It’s fitting that my last work in the world of financial aid was to volunteer at Massachusetts College Goal Sunday. This year’s CGS was significantly different for me personally than in years past for several reasons.

First, this is the first year I’ve presented at College Goal Sunday.

Second, this is the last time I’ll be working in the financial aid industry after my departure at Edvisors.

Third, the differences in the FAFSA and FAFSA on the Web worksheets this made for a more complex, more challenging College Goal Sunday than ever before.

Let’s start with the first – relatively late in the process of creating this event, I was asked to present for the Framingham/Metrowest site. I spent some time reviewing and editing the presentation beforehand, working with the national College Goal Sunday committee to make it a little more streamlined…

… but the projector at our site didn’t work, so I ended up winging it instead. The truest test of a presenter is when everything goes wrong and that lovely slide deck you made just flat out doesn’t work. How well do you know your stuff? I’m proud to say that having none of my slides didn’t compromise the presentation at all – and in fact might have helped because the audience then HAD to listen to me and couldn’t mix up their verbal brains trying to read slides and listen to me talk at the same time.

On the second point, I can say pretty much whatever I want now that I no longer work in the industry. This is rather liberating.

Here’s the biggest challenge that we had at this year’s College Goal Sunday. The form given to students and families, the FAFSA on the Web Worksheet, is basically not worth the paper it’s printed on. It’s supposed to make the FAFSA process easier and more friendly, but instead makes it deeply confusing and frustrating for many students.

If you look at the slide deck for presenters, there are half a dozen slides which are all labeled, “Important question not on the worksheet”. That the College Goal Sunday committee had to go to these lengths is a sad commentary on how poorly the government’s forms were created with regard to the online application. Things that are omitted? Well, for starters, questions like assets (cash on hand, in savings and checking – vital financial aid information) don’t appear anywhere on the worksheets but are in the online application. Someone just using the worksheets would be rather startled to be asked for a bunch of information that isn’t in their preparatory worksheets.

Other questions that are deeply flawed? One of the biggest showstoppers – and one that caused more than one FAFSA application to completely fail – is the question about income tax paid in 2009. Again, this doesn’t appear anywhere on the worksheets. However, the wording in the online application is incredibly vague:

“Enter the amount of your income tax for 2009″.

This single question caused more errors and blowups in the application than any other, of the families I worked with. What should the question actually say?

“How much did you pay to Uncle Sam in taxes (NOT withholding, not your annual income, not anything other than what’s on line 55 of your IRS 1040) last year?”

Very few of the families who completed the FAFSA got this question down in the first attempt. Many got to the end of the application and were confronted with an error correction screen saying that the numbers in their application didn’t add up.

Another doozy, one that can affect your financial aid significantly in some cases? There’s a question about your adjusted gross income in 2009. In the online application, there’s a “helpful calculator” which supposedly can help families estimate how much their AGI is. As far as I can tell, this calculator doesn’t do anything useful, which is a shame since there are several adjustments that CAN change your adjusted gross income, which in turn can change your financial aid eligibility, such as the tuition and fees adjustment or the student loan interest adjustment. None of these are accounted for in the online application.

There are also some interesting interface issues with the online version of the FAFSA, one of which is a dealbreaker of sorts for people looking for help. Along the righthand side of the application, there are floating help boxes that change contextually based on what question you’re on. Lots of students and families today said they couldn’t find the help system at all…

… because they thought those boxes were ads. They’re strategically located in almost the exact same spot as you’d run a skyscraper banner ad, and if you look at studies of how our brains interact with web pages, we nearly automatically ignore advertisements like banner ads.

I’ve nothing but positive remarks for the staff and volunteers for this year’s College Goal Sunday. As usual, everyone who volunteered did so out of the goodness of their hearts, giving up a Sunday afternoon to help students and families figure out the world of financial aid and get them started on that path. I commend the folks at MASFAA and its partners for continuing to make this important day happen every year. I just wish Uncle Sam made it easier for those families to get through the paperwork to accomplish their educational goals.

Finally, College Goal Sunday was a great note to end my career in financial aid on. Nothing’s better than helping other people, and that’s a great way to go out.

Stay tuned tomorrow at noon eastern time for where I’m going next…

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Video

Slides

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Here’s an example of how difficult profitability can be even in a very closed, contained, predictable system. Let’s take Farmville, the popular Facebook game. Of all the crops available to early players of the game, which is the most profitable?

A casual look says it should be cotton. That giant 207 coin payout for planting cotton is definitely the biggest number on the page. Of course, that’s only gross profit. Each crop also costs money to plant. Do some quick math to subtract the cost of seeds and suddenly artichokes become more profitable – that’s net profit per crop, profit after costs.

So, should you go plant artichokes willy-nilly? Not necessarily! You forgot tilling costs, which is a fixed, flat 15 coin fee for every plot of land. While this may not change the choices between artichokes and cotton, it drastically alters the profitability of cheaper items like soybeans, which at first glance look like a terrific investment – plant for 15 coins to reap 63 – but becomes plant for 30 coins to reap 63 after the tilling cost.

Finally, take the amount of time you’re willing to invest in Farmville. For me, it’s virtually none. I’ve got better games to play in my free time, like Warcraft, so Farmville is at best a curiosity. If you’ve got a lot of time to invest in the game, then you have to do one final calculation for profitability – how much income per hour each crop reaps. Divide each crop’s net profit after costs and tilling by the number of hours to maturity to get net profit per hour, and suddenly, inexpensive but time intensive raspberries yield the highest overall profit per hour – if you’re willing to babysit them every two hours.

What’s the lesson in all of this? Calculating return on investment and profitability can be very tricky. In the incredibly simple Farmville case, the tilling cost is one people leave out of their calculations more often than not. The example of raspberries also demonstrates that what looks like the biggest number at first (artichokes) isn’t – you might be better served cranking out a smaller margin with high frequency than a big margin very infrequently, particularly if you’re in a business where market conditions shift rapidly.

Now imagine how difficult this is to apply to real businesses, where prices, markets, and conditions change, where costs and profits are not fixed, and where time is not free, and you get a sense of how truly amorphous profitability can be.

This is also why it’s super important to get kids and adults playing games like Farmville and Warcraft, to teach them the powerful economics lessons in their games so that they can dig into understanding business without putting real money on the line.

Have fun farming!

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First, via Blytic, a look at food stamp usage and unemployment.

You don’t have to be a rocket scientist or an economist to figure out that this recession still has legs and a long way to run before we even begin to approach “normalcy”. Anyone talking about recovery is being a little on the premature side, don’t you think?

Second, via Barry Ritholtz:

Again, you don’t need a Ph.D. in economics to figure out that the housing bubble still has a long way to come down. A 4 year old with a ruler and a crayon could diagram out the long term mean and see that when it comes to reversion to mean on a multi-decade basis, we are still far, far away from the mean, which indicates that housing prices still have a long way to drop.

When you strip away the spin of government press flacks and media outlets desperate to gin up advertising revenue by getting consumers to spend unwisely, when you reveal the data as opposed to the opinion, the news is less than good, and the calling of a bottom, recovery, and green shoots is premature at best.

So what does this mean for you?

If you’ve been getting by, keep doing what you’ve been doing, only moreso. Thrift is the new black. Keep watching the fridge and the toilet paper.

If you’ve not been getting by, I’m sorry. There’s not much advice or counsel I can offer that hasn’t already been thrown at you a dozen times over. Consider putting a few hours into setting up some affiliate stuff, knowing that a payout if successful is probably 30-60 days away, but it might be a little supplementary help. If you’re job hunting, take what you can get.

Above all else, if there’s a single concept you must get sooner rather than later, it’s that positive cash flow means everything in this environment, whether it’s your business or personal life. Positive cash flow is pretty much all that matters for the short term. Get more money coming in than going out.

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Along the way, I presented an 18 minute talk on monetization and why it’s vital to new media. Longtime readers of this blog will find many of the themes to be as familiar as old friends.

I also did my usual Sunday morning semi-improv presentation, My Top 20 Social Media Tools. Unlike the other presentation, I’m not publishing this presentation in any context, and here’s why: you had to be there and ready.

The Sunday morning presentation is always a tough one for people to make. It’s at 8 AM, which, after a night of partying, only the hardcore attendees can usually make. Delivering a super-tight, all-meat presentation that many have expressed a desire to see is my way of thanking them for making that extra effort to show up.

It’s also part of a martial arts lesson my teacher, Mark Davis of the Boston Martial Arts Center, is constantly reinforcing with us. Very often in the black belt class, he’ll show a technique only once as a way of helping us train our minds to capture and catch as much information as possible, to be vigilant about paying attention.

Social media in some ways makes us reliant on the crowd, reliant on the tools, reliant on waiting for someone to retweet or blog or podcast an important event. That laziness – and it is mental laziness – softens our ability to capture vitally important things that happen which may never happen again. Think about your own life. Have you ever had the experience of missing a child’s first important event, missing a news story break on the street right in front of you, missing a key piece of information at a conference? I know I’ve missed information, especially in the dojo, because of a lack of focus. I know I’ve missed some terrific photos due to inattentiveness.

Thus, that presentation will never happen again, at least not like that. The slides won’t be posted, the video won’t be uploaded, the information never shown again. If you were there – fully and wholly there, meaning you were paying attention and not twittering, blogging, chatting, etc. – then you got some information I hope you find useful. If you weren’t there, then please make the effort to actually show up at events like Podcasters Across Borders or PodCamp rather than hoping someone will live stream/live tweet/live be there for you. You’ll find that there are many more gems from the weekend which will probably not be published from other presenters and attendees as well.

Also, big shout outs to all of the longtime friends and fabulous conversations from the weekend, from Marko Kulik’s photo advice to intense debates about the future of media with Whitney Hoffman, Tod Maffin, and Julien Smith, to the many other great conversations over the weekend.

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Let me give you an example from World of Warcraft. One of the side parts of the game (a very big side part for me) is the in-game economy. You make gold by creating stuff, by killing stuff, or by trading with other players for their stuff. In the game, there are “secrets” – great spots for earning gold through killing things or great tactics to use in the Auction House (an in-game eBay of sorts).

These secrets are powerful, capable of generating hundreds or thousands of gold a day, compared to the average player who earns perhaps a few dozen gold a day. The catch is this: their value decreases in direct proportion to the number of people who know and use the secrets, because the server’s economy is a zero sum game – if I know the secret and you learn it, at best our earning potential is halved, unless you’re truly incompetent.

There are lots of similar examples in real life – in the world of search engine optimization, Google Juice is more or less a fixed sum game. If I learn a powerful SEO tactic, the more people who know it, the less value it has.

Contrast this with the social media world of sharing everything (from the mundane to the powerful), openness, and transparency. If you share something of value, your social currency increases among those you share it with.

Here’s the questions I have for you: how do you value a secret vs. the social currency earned for sharing the secret? Which is more valuable to you, and in what context?

Please leave your thoughts in the comments. Yesterday’s discussion was especially good to read, so I look forward to hearing less from me and more from you.

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Some other indicators? If you work in an office, see how often the cleaning service does things like empty trash or clean the restrooms. Check the quality of consumables like toilet paper – changes, especially significant, fast jumps in quality – indicate that the first stages of cost cutting are occurring, possibly silently. In a tough economy, it’s the prudent thing to do for companies. If your company has a cafeteria, see if food selection and quality change significantly in a short time. Know your admin team really well? Ask them how frequently they’re reordering supplies (supplies tend to go missing at a faster rate in tougher times) and if they’ve been given additional, more stringent purchasing restrictions.

All of these little economic indicators, in and of themselves, mean little, but aggregated may give you a more complete picture of how things are going in your neck of the woods, and can help you plan accordingly. If you see a series of sudden, abrupt changes in your company, it might be time to start looking for another job before it’s too late.

Congratulations to all. We’ve made it through the subprime crisis and only lost GM, every investment bank, nearly wiped out the FDIC Deposit Insurance Fund, put 1 out of 8 homeowners late or in foreclosure on their mortgages, and sent the economy into a tailspin. Otherwise, we made it through the subprime crisis.

We’re ready to start growing again, right?

Except… except the pool of alt-A and option ARM mortgages (all of which is defaulting at the same or higher rates of default than subprime 2 years ago) is still ahead, and it’s 50% bigger than the subprime mortgage market ever was.

If you’re thinking the worst of the storm has passed, it’s more like the eye of the hurricane. The second, stronger wall of the storm is arriving shortly. If you’re thinking that now is the time to spend a little more freely, to open up your wallet, think again and batten down the hatches. If anything, now is the time to increase your financial conservatism, to tighten spending if you can. Only once the storm has fully passed – in a couple of years – will it be time to go outside and start planting anew.

For more detailed charts, check out this post on Mish’s blog.

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Bloomberg’s commodities index of indices:

Commodities, or commodity futures, are investments in the future value of things like rice, gold, oil, cattle, and other tangible goods.

Baltic Dry Index:

The Baltic Dry Index is an index of costs to ship things on cargo ships. As BDI goes up, the price to ship something goes up. Unlike most investment metrics which are based on future value, BDI measures what it costs now to ship something. BDI is important because you don’t buy shipping if you’re not moving stuff to sell.

New Jobless Claims:

This is the number of new unemployment claims, measured weekly.

All of these charts show stabilization in the economy – arresting the freefall. Is it because of sound economic policies, stimulus, or the natural course of time and the business cycle? Hard to say. Certainly anyone promoting their own interests will claim that they’re the key influencer, but I suspect it’s all of the above with an emphasis on natural market dynamics. Even the largest forest fire eventually runs out of things to burn and snuffs itself out in time.

Once the fire has passed, it’s time for the forest to regrow. Small, tentative steps at first, little sproutlings and seeds, but regrowth always happens.

I still think there’s other parts of the forest just catching fire now – commercial real estate, credit cards and last-resort consumer credit, etc. – that will burn for some time to come. That said, there is cause for optimism, however cautious. Be on the lookout for areas of regrowth that you can partake in and carefully wade in.

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There is no such way to intermediate time. There is no coinage for time, no way to purchase time back that you have spent. If time were actually money, you could buy back that missed softball game or child’s first play. You can’t.

In fact, when you think about it, time isn’t money, but money is time. Money represents a store of value in classical economics terms, and value is time and energy spent on something.

Look at all of the things that function as money or precursors of money. The Pequot tribe had a certain kind of seashell called wampum. Multiple civilizations used gold and other metals as coinage. Why? Because these items were rare. Finding them, prospecting them, and refining them took time and effort.

Consider money as a store of time and energy, then. How long does it take for you to mine up a nugget of gold? Let’s say as a skilled miner that takes you two hours. How long does it take to harvest an ear of corn? For a skilled farmer, probably a few minutes at most. Thus, that nugget of gold is a time equivalent of two hours for a skilled tradesman. If you can harvest 80 ears of corn in two hours as a skilled farmer, then your corn is worth two hours of your efforts – or a nugget of gold, or whatever other store of value you choose. More important, as trades specialized over millennia of human history, it would take far longer for the miner to skill up his corn harvesting than it would for him to simply pay for the corn itself.

Time + energy + skill = value.

This is the basis of money, the raw foundation of money. Money stores value, and value is time, energy, and skill combined.

Consider what this means for social media and new media.

What things are you investing your time in, building skill, so that you’re creating value?

When someone starts to talk about monetization, exactly what value are they placing on your time, effort, and skill? More important, what value do you place on yourself?

This, by the way, is why so many folks in social media object to monetization – not because money is bad, but because any new field inevitably has two extremes: those folks willing to value themselves for a pittance (thus devaluing everyone else) or those folks who pimp and sell at obscenely high prices far above the value they create, thus undermining the entire community’s reputation and devaluing everyone else. After a field matures and the low bidders & snake oil salesmen are washed out, a balanced perspective on value is usually achieved.

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- It really looks like commodities have bottomed. They’ve flatlined for almost a full quarter, which is a major improvement over freefall. Sure, some of it is speculative, especially in gold, but lots of it is just ordinary business.

- BDI has bottomed and is slowly edging back up. If you’re not a follower of the world of freight and shipping, BDI is the Baltic Dry Index. Unlike other indicators, BDI is a price index to put stuff on ships. Unless you’ve got sales, you don’t spend the money to put stuff on ships and haul it across oceans.

- In a few conversations over the weekend, there’s a lot of new entrepreneurial activity going on. I talked to one guy who’s starting up a cash-basis real estate venture, working deals with landlords to manage vacant properties. Another guy is entering the biotech small business world as an importer of scientific equipment. Still another is doing regional direct resales of telco gear from shuttered companies.

One very interesting commonality among all of the folks I talked to with entrepreneurial ventures is that all of their business models – which at first glance appear quite sound – are also entirely cash-based. No one is touching credit, lending, or any form of debt either to run their businesses or as a way for customers to pay for services or goods.

This is likely to be the trend for a while, I suspect. No one is talking about equities, lending, or speculation, and rightly so – those markets are still incredibly unstable, subject to additional losses, and frankly, who wants to invest in the companies that got us to our current economic situation?

What does this mean for you? There are new opportunities beginning to spring up. If you have cash, if you have capital, there may be some great new opportunities to put it to use, either as an investor or an entrepreneur. If you’re looking for work, search more than just the big job boards – dig deep, use Google, find new businesses in and around your area. You might just find that ground floor opportunity you’ve been looking for.

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The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

I only wished the video went further. It ends at the credit crisis and failing investments – and the chain reaction beyond that is choking of credit to businesses, which puts some out of business, which creates joblessness, which creates more mortgages that can’t be paid, which creates…

Hat tip to Garr Reynolds for this one.

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Create a $100,000 loan grant run through the federal department of your choice, backed by the Treasury.

Businesses of any size may apply for and receive a $100,000, one year loan at the Federal Funds Rate. If a business then spends that loan funding solely on employment (verified by new payroll taxes and W-2 data from the IRS), at the end of one year, the loan is forgiven, essentially giving the business a free employee or three for a year.

Conditions: payroll taxes and W-2 data should verify that the business spent the equivalent of $100,000 solely on employing new hires. Using data the government collects anyway, controls should be able to easily verify that these are new hires and not existing employees. Don’t spend it correctly? IRS detects a little hanky panky? Interest capitalizes and the loan enters repayment immediately.

Why a stimulus idea like this? Rather than attempt to plow money into specific industries, this lets businesses hire or rehire based on what that specific business needs to grow. The Student Loan Network might need a junior web developer but the Advance Guard might need an admin. By giving businesses the discretion to hire who they need, the market can get the talent actually required, rather than decided by government fiat.

This kind of stimulus will, by design, disproportionately benefit small businesses. Because they’re more agile, this will help them grow faster. Because it’s small business, the ability to bring unemployed citizens in for retraining will work better – after all, you’ll learn the craft of baking bread faster at a small family bakery than you will at Omni Consumer Products Grain Division. (though certainly they can apply and get the same loan)

What’s the cost? The IRS estimates roughly 30 million small businesses exist in the US. Guess what? This is a three trillion dollar stimulus. Considering some of what’s being flung around Wall Street and DC, that’s in the ballpark of other proposals. What makes this one different? If 10% of businesses get the loan and start hiring, the 3 million job deficit goes away immediately, rather than waiting for government funding to flow through states, cities, and banks.

What’s your stimulus idea?

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Wall Street Journal:

International Monetary Fund chief Dominique Strauss-Kahn said the world’s advanced economies — the U.S., Western Europe and Japan — are “already in depression,” and that the IMF could slash its global growth forecasts further. The “worst cannot be ruled out,” he said.

The IMF managing director’s comments to reporters after a speech in Kuala Lumpur, Malaysia, represent the most dire estimate thus far of the state of the global economy by a major political figure, and were far more pessimistic than forecasts released by the IMF as recently Jan. 28.

UK Prime Minister Gordon Brown in Scotland On Sunday:

‘WE SHOULD agree as a world on a monetary and fiscal stimulus that will take the world out of r… depression.” Thus spake Gordon Brown at Prime Minister’s Questions last Wednesday, creating shock waves as far afield as Washington (“He said the D-word!”).

San Francisco Federal Reserve Bank President Janet Yellen:

The economy is “severely depressed,” and the U.S. faces “horrific” deficits over the long term, Yellen said in response to audience questions.

Yes, it’s a depression. The D-word. It’s okay to say it. It’s okay to admit it, because to use it brings our public discourse in alignment with reality.

Often quoted are the unemployment rates during the last depression – 25% of the workforce. During the last depression, that accounted for 11,385,000 people at the peak.

On Friday, we hit 7.6% unemployment – 11,616,000 people.

Percentage-wise, the percent of the labor force unemployed during the depression of the 1930s was much higher than today. That’s what you hear politicians say over and over again as they try to soothe anxieties of the public that are looking at a very different reality than the marbled chambers of Congress.

In terms of real families, real kids’ mouths to feed, real parents awake late into the night, we’ve just surpassed the last depression.

If we’re willing to drop false pretenses and admit in our public conversation that yes, this is a real depression, perhaps that’s the wakeup call that our political leaders need to hear. Drop your stupid partisan agendas, BOTH parties, listen to the economists who have been proven right over and over again in this climate (Nouriel Roubini, James K. Galbraith, many others), and get America moving again.

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Sample:
DJIA +146 VIX 42.28 TED 95bps 3mo LIBOR 1.17 1mo OIS 20bps MSCI +1.53% BDI -2.54% 30yr 4.85% BCF 51.39 GLD 919.90 RR 12.30

DJIA: Dow Jones Industrial Averages futures for the day, based on Bloomberg after-hours market data. Gives an idea of what the market sentiment will be at the start of trading, typically due to Asian and European market movements.

Updated: At the recommendation of Mike LaLonde, I’m throwing the S&P 500 Futures (SPX) in right after the DJIA. The S&P 500 is a measure of a broad range of companies, giving a bigger picture of market sentiment.

VIX: Chicago Board of Options Exchange Volatility Index, based on Yahoo Finance data. The VIX is considered by some to be a leading indicator of how crazy the market is, based on S&P futures. A high VIX number (above 20) indicates that something’s going on in the market.

TED Spread: The difference between Treasuries and Eurodollars, typically T-bills and LIBOR (London Inter Bank Offering Rate), as measured by Bloomberg. A big TED spread indicates banks don’t trust each other and would rather borrow from the government.

3mo LIBOR: The interest rate for 3-month LIBOR, as measured by Bloomberg. This is the rate banks charge each other in London for borrowing money and is a good non-government measure of interest rates.

1mo OIS: 1 month overnight index swap, an interest rate that measures risk and liquidity in the money market, as measured by Bloomberg. A higher OIS indicates less cash in the system as banks hoard cash. A lower OIS indicates banks are willing to lend more freely.

MSCI: A stock market index of world stocks (MSCI used to stand for Morgan Stanley Capital Int’l), as measured by Bloomberg. This is an index containing stocks from 23 countries, and tells you how the world market is doing.

BDI: Baltic Dry Index, as measured by Bloomberg. This is a daily average of the price to ship raw dry materials, and is a good current indicator of economic health for goods and services. The reason why is that it costs money to put stuff on a boat and ship it – so if BDI is low, it means producers and retailers aren’t shipping stuff and the economy is unwell. A high BDI means that people are paying real money to ship stuff.

30yr: The average 30 year fixed mortgage interest rate. Since housing is such a vital component of the economy, seeing what mortgage rates are doing is useful for figuring out how housing is likely to be doing.

Updated: At the recommendation of economist Maria Simos, I’m adding BCF and GLD.

BCF: Brent Crude Futures, as measured by Bloomberg. This is the price of barrel of Brent crude oil, which gives a sense of where energy costs will go based on the source product. Neat trick – take the price of a barrel of oil and divide by 25, and you often get very close to the retail price of a gallon of gasoline.

GLD: Gold 100 oz futures, as measured by Bloomberg. Gold is the, well, gold standard, of a third party measurement against inflation. As countries inflate or deflate their currencies, the price of gold goes up or down.

Updated again: I’m adding RR: Rough Rice futures, Chicago Board of Trade. Why? Most of the planet eats the stuff, far more than other grains. When rice prices are high, you’re talking about a global increase in prices on the consumer. i was debating corn or rice, but chose rice because it’s purely a food stock, whereas corn has additional deviations due to things like ethanol.

Any one of these indicators has economic implications, but combined, I think they’re a good quick snapshot of different parts of the economy and how things are going on a day to day basis in a broader perspective than just the stock market.

What public leading economic indicators do you think are important?

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Where’s the bottom?
When do things get better?

First, a disclaimer: I am an armchair economist at best. I’ve never taken a course in economics, but I do own Economics for Dummies and have read it cover to cover many times. That’s enough for the barest of basics, but I don’t want you thinking I’m some elite economics expert. I am not.

That said, theoretically, I can’t do worse than the “Experts” who have driven their companies into the ground in search of short term profits, can I?

Where’s the bottom?

The economy as it stands now hinges on two factors, employment and housing prices. Housing prices are important because an inordinate number of loans and investments based on loans rely on housing prices. As long as housing prices continue to fall, the value of those investments will continue to fall, and the credit, lending, and investment parts of the economy cannot recover. The exception to this is if a company that wholly owns its loans can write down the loans and sell them immediately, or devalue them so significantly that the book value of the loans is lower than housing prices will ever get.

Employment is the other piece of the puzzle, which controls the domains of consumer spending, productivity, and retail investing (including real estate). As long as employment continues to decline, more consumers will be benched on the sidelines, more people will not be able to afford homes or even basics. Demand for assistance in every form will deplete government by depriving it of both taxes and additional costs for services.

Of the two, employment is by far the most important. With employment and income, consumers will be able to afford real estate, especially if prices continue to decline. Once enough people are employed gainfully and can begin participating in the economy again, buying everything from commodities to homes.

How will you know the bottom? The same way you knew the top. Probably a quarter or two of waffling, neutral employment with neither gains nor losses, then two quarters of sustained growth in employment across broad sectors, with velocity towards the upside. Once employment ticks upwards significantly, you’ll see all the markets dependent on the consumer begin to recover as well – so figure real estate and housing prices stabilize a quarter or two after employment stabilizes, then ticks upwards a quarter or two behind employment.

When do things get better?

I don’t know. I wish I knew. I do know that many of the crap mortgages won’t flush out of the system completely until late 2011. There’s no telling whether broader economic declines will hasten the expiration of those mortgages or whether a recovery package inadvertently spawns new stupidity in lending. Both scenarios are possible. I’d say conservatively that 2009 is a write-off in terms of broad economic growth. 2010 may or may not show a turn.

Why don’t we know when things will get better?

Back to economics 101. GDP – gross domestic product – is a formula. C + I + G + (X – M).

C: Consumer spending
I: Investing
G: Government spending
X: Exports
M: Imports

Right now, consumer spending is in the toilet.
Right now, investing is in the toilet.
Exports are down.
Imports are down too, but our few exports – autos and airplanes – are in more dire straits than imports.

That leaves government. There is no way that the government can singlehandedly carry the entire economy by itself, no matter how great you think Barack Obama or Timothy Geithner is.

Government spending will increase, to be sure. What government is counting on is multiplier effects – throw enough matches and even a wet forest will eventually catch. The question is, how many matches is that?

So what do you do?

Look objectively at the situation. Cut costs. Conserve cash. Save like crazy, because there’s no telling if your job is next on the chopping block, as grim as that sounds. If you’re a business, spend wisely and invest in your people if you can.

In this environment, time is the only thing that will heal the economy. Time will flush out the poison.

In this environment, we are rich in time and poor in money. Thus, spend time rather than spend money. If you have the ability to pursue alternative forms of marketing that are lower cost – direct email marketing, social media, new media, PR, etc. – but time intensive, that might be a fair trade right now.

Give your company or business an objective and then give your team the freedom to get to that objective by any legal means necessary. Take the time to prune out processes that don’t work. Take the time to do inventory and jettison things that you’ve outlived, outgrown, outlasted.

If you’re unemployed or underemployed, time is an enemy because capital is limited. Spend it wisely, focus on job search and income generation. Be unrelentingly aggressive in your job search. If you have a choice between offending a few people with unsolicited email and putting food on your table, as Emperor Palpatine instructed Darth Vader, do what must be done. Do not hesitate. Show no mercy. Network as you can, but if you have to pull out the red saber, no one will fault you for wanting to take care of your family and home.

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The lesson is simple: your product or service is only worth what someone else is willing to pay.

Sometimes, that can be mispriced in your favor – people will pay a lot of money for something that to you is of comparatively little value. Where businesses get into trouble is when it’s going the other way, when you’re demanding to be paid more than what the market is willing to bear.

Take a look at the real estate markets right now. Is real estate moving? Sure is – at the right price, which is currently foreclosure or short sale pricing, pricing far below “market value”. The reality is that the market value is whatever a house will sell for today, not what the seller wants it to be for a profit, not what the agent wants it to be for their commission.

If you’re not earning the profits you want to be as a business, either you have something no one wants or more likely you have something that someone wants but at the wrong price. You can either lower prices or sell something else with a higher profit. The laws of economics are immutable and no amount of wishing or wanting the price of what you have to be higher will make it so.

How do you know what the market is willing to bear? You’ve got to research, gather data, shop competitors, and test pricing repeatedly until you discover the true price of the product or service you have, and then continue to monitor and research changes in the economy and adapt to them. Do this well, and you’ll not only discover the pricing of your offerings, but you’ll eventually gain a sense of when something is trending, when you’re about to see a wave of potential profit roll in. As long as you’ve been paddling and are in the water at the right time with the right board and the right skill, you’ll catch the wave.

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Consider a few things:

1. The jobless reports crested today at 542,000 jobs lost/initial unemployment claims filed. This is huge, and indicates that there is severe weakness in all sectors of the economy. This close to the holidays, jobless claims should be declining as the service sector staffs up for the holiday retail season, yet we see the opposite happening.

2. Major companies are getting pummeled, such as GM, Citigroup, and others. A failure of a major Dow component or Fortune 10 has a significant impact on the economy.

3. Mayors Bloomberg and Daley of NYC and Chicago were warned to prepare for thousands of layoffs by the end of the year.

4. We still haven’t unraveled Bear Stearns and Lehman Brothers’ exotic financial instruments. A GMAC failure would be very, very bad.

5. We still haven’t unraveled the massive derivatives market.

There’s a lot of doom and gloom in the media, but not all of it is unwarranted. There really is no bottom in sight.

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Yep, another economics crossover. Blizzard Entertainment’s Wrath of the Lich King expansion pack for World of Warcraft dropped last week, and its impact on the economy has been fascinating. Veteran players of the Auction House (the in-game free market) have been finding that since the expansion came out, very little has been selling. The reason, however, is not because the most advanced players in the game are in a new part of the game. The reason is likely because the most advanced players (and the wealthiest, or at least those with greatest access to capital) are running out of money.

If you’ve never played World of Warcraft, it’s a virtual reality game, an online role playing game in which you are an adventurer beating up other people or game-generated opponents. Part of the game is buying and selling equipment to make your character better, more effective. Whenever you defeat a creature in the game, you typically get a small reward of some kind, plus some experience points which contribute towards making your character better. Once you hit the maximum level of experience points, money is substituted for experience points. For a long time, since the last expansion pack, top players have been generating hundreds of gold (the in-game currency) a day, and pouring that money into the virtual economy.

Here’s where the expansion pack changed the economy. The expansion pack now allows top players to earn more experience points, up to a new cap. Because they’re fighting stronger, better opponents, their equipment repair bills (yes, you can’t escape bills, even in virtual reality) have increased, but more importantly, there’s not generating capital any longer – they’re generating new experience points to reach a new maximum level. On top of that, a new class of character was introduced, and experienced players have been trying to build up those characters as fast as possible, again taking a lot of money and earning potential out of the virtual economy.

Think about that for a second. Your top sources of capital in an economy have dried up, while expenditures of capital have increased.

You have, in other words, deflation. Deflation, economically speaking, is when the amount of money in an economy decreases with respect to goods and services in the economy. A dollar (or gold, or whatever measure of currency) is worth more tomorrow than it is today, because there’s just less money available. Deflation brings prices down, but that means it also brings wages down, too. Consumers lose spending power. Demand for items drops because there’s just less money to buy things with.

As a result, economic activity slows down. Supply outstrips demand. Items in the Auction House are still being listed, but buyers are getting harder to find. If you look at the moving averages of prices, you also see that prices are falling – exactly what you’d expect in a deflation. This is a double whammy for sellers trying to move goods in the Auction House – fewer buyers and falling prices.

Sound familiar?

This is exactly the situation that the real economy, especially real estate, finds itself in. You have an absence of buyers complicated by falling sale prices due to foreclosures and lack of demand. Because housing has been a disproportionate amount of economic activity over the past 5 years, the collapse of the housing market has in turn spread malaise to the rest of the economy.

This is also why inflation isn’t a concern right now. Governments of the world have been printing money like crazy recently, borrowing against future taxpayer earnings, or just outright inflating their currencies. However, inflation isn’t a concern because capital – money, in the form of credit – is being destroyed faster than the governments are creating it, as investments go bad over and over again. Without the capital generators of top players in a virtual game or an engine of growth in the real game of life, money is being used up faster than it’s being generated.

How will things change? Well, in Warcraft, those top players will again in the near future hit their maximum levels of experience, and will once again return to income generation. As that happens, capital will return to the markets and you’ll see sales and buying rise again. It may take some time to get there, as reaching maximum experience does take time and effort, but it will happen. In Warcraft, at least, the engines of the economy – top players – can be counted on to bring new influxes of currency to the world.

This is the conundrum that faces the real world economy. The practices – irresponsible lending, irresponsible buying, irresponsible investing – that drove the last economic engine are broken. We can’t go back to them. We need a new economic engine that can begin to generate growth and capital. When we figure that out, when we figure out what will bring money back into supply without the danger of another bubble, we’ll see things turn around in real life.

What should you be doing? Both in the game and in real life, in a deflation, preservation of capital is essential, in the form of saving money, reducing expenditures. Both in the game and in real life, if you have a capital base, you should be looking for very cheap opportunities for investment and growth, and spending the money you do have very selectively, looking to pick up serous bargains. If a dollar is worth more tomorrow than it is today, then it makes sense to hold onto those dollars, to not spend beyond necessities, and to find new opportunities for growth. Find that next economic engine, be very picky about where you spend your money, and keep your eyes open.

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If you’ve dabbled at all in World of Warcraft recently, you know about the great zombie invasion. If you haven’t, here’s the very short version: a zombie plague spread throughout the game as a promotional event for the new expansion pack. The mechanics of the zombie invasion are simple: zombies spread their infection, causing other players to turn into zombies or die. The mechanism, as set up in the game, was so virulent that it effectively killed off populations of entire cities and made whole parts of the game unusable.

So what does this have to do with a recession? The zombie invasion also destroyed players’ access to the in-game Auction House, which is more or less the hub of the Warcraft economy and the central free marketplace. However, instead of banks not lending, the zombie invasion simply killed off all the auctioneers and auction managers. The net effect, however, was the same as in the real world economy – players, teams, and guilds were effectively denied access to the marketplace, credit, and trade.

Fortunately, Blizzard Entertainment called off the zombie invasion after a few days; real life isn’t so lucky. Nonetheless, the strategies that helped players endure during the zombie invasion are still applicable to the real life recession.

1. Hoard cash. Without access to markets, players needed to conserve cash (in the game, gold) to meet operating expenses (armor repairs, trades). Without access to markets, you basically had to survive on whatever you had in the bank at the time the zombies made the marketplaces unusable. The same is true in the recession. Cut down spending and hoard cash to ensure that you can meet your operating expenses without access to revenue for a short or even intermediate time.

2. Stay away from danger. If you weren’t a high level player, the moment you entered one of the capital cities, you were either turned into a zombie or just killed outright. Only by staying on the fringes and frontiers of the game could you outlast the zombie invasion. The same is true in the recession. Capital markets, investments, real estate, any area of the economy which is “infected” by the financial contagion, is a deathtrap. Only the strongest “players” should even consider being in those areas, and even that’s no guarantee that they’ll make it. If you’re not one of the strongest, the edge, the frontier, the fringe is where survival, if not prosperity, lies. If you’re not involved in things like social media, new media, and the like, you should be. This is the frontier.

3. Make powerful friends. During the zombie invasion, if you were a low or mid level player and you had to go into a dangerous or infected area, you needed a high level player escort or even a team of high level players just to get you to and through the area quickly and safely. Those players who belonged to guilds had access to level 70 (maximum level) players who could get you in and out without certain death. The recession means the same for you and your company, especially if you’re a small business. Strong partners can help provide additional cover. You still have to pull your own weight, but help from your friends and community can mean the difference between making it and not making it.

4. Go back to basics. Without access to markets, if you needed gold in the game, you had to go back to the grind of killing other creatures, completing quests, and non-market mechanisms. The profit from such activities is typically much lower than when you have access to the marketplace, but it got you by and helped you meet expenses. In the recession, back to basics and bootstrap financing is the name of the game.

5. Cash is king. In the game, rare and unique items often sell for huge piles of gold in the Auction House. That Netherstalker Helm of the Bandit can fetch a tidy sum – but only if you have access to a marketplace where it can be bought. With no marketplace, that piece of armor is effectively worthless, because you can’t barter it for armor repairs or food. Only gold matters in a zombie invasion if you don’t have access to the market. If you know access to the market will be restored, you hold onto your valuable game items to sell at a later time, but they’re not helpful otherwise. In the recession, if you can afford to hold your existing investments, you should, but only cash matters. Cash is king, cash is immediately usable, and no matter what you think your investments are worth or what you paid to get them, you can’t use their inherent value as cash.

6. There is an end. The zombie invasion was part of a Blizzard promotion for the expansion pack. It was generally accepted that it was a major game event and would be finite in length, though no one knew how long it would last. The strategies we all undertook to endure and outlast the zombies worked, but we knew they were finite. The same is true in the recession. Things are bad. Things are very bad. Things will not always be bad. If you can outlast the recession, if you’ve got the ability to bootstrap your cash needs, then you’ll be in great shape when the recession ends.

Whether you’re fighting the recession or zombies, see if these tips can work for you. And remember, zombies and recessions both love brains. No matter whether you’re in a virtual world or the real one, that’s the most powerful asset you have.

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Consider this: in an economy when the average worker lasts about 2 years in any given job, how many workers have expertise? How many workers have achieved any degree of mastery? 1 in 4 workers at any given company has been there less than a year, according to Department of Labor statistics. 1 in 2 has been with their company less than 5 years.

Translation: that means that half the workforce is probably not developing expertise in their job at their company.

Certainly, some trades let you accrue experience no matter where you work, but for the most part, learning the ins and outs of an organization and how it functions requires a level of mastery all its own. You may be a proficient public relations professional, but are you proficient at navigating the hallways of SHIFT Communications? You may be a financial aid professional, but are you proficient at the culture of the Student Loan Network?

This is why the idea of the golden rolodex not only persists, but has great validity. I can say from personal experience that after 5 years in the financial aid industry, my personal network is significantly more useful to me and my employer than it was on the first day of the job, or even after a couple of years. When you hire a seasoned veteran from any industry, they bring experience and their personal network. You’re not just hiring a person for their talent, because there’s a lot of talent out there. You’re hiring for their mastery, for their life experience and insights.

So here’s the takeaway: how many times have you changed jobs in the last 5 years? How many times will you change in the future? If you’re changing constantly, how are you going to build mastery?

If you’re not willing to stick it out at your current employer, find one where you can, because you’ll need the time to build experience and achieve mastery.

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What opportunities are there in the recession?

I’m not sure she ever got an answer, at least a direct one. Here’s my thoughts about things you can do in a recession.

First, marketing of any product or service which helps consumers save money, reduce expenses, or stretch dollars is a big opportunity. Take a look at companies like Walmart, Dollar Store, Family Dollar, fast food like McDonald’s, etc. – these are all poised to become higher growth areas because consumers simply aren’t willing to spend like they used to. Look for ways you can help your customers save money, and you’ll be at the top of their list and mind.

Second, recognize that some things are inevitable in any economic downturn. Domestic violence, violent crime, theft, and other crimes from desperation always go up. Prepare appropriately, and keep an eye on coworkers and friends. This is a great time to build your personal network, to expand who you know and who knows you. Keep an eye on friends new and old for signs that the economy is fraying their nerves and spirits, from depression to victims of violence, and make sure they know you’ve got an open ear and a friendly shoulder.

Third, encourage your employees, coworkers, and colleagues to grow even more human in their roles as communicators to your audiences. Maybe you make Enterprise PR Software or underwrite private student loans, but that shouldn’t stop you at all from offering a money-saving recipe that your grandmother taught you. Even on corporate media outlets, it’s okay to be human, and when you encourage your team to be human and occasionally go off-topic, you reinforce the humanity of your company AND provide additional value to your customers.

At the New Marketing Summit, the theme of my presentation was study something old to learn something new, on ko chi shin in Japanese. This also means talking to your seniors who made it through the Great Depression and asking them what things they remember, what tricks and secrets they came up with, to help them get by and thrive. Everything from recipes to canning and preserving food to getting creative – these folks have seen it all before and then some, and have the knowledge you need and you can share.

Fourth, once lending and capital markets gain some normalcy, expect a spike in lending and loan products. Financial services is a pretty intense industry to work in right now, but once capital markets normalize and credit becomes available again, expect to see a sharp spike in growth from the currently constrained levels. If you work in financial services right now, stay put if you can.

Fifth, share your knowledge freely about anything and everything you’re doing to weather the recession. Share with friends, family, coworkers, and your respective audiences. Find a great free park or activity locally? Share it with the office. Find a neat lifehack that saves you some money? Share it as far as you can. You may end up with something that goes viral, but even if it doesn’t, your audience will appreciate it. Share what you know, tips and tricks, with your audience, with your community, and encourage them to share as well. We are each strong, but stronger together, smarter together.

Finally, there has never been a better time to dip your toes into new media and the tools available. Virtually all, such as Twitter, Flickr, blogging, podcasting, wikis, private label social networks, MySpace, Facebook, and more are free or extremely low cost. If you’re a marketer, try out the tools and see what they can do for you, not only for reaching greater audiences, but for reducing costs as well.

We have a rough road ahead of us. No one grounded in reality contests that. However rough the road is, no one says you have to walk it alone.

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The bad news? This is the bottom of the third in a nine inning game. There’s a lot of darkness ahead, a lot of trouble. There are no easy answers, no quick fixes that will work. Momentum has picked up so fast that on the financial markets, news that would have been hailed as revolutionary a year ago is shrugged off in less than an hour now.

What we face in the months and years ahead is nearly unprecedented in terms of economic turmoil. Our society at large will be different when we emerge on the other side. Some won’t make it.

The goods news? You’re not alone, as my friends remind me often. You as a participant in social media, in new media, have a vast network of friends and acquaintances. Now more than ever, you need them and they need you. Think of it as a guild of sorts, your particular band of rogues, working together, helping each other out, doing what must be done to keep things moving forward. Know what your superhero powers are and what your Kryptonite is, and band together with like-minded folks who have complementary powers.

Go to conferences. Go to events, go to meetups, get out of your office and away from the desk and talk to real people. You say you’re not in customer service? Wrong. You’re in customer service more than ever, especially if your title has a capital C in it. You may find that you need your customers as more than a revenue stream or a commodity – you may find you need your customers as friends and allies.

There are unquestionably dark times ahead, and there will be points when it seems as if there’s no light.

The light that you need to get out has to come from inside you, your heart, spirit, will, and drive.

The light that you need will grow more powerful when others bring theirs, too.

Grab your light and set foot on the path.

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Fundamentally, the entire credit crisis has been caused by two basic problems.

1. Too much borrowing.

2. Not enough saving.

That sounds really trite and overly simplified, doesn’t it? The fact of the matter is that it’s true. The housing crisis wasn’t caused by a surplus of houses, but by an overeagerness to lend without considering a borrower’s ability to repay. Easy credit meant demand for houses went up, and supply went up to keep pace. Now that credit is more restricted and borrowing is harder, supply is up but demand is down.

Second fact of the matter is that saving is down, considerably. The average American over the past five years has spent more than they earned to the tune of 130%, relying on easy access to, yes, credit, to fulfill their consumerist desires. With no money put aside for a rainy day, vast numbers of Americans are finding themselves underwater in a financial hurricane. In the past, when the economy has taken a downturn, Americans had some financial cushion to rely on, but with the devaluation of stocks, even things like 401(k) retirement plans have lost considerable value.

The bank bailout proposals currently floating around Congress do nothing to address either issue. Secretary Paulson’s plan calls for $700 billion – that’s $700,000,000,000 – to buy poor quality assets (failed mortgages and investments) from banks and try to sell them off at a later date. If you as a banker, rationally, want to do what is best for your bank, you’ll gladly sell the Treasury all your garbage and keep the performing loans for yourself. I would, rationally, because that’s good business.

What happens to the average homedebtor who has fallen behind on their mortgage? Absolutely nothing. No help at all. Why? The bank has been relieved of its obligation to investors but the homedebtor has not. Wall Street profits, but Main Street remains underwater.

So what’s the alternative? How can we find a real solution to this mess? Clearly, bailing out Wall Street and the wealthy friends of Secretary Paulson will do nothing to help the average homedebtor.

We look to economics 101. Supply of houses still exceeds demand. You can change this equation by increasing demand or reducing supply. The general talking point behind the bailout is that banks will be willing to lend again – but it’s lending that got us into trouble in the first place. That’s like giving a bottle of Jack to an alcoholic trying to quit. Yes, the tremors stop, but the root problem remains.

Increasing demand through lending is a no-go. That leaves reducing supply. We have currently anywhere from 9 to 20 months of inventory in housing, depending on the regional market, and a healthy level of inventory is around 6 months, or so my realtor friends say. How do you get rid of a lot of houses quickly? One potential idea is to convert them into affordable housing under the HUD Section 8 program, helping families who had no shot at home ownership even with absurd lending policies actually get started. The downside to this idea, at least from some folks who’ve commented to me, is that middle class homeowners will strongly fight any mixing of income classes in their neighborhoods.

A second idea for reducing supply, radically proposed, is demolition of the existing homes. In certain cases, this might make sense, especially if there are entire neighborhoods that lay fallow. Dismantle them for supplies as much as possible, and convert that section of a city into a community park.

A third idea, and the one I like best, is to use bailout money to buy out foreclosures at fire sale prices and deed over the properties, many of which need repairs, to a private agency like Habitat for Humanity, which employs a more rigorous screening process than HUD and forces future homeowners to put in significant sweat equity to create a true sense of responsibility and ownership.

We also need economic growth. Look around America. Bridges, rail systems, roads, public schools, the entire infrastructure is rotting away. Instead of giving Wall Street a handout, let’s agree to rebuild Main Street – it needs it. These are jobs that are inherently American and can’t be outsourced or shipped overseas. These are also projects that pay a dividend over time – improved roads, schools, parks, and civic infrastructure contribute to both morale and commerce.

To trim the budget and pay for at least some of this, we need to get out of Iraq. Win or lose, right or left, Iraq is a money sinkhole. No matter how well you think we’re doing, we can’t afford it.

To address the savings issue, I’d take the lesser portion of the bailout funds and instead of paying off Wall Street, create massive tax incentives for saving. Since Congress is clearly in the mood to spend anyway, I’d waive all taxes on savings accounts, certificates of deposit, Treasury bills and bonds, and non-investment vehicles for 2 years, encouraging anyone and everyone to sock away as much money as possible. A savings account that earns a meager 3% interest looks a whole lot better when interest earned is 100% tax free. This will also have the net effect of recapitalizing depository banks, which is something they’ve been desperately trying to do on Wall Street.

Will these ideas cure the ailing economy? No. Will they help? Yes. They address the fundamental issues of supply and demand far more effectively than giving Secretary Paulson a wheelbarrow full of cash and a hug, which is about all the current proposal entails. Only time and the free market can flush out the crap that’s in our system, but by focusing the majority of money on the power base of America – us, the taxpayers – we might get some long-term good out of this.

Consider joining the Facebook group I’ve set up to protest the current bailout proposals.

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If you’re an American citizen, you need to read this.

Heck, if you’re not an American citizen, you need to read this.

If you’re an American citizen, you and your children are bound by this bailout and its terms. You and your children will be responsible for repaying it.

Pay attention to section 8.

If you don’t like what you read here, contact your Senator and Representatives NOW. Give them this simple message: if you vote this in, I will vote you OUT.

Source: New York Times

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY

TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

Commentary: It’s shocking to see contract law itself invalidated in legislation.

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

Commentary: Key point there. At any one time – the Secretary *has* a blank check as long as he keeps the aggregate amount under $700 billion, just like you can max out your credit card indefinitely as long as you stay below your limit.

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Commentary: Treasury Secretary Paulson has been made immune from prosecution and basically been given a blank check to do whatever he wants with regard to the government bailout. Congress has given the Treasury the legal right to say that whatever the Treasury does is the law, and therefore cannot break the law.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Commentary: Congress last increased the debt ceiling to $9.815 trillion on September 28, 2007. This adds $1.5 trillion to our childrens’ bill, because there’s no way in hell we’re paying this off in our lifetimes.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.–The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

Commentary: if this were truly about helping America, it’d be restricted to residential and commercial mortgages only, not the insane derivatives, CDOs, CDSs, and other financial bets placed by investment banks on top of mortgages.

(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.

(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

Remember the SEC issuing a ban on naked short selling on July 18?

Here’s the list, in case you forgot:

Allianz SE
Bank of America Corp
Barclays PLC
BNP Paribas Securities Corp
Citigroup Inc
Credit Suisse Group
Daiwa Securities Group Inc
Deutsche Bank Group AG
Fannie Mae
Freddie Mac
Goldman Sachs Group Inc
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc
Merrill Lynch & Co Inc
Mizuho Financial Group Inc
Morgan Stanley
Royal Bank ADS
UBS AG

So far:

Allianz SE
Bank of America Corp – full
Barclays PLC – couldn’t handle Lehman, capital constrained?
BNP Paribas Securities Corp – couldn’t handle Lehman, capital constrained?
Citigroup Inc
Credit Suisse Group
Daiwa Securities Group Inc
Deutsche Bank Group AG
Fannie Mae – dead
Freddie Mac – dead
Goldman Sachs Group Inc
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc – dead
Merrill Lynch & Co Inc – swallowed
Mizuho Financial Group Inc
Morgan Stanley
Royal Bank ADS
UBS AG – in trouble?

The SEC more or less identified everyone it thinks is too weak to survive without government intervention.

Place your bets!

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BEA treats homeowners as businesses, which pay rent to themselves. Therefore, homeowners contribute to the real estate industry’s GSP even if not employed by the industry.

Talk about artificially inflating economic figures to make things look better than they are. This is akin to saying that if you own an iPod, you’re essentially running an iPod rental business, renting your iPod from yourself every month.

Does that make any sense at all to you? It doesn’t to me – and that means that the numbers on things like productivity, inflation, and the economic health and well being of the country are flawed.

Financial results for the second quarter are contained in the FDIC’s latest Quarterly Banking Profile, which was released today. Among the major findings:

Provisions for loan losses continue to be the main cause of falling earnings. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled $50.2 billion, more than four times the $11.4 billion the industry set aside in the second quarter of 2007. Almost a third of the industry’s net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.

Noncurrent loans are still rising sharply. The amount of noncurrent loans and leases (90 days or more past due or in nonaccrual status) increased by $26.7 billion (20 percent) during the second quarter, following a $26.2 billion increase in the first quarter and a $27.0 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans and leases in the last three quarters consisted of real estate loans, but noncurrent levels have been rising in all major loan categories. At the end of June, 2.04 percent of all loans and leases were noncurrent, the highest level for the industry since 1993.

Assets of insured institutions declined. Total assets of FDIC-insured institutions declined during the quarter for the first time since 2002. The $68.6 billion (0.5 percent) decline was caused by a reduction in trading assets at a few large banks. Assets in trading accounts, which increased by $135.2 billion in the first quarter, declined by $118.9 billion (11.8 percent) in the second quarter. In addition, the industry’s holdings of one- to four-family residential mortgage loans fell by $61.4 billion (2.8 percent). Real estate construction and development loans declined for the first time since 1997, falling by $5.4 billion (0.9 percent).

The FDIC’s Deposit Insurance Fund reserve ratio fell. Due to a significant increase in loss reserves, including reserves for failures that have occurred since June 30th, the DIF balance fell to $45.2 billion at the end of the second quarter, down from $52.8 billion at the end of the first quarter. While insured deposits rose only 0.5 percent during the quarter, the decline in the fund balance caused the reserve ratio to fall to 1.01 percent as of June 30th from 1.19 percent one quarter earlier. Because the reserve ratio is now below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 requires the FDIC to develop a restoration plan that will raise the reserve ratio to no less than 1.15 percent within five years.

This is a big deal, folks. A scant 1.01% reserve is all that stands between you and massive runs on banks.

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It’s not like there’s too many walls.
It’s not like I don’t have the balls.
It’s just that I, well, I don’t know how
to live my life in the here and now.
- Matthew Ebel, This Too Shall Pass

A few folks have lamented that whenever I blog about economic issues, it’s never positive. In fact, it can be downright apocalyptic in tone. I make no apologies for the twitter stream and pile of blog posts that highlight just how unstable our economy is, but a few other folks have asked for something more than just paralyzing fear. What can we do, they ask?

That’s a good question. On a macro level, not much. The market has to correct itself, and government meddling (particularly to save preferred investors) will only prolong the misery. We’ve essentially poisoned ourselves, economically, and the only cure is to flush the poison out. The longer we take, the longer we wait to make hard choices, the more it hurts and the more permanent damage the poison does. Ultimately, I believe as I mentioned in the past that this economic downturn won’t hit bottom for a few more years – we took years to climb to the top of an absurdly overinflated peak, and we have at least the same amount of time on the ride down.

I’m punching out, it’s time to go.
My days are numbered, this I know,
but as it turns out no one burns out
’till they think they’re in control.
- Matthew Ebel, This Too Shall Pass

On a personal level, you can do a tremendous amount. First, close to home. Pare back spending. I mean it. You may or may not be feeling the effects as drastically as your fellow citizens, but pare back anyway. Learn to cook. Learn to make a decent cup of coffee at home. Learn to do more with less – and you may be surprised when you do that you’ll uncover skills, aptitudes, and pleasures you’d bypassed for convenience’s sake. I recently made strawberry mint jam with my wife and for the price of a few jars of commercial swill, we made 20+ jars of the most incredible thing you’ve probably put in your mouth recently.

Teach and share as much as you can. If you find a great bargain, tell your network about it. If you discover a new trick, or a new way to optimize something in your life, share. Teach, share, trade. Got a super low cost recipe for a great dish? Blog it. Know of a good deal coming up? Tell us all. For example, I’m a huge advocate of Craigslist and Bargainist, both of which have terrific free sections.

If you’re religious, this is a great time to unplug the television, filter out some of the distractions of daily life, and give some study time to your faith. As things get worse – and they will, before they get better – people in every community will need pillars to lean on, and those pillars aren’t just the guy or gal up at the podium. If faith sustains you and those you care about, focus on learning how to power up and recharge fast.

Help. Help as much as you can, in any way that you can, even if it’s something as minor as retweeting something. Get out of the digital world if you can and go help in the real world. Raise money for a non-profit like Second Harvest or the charity of your choice. Tutor a kid in the local school. Volunteer for a campaign like College Goal Sunday. If you’re a social media maven, change your focus from the fishbowl to using the power of the tools you have to effect change and make your patch of the world a better place.

Plug into some uplifting music and have it handy. Music is incredibly powerful and can change your mood instantly if you let it.

Most of all, understand that this is an end of an era, but not the end of the world. There is and will be a great deal of need in the days, weeks, months, years to come, a great deal of suffering and pain – as it has been for millennia, and as it will be for millennia to come, long after we’re gone. The periods of relative prosperity are tempered with periods of relative pain, but as long as we focus on the things that really matter – the people we care about and who care about us, our community (virtual and real), our patch of reality that we can call our own – we can be rocks, mountains of strength against the maelstroms of uncertainty.

I work all day and
take my time to smell the grass.
I’d run away but I know
I can’t run that fast.
Life may be short,
but boy is it a blast
and all this too shall pass.
- Matthew Ebel, This Too Shall Pass

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I especially liked this:

In my talks with other podcampers, one of the issues that came out of PCB3 was the desire to actually create something at Podcamp. At this point, many of us are veterans of podcamps and new/social media, and are looking to expand our horizons. The sessions, while mostly interesting and informative, are generally rehashes of things we’ve seen and done for several years now. Many of us want some kind of track where we can physically put the skills we’ve learned and honed to good use.

Here is the challenge that faces America right now – people are making hard choices between gasoline and food, between college and electricity, between losing their house and losing their life.

We can’t do much at a single PodCamp to influence global policy, not yet. We can attempt to keep the carbon footprint of PodCamp as small as possible, as PodCamp SA did. We can’t influence ExxonMobil or the other energy companies directly yet, though new media folks are starting to work their ways into the blue chips.

What can we do?

Two things are squeezing the average Joe right now – food and fuel.

Here’s the social media challenge for PodCamp Philly, appropriate for the city of Brotherly Love, Geno’s, Pat’s, and some of the worst poverty I’ve seen in an American city.

Let’s make a social media cookbook that we can complete and distribute by the time PodCamp Philly is over. The focus? Making food as affordable as possible.

I’m reminded to say that this is open to everyone, not just people attending PodCamp Philly.

What might this entail? Between now and the close of PodCamp Philly, find, create, revise, and publish recipes using the lowest cost foodstuffs available that still satisfy basic nutritional needs and don’t resemble gruel. Use social media and real life connections to talk to a grandparent that got by during the Depression. Find old wives’ recipes and dig up ideas from old church community books. Dig deep into your community and history to find the treasures hiding just out of sight, like how to make popcorn on a stovetop or jam from scratch. How to bake a loaf of bread yourself. How to make pasta or plant an herb garden.

Let’s unite all of our networks, all of our knowledge, and all of our generations we have access to. Let’s take this information, these recipes, and blog them, with instructions and cost breakdowns. Video them and publish the videos as tutorials. Record audio walkthroughs. Let’s rip a PDF of this that can be distributed to every soup kitchen and food pantry in America, something that they can then pass on to their customers. Let’s fire up iMovie and iDVD, Libsyn and Blubrry, and make some media worth distributing. Let’s grab Chef Mark Tafoya, Jennifer Iannolo, Nina Simonds, Kathy Maister, Ming Tsai, and ask the hell out of everyone doing a cooking show in new media to help us with this goal. Let’s get Second Harvest, United Way, and every corporation with some dollars to spare to get involved and sponsor this project.

Our goal? A social media collection detailing cheap, easy, healthy food so that a parent with 5 dollars in their pocket can do at least SOMETHING other than the dollar menu at a fast food chain.

Then, at PodCamp Philly, let’s put it all together. Let’s assemble it, put up the web site, search engine optimize it, use all of our social media powers to promote the hell out of it with every service we can get our hands on, and see just how far we can lob the thing into the air.

Are you game?

I’m reminded to say that this is open to everyone, not just people attending PodCamp Philly.

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We’re already at $4/gallon for gasoline.

How much would gasoline go up if we get another Katrina?

Gas before Katrina was in the $2.25 range. Then it leaped to $3, $3.50 in places before the markets resumed normal operation. An increase of 36%, give or take.

A similar increase today would put gasoline at $6 or so, assuming it would be available.

So this is the time of year to take the 5 gallon gas can to the local gas station, fill it up, and add a gas stabilizer to keep the fuel usable during longer periods of storage. In a Toyota Prius, 5 gallons will get you from Boston to Montreal or New York City – enough to get out of Dodge if things got unpleasant.

What are you doing to prepare for a potentially above-average activity hurricane season?

There’s a twist to this story.

Click here to view the embedded video.

Watch the video in its entirety.

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In recent years, the concept of a “Goldilocks” economy has permeated the policymaking world. For after decades of painful economic booms and busts, politicians and central bankers have become wedded to the idea of chasing a growth rate that is neither “too hot, nor too cold, but just right” – as Goldilocks famously said, in reference to her porridge.

I’ll take a moment to make another fairy tale reference. Depending on the storyteller and the story source, there are three bears in the Goldilocks story…

… and in some of those stories, when the bears awaken, they kill her.

Not a good omen for our economy.

Farewell, Bear Stearns. If it’s any consolation, a number of your colleagues will be joining you soon. Why? Simple: there isn’t enough money in America to save the financial system as we know it. It’s coming apart at the seams.

This is a good thing.

For sure, there will be lots of folks who will have to go through economic pain – heck, depending on the credit markets, there’s no telling how my current employer will fare, so I’m not at all exempt from this, either. It’s still a good thing overall, and here’s why. For the last 37 years, America has been living beyond its means. Our overall savings rate has dropped into the negative, and we’ve been spending like a drunken sailor.

Come to think of it, I’m fairly certain drunken sailors spend less. Because they typically don’t have access to leverage or derivative financial instruments, they can only spend what they have in port.

How much too much have we been spending? Warren Buffett warned in 2002 that derivatives – bets on bets, essentially – were financial weapons of mass destruction.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. – Berkshire Hathaway Annual Report

According to the Bank for International Settlements, the total outstanding notional amount is $516 trillion (as of June 2007).

The annual gross domestic product of the United States of America – the goods and services that back “the full faith and credit of the United States” on which all of our bonds and other promises are made is… $15 trillion.

Think about that for a second. If 3% of the derivatives in existence go bad (about the same amount that touched off the subprime bonfire last year), an unravelling could occur that would exceed all the goods and services the country makes, period.

All of this massive leverage – which is a fancy word for gambling, really – is catching up to the financial system rapidly, and all of the money in the world can’t bail out the system. It’s my hope that things unwind in a relatively orderly fashion, like a building evacuation, so the building can be torn down and rebuilt more soundly, but one way or another, the house of cards is coming down, and needs to.

Americans need to start saving again. Yes, the entire financial system incentivizes us to spend, spend, spend, but if you can resist the temptations of mass media, marketing, and incentives and put some money aside, you’ll be far, far ahead of your peers and colleagues.

In a downturn, cash is king. Save, reduce expenses, and batten down the hatches.

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Consider the bubbles we’ve had:

• Defense spending
• S&L
• Dot-com
• Real estate

Each bubble larger than the last.

It’s like… like the United States has been bar hopping, and the real estate bubble was the final bar before last call. Then someone stood up and yelled “Drinks are on me!” only we don’t know who. Doesn’t matter, drinks are on someone, so drink up!

The credit crisis is the hangover for 37 years of excessive drinking at the fiat currency bar. As the song goes, you don’t have to go home, but you can’t stay here…

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That said, the show must go on – but how? When donor pools dry up, how do non-profits weather downturns? Here are 5 ideas.

1. Batten down the hatches. Just as every other American individual and business MUST do, non-profits need to be ruthless about cutting costs. Got a photocopier in the office? Unplug it, and ask that people use a scanner and email instead. Enforce 100% lights out at the end of the workday to cut power costs. Reduce or eliminate as many consumable as possible – belt tightening is the rule.

2. Hit up donors sooner rather than later. It’s customary in the non-profit world to ask donations and contributions around the holiday season, but as the economy trends downward, you need to ask now, while there’s still disposable cash. Pick a reason, any reason, to ask for donations. Hitch up to minor but relevant holidays, or an aspect of those holidays, or heck, just manufacture your own holiday, but ask.

3. Increase focus on microdonations. The Internet gives non-profits greater reach at lower cost, more so than ever in history. Leverage that power to focus on building your house list, your potential donor base. This requires some serious heavy lifting in marketing, but as long as you have capable staff, you’re trading time and energy marketing online versus expensive offline marketing. Learn how to find your donors online, and learn how to get small donations from LOTS of people. Be sure to investigate any and all payment options and find the lowest per-transaction costs. Amazon and Google Checkout both offer 100% pass-through of contributions.

4. Build buzz. You’re already doing good work – now get off your duff and start marketing the heck out of your works. The more awareness you can spread about your work, the easier it will be to get critical general operating funds out of donors. Look carefully at how you market your works, and make friends in the PR and marketing fields so that you can ask their advice before launching any kind of campaign.

5. Mind your money. Wherever you’ve got your money parked, be SURE it is safe. If you have general operating funds in anything other than an FDIC insured account, your organization is at risk from a legion of predicted bank failures. Make sure you’re playing it super-safe with the cash this year – know where it is, and know that it’s insured.

With luck, talent, and intelligence, operationally efficient and forward-thinking non-profits should do very well in 2008 as the rest of the pack is slaughtered by the economic sharks in the water. With fewer competitors for donors’ money, the most lean and aggressive non-profits can potentially earn some big donor market share. Good luck!

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Now, understand that I work for a financial institution, a lending company. It is in my short term interest and financial welfare to recommend that people should always pay their debts, and for the most part, if you have the ability to repay, you should.

However, in cases like the story above, sometimes the responsible thing is to walk away.

Which is worse?

• Declare bankruptcy, default on your loans, and take a 7 year hit in which you pretty much are cut out of the lending world?
• Deplete your retirement, default on your loans anyway, and not only take a 7 year hit on credit, but also be wholly dependent on welfare and charity for the last 20 years of your life?

Which is worse?

The logical conclusion, the business conclusion, is to walk away from your debts. Don’t think that businesses don’t make that decision every day. Sallie Mae (ticker:SLM) lost a deal with JC Flowers – they walked away. There were consequences, but the consequences of walking away were weighed by JC Flowers and they decided that walking away made the most financial sense.

There’s a culture encouraged by financial institutions that there’s a moral penalty for walking away, and that moral pressure is one of the many forces used by companies to keep individuals in obligations, whether or not they have the ability to repay.

Here’s the problem with that. It’s short term thinking. For the citizens in the MSNBC story, it is in my long term interests as a taxpaying citizen of the United States for that borrower to walk away. Companies come and go, but that citizen, if he depletes his retirement, will be dependent on me and others for a subsistence lifestyle. Just as he’s trading his future for the present, so are financial institutions trading America’s future for the present if they continue to encourage debt holdings by consumers who simply cannot pay and will not be able to pay.

Conclusion: if you’re a financial institution with a consumer who cannot repay, that loan is going to decay sooner or later anyway. (unless it’s a student loan which can never be forgiven or written off by the consumer) Write it off now, preserve that citizen’s retirement and savings, and help them be able to buy your services later on down the road. Think long term, think big picture.

Why we won’t embrace this solution:

Few businesses understand the sunk cost fallacy. Banks and mortgage holders cling desperately to assets that continue to decline in value in the vain hope that they’ll be worth something close to what they paid.

Remember this: a bag of gold, no matter how valuable, will kill you if you’re trying to stay afloat.

Give people about a month after their subprime mortgage payment balloons to obscene proportions and it’s not hard to guess that in some cases, that will lead to divorce and broken homes. The next big wave of resets begins in March 2008, based on the CSFB data in the chart above.

Buckle your seatbelts and unplug the popcorn machine. 2008 is going to be a rough year.

The market crashes, turns to ashes that you’re dancing on
while some fat lady cues up for a song.

You just don’t panic, so they said
in all the good books that I have read.
You just lay back and feed your head,
but that ain’t clever, that never got nothing to
sell, hell, oh well, maybe we were
better off dead.

- Matthew Ebel, Better Off Dead from the album Goodbye Planet Earth, the best damn album you’ll buy today

And for just 2007:

You don’t Google it if it’s not on your mind.