experience is that co-pays themselves are a blunt instrument that insurers use indiscriminately, often creating perverse financial incentives. I think that dynamic is most simply demonstrated with an example: chronic hepatitis B (CHB).
You've been talking health care for average folks, but what about those of us who aren't average? There's a saying doctors learn in med school, "When you hear hoofbeats, think of horses," but every once in a while it turns out that what you hear is a zebra.
In medical parlance, I'm one of those zebras: I did a lot of running around getting all sorts of negative or inconclusive tests, until finally my naturopath got me on the right track that led to a good allergist/immunologist (after years wasted with a lousy one), who ordered an expensive ($500) and rare test, twice (second time at a
different lab to confirm, as results were almost too unusual).
Result? Turns out I have a random 1 in 10,000 immune defect (which she treated successfully with a protein vaccine, G-d bless her).
Before that was discovered, I had a lot of doctors treating me like a psychosomatic, since if they couldn't find anything wrong, it must be all in my head. And my concern is that calculations of false economy could result in zebras like me not getting the diagnoses and care that we need to get back to participating fully in life.
By false economy, what I mean is that, on the surface, we are an unfair drain on the system, getting a lot of expensive and inconclusive tests, taking a lot of expensive specialists' time. But in a larger sense, if you look at me not as an economic variable in the health care system, but rather as an economic variable in the greater economy of domestic production, by helping restore me to health, you're getting back many times the health care investment by restoring me to full economic productivity.
Several listeners have objected to Monday's podcast comparing health insurance to an all-you-can-eat buffet. Bradley Smith joins a few of you in recommending the video pitch for a public health insurance option. Smith writes:
I have a cavity so I go to a dentist and get a filling. I cut my leg so I go to a doctor to get stitches. I break my arm and get it put in a cast by a doctor. I want to have unprotected sex with my wife and I have a vasectomy.
I DO NOT "OVER CONSUME" HEALTH CARE. NOBODY I HAVE EVER MET "OVER CONSUMES" HEALTH CARE.
Wayne Tucker writes that he was glad to hear LL Cool J and Crazy Eddie on a recent podcast:
Both featured prominently in the soundtrack of my life in the mid '80s, when I was a bike messenger in Manhattan. It is the only job that left me feeling depressed on Friday afternoons because, even though I was in my 20s, had money in my pocket and was free in NYC, I couldn't hope to achieve the measure of fun that I could expect when I returned to work on Monday morning.
I also suppose that it's some sort of economic indicator that my bike messenger paychecks in 1986 were for precisely the same amount that is on my teacher's paychecks today. I don't mean that the figure is the same in adjusted dollars; it's the same series of digits. What is more, the modest sums on my 50-hour-week teaching checks don't reflect a prorated summer break; the checks stop coming when the school year ends in May. It's amazing what a quarter of a century, a Masters degree and 5 years in the same job can do for you.
I was listening to podcast #81 on financial innovation, and I felt like shedding some light upon this subject from an overseas perspective.
Brazil was one of the economies that did not suffer so much with this crisis. The country's economy had a shorter decrease and had a faster recovery. In fact, the recession in Brazilian economy was only a technical one, as opposed to American or European economies, which indeed faced a recession.
One of the reasons for that stability is regulation. Here in Brazil, financial products as simple as mortgages are so regulated that most people don't have access to them. Actually, because the majority of the Brazilian population is poor, the financial system seems to reject the idea of launching risky products, as the default risk appears higher than in other economies.
I don't hear it talked about much. Maybe it's not sexy enough. The economic crisis reads like a whodunit crime novel. Risk capitalists seem motivated by how much they can get away with and how cleverly they can think up schemes for leveraging money and not get stuck being accountable for losses.
Maybe morality is boring. Maybe the notion of setting up banking systems for long-term stable growth falls flat in terms of interesting story line. The collective consciousness seems to like big spikes and big dips, big winners and big losers, big secret dealings, big government interventions, big excuses from Wall Street, big shock and horror from the populous at large, big fears about what horrible thing might happen next. Maybe it's the thirst for adventure and a lot of very smart people chomping at the bit to see what innovative way they can play the system, just for the fun of playing it, like a board game where everyone's protecting their own advantages and hoping to dominate the other players.
Maryellen G. has another answer to our question about who a patient most closely resembles in our current health care system. She writes:
A patient is a corporation hoping it's too big to fail.
I think a lot of us patients are like very large corporations who make risky choices for short term gain, assuming that if and when things get really bad, the public will have to step in and help us. We argue against regulation that might make it more possible to plan for and avoid economic disaster from a health crisis. We argue against it until the very minute when we actually need public help (and sometimes even still then!), because we think by buying cheap health insurance, we'll save some money short term, and if we ever get really sick, we'll get help from the public - the government, our families, other patients (by just not paying or going bankrupt).
Another issue that is important is the medicolegal cloud that hangs over everything we do. Your example of the cost of a Medicare patient differing between Florida and Colorado is a simplistic view of the issues. Why do MDs order more tests? I get no extra reimbursement for tests I order in the hospital -- zero. The easiest thing for me is to "order the aspirin" and send the patient home. That way I get to go home early and see my kids.
The reason is because of the odds game. Medicine is not exact. We make diagnosis based on odds. Your patient example may have a 1-2 percent risk that this chest pain is a heart attack. 98 times I make the right decision to send him home, however, if I am wrong and the patient has a heart attack, I'm at fault. In states that have an onerous tort system (Florida is one of them), MDs treat patients not to miss the 1-2 percent heart attack as opposed to playing the odds this is simple non cardiac chest pain.
If you have ever been sued, it is an extremely distasteful experience. The opposing lawyers job is to prove you incompetent, saying the odds were against this being a heart attack does nothing to win over a jury or family members of a loved one that passed away. This causes MDs to practice defensive medicine -- I am going to treat this patient as if this is a heart attack until proven otherwise. That means I will order the MRIs, CAT scans etc. You may catch that heart attack 1-2 percent of the time but the other 98 percent is wasted resources.
On Friday's podcast, we asked you to tell us who a patient most closely resembles in our current health care system. Michael V. has an answer:
A patient is a student.
He is a consumer when choosing a school to go to. Once he's enrolled in school, he hands over his authority to the teacher who knows "best" how to train/teach him a particular discipline. He pays the school/teacher, but has very little say over how he is taught.
The fiduciary model of medicine is wrong, but so is the open market, consumer model...in my opinion.
Watching the US health care debate from a distance, with the context of the Australian system on my mind, one question keeps coming up: why does it cost so much more in the USA?
The pharmaceutical benefit scheme (PBS) ensures that no matter how much a particular medication costs, the most I will pay is $33-$35/month. The PBS is set up around the very idea that the patient shouldn't have an interest in the cost of a medication. If the most appropriate medication costs twice as much as something that will kind of do the job, the government will cover the difference.
Medicare, which covers all Australians, will pay doctors for each consultation. This is a little misleading as the scheduled fees set by the government are generally low, so usually an out of pocket expense is incurred. There are doctors who charge only the scheduled amount (bulk bill) but these generally feel like a McDonald's drive through, with each appointment lasting 5-7 minutes. I prefer to have 15 -20 minutes set aside for the appointment, so I pay an extra $22.
Not a helicopter: the 1997 Geo Prizm. (Edmonds.com)
By Laura Conaway
Friday's podcast about health care included the story of a doctor who'd asked his hospital for a helicopter to use in commuting. That struck Ronald Meyer of WBEZ land as ridiculous, on our part. He writes:
As one who has listened to virtually every podcast since you began last autumn, I can tell you that the foolishness over the helicopter rides for the doctor was not up to your usual standards. Imagine having a show about journalism, and focusing only on the most abject plagiarism. I believe you spent about 10 min acting as though all doctors commute in helicopters. Not true.
I am an anesthesiologist in suburban Chicago in my 26th year of practice. I commute in a 12 year old Geo Prizm. I typically awaken at 5:10 AM so I can get to work and make sure everything is safe for my 7:00 or 7:30 case. The hospital I work at is pleasant, but all they give us is a 9x15 "office" for members of our 16 person group to hang out between cases. An adjoining room is just big enough for a bed for the days I spend 24 hrs there.
I have been temping for the last year in the patient accounts department of a prominent neurosurgery group. I deal with insurance and billing from the specialists end of things. Our surgeons range from those that will send patients to a collection agency in a heartbeat, to those who will almost always take a personal hit to write off a patient's bill. What bothers me most, though, is observing how patients are treated, both by us in patient accounts and the insurance companies.
When patients claim they don't have the money to pay us (they have thirty days from when the insurance pays to pay the remainder or set up an payment plan, which can take no longer than one year), we don't take their word for it. We have them fill out a monthly budget, go to the county auditors website to find out the value of their homes, and push back at every turn - often nearly forcing them to pick up a medical only credit card, called CareCredit. If they qualify for CareCredit but choose not to use it, we have no mercy. We use a lot of black humor when talking about patients because otherwise I don't think we'd be able to look ourselves in the mirror, sometimes.
With your recent and excellent show on fancy food economics, I would like to share this gem from my local supermarket --a can of Spam at the low price of $9.00.
I'm in Denmark and we usually don't get Spam (the brand that is), but here in the capital you can occasionally find real imported American products. They come with a really high price. The local price is 48 Danisk Kroner (dkr) which is roughly the same as $9.00. Part of the story is of course our 25 percent sales tax.
The same supermarket also has U.S. Cherry Coke at $2.87 per can. (Yes, that is 15dkr per can)
Alex says his Planet Money indicator is 39. He writes:
That's the number of results when I searched the phrase "fell less than expected" in Google News this morning, for articles in the last 30 days. Expanding the search to the last four months, the results are 148. And charting the number of times this phrase appears since the beginning of the year, there's a noticeable spike in April.
My interest in this piqued when I read a few stories today of Ben Bernanke saying the economy is stabilizing. The articles themselves had a lot of grim news, particularly about the job market. But the headlines were mostly optimistic. It reminded me that last week, as the stock market rose, I read the phrase "fell less than expected" repeatedly in financial news.
The other day, I heard something that related back to one of your shows on financial tools, that I thought would be of interest. I really hadn't heard of anything like this before, but I'm sure it happens all the time.
My fiancee's sister recently asked him for a loan to buy a trailer. I know that his sister and her husband both work hard and are very frugal with their money. It surprised me that they didn't have $5,000 saved up. My fiancee explained that the reason they didn't have the cash on hand was because they had just wired their money to a bank in Mexico. He said that they get a higher interest rate there than any savings account they would have here.
Three inches of manila rope. Cost: $0.05. Jesse Johnson
We sent Planet Money intern Matt Katz out around Manhattan today to look for things that cost 5 cents or less. Before Matt left, some of our Twitter crowd suggested the hardware store might be a good place to look. Listener Jesse Johnson thought the same thing, but says it wasn't as easy as he expected. He writes:
When I saw your request for photos of items you could buy for five cents, I had to jump at the opportunity.
As a teenager not too long ago, I worked as an associate for my local hardware store. I keenly remember frequent sub-dollar totals at the register and thought the assignment would be a breeze -- boy was I in for a surprise. After strolling aimlessly isle by isle, I was unable to locate a single screw, washer, nut or bolt for less than seven cents. Dismayed I took a trip to the bulk section and found the cheapest rope was sold for twenty cents a foot. For your consideration, I submit a photo of three inches of quarter inch manila rope.
Let me tell you about how paramedics get paid at my hospital. We're a non-union shop, and we nominally do in fact get paid for performance -- but for the most trivial, stupid things. For example, we get performance reviews on our appearance, attendance and paperwork.
Do we get rewarded for providing good patient care, for saving lives? NEGATIVE. I could be killing people right and left, but so long as my paperwork is in order, I'm a fantastic employee in the hospital's eye.
Since the age of 21, I had worked in the building trades as a pipe and duct insulator out of local #16 San Francisco. In Jan of 2004, my friend opened a mortgage bank and offered me a career change. I knew absolutely nothing about this industry but immediately fell in love with it. I started out working at the lock desk and eventually became head of secondary marketing, as well as account executive to outside retail branches. Then the summer of 2007 hit. There were multiple pay cuts as well as the loss of monthly bonuses.
After 3 years of learning a fascinating business that was giving me a good living, I found myself facing the reality that I may have to go back to being a labor man. By Oct 2008, I could not weather the storm any longer and went back to my union. Here is the good part, I hooked back up with the same superintendent that I had worked for and started working immediately. In fact, I have been working a lot of overtime with more on the way.
Conner Corwin, MIT Sloan MBA Class of 2010, likes Planet Money but objects to the comments about MBAs in our Monday podcast. (Those comments would be mine.) Corwin writes:
I am however not the biggest fan of what was said in the podcast about MBAs. You should go back and listen to it, but I'll quote:
(sarcastic tone) "Just look at how happy all those MBAs made the economy....ooooooo.......just sayin'..."
I am an MBA Candidate for the MIT Sloan Class of 2010 and I am personally pretty tired of hearing all the slack we are getting in the news. Yes, if Fox news or some other joke news system wants to talk like that, fine, its their place to make such comments. But from all of my experiences NPR is not like that. I work very hard, I am taking classes and learning methods and theories to FIX the economy, and have personally done nothing to put us in this recession.
Ryan Christianson has an idea about how to determine teacher's salaries that he admits is "kind of crazy." He writes:
What if teachers were paid based on the future income their students make. For example, student A grows up to make 100k a year. We look at the records and find the 20 teachers that taught student A and compensate them based on that. Compensation could be based on number of months spent with student.
That way the students would turn into "investments" for the teachers.
Yesterday on the podcast we asked you to tell us how compensation works at your job and how you think it could be improved. One of the first people to respond was Elan, who works in the video game industry. Elan writes:
I work at a large, very well-known company that makes video games for PC and consoles. Most of our employees are on salary, but a large part of our total compensation comes from year-end bonuses derived from royalties on our games' sales -- essentially a profit-sharing scheme.
A particular employee's share of the bonus is determined from seniority and from a system of performance reviews. Basically, we all privately provide feedback on one another to management, and then management uses this information and its own judgment to decide how big someone's bonus ought to be.
Anybody else notice a strange quiet on American streets over the holiday weekend? Hoover Pendleton writes from Portand, Ore., that the recession has resulted in "people setting less stuff on fire":
Every year (first with our skittish dog and now with our early-to-bed toddler) the 4th of July has been kind of a nightmare for us, as every kid (defined loosely as anyone under 15, and any male under the age of ~57) in the City spends three days or so setting a match to anything and everything in the hopes that it will make some kind of large exploding sound. The 3rd, 4th, and 5th have always been the worst, with fireworks going off until the wee hours of the morning for three consecutive days.
I'd like to tell you about why I'll never pay my mortgage down, EVEN if I come into a nice stash of cash like those folks you interviewed on the last show.
First, the tax break. I've read that the tax break is a wash in the end, but generally I think having that deduction is a good arrow to have in your income tax avoidance quiver.
Second, even assuming the tax break is a wash, it turns into a definite benefit when you consider what you can do with the principal. I'd much rather invest that money in other asset classes to diversify my portfolio, especially since it is the mortgagee, not the mortgagor, that sees all the benefits of appreciation. This is, of course, leverage, which as of late has a bad rap but is a good thing when managed well.
I'm a recent college graduate from UW-Madison. I just finished a phone interview for an entry level position at a large company (NYSE traded). The listed requirements are 2 yrs lower than my education level and the job pays lower than I'd like (~25,000) but right now I only
have a part time job and need both more work and health insurance.
I'm currently working as a page at the Madison Public Library. I interact with the public and like my coworkers. The busy work I do isn't very rewarding, but it isn't difficult for me either. I think another part time job might be better than a full time job I wouldn't enjoy -- if they would result in the same pay anyway. Health Insurance is the real issue but I think the first job out of college dictates future opportunities in some way too.
I think did everything right. (and I'm pretty lucky) I live within my means and put 20% down when I bought my home in 1999. I have a 14-year old truck, a steady job and a 1 mile commute. After this latest meltdown and the interest rates dropped, I took advantage of the situation and enacted my very own stimulus program.
Even with the recent drop in home prices, my home is still worth double what I paid for it. So I got a re-fi (30 yr fixed) and pulled out some cash. I am now taking advantage of every tax credit and incentive I can get my hands on -- new Energy Star appliances, new energy efficient heating and a/c units. And to top it off, I'm even putting on solar panels.
When the President announces that he wants to shut down your regulator agency, what do you say to your staff? That was the dilemma facing the boss at the beleaguered Office of Thrift Supervision this week. The OTS regulates savings and loans. It's the agency that supervised Washington Mutual, A.I.G. and IndyMac. On Wednesday the staff received this email from the OTS Acting Director:
From: Bowman, John E
Sent: Wednesday, June 17, 2009 2:30 PM
To: #WASH_USERS; #REGION_USERS
Subject: White House Meetings
Date: June 17, 2009
To: All OTS Employees
From: John E. Bowman
Subject: Meetings at the White House today
Late this morning, I attended a meeting at the White House with President Obama and the other federal regulators, then attended his speech on his proposal, "Financial Regulatory Reform: A New Foundation."
The President said in his speech that one element of the proposal is to "dismantle" the OTS. I realize this statement could be unsettling to you.
Listener Josef Lieck just spent a week in Taiwan. He writes:
At first you might think it's a shopping mall a night, but then you'll see that all the doors are wide open on an early afternoon. It is actually a whole bunch of completely deserted flag ship stores in a shopping mall (Star Place) in Kaohsiung, Taiwan. People here tell me, yes, they have been hit and hit hard.
I lost my job as a teacher here in CA. Laid off due to our economy, to make it short. Anyway, yesterday I went in to pack up the last of my belongings and hand in my keys. After moving my belongings out I was waiting for my wife to arrive to haul me and my stuff home. Sitting on my desk was the collection of Boxtops For Education that my Kindergarten students collected so diligently and turned in so proudly. ($0.10 each) So there I was, let go due to budget problems, my very last moments as a teacher, counting out bundles of coupons to help the school pay for balls and paper next year. It really struck me as ironic and sad.
On Monday's podcast, we talked about the economics of buying votes for the election last Sunday in Lebanon. The going price was about $1,000 apiece. An coalition backed by the U.S. government defeated one pushed by Hezbollah.
A pair of responses, the first from Leandro Serrano, who forwards Thomas Friedman's NYT column on the glories of a free and fair elections. Serrano writes:
He is saying the opposite that you are saying in your podcast. Whom do I have to believe?
The second comes from Zaher Hulays, a Lebanese American working in Massachusetts, who writes that the price of an individual vote sounds like a bargain:
I do have a few issues with the way you addressed the economics of vote buying, indeed the $1000 per vote seems to be an excellent value considering that a Hezbollah win would severely restrict foreign aid to the Lebanese government and army, limit foreign investment, curtail tourism in Lebanon, and possibly create a conflict with Israel that would make the destruction of the summer 2006 war seem like child's play.
Louis writes that Wells Fargo sent a letter announcing it had cut one of his credit lines this spring, and he's had no luck appealing it:
Never mind that I am a 20 + year customer, have 3 business accounts as well as 3 personal accounts and have a high (771) credit score, high average balance in the accounts, and no debt with them. After all what damage could be done to my small business and its 17 employees by a sudden 75% reduction to our credit line?
The letter instructs me that their representatives are unavailable to to discuss my specific personal credit, but I am at a loss as to why not. After all this is my credit they have reduced. I did call and was told that I should go into my branch if I wanted this changed, I did so, but the branch manager said he could do nothing about it. He seemed perplexed as to why I was there.
Ever wonder why the recession is getting deeper? What happened to making more credit available?
Handmade baskets for sale in Pennsylvania. Neal Collier
Neal C.'s Planet Money indicator is $35. He writes:
I am an electrical engineer who had shifted careers back in March of 2008. I left a Controls Systems Integration Company to go to heavy industrial (mechanical and electrical). The company went from ~70 people when I took the job (March 2008) to ~20 when I went to "part-time" (February 2009). Part-time was being laid off really, but that did not happen officially until April 1st.
What to do? Contacted head-hunters, co-workers, etc., and ALL said something along the lines of "Great resume! Love to have you! Just need a month or two to get that big contract to put you on."
I work in a state capital bureau of a major newspaper. One of the things I do is try to keep my colleagues all coffee-ed up, and sometimes I buy a pound of coffee for the bureau from the Starbuck's downstairs, using the petty cash checkbook. Just now I went downstairs to get some, and they pointed at this sign (attached) and asked me if there was another form of payment I could offer.
I asked the barrista why (I know those nice folks there pretty well), and he said, "Most of the checks we've been getting here lately have been bouncing, and I guess it's happening everywhere else, too."
I, like many young NPR listeners, reluctantly count myself as among those with the slightly pejorative label 'hipster.' When I heard the lady on the last podcast say that one can shop at consignment shops and Goodwill, I thought, "Hey I do that... why am I still not able to save money?"
I think one of the most ironic things about a subculture that loves irony, is that the image, like any image, is difficult to keep up. While most of my friends and I live in a way that would reflect thriftiness, there are still expenses beyond thrift store clothes and couches dragged in from the street.
Attached is a photo I snapped today of a homeless couple living on the outskirts of our church property (hidden behind a grove of trees between our parking lot and a school). The husband asked me today if we could give them a few more days to comply with the sheriff's eviction because he said there's no room at the local mission.
As an active member of our church I must confess feeling at best awkward, and at worst a failure in living up to the Gospel. We are a small and struggling parish, and I take some comfort in the presence of a very well-run city mission here in Holland.
Oberstadt adds that it's hard to know whether you're living up to your beliefs in a situation like this.
In Bethlehem, Pennsylvania, a stalled hotel. Kim Shively
Kim Shively writes from Kutztown, Pennsylvania:
I am attaching three photos I took this morning, which seem to epitomize the history of the American economy over the last century. One picture features a photo of a half-finished hotel set against the backdrop of the old Bethlehem Steel Factory in Bethlehem, PA. Of course, Bethlehem Steel represents the manufacturing might of the United States for much of the 20th century. It was the second largest steel producer in the U.S. before its final closing in 1995, brought to its knees largely by cheaper steel imported from places like Russia and China. Still, much of the steel in the buildings in Manhattan, for example, was manufactured here, and of course, it was a major employer for the entire Lehigh Valley region.
But the casino's opening. Kim Shively
The hotel was under construction until September 2008, when the economic fiasco that struck the world brought the hotel construction to a halt. The developer is waiting for funds from the new Sands Casino that is opening this Friday here in Bethlehem in order to complete the hotel. The casino complex -- with shopping, restaurants and of course gambling -- is a much anticipated business that many have seen as the economic salvation of Bethlehem after the steel plant shut-down and the ensuing economic decline of the area. To me, though, this represents the great economic shift in recent American history -- from manufacturing useful material to extracting money from a service that produces nothing of value to anyone except profits to the corporate owners of the casinos and tax revenues for the city. Is this the 21st-century economic model for our country? I find it rather sad.
As a kid growing up in the 1990's I collected NHL hockey cards. I would spend my allowance on a couple packs each week, collect entire sets, and then dutifully set the cards in plastic sheets for them to accrue in value. I looked up the going price in the Beckett catalog and dreamed of my future fortunes when I would sell the cards off a couple decades later. Originally, I only collected Topps and O-pee-chee, but then came Upper Deck, Fleer and even McDonald's started offering cards. The market become flooded with different varieties, but the Beckett guide said they were all valuable so I dutifully kept collecting.
I have such an indicator for you, 5. That is the number of live or dead cockroaches that I have seen in my workplace in the past 2 weeks. This is compared to 0, the amount I saw in the year before. This all just so happens to coincide with the announcement my company made about reducing to contract janitorial services by 30 percent to save money.
Yesterday we blogged a study from the Pew Research Center that showed younger people have had to cut back more than older ones. wonkguy responds:
The interesting story at the PEW website is the disparity in the impact of the recession in the elderly based on race. Which, I assume is linked to the disparity in incomes of the groups (white/black/hispanic) when they were working. We will be dealing with the impacts of economic racial disparity for a long long time to come.
Many years ago, in high school, one of my teachers was telling me that the way you can tell if a restaurant is doing well is by their napkins (at least the restaurants that use paper napkins). Think about a typical short order restaurant that has napkin dispensers, the ones with the paper napkins inside, at every table. This teacher told our class that all the napkin dispensers are pretty much one standard size and are usually filled with one size of paper napkins.
He stressed that a restaurant that was doing well always has the napkin dispensers crammed super full so that whenever a restaurant patron goes to get a napkin, they usually pull out 2-3 more than they really need and wind up wasting them. However, you can always tell a restaurant that is struggling a bit because the napkin dispensers are always less full, meaning that you only pull out one napkin at a time, waste fewer napkins, and save the place some money.
Unlike welfare, student aid is more than a stopgap.
This week, President Barack Obama announced that he wants to change key parts of the federal system for student aid. Among the proposals is a move to turn Pell Grants into an entitlement program, similar to Social Security. A pair of Planet Money Twitter pals began (quite civilly) duking it out over the issue. We asked Eric Sipple and JL Johnson to take it outside the 140-character box. Johnson opposes the Obama plan -- you can find his response here.
Below, Sipple argues for it:
I was lucky. The savings account in my name was opened when I was an infant, funded by every check, bond and $20 bill slipped into a Christmas card throughout my life. Gifts I got to keep. Money? That went into the college fund, along with whatever extra money my parents had left over after the day to day expense of raising a spoiled only child. My four-year degree took me eight to earn but left me with less than $7,000 in debt. Like I said. Lucky.
The last two decades have seen a drift in the makeup of student financial assistance from grants to loans. When the Pell Grant was introduced in 1976, two years before my parents started my college fund, it covered 72 percent of the typical cost of four-year undergraduate education. By 1997, when I was sending out my college applications, it covered only 35 percent. It wasn't any better in 2006, the year after I finally earned my degree. President Obama's plan to tie Pell Grant increases to inflation is a step toward reversing that trend.
When did Americans become comfortable in accepting handouts without clear means of repayment?
This week, President Barack Obama announced that he wants to change key parts of the federal system for student aid. Among the proposals is a move to turn Pell Grants into an entitlement program, similar to Social Security. A pair of Planet Money Twitter pals began (quite civilly) duking it out over the issue. We asked Eric Sipple and JL Johnson to take it outside the 140-character box. Sipple supports the Obama plan -- you can find his response here.
Below, Johnson argues against the change:
In his book The Audacity of Hope, then U.S. Senator Barack Obama spoke heavily on values, values that in his own words "help realize opportunity." The values of self-reliance, self-improvement, drive, discipline, temperance, hard work, and personal responsibility, says Obama, are rooted in "a confidence that each of us can rise above the circumstances of our birth [and] society as a whole will prosper." Later he states:
"Our system of self-government and our free-market economy depend on the majority of individual Americans adhering to these values. The legitimacy of our government and our economy depend on the degree to which these values are rewarded."
Considering these words, written less than five years earlier, I find it troubling that now President of the United States Obama has sponsored the ambitious goal of making Pell Grants an entitlement program the likes of Social Security and Medicaid.
I am from suburban Detroit and felt that Mr. Langfitt's comments were definitely reflective of several aspects of the area and its connection to the auto industry -- and yes, it is true that nearly everyone has some relative that has worked or works for the "Big Three." That said, it should be noted that his comments seem to reflect, for the most part, only the views of UAW members. Of course I can only speak for my self, but anecdotally I know I am far from alone in having feelings of animosity towards the UAW and its overpaid members; this phenomenon of ill will is not isolated to cosmopolitan coastal cities.
Jacqueline from Cleveland, Ohio, posted this economic indicator on our Facebook page:
5. The number of couples I know that have met and started dating since the economic disaster that began last September. Including myself, all 5 couples met either right before or right after being laid off or just "out of work". Normally, something as devastating as a loosing one's job would cause a brand new, fragile relationship to end. In these cases, however, the tough economic times have seemed to "pull" the couples together. Fewer hours stressed out at work, no commuting, less money for happy hour with single friends and a general desire for companionship during this rough patch -- has actually helped the relationships grow!
Seen in Seattle's Laurelhurst neighborhood.Seven_Null7/Planet Money Flickr pool
Mike from Parsippany, NJ writes:
My wife and I started looking for our first house just after we got married (October 2008). At first we found plenty of homes that had been on the market for several months, and we saw prices on those homes drop over the next couple of months as they remained on the market without any interested buyers. We took our time shopping around, knowing that we had the advantage in this buyer's market and confident that we would find a great deal.
As of a year ago, it was extremely rare for a contract attorney/document review job (particularly for large firms) to pay anything below $40/hour. That rate was standard across doc review agencies and felt extremely stable.
Now, the majority of the doc review job announcements for contract attorneys specify that the pay will be only $35/hour. Whether that reflects that firms are not willing to pay the agencies as much, or that firm clients are not willing to pay the firms as much, or that agencies are just trying to keep more of what the firms pay, I don't know. But it really stinks.
With the news today that Chrysler will file for bankruptcy after all, I checked in with the automotive worker who walked us through the union's new agreement. He writes that he's trying to keep some distance from it all, after years of following every twist and turn in Detroit:
At first I couldn't get enough news about what's going on and that was all I would talk about. I thought knowing what was happening would give me some sort of control. After 9 years of doom and gloom and no possible job prospects out there for me, I will just keep showing up to do my job until the doors are padlocked shut. I have too many people around me now who look at me as one of the lucky ones. Considering they can't find work and the job market gets more flooded everyday with more people going for the same few jobs.
Got this from a Chrysler worker who'd taken a spin through today's UAW agreement with the automaker:
The thing that stands out to me is that we did not see a cut in pay or benefits. That is huge and considering what is going on around with job losses (and pending job losses). I consider myself very lucky. Our only losses are a couple holidays, forced vacation time used during layoffs, Christmas bonuses, performance bonuses like "profit sharing."
Another minor loss is overtime pay is now after we work 40 hours. It was set up where we were paid time-and-a-half for any time we work over 8 hours in a day and on Saturdays. The way it is set up now is if you miss a Tuesday and you work Saturday, Saturday will be at your normal hourly rate until you complete 40 hours.
Forgive me David Kestenbaum, for I have sinned. It has been 32 years since my last confession.
I am writing to you from Rome, Italy. The crisis is so bad I can't even afford to call in to your show. I hope you don't mind a confessional email.
Living only a few miles from the Vatican, I feel I should be brutally honest with my confession or be struck down by a renegade motorino. It turns out I have a lot of financial dirty laundry to air (and no oversized Maytag dryer to ease the burden).
I have lived and worked overseas for the past 9 years with my wife and three kids. After thinking a great deal about our role in the current financial crisis, I am now convinced that we single handedly caused the current economic depression faced by our great country.
Larry J. sent the White House this letter after hearing our interview with Priya Raghubir on Friday's podcast. He writes:
At the end of the interview, the professor theorizes that if the government issued government rebates as travelers checks that would be accepted by retailers, then there would be a greater likelihood the money would be pumped back into the economy rather than left in the bank where they go to deposit a standard government check. Says Priya Raghubir, "the minute [the tax stimulus] goes into the bank account it becomes savings, it becomes real money".
We first talked to listener Daniel Cross back in January, right after he learned that he would be required to take a furlough from his job as a circuit designer. At the time, he said he wasn't sure whether it was a "prudent move to conserve cash to ride out the bad time or a last ditch effort to try to save something from total collapse." A few weeks ago we checked back in on Daniel, and he told us layoff rumors had taken over the office, making it difficult to get any work done. Daniel said he felt like he was working for a zombie company. Today he sends this update:
As I prepared to take my mandatory 1 week unpaid leave, I was approached by my management about whether I would be interested in a position out of state with the company that was acquiring my design organization. At that time, I expressed general interest, but after considerable discussion with my family and soul-searching, I elected not to accept the offer.
I sometimes play poker at one of the mountain town casinos in Colorado. The gambling is limited stakes, with a $5 maximum bet. Although I could have sworn I didn't have a "tell" -- I did, a huge one. When I had a hand I felt good about, I would toss out a red $5 chip. If I didn't feel so good about my hand, I would put out five white $1 chips in order to save my red chips.
I was appalled when I realized what I was doing. I stopped, of course, and now I watch for the same behavior in others. I would bet the best poker players recognize this behavior intuitively. I didn't have a name for it until I heard about the Denomination Effect on your podcast.
Refilling the basements in Olathe, Kans. Brian Grantham/Planet Money Flickr pool
Brian writes:
After I dropped my step-son off at school, I noticed the basements, that were dug in the late last summer, were being re-filled. The outlines of the basements had matched the town-homes in this subdivision (Asbury), consisting of mainly retirees.
My wife (now pregnant with our second daughter) and I were very happy to see the basements dug last summer, as it meant that the sidewalk would be completed: we want the sidewalk to eliminate our need to walk in the street during our family walks.
I live in Baltimore, MD and I recently saw this sign in my neighborhood. I can understand having to sell your jet ski or wine collection to help make ends meet but having to sell your fishing equipment is just plain sad. The neighborhood I live in is a mix of long-term residents who primarily worked blue collar jobs and a group of younger residents drawn to the sense of community the neighborhood offers. Its difficult to say how the recession is affecting Baltimore, mostly because Baltimore was pretty bad off before the recession started.
After Friday's podcast on bank profits -- on which I asked a rather populist question about AIG boss Edward Liddy's $3 million stake in Goldman Sachs -- we got this from Erik Martin:
I have to say that all the "populist rage" confuses me. Laura, why does it make you angry that Edward Liddy is rich? Seriously. He's only been CEO of AIG since September. He's the guy they brought in to try to fix things, not the guy responsible for running AIG into the ground.
The only thing I can come up with is that it's a general rage against rich people. And that truly scares me. You can't have a vibrant economy with making people rich. To the degree that a nation becomes intolerant of rich people it becomes impoverished.
This letter and screengrab from Gordon Wilson have stuck with me for days and days now. Wilson says he's happy to show us why people aren't saving. Yes, he says, some people just aren't used to putting money aside -- but look what happens lately when you do. Exhibit A: The interest rates on certificates of deposit. He writes:
People should save. But there needs to be more of an incentive to do it. These saving rates don't even cover the cost of inflation.
One of the unfortunate side effects of having the fed rate at such a low level [0 to .25 percent] is that people who want to save are effectively punished for doing so. A 5-year CD at 1.75 percent?! That is outrageous.
Since 2000, annual inflation has generally ranged between 2 and 4 percent. If your money isn't growing faster than that, its purchasing power is shrinking. The bank will hand it back to you, with interest, but you can't do as much with it as you could have done today.
Listener Dan Ross has an interesting point to add to our story last week about the FDIC raising fees on banks:
I am on the board of a very small bank. Our FDIC charges will go up so high that we may have to eliminate one employee in order to pay the assessment, while the banks that caused the bulk of the problem will pay their additional assessment with TARP funds. Perhaps this additional information would have added to your report.
It is true that the Treasury money doesn't come with any restrictions that prevent banks from spending TARP money on FDIC fees. It's not a matter of the size of the bank -- if the biggies that got TARP funds can use them for the fees, then so can the small ones that got help, too.
My father lives in Florida and has worked in boat construction since the early 80's. In January, all new construction on personal watercrafts stopped. The only work to be had was finishing up pre-existing orders, and once that was done, the furlough started. He's been on furlough for two months and word has started to spread one of the big manufacturers is going to close their doors.
This is also bad news because Florida has been hit hard by the housing crisis. My dad has been putting in job applications everywhere he can, but no one has any type of construction jobs available.
Adults aren't the only ones worried about the economic crisis. 17-year-old listener Chris H. says lots of his friends, aged 13-18 years old, are concerned about this "economic thing." He writes:
A friend of mine (age 16) was talking about budget cuts in his school district, all of athletics was gone, maintenance was drastically cut, classes would get much larger, and so on. He was concerned that eventually he would end up with what he called "a totally ghetto school, where the teachers don't even show up." I have heard quite a few variations on this budget cut concern.
After so many people wrote in defending Canada, I had to listen to the April 3 podcast a second time myself to be sure we'd mentioned the Truth North at all. And we had.
Anne-Marie Rivard writes:
Just a quick word to let you know how incredibly offended I was upon hearing Adam Davidson and Alex Blumberg refer to Canada (and Italy, no less!) as insecure nations. Please. I usually find your podcast quite interesting and informative. But thanks for reminding me that I'm in fact listening to an American product, i.e. a product with a superiority complex.
The crew has retaken that aid ship hijacked off the coast of Somalia -- AP reports the captain is still held hostage -- but not before listener Nicole Kontolefa noticed something. She writes:
JUST listened to the last Planet Money podcast yesterday and was amazed that it is cheaper to reroute cargo ships to go around Africa than pay the canal's toll. Then when I heard about the hijacking of a cargo ship, which is rarely reported on in the States it seems -- it's a Maersk ship! Did they account for pirates in the cost benefit analysis of bypassing the Suez?
The Maersk Alabama was on its way to Kenya, with a load of food supplies for East Africa.
For a while now, the same question has occurred to me whenever experts debate our current economic troubles. Whether it is Geithner discussing liquidity problems suppressing prices or debates about mark-to-market, the fundamental argument seems to be what the new normal is.
From one point of view, the Old Normal was artificial, fueled by the giant pool of money, cheap credit that inflated prices and led to rampant and wasteful speculation. Poor investment choices, excess housing now falling into disrepair, defaulting mortgages, all make that pool of money less gigantic. The real liquidity crisis was the over-liquidity before the housing bust, and current liquidity levels are the New Normal, reflecting the smaller pool of money and a clearer sense of the risks in real estate investment.
Right after we took our audio tour from the U.K. to the Suez Canal to an Egyptian bakery, came some news from the Suez Canal. Our Maersk Line executive told us he was sailing his ships around Africa because fees at the Suez were too high. The Suez wasn't budging on rates. Now looks like they may be open to negotiation. Looks like the Panama Canal is, too.
Plus listener Alex Hoffman wanted clarification on that Suez story:
I think you got some things on the Suez Canal story wrong, or at least left some things out.
1) It sounded like the shipper is worried about losing money, not that he is already losing money. That is, he looks at a declining market and is acting proactively to keep from losing money.
I was speaking with my nephew who lives in New Jersey and had just lost his job at an auto supply store. But he was very excited at a new job that "fell into his lap." He found a position as a terrorist -- at $19/hr.
It seems that Fort Dix is hiring folks to role play as terrorists for training purposes. Not only does it pay well (from his perspective), but it seems like he was having fun. He noted there was opportunity for advancement... (I guess you would know if things aren't working out if they assigned you to play the role of a suicide bomber....)
Restaurants on Wyndham Street in the popular Soho/Lan Kwai Fong neighborhood are beginning to shut their doors as the city's bankers and expats feel the pinch of job losses and salary cuts.
Jenny from Sweden wrote this letter after hearing our podcast on global frustration. She writes:
Being a little behind on the podcast, I only just heard the story about the Swedish metal workers union. In the show, it sounded as if the union had agreed to less pay for the same work. Instead, they agreed to reduce the number of hours worked, essentially giving their workers forced unpaid leave. This is still very uncommon in Sweden, but it's not quite as bad as it sounded on the show.
After smacking us around for the "right-wing lunacy" of that Kent Smetters interview about savings and Social Security (boy, did a lot of you not like that one), Elon writes:
I really meant to write you about something that I found quite touching. The architecture firm I work for prides itself on never having laid off an employee in 15 years of existence, but the current economic climate is really testing us, and a couple months ago we went to 90% time & salary.
Monday's podcast included an interview about how much money people should save. Kent Smetters, a professor at the Wharton business school, says the market knows -- and should tell the rest of us. To which listener Jeremy responds:
I think that there's one major thing that Mr. Smetters overlooked in his analysis of why Americans don't save enough, namely the rate at which certain major expenses have risen over the past few years. This is largely based on the work done by Harvard Law professor Elizabeth Warren and her daughter Amelia Warren Tyagi. Their basic thesis is that it takes a lot more money to maintain a middle-class standard of living than it used to.
Namely, the cost of three big things has been rising a lot faster than inflation and wages over the past few years: health care, housing, and college education.
Lindsey Kraft writes from the Forest Park Public Library, outside Chicago:
This book display, filled with books on career advice, at the Forest Park Public Library, was empty after a few a days. As soon as I saw it I thought to myself, "Planet Money indicator."
Library usage statistics are up all over the country. We are busier than ever! I guess that's another indicator.
We'll be taking a look at global recession outrage on the podcast today with reports from Sweden, Shanghai and Egypt. We've received many letters from listeners around the world telling us who they are angry with, but today we got a letter from a listener in New Zealand, who says people in his country aren't mad at anyone.
Troy writes:
New Zealand has decided not to participate in the "financial crisis". If anything the crisis has helped the NZ economy galvanize. There are a few losers that were around the margins and some hard luck stories, but even the Prime Minister has decided not the participate as illustrated in this WSJ interview.
The real winners have been the exporters. The lower Kiwi dollar has helped pushed exports up. Also, Importers are not hurting as bad as you might think. People are just saving a little more and putting off buy big ticket items. Real estate is down, and will probably fall another 8% until it reaches the classic 3-1 ratio with earnings, but interest rates have stabilized.
I am living in Ireland. We are having an unprecedented economic contraction...in 2009, of around 6.5%. Our banks held no U.S. toxic assets, but we have lots of loans to Irish property developers that have soured badly. Our population is 4 million, and we have put 7 billion euro into our 2 main banks, but it looks like we will need to put in more.
Our budget deficit is going to be over 10% in 2009. Luckily we are in the euro and have some stability from that. Unfortunately, our exchequer was too dependent on property related taxes, great in a boom, but crushing when the bubble pops.
Irish people are not blaming the U.S. subprime for our problems. Our problems are all homegrown, just crystallized by the worldwide crisis. We thought we were different, a unique invention of the brains behind the "celtic tiger", and by borrowing and selling houses to one another we could become very wealthy.
A sign of the times in Seattle. Photos by Tom O'Brien
Listener Tom O'Brien writes from Seattle about how the death of the Seattle Post-Intelligencer's print edition is changing the city's landscape:
Here is how other media are treating the unsurprising demise of one of our newspapers. Like most Seattleites my biggest question is what will become of the PI Globe, a Seattle landmark for the entirety of my life, and eerily similar to the globe on the roof of the Daily Planet, the paper Clark Kent works for.
The Seattle Times, historically the high brow alternative to the relatively yellow and working class journalism of the PI, ran an elegy.
The Toronto Star is getting in on the blame game. Listener Shreve L. from Toronto points us to an article titled "Meet the Canadian whose big idea felled Wall Street." In it, the Star calls Former University of Waterloo statistician David X. Li the man who "supplied the matches" that burned down the American economy -- a reference to Felix Salmon's piece in Wired. Shreve writes:
For the most part the readers who have commented on the article seem to see past the sensational headline, and find the articles nationality based attempt at blame distasteful. But perhaps its true that Canadians are at least a little proud to be included as part of the global catastrophe. Don't forget about us.
I graduated college last May in the States and I am currently taking "find myself" year in Paris. I support myself by working at an expatriate bar called "the Great Canadian" (I'm from New York). It is a popular sports bar amongst French and English speakers. It is right on the Seine and in view of Notre Dame. With a location like that drinks are on the pricey side. In the last months thanks to a terrible exchange rate with the pound we've lost a lot of our customers and paying 7 euros while watching a rugby match sounds a bit ridiculous. So now the pints are 5 euros. Still expensive, but still.
Better behavior at the dollar store, please Forwarded by Nathan Foote
On Monday's podcast, we heard from Matthew Noah Smith, a Yale philosphy professor who walked us through one way of looking at blame. Smith first got in touch with us when he pitched the idea of including philosophers on Planet Money. He wrote:
[O]ne thing to ask a political philosopher is the following:
"Should we sacrifice any of our moral commitments -- for example, our commitments to justice and free markets -- in the name of ending this crisis sooner?"
I am an American and loyal listener in Porto Alegre, Brazil. The B in the BRIC. Porto Alegre is one of the strongest cities in Brazil economically, and our location, which is closer to Buenos Aires than to Rio, means that we are deeply tied into the Mercosur. Just in case you were curious what things were like here, I thought I would let you know. High-rent stores in the fancier shopping malls are all liquidating. I mean ALL the retail stores. It is incredible. Orders from manufacturers are collapsing and people are starting to get laid off.
I'm that guy who's blameless that you guys talked about on your "who's to blame" segment. I put 20% down on my condo when I bought it 2 years ago, I make my mortgage payments, I have credit card debt but it is all at 0% interest and I have at least enough money in a high interest earning (over 4%) checking account to pay off the credit card balance at a moments notice.
Derek from Talent, Ore., applies Joshua Bearman's "Delicious Cake Futures" story, about a lunchroom economy, to the housing market collapse:
Listening to Josh's story from 3rd grade, I realized that for the past few years, I have felt similar as I watched home prices skyrocketing in our area (the Rogue Valley in southern Oregon has the city of Medford, one of the most overvalued markets in 2007 I believe).
I knew people who were buying homes (chocolate-dipped nutter butters) and it felt like with prices headed nowhere but up (abundance everywhere), I would never own a home (scarcity), would always be a renter, and like Josh, I would be doomed to raisins for the rest of my life.
Dodd sends this picture from a sample sale in Soho. He writes:
I was dragged by my girlfriend to a kitschy boutique, where people who received "personal invitations" could shop for hip clothing at bottom barrel prices. Well, slap me in the mouth and call me Suzy... this place was bananas. After a 1/2 hour wait just to get in the place, I then had the pleasure of scuffling with over-eager skinny-pants hipsters clutching arms of sweaters, coats & pants for $110 T-shirts and/or $400 sweaters. These people couldn't get it out tha door fast enough. Just buckets of cash being dumped on the register. All I was thinking was "Recession Reshmeshon". I had to snap pictures of fiscal feeding frenzie for proof.
My economic indicator: 12. That's the number of years it took running his own business before my boss gave in and bought a microwave for the office.
He's always resisted because he doesn't like the smell of warmed food in the office. [O]thers who've been at this architecture firm six years and longer have been eating cold soup and leftovers or eating out more than they'd care to for some time now. He's laid off 40% of the office in the last year (5 people), finally resorted to bringing his own lunch, and realized it would be nice to be able to heat it up.
[L]ast year around this time, I started to think about changing careers. One of the reason is that I've been at my current job for 8+ years and finally came to the realization that this was not what I wanted to do. I wanted to go into the graphic/web design field. After a few months, of researching and putting together my portfolio(I have the skills, but lack the real world experience), I finally started job hunting. I landed a few interviews but nothing happened. Then October hit and jobs just seized to exist.
This morning on the radio, Alex Blumberg and Adam Davidson reported on the inevitable pain for ordinary folks of saving the banks.
In the report, Columbia Business School professor points out that U.S. consumer debt rose sharply between 2000 and 2008 (see chart). In 2007, it came to equal gross domestic product -- we owed as much as our entire economy was worth. The last time that happened? 1929. "The problem is us," Beim says.
Evelyn Way heard the report and wrote:
"It is a shame that we were told after 9-11 that it was out patriotic duty to shop and now we are being blamed for not living within our means."
After Friday's podcast on President Obama's foreclosure plan: Bill Payne writes:
One of the things I would like Planet Money to address at some point are those who saw this whole mess coming and stayed away from buying a house period. Again and again there is discussion about angry responsible homeowners, but what about angry responsible renters. I have lived in Chicago for 10 years and watched the city flattened and rebuilt lot by lot at an amazing pace.
I've been observing over the last few weeks, as the financial situation worsens, gas increases, etc, that the number of lunches in the company break room fridge are increasing.
Usually, there's only 4-5 lunches inside the company fridge at any given point in the year, and I assume people usually eat out. But lately, it seems that the company fridge is almost always stuffed with people's take home lunches.
My assumption would be that as people's confidence in the economy lowers, the number of "sack lunches" increases, since people don't feel secure spending that $10 on lunch. (Which, economists say is what they *should* be doing to fix the economy, but that's a separate
issue.)
I saw on the blog recently a post from David about how it's hard for the banks to be able to say what they've done with the money because if you get a check from mom and dad, it goes in your checking account and who knows where the money went specifically. I feel motivated to comment because I have spent my life working for non-profit organizations. We would get various federal, state and local grants and the government would insist that we scrupulously account for how we spent their specific money. It certainly was a pain, but definitely not impossible.
my company has been steadily downsizing since the new year--laying off three or four people (of about 150) every few weeks. i am part of a team that originally had two [people]; my co-[worker] was laid off and as a result, i'm finding myself with twice as much work to do. i have a feeling that many workers "left over" after downsizing are experiencing the same thing--they're having to do the work that the laid off workers would have done, in addition to their own jobs. while my company has laid off people, limited the hours we can work daily, and are considering making salary cuts, they don't yet seem to realize that less time and less employees generally means production will slow down. because of this, i and the other "survivors" are doing more work, in less time, and for less money.
I've so been there, and I'm guessing any number of you have, too. Chart proves it.
I know you've been asking listeners to send in examples of the economic downturn they encounter in their own lives. Here's one from mine. I'm a PTA mom at an elementary school, Sope Creek Elementary, with one of the best PTA's in the country.
I'm forwarding our latest PTA e-mail, which informs us that we have failed to meet all of our fundraising goals so far this year and have even had to cancel a spring fundraising event because the company we do it with (which frames our children's artwork) has gone out of business.
In addition to this bad news, we've just been told by the superintendent of schools that Cobb County (our school district) will have to increase class sizes next year as a result of a budget shortfall.
I am working as a maintenance mgr for a rural development/section 8 subsidized and market apartments. Here in Mid-coast Maine. Currently one of our 'investors' is neglecting one particular apartment complex and the apartments are starting to deteriorate. I visited a reclaimed building materials non-profit to see what they had and If I could get the job done with the materials I found there. Talking to the employees they are hanging by a string to stay afloat and even gone without pay (and still working) for some time. This is a store with great stuff, reclaimed but great stuff and they have great deals. They are seeing a dramatic downturn. It goes to show that when the going gets tough people who didn't have the money to shop at a retail hardware store are not going to a reclaimed hardware store either. bummer.
There are certain rituals that come with a layoff, like cleaning out your desk, giving back your security badge and that awkward goodbye lunch. Bryan sends another one to add to that list -- the disabling of your e-mail account:
This is a personal indicator that can only happen in these modern times. More and more, when I send emails to friends at their company address, I receive one of these as attached. This is often the first indicator that someone you know has been laid off at a company. Who would have thought that this technical error message would indicate someone's misfortune?
I've got my own personal Planet Money indicator for today, zero. I work in the market research industry and for months my employer has been talking about promoting me (adding a "senior" in front of my title). Obviously timing has been bad for this sort of promotion. We even lost a few team members last month to layoffs. I haven't gotten the promotion because there simply isn't enough money available to cover the associated bump in pay, unfortunate but totally understandable.
Well, my employer has decided to give me the promotion anyway. I have really been doing the job anyway for some time now and they want to at least give me the title change to acknowledge my contribution to the company. They'll run new business cards for me, but my paycheck wont be changing.
After the Wednesday podcast, listener TrevorL took exception to economist Anita McGahan's definition of disintermediation. McGahan has written back. Both responses after the jump.
I find that the most important thing I have learned while listening to your podcasts, is that no-one really understands our economy. The economists you have interviewed are happy to portray their pet theories as fact, but if we have learned anything over the past year, it is that they are all just theories, and unlike in real scientific endeavors, we don't seem to be getting closer to a generally agreed upon understanding of the economy works.
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.
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.
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.
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.
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.
Shalali Infante sends this letter from Pint Sized Farm in Alburquerque, NM.
After listening to your podcast, "Where Did all the Money Go?," when you interviewed Niall Ferguson, I started thinking of how I define value and wealth in my life. My wealth comes from feeding my family. I raise food for our family on my small farm. We have three milk cows, three milking goats, 70+ chickens, two hogs (a breeding pair), some ducks and turkeys.
A lot of you have been asking for more from Adam's cousin DJ, who talked on the podcast about his decision not to go to college. Some of you even called it our best podcast yet.
Philip Vitale disagrees. He writes:
Just heard the podcast with the story of DJ. Frankly I cringed every time you, Adam, made a condescending remark to DJ. Even though you were apologetic at the end, the tone of your voice didn't in any way indicate to me that you were really sorry. Maybe that's just a professional tone that you can't drop. Look, I enjoy your reports and in a way the tables were turned on you but I still didn't get the feeling that you actually believed your friend Pietra. College to my mind is just another function of big business. But that's a different issue.
Bob G. sends us this note from Lake in the Hills, Ill.
A sign this morning on how tough times are:
I placed 3 large bags of donations on the front lawn this morning for AMVETS. The bags were long gone before AMVETS ever got there. They were clearly marked AMVETS.
After all these episodes about money, I must tell you about a fascinating story I heard at the Railroad Museum of Oklahoma in Enid, Okla., from the Museum Director Frank W. "Watermelon" Campbell.
On a tour, he pulled out books of "Train Money." Dollar bills that were printed by the train companies in the mid-1800s. These bills were exchangeable dollar for dollar between lines and were used to purchase goods in train towns all over the country.
Watermelon told me that people preferred the train money to federal notes and held onto them even when the federal government outlawed the use of such money for legal tender. The story goes that people didn't trust the government as much as they trusted the train companies (he's a train buff... so he has an angle on this) and predicted a collapse in the value of the US dollar long before the great depression.
I must say, that is an interview I'd love to hear.
Marvin writes from Birmingham, Alabama to say he's seeing food prices increase:
I have seen price increases at Walmart, McDonald's, Wendy's, Burger King, etc. Unfortunately I eat a lot of junk food. So the last couple of weeks when I have gone to my local grocery store (Bruno's, or Walmart Superstore) to buy these items I noticed they have gone up from 15-20%. I am referring to chips, soda (pop), ice-cream, etc. For example you could get 2 liter coke or Fanta from Walmart for $0.99, but now it's $1.25 at Walmart, and $1.59 at Bruno's with a $0.09 savings with loyalty card. I could get Cheeto's chips for about 1.68 at Walmart, now they have gone up to $2.50 in both Bruno's and Walmart. And for the fast food places, Wendy's and McDonald's, I notice they still have a few items on the value menu, however, other items that were pretty low, have gone up in price a couple of times since the summer, like the prices of fries and shakes, and drinks. The fast food price increases really made me scratch my head. I understand that Coke-type products (Frito-lay, Fanta, etc may all be owned by the same parent company). But I just don't understand any price increase especially during this time of economic crisis.
I think the biggest indicator yesterday was the fact that I could easily find a parking space at the local mall on Sunday afternoon, three days after Thanksgiving. Generally during this time there is a type of ballet/rally race/arm wrestling competition to see who can successfully follow a shopper out of the front door of the mall to their car. I can't believe that we won't see really really bad numbers coming out of the 4th quarter.
Robert, now of Ames, Iowa, sends this about job prospects in the Dakotas:
I saw your post on unemployment rates today and, unlike Shayne in Houma, I was frankly not surprised to see South Dakota's two major cities atop the list. I grew up in Rapid City, and most of my family still lives there or in Sioux Falls, and I know the state well. I am in college in Iowa now, and I think that if I were to go back to look for a job when I finish, I might well be able to find one.
I grew up in Houma, Louisiana left to go to college and graduate school. I was surprised to see it as one of CNN's best cities to get a job! After about five seconds of thinking about it, one word came to mind: Katrina.
I heard a lot about deflation and prices declining during this economic crisis. But I have been struck in the past 2-3 weeks to see how much prices have gone up on snack foods, fast food, and all food at the grocery store.
I hadn't noticed, but then I don't do the grocery shopping at my house. One report I found says prices for packaged food will likely keep going up, but that manufacturers only have so much leeway before customers stop buying. Anyone else seeing higher prices for food just lately?
Rod & Lorrie write to share a bit of good news from California:
Like many Americans we have essentially slammed on the brakes for all discretionary spending in the past couple of months. We had placed an order for a solar array for our home in July. Not because it was an attractive financial investment, but because we felt it was the right thing to do at this time. By late September we were wondering about our timing. By the first week in October we realized that such a large discretionary investment was not a good thing at this time, especially given that I had retired early two years ago and my formerly reliable 401k investments were taking a huge beating. We started the process to cancel our order and take our lumps.
Then we received help and encouragement from a most unexpected source, H.R. 1424, the Emergency Economic Stabilization Act of 2008. As the fight to pass this bill was played out on our television screen and on our radio while the nation held it's breath, who would have guessed that some of those obscure adders to the bailout package would directly help someone other than AIG and the big banks?
I'm an opera singer in Chicago, covering the title role in "Lulu" with the Lyric Opera of Chicago, and I thought you might like to know about a line in the show that's been getting enormous laughs.
Act 3, scene 1 of the opera takes place at a party where everyone's talking about shares in the Jungfrau Railway company. Everyone owns or wants them, as they're going up and up. There's an exchange between a bank director and a mother at the party.
Mutter: "Meine samtlichen Ersparnisse bestehn jetzt aus Jungfrau- Aktien. Wenn das nicht gluckt, Herr Generaldirektor, dann kratze ich Ihnen die Augen aus," which she delivers with a laugh. It means: "My entire savings are in Jungfrau shares now. If this doesn't succeed, Mr. Bank Director, then I'll scratch your eyes out!"
We're getting a lot of mail today from people wanting to talk about the American auto industry. Leaders of General Motors, Ford and Chrysler asked Congress yesterday for a rescue or loan or bailout, whatever you want to call $25 billion in financing from Uncle Sam. Their request is drawing a fair bit of flack in the press, like this op-ed from Michigan luminary Mitt Romney.
One of Detroit's big problems is that it's paying a ton for employee benefits like retirement funds and health insurance. Listener Jesse Knaak writes:
Instead of a handout why doesn't the federal government take on the responsibility of the medical care for the union retirees? If that debt obligation is taken off the books it would allow some breathing room for restructuring.
Credit Anecdote: Applied for and received financing for an Apple laptop with 90 days interest free. A whole $3k approved. Wow!
Which is a quite different story from the one Michael shares, about American Express closing a certain type of business account -- not just his, but all of them. He sends photo evidence.
Keep these reports from the economy coming, please. You're living it.
We're lucky that we don't work for one of the Big Three, but for a Japanese brand that is actually manufactured in Ohio, Kentucky and Tennessee. Something many Americans don't realize when talking about the car industry, is that it's not simply Detroit. Honda, Toyota, Isuzu, and Subaru all have factories here in the US that employee hundreds of thousands of Americans- manufacturing parts, assembling cars, shipping cars to points all over the world, and the dealerships that employ people to sell and maintain those vehicles. My Japanese badged SUV was made in Indiana.
Sales in our particular dealership are down about half of what they were a year ago, and that is when the crises had already started. Our dealership is not alone- everyone in the area is in the same boat. Credit is hard to get now, so people that typically finance a car are holding onto their older vehicle. We've seen more cash deals in the last six months than in the last six years. People that are holding onto their older vehicles are tending not to get them serviced, especially with the holiday season coming up. The store is preternaturally quiet, and it's unsettling, like being in a classroom after the kids have all gone home.
I have a sign of the diminishing job market. I work at a movie theater, and despite the news saying that the film industry is the one business model that is recession-proof, we've found out recently that our movie theaters are not. As far as we can tell, there haven't been any sizable declines in our number of customers, yet we are being mandated to cut hours like crazy. I'm not sure if the higher ups see something we can't see, or if they are simply preparing for a future that might not be so bright, but it hurts. Showtimes are being cut back (fewer weekday matinee shows) and we are expected to do the same amount of work with much fewer staff members. Of course, we still have the same number of employees, because the company doesn't want to lay anyone off and have to pay unemployment, so many of us are now trying to live off 15-20 hours a week. Nobody has quit yet, and I believe this is because of the complete lack of available jobs out there, even at the minimum wage level.
Listener Eduardo Bortoni asks two good questions. The first has to do with CDOs:
1) Why is it still difficult to price CDOs? Aren't they supposed to be generating cash every month due to the income streams in the the "things" in them? Shouldn't this provide a clue to it's intrinsic value?
Eduardo is asking about these complicated bond-like things that are at the center of the financial crisis: CDOs. These are called Toxic Assets, or Toxic Waste and are so unloved and unwanted that nobody will buy them even at firesale prices of a dime on the dollar.
Eduardo notes, correctly, that many of these CDOs are paying off money every month. Doesn't anybody want that money? Should they be willing to pay something for them? Then why aren't they moving?
The answer is complex and lies at the heart of this crisis.
Bob Bonifacio started working in the mortgage industry about 11 years ago. He writes:
I landed a job (much quicker than I had anticipated) at another broker financing home improvement loans for a pool builder. These loans were often exotic and risky endeavors, they only required minimal documentation (if any at all) and the lenders appeared to have no regard for their position's safety. If a person owed 200k on a 200k house, they would lend dollar for dollar OVER the value of the house to complete a pool installation which could range anywhere from 15-20k to 60-80k. Risky, I thought, but shoot these are big time companies lending serious money they must've done their homework. After about a year I moved into what I perceived to be the cleaner and better path in the mortgage industry; I accepted a position as an account manager / underwriter for a lender. The lender was known for it's extremely aggressive underwriting guidelines and seemingly endless creativity in devising new and elaborate ways of structuring loans.
The reason I decided to write today is because today is the first day where I have really been hit hard by the crisis. I mean of course prior to today I had cut back on shopping and been in serious discussions with my significant other about how to cut household expenses. I've been online reading blogs about "no-spend" years for inspiration and so on. But still I think the fear was very small compared to what I felt when I got a phone call from my Mom today telling me that my father got laid off today.
There's a local restaurant here in Goshen, IN called [...] that my coworkers and I frequent. Typically we're seated fairly quickly, though it's busy enough that lunch always takes awhile. Today we went and were confounded, because instead of someone to seat us and a server, there was one lady up front taking orders and one waitress delivering food.
Because of the economy they got rid of servers and seaters, and now sell food a la carte. You place and pay for your order up front, then sit down with a number card waiting for someone to bring out your food. You get your own drinks. They also switched to baskets from plates, so you get less of things like french fries. And there are fewer items on the menu, and the meal deals are gone.
Counting up employees, around 11:30 I saw the order taker and one waitress, which is down from a greeter and 4 waiters over lunch in better times. I assume there was a cook wandering around somewhere, still.
We're going to be talking deflation on the podcast today, as in "How in the world could falling prices be so bad for you?"
Meanwhile, Jason writes:
I came across an old article that I thought might be useful for you.
It describes the economy of a WWII POW camp, and how a market quickly emerged for trading rations. Cigarettes became the currency, but the most useful thing is that while the camp economy basically had all the features of a huge international one, it was quite simple, with very few inputs, which makes it easy to understand. They went through periods of inflation and deflation, set up a basic futures market, etc.
At the nudging of economist Simon Johnson, I went looking today for economic indicators in America's hospital emergency rooms. Johnson had been told by a couple of doctors that ER visits had dropped off in September -- not what you'd expect to see in hard times.
And, according to the notes I'm getting, not what you're seeing. The American College of Emergency Room Physicians was kind enough to ask the doctors on its mailing list what they're seeing out there. The answer is lots of visits, and lots of heartache. A doctor in Los Angeles writes:
I am a military officer and, in the middle of these troubled times, I bought a 47" LCD TV -- I guess I'm not alone. So, while others are scaling back, military members are doing their part to help the economy!
Which is not to say that military families have typically been living on Easy Street.
Dave Purdy sends this story from the New York Times, "A Question for A.I.G.: Where Did the Cash Go?" The insurance company has been burning through its $123 billion bailout loan from the Federal Reserve.
Regulators are now looking into whether AIG knew it was coming in for major losses months ago -- losses that weren't apparent on the company's balance sheet. The Times reports:
For $59 billion of the $72 billion A.I.G. has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.
As Purdy points out, the article says much of the money appears to be backing AIG's credit default swaps. He also highlights this paragraph:
Jumping into the buy/don't buy debate, Aaron writes:
I remember a couple days after 9/11 there was this talk going about that the following monday when the markets reopened everyone should go buy something, keep the money flowing in other words. It wasn't until years later that I thought about that idea and concluded that it is totally absurd.
Gordon listened to our Economist House Call from yesterday, in which Simon Johnson advised an employed person in Rhode Island to spend at least a little money now and then. Gordon writes:
"Please, no more of the economist you had on your show today (Tuesday) who tells us that we need to keep spending...
"I've recently lost a job and was lucky to have found another one that is further away from home and pays about 1/3 less than what I was making previously. But at least I can still put food on the table.
Layton finds customers of a restaurant chain lamenting its demise.
Sean wants to know about the "yen-carry trade." I hope to have something about this on the podcast this week.
Akos sends an alternate take on the financial crisis, by Lawrence White at the University of Missouri.
April, an independent Web designer, reports she has just been asked to keep the hours down. She opened a thread about this on the Planet Money Facebook group. "We are getting hammered because of the recessions, and my budget has dried up," writes the client.
Murph sends this on bank dividends and asks what banks can and can't do with bailout money (more on that to come).
Traci's still loving this Rebel Diaz video against the bailout.
David wants to make sure you see this item from Nobel laureate Paul Krugman, who writes, "[D]espite the big-sounding numbers, financial institutions are losing capital faster than governments are putting it in."
Tom, Angie, Deborah and Jennifer are wondering whether banks will use their capital injections to, you know, make loans.
James sends this link from Fleet Buzz -- a fascinating look at the airline industry and the oil economy that commenters then steer in the direction of "Scooby Doo economics."
Aditya, David and Dorothy (among many others) send this report from the Minneapolis Federal Reserve, "Facts and Myths about the Financial Crisis of 2008." Aditya wins the prize for including a link to the Cliffs Notes version over at the estimable blog Seeking Alpha.
Economist Diana Furchtgott-Roth of the Hudson Institute challenged Obama supporters on Wednesday to make sense of their presidential candidate's economic proposals.
Listener John Moyer sends this response:
"Obama's Plan makes sense, the problem is people always hear we're going to tax the wealthy and then think the opposite of the old Reaganomics plan and think by taxing the rich you'll automatically stop job creation.
