[Springboard] Karen's car

Wed Nov 19 14:30:59 EST 2008

Excellent synopsis.

M. George Walters

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From: springboard-bounces at wedgeblade.net
[mailto:springboard-bounces at wedgeblade.net] On Behalf Of Robert Rafos
Sent: Wednesday, November 19, 2008 13:28
To: jfwiegel at yahoo.com; Springboard Dialogue
Subject: Re: [Springboard] Karen's car

Jim,

In a very short answer there are at least 3 drivers of the current crisis.
1. The need for higher returns, 2.  Hedge Funds, 3.  Desire for more or
greed.

1.  As stock returns diminished and bond yields fell, the big players;
pension funds, endowments, and mutual funds needed to earn better returns to
meet their obligations.  For example pensions were experiencing liabilities
to pension payments, but the money in the fund couldn't meet it.  Under law
the company has to make up the difference over time by paying into the fund.
In some cases amounting to billions and one of the issues exacerbating the
automotive industry problems.  Ergo where can we get higher returns so we
don't have to make those contributions.  The return beast is very hungry.

2.  Along come hedge funds with some neat ideas and all kinds of complex
ways to make more money.  One of the key ingredients to doing this is the
use of leverage.  That is I have $100 of capital, and I go out and borrow
$500 from an investment bank (Merrill, Bear Stearns, Lehman, etc.).  Now I
have $600 to invest, and the plan is I can make more return on my investment
then I have to pay in interest to the bank.  A classic example is a company
called Long Term Capital Management, started no less by several Nobel
winning economists.  They went out and raised a substantial amount from
investors with the promise of very high returns.  For a number of years they
did and the numbers were extraordinary.  The real numbers may never be
known, but guesses indicated they had $2.0 billion and borrowed anywhere
from 50 to 100 times that amount.  Unbelievable leverage that worked until
1998.  They were investing in debt of developing countries which was paying
very high yields because of the risk.  One day Russia said we are going to
pay off our loans.  Wham your investments were worthless or toxic.  To deal
with this situation the Fed stepped in and circled the wagons, the usual
paragons of virtue JP Morgan, Citibank, B of A, etc. to bail out the
investment banks.  The cries of regulation for hedge funds was largely
unheeded, hey those guys had deep pockets and a strong lobby.

3. Regardless of LTCM the return beast was still ravenous.  All kinds of new
and exciting ways were devised to make money.  Special Investment Vehicles
(SIVs) were designed where banks, hedge funds and investment dealers
packaged all kinds of assets (auto loans, credit cards, mortgages, equipment
leases, etc.) to sell to investors.  As long as everything is running
smoothly people are making money, the sellers and the buyers.  I don't need
to document the excesses that were driving this (get your Xmas bonus at the
firm and buy yourself a Ferrari).  Where it gets sinister is what happened
in the mortgage market.  In the desire to sell more to make more, they put
out mortgages with 5% or nothing down, low interest rate for a couple of
years and then it balloons to much higher rates.  This is the teaser to the
American dream of owning your own home.  They even targeted low income and
inner city residents.  Often the homes were way beyond peoples means.  The
premise of this is real estate always goes up, right.  NOOO, it can fall
too.  Here, I am in my $400,000 home with a $380,000 mortgage and the house
is now worth $350,000.  My payments are going up next year, so lets get the
dog and cat and split.  How many million defaults so far?

This is pretty simplistic, but it was fun writing it.

Bob Rafos

On 18-Nov-08, at 9:39 PM, James Wiegel wrote:

This is great.  Talk a little bit, Bob, about where the explosion of
investment and finance firms ties into this . . .

Jim Wiegel

I know nothing grander, better exercise, better digestion, more positive
proof of the past, the triumphant result of faith in human kind, than a
well-contested American national election. Walt Whitman

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Tolleson, Arizona 85353-2401
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jfwiegel at yahoo.com
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--- On Tue, 11/18/08, Robert Rafos <rafos at sympatico.ca> wrote:

From: Robert Rafos <rafos at sympatico.ca>
Subject: Re: [Springboard] Karen's car
To: "Springboard Dialogue" <springboard at wedgeblade.net>
Date: Tuesday, November 18, 2008, 7:11 PM

To Jim's question, What is holding this in being?   

Page 36, Paragraph 67: Reagan described as the modern prophet of profligacy,
gave MORAL sanction to the empire of consumption adding to America's civic
religion two crucial beliefs: credit has no limits, and the bills will never
come due.  Page 60, Paragraph 139: Bush two weeks after 9/11 encourages
Americans to "Get on board.  Do your business around the country ... Get
down to Disney World in Florida."  Page 53: George H.W. Bush declared, "The
American way of life is not negotiable."  The political has given credence
to the economic and supported its dominance.  With the top leaders holding
this image and vision out to the country, the result is not a surprise.   

To Jim's question, Where do we experience ourselves caught in this in our
lives?  

It's subliminal and sneaks up on you.  I remember arriving in Toronto from
Tokyo with 2 suitcases and 8 cartons (the size that the print shop got its
paper in).  Now we have a house full of stuff.  How did it happen?  It's
easy to rationalize, you buy a house you need furniture, then you have to
decor it, one TV doesn't work since we watch different things, each need our
own computer, etc.  Well you have a job and need to look presentable for the
staff and clients and wind up with 8 suits, 40 ties and 30 dress shirts.
You can go on and on.

One day the shoe drops and you say "What have I, we, the corporate we done".
At that point I, we have the opportunity to change.  The more that do, the
bigger the impact.  

Society and our politicians need a new moral compass that inspires and leads
us (the US) in a new direction.  

Bob Rafos

On 18-Nov-08, at 7:01 PM, KarenBueno at aol.com wrote:

But isn't the bottom line of the "Limits of Power" (first half, anyway) that
we already have way more than we need?  Why would I need any kind of new
car?  I've read studies that say my care, which gets 33 mpg on the highway,
is still a less extravagant way to drive.

But beyond that, why on earth is my decision, as one of some 300 million
people, going to make a difference in the way Americans are addicted to
extravagance?  Breaking that cycle of profligacy (which I had to look up in
my Websters) seems even more impossible than renewing the church.

Karen Bueno

In a message dated 11/18/2008 2:44:36 P.M. Mountain Standard Time,
geowanda at earthlink.net writes:

If possible, I'd wait until the next generation of plug-in hybrids come on
line, possibly this Spring.  The Japanese car makers have them already, and
the Americans are working on them pretty hard.  They will be the bridge car
to all electrics or alternate fuel types.  They might let the diesels from
Europe in next year that are also high mileage cars. 

George Holcombe

14900 Yellowleaf Tr.

Austin, TX 78728

Home:  <skype:+15122522756?origin=IETB>  512/252-2756 

Mobile  <skype:+15122945952?origin=IETB>  512/294-5952 

geowanda at earthlink.net

On Nov 18, 2008, at 12:31 PM, James Wiegel wrote:

Karen's answer.  How about the rest of you??
--- On Tue, 11/18/08, KarenBueno at aol.com <KarenBueno at aol.com> wrote:

My 2000 Saturn is still running with over 100,000 miles.  The new auto
prices are so good.  Do I with good conscience buy a new car, or do I
continue to drive my Saturn until it dies?

Karen Bueno

In a message dated 11/17/2008 10:06:45 P.M. Mountain Standard Time,
jfwiegel at yahoo.com writes:

what is holding this in being?  where do we find ourselves caught in and
even reinforcing this crisis in our communities and in our lives?

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