Financial Crisis 101 - 10/21/08

PHILADELPHIA - October 21, 2008 - I talked about it a few days ago, explaining it's the interest rate that banks charge each other for short term borrowing.

The 3-month Libor has become a benchmark for determining the state of the credit market, and the good news is that the Libor had a steep drop yesterday and another drop today.

The folks in the financial community who watch this kind of thing every day seem averse to any rounding of fractions. The Libor was quoted this morning at 3.83375%. Three weeks ago, the Libor hit 6.88% as bank lending almost ground to a halt. The declining Libor is encouraging news, because it suggests that the measures being taken by the federal government are beginning to have an effect in the credit markets. But if you think that means we're climbing sure-footedly out of the financial and economic mess, think again.

The conventional wisdom is that we've already begun a significant economic downturn, and the extent of that downturn can not yet be predicted or measured in advance.

But here's a pretty good example of how the downturn hits Main Street right between the eyes. The outlook for the holiday shopping season was already bleak even before the financial crisis erupted. Last week, retail sales came in at their lowest monthly decline in three years. So going in, you know that hopes for a decent shopping season, when retailers make 25 to 40 per cent of their annual revenue, are suspect.

But as a report done by Reuters this week pointed out, there's another concern that may not be as apparent, at least not until a shopper becomes a frustrated shopper, then an exiting shopper.

Here's the problem: The government says retailers have already cut about 250,000 jobs this year because of the economic downturn. And some retailers are also scaling back plans to hire extra help for the holiday rush. So here's the start of a vicious cycle. If a shopper, who's concerned about spending in the first place, comes into a store and can't find help locating an item, or has to wait in extra long lines at check-out counters because there are fewer cashiers, or if the stores are messy, well, that's a sure prescription for that shopper to go somewhere else.

So how do retailers balance the task of hiring enough holiday help to attract and keep shoppers, while at the same time pegging their payroll to a weak sales environment, the exact extent of which can be determined only as you go? That decision can mean the difference between a weak holiday shopping season and a disastrous one for any given retailer. Good luck guys.

And speaking of consumers, which means most everyone, we have been criticized for "living beyond our means." As a country, we have been told that that bad behavior brought about the mortgage crisis, and now we're finally paying the piper for our sins.

Robert Reich, who was Secretary of Labor in the Clinton Administration, and known as one of the most liberal Liberals in America, sees the "living beyond our means" issue thru a different prism. He gave his view on the radio program, Marketplace.

Robert Reich: The "living beyond our means" argument, with its thinly-veiled suggestion of moral terpitude, is technically correct. Over the last 15 years, average household debt has soared to record levels, and the typical American family has taken on more of debt than it can safely manage. That became crystal clear when the housing bubble burst and home prices fell, eliminating easy home equity loans and refinancings.

But this story leaves out one very important fact: Since the year 2000, median family income, adjusted for inflation, has been dropping. One of the main reasons the typical family has taken on more debt has been to maintain its living standards in the face of these declining real incomes.

I mean, it's not as if the typical family suddenly went on a spending binge ­-- buying yachts and fancy cars and taking ocean cruises. No, the typical family just tried to keep going as it had before. But with real incomes dropping, and the costs of necessities like gas, heating oil, food, health insurance, and even college tuitions all soaring, the only way to keep going as before was to borrow more. You might see this as a moral failure, but I think it's more accurate to view it as an ongoing struggle to stay afloat when the boat's sinking.

The "living beyond our means" argument suggests that the answer over the long term is for American families to become more responsible and not spend more than they earn. Well, that may be necessary, but it's hardly sufficient.

The real answer over the long term is to restore middle-class earnings so families don't have to go deep into debt to maintain what was a middle-class standard of living. And that requires, among other things, affordable health insurance, tax credits for college tuition, good schools, and an energy policy that's less dependent on oil -- the price of which is going to continue to rise as demand rises in China and India and elsewhere.

In other words, the way to make sure Americans don't live beyond their means is to give them back their means.

Of course, Reich isn't talking about the guy who spends half his income on season tickets to the Eagles or Phillies, or both! But the recession (alright, let's just stop skirting the issue and say that's what we're in) may force some of those ticketholders to rethink their commitments. That will be a crushing disappointment for those club seat holders, but when enough fans have to cancel their tickets, it will also be a problem for the teams.

Yesterday, we talked about how the movie industry is already showing the strain of the bad economy. Well, reports say the sports industry is also vulnerable. Said Michael Cramer, professor of sports management at New York University: "We've taken an incredible leap with the pricing of tickets that is going to come back to haunt the major sports."

And Cramer makes the point that it's not just the fans at the bottom of the ticket chain. "It's the people at the top end that don't have the money." In fact, Baseball Commissioner Bud Selig reportedly told teams this month not to overprice tickets next season, and that came after per game attendance fell 1% this season. Reuters reports that ticket sales for the NBA are trailing last year, G-M has decided not buy a TV ad in the Super Bowl, the PGA is worried because the tour is driven by corporate sponsorships. Some of those companies have more serious concerns that sponsoring a golf tournament.

And what about the bids for naming rights for new stadiums. Pity the Giants, Jets and Cowboys! (That's supposed to be a joke.) Talk about bad timing.

But there's good news for the rest of us. Oil prices lost over 3 dollars a barrel today to close short of $71.00. And OPEC nations seem uncertain about how to handle the continuous decline. Word is even if OPEC calls for a cut in production of one million barrels a day, many individual countries might ignore it. And the price at the pump continues to go down.

Jim Gardner

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