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StrategyDriven Podcast Series

StrategyDriven Editorial Perspective – Panic of 1907 vs Great Recession of 2008

Panic of 1907 vs Great Recession of 2008This year, 2013, marks the 100th anniversary of the Federal Reserve System, and central bankers are taking a historical perspective. That is “good advice in general,” Fed Chairman Ben Bernanke told attendees at the Fourteenth Jacques Polak Annual Research Conference, in Washington, D.C earlier this month.

“An appreciation of the parallels between recent and historical events greatly influenced how I and many of my colleagues around the world responded to the crisis,” Mr. Bernanke said.

He went on to describe the similarities between the banking crisis of 1907 – the one that inspired the formation of the Federal Reserve – and the more recent 2008 financial crisis.

Both fit the archetype of a classic financial panic, Bernanke said. Both crises started in an economy in recession and both suffered from a sudden lack of liquidity.

In 1907, money was tight in part due to the rebuilding of San Francisco. After the Bank of England raised its discount rate, causing more gold to flow out of the US, New York was left with unusually low monetary reserves just as it entered the cash-intensive harvest season, explained Ellis Tallman and Jon Moen in a 1990 article about the Panic in the Atlanta Fed’s Economic Review.

In the more recent crises, Bernanke explained, liquidity started to dry up when housing prices declined, and subprime mortgage defaults rose in 2007. As the underwriting weaknesses of subprime portfolios became known, banks stopped lending to each other, paralyzing credit markets. By 2008, losses from these portfolios were causing banks to fail.

In both crises, a tinder-dry credit environment made them vulnerable to sparks. In 1907, the fire started when F. Augustus Heinze and C.F. Morse tried and failed to corner the stock of the United Copper Company. The investigation into the scam revealed an intricate web of corrupt bankers and brokers. (Heinze was president of Mercantile National Bank, and Morse served on seven New York City bank boards.) When the president of the second largest trust in the country was implicated in the copper cornering con, depositors started a run on Knickerbocker Trust.

Without a central bank, the availability of liquidity depended on the discretion of firms and private individuals, Bernanke explained. The Lehman Brothers moment of 1907 came when New York’s financiers, led by J.P. Morgan, were unable to value the trusts, and refused to ‘bail out’ Knickerbocker. (Unregulated and a relatively new innovation, trusts were the ‘toxic assets‘ of the 1907 crises. Trusts, however, were financed by consumer deposits, while the toxic asset of 2008 were securities contracts held by investment banks.)

Their refusal prevented other institutions from offering aid, and depositors started a massive run on banks and trusts, exacerbating the liquidity crises. (In 2008 a loss of confidence in the banking system did not turn into a consumer run on banks primarily because of FDIC deposit insurance.)

Morgan et al realized that a failure of the trusts could spread to the entire financial system, and they ultimately convinced John D. Rockefeller and others to pony up enough cash to stabilize the markets.

Similarly, American lawmakers eventually agreed that failure of the nation’s largest financial institutions was not an option, and passed the $700 billion Trouble Asset Relief Program in October 2008 (reduced to $475 billion by the Dodd-Frank Act). This program was designed “to strengthen market stability, improve the strength of financial institutions, and enhance market liquidity,” according to the Federal Reserve.

A major difference between the two crises, that I can see, is the popular perception of these liquidity liberators. In 1907, Senator Nelson Aldrich called the actions of JP Morgan and crew heroic. In his arguments for centralized banking reprinted in the New York Tribune, he warned that without it “men may not be found in another emergency with the patriotism, courage and capacity of those who in this crisis rendered such inconspicuous and invaluable service to the financial interests of this country.”

But in the 2008 crisis, when taxpayers rendered this very same “invaluable service,” people stormed the streets in protest. From the tea party conservative to the Wall Street occupier, hatred of the bailouts was met with bipartisan vehemence.

So why is it that when a handful of wealthy individuals restore liquidity to a broken system they are courageous patriots, but when it’s taxpayer’s, lawmakers are voted out of office? Perhaps the vehemence comes from how the money was used. In 1907, it was to save consumer’s retail deposits, in 2008 corporate wholesale funds.

As Bernanke explains in his speech, seeking to stem the panic in wholesale funding markets, in 2008 the Fed “extended its lender-of-last-resort facilities to support nonbank institutions such as investment banks.” This had little direct impact on consumers. As Fed governor Daniel Tarullo recently said “the savings of most U.S. households are generally not directly at risk in short-term wholesale funding arrangements.”

In 1907, on the other hand, ending bank runs meant “widows on the corner” could cash their checks, shop-owners could feed their families.

Another problem with the 2008 solution, from the popular perspective, was the moral hazard it created.

Senator Aldrich worried that courageous individuals might be hard to find in a financial emergency, and it appears he was right to worry. Senior executives in 2008 were not interested in rendering an inconspicuous service to the financial interests of the country. They didn’t even want to forego their bonuses. But in trying to account for the rarity of courage, lawmakers in 1913 may have created a system that prevents it from emerging.

A July 2013 Congressional research report articulates a challenge for today’s central bankers. “Although ‘too big to fail’ (TBTF) has been a perennial policy issue, it was highlighted by the near-collapse of several large financial firms in 2008… If a TBTF firm believes that the government will protect them from losses, they have less incentive to monitor the firm’s riskiness because they are shielded from the negative consequences of those risks.”

In 1907, the wealthy elite pooled their resources to prevent the failure of banks and trusts, saving millions in consumer deposits. In so doing they bore the brunt of the consequences of their risks, and Americans considered them heroes for it.


About the Author

Cara WickCara Wick writes about American financial and political history at www.bankersnotes.com. She holds a BA from Williams College and an MBA from the University of Iowa. Cara can be reached at [email protected].

StrategyDriven Podcast Series

StrategyDriven Editorial Perspective – The Ugly Truth About Partisan Public Project Labor Agreements

While we voice concerns about debt and spending, we also need to be mindful of the state of employers, particularly small business and their struggles to remain competitive and viable. Statistically small business, employers of at least 50 percent of our workforce, are struggling, and eager to get your business. They are begging to serve you while balancing unclear taxes, health insurance obligations, and uncertain ability to make payroll. Public project labor agreements (PLAs) provide another hurdle, unless their employees choose to pay union dues.

Here is the ugly truth for small business employers without union workers…

As the result of $50 Million in Hurricane Sandy damage, the New Jersey Senate passed Bill S24251 that approves PLAs. That means that non-union employers will not be included in the bidding process for public work or state funded contracts unless there is a collective bargaining (union) contract representing employees. This is not only bidding preference, this is a freeze small businesses out of competitive bidding unless their employees pay union dues.

In other words, non-union contractors have no place in this public work, period. The NJ Senate Bill S2425 enhanced their existing law in New Jersey for PLAs to include roads, bridges, and water treatment. The bill was introduced and sponsored by Senate President Steve Sweeney, former vicinity president of Iron Workers District Council of Philadelphia. This is a stark contradiction to Sweeney’s inaugural goals including “encourage shared public services among local governments as a way to reduce spending… and make the state business friendly.”2 This Senate Bill is hardly a cost saving, business friendly measure.

Further, in support of unions, on February 6, 2009, President Obama signed an executive order reversing George H. W. Bush’s prohibition on the requirement for project labor agreements on federal projects.3 Obama claimed “it was the government’s policy to encourage the use of labor agreements to avoid misunderstandings about the cost of labor and to ensure that one contractor’s workforce problems during a project not delay other teams involved in the contract.” What it does not address is the freezing out of non-union bidders and the increases in taxpayer costs.

Statistically speaking, only 13.2 percent of the 2012 U.S. private construction workforce belongs to unions.4 This information represents that 87 percent of this employment sector are non-union employees, a solid supposition that they are from the small business sector.

Is this precipitating and/or worsening the status quo with small business? The success of small business is largely measured on their ability to hire and maintain employees. Their success for work is neither viable nor likely considering PLAs. According to the 2012 Year End Economic Report of the National Small Business Association,

  • Just over one-third (38 percent) anticipate their firms will grow in the coming year—the lowest this indicator has been since we began asking this question in December 2009;
  • Hiring remains stagnant with the number of small-business owners who project decreases to their employment size in the coming year rising from 12 percent to 16 percent;5

The reality is that there is a major difference between supporting unions and taking away legitimate bidding power from small contractors and family owned, non-union businesses. And, the competitive bidding process is in place to assure the best look at products, quality of services, at the best price. Competitive bidding is most often used by government agencies that are required by law to open contracts for bid and must award business to the lowest bidder. This is intended to ensure impartiality in buying decisions and assure the best price.

Further included in a PLA is the stipulation that may require even non-union contractors to make contributions to the union benefit and pension funds for each employee. That would result in additional contributions (possibly double the cost) to employers for benefits and pensions that have already been provided.

All eyes are on New Jersey Governor Chris Christie to see what he will do with the NJ approved State Bill 2425. According to Chris Christie’s Office, he will consider the bill including a possible veto when it reaches his desk. Republican Governor Christie is a union supporter, who is up for re-election in November, 2013.

We must not forget, the costs to taxpayers on project labor agreements is between 12 and 18 percent higher when union contractors are only part of the bidding process.6

House Bill HR 436 has been introduced by Congressman Andy Harris (R) from Maryland which would prohibit preference to labor unions or other discriminatory provisions in government projects.7 The Bill has been referred to the House Committee on Oversight and Government Reform.

We know our priorities, at least according to public opinion; Jump start the economy, provide avenues for small business to thrive, patronize local business – not exactly the focus of legislators. The survival of small business is being largely ignored by the elected officials of New Jersey and Washington who must remember that they also represent small businesses, and workers who choose not to be represented by labor unions.

Keep in mind that the National Labor Relations Act clearly protects the rights of employees to form and join unions but it also provides the right to refrain from association with unions. These actions could result in a process of “pay to play” – or in this case, pay to work.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!


About the Author

Wendy Powell is the author of Management Experience Acquired. With more than twenty-five years of human resource and management consulting experience, Wendy has spent most of her career at the University of Michigan. She is currently on the business faculty at both Palm Beach State College and the University of Phoenix. A member of the Society of Human Resource Management, she received a leadership award in 2002 from the Midwest College and University Professional Association for Human Resources. She is routinely featured on The Huffington Post and has appeared on Fox Business’s The Strategy Room. Wendy holds a Bachelor of Science degree in business management and a Master of Arts degree in organizational management.


References

  1. http://www.njleg.state.nj.us/2012/Bills/S2500/2425_I1.HTM
  2. http://www.impact-net.org/news/iron-workers-district-council-president-steve-sweeney-sworn-in-as-nj-senate/
  3. http://www.whitehouse.gov/the_press_office/EXECUTIVEORDERUSEOFPROJECTLABORAGREEMENTSFORFEDERALCONSTRUCTIONPROJECTS/
  4. http://www.bls.gov/news.release/union2.t03.htm
  5. http://www.nsba.biz/?p=5242
  6. http://thetruthaboutplas.com/get-the-truth/
  7. http://thomas.loc.gov/cgi-bin/bdquery/z?d113:HR00436:@@@D&summ2=m&
StrategyDriven Podcast Series

StrategyDriven Editorial Perspective – Gather Ye Sugar Plums While Ye May; Your Personal Discretionary Budget will be Impacted by Washington

Spend well this Christmas/Holiday Season and be merry. But ‘tis the season for budgeting for the New Year as well. Unless otherwise averted, your Christmas/Holiday or otherwise discretionary budget will fade next year to infinity and beyond. The trend is that American holiday spending has diminished over the past 10 years from $1,037.00 in 2002 to $854.00 in 2012.).1 This latest statistic compares to pre-recession spending. Throw a travel budget into the mix (average of $1,200)2 and double your expenses for gas, and there you’ve got it, your discretionary budget is going, then gone to pay your new tax obligations.

The Grinch could no more create this story; it is reality.

Reality be damned, according to the bi-partisan Tax Policy Center, the average American family is expected to pay $3,500 more in taxes annually.3 This is the average for families, not millionaires or the nouveau riche defined $250,000 earners. This will affect us all, in a ho ho sized way, and I don’t mean Hostess. Take this seriously; your wallets will be lighter.

What is a family to do? Perhaps hunker down and bake gingerbread men, call your congressional representative. Now we are talking about real impact. Let us not forget, this will not only affect the ‘rich’ Americans. This is planned to hit us all in the pocketbook.

We also need to plan for Obamacare. Many of us think that this tax, as defined by the Supreme Court, won’t affect our spending and expenses; Think again. Families will need to maintain their insurance at their employer, buy insurance or pay the tax penalty, estimated at $2,085 for a family in 2016 (average consistent with income level scales).4

If employers, no, WHEN employers stop their insurance benefits, this will become more real. We have been told if you like your doctor, you would be able to keep your doctor; if you like your plan, no one will take it away. President Obama indicates that 98 percent of Americans will be unaffected by the tax penalty and suggested that those who will be, should face up to their civic responsibilities. But a more recent estimate is that more than 6 million uninsured people will pay the tax penalty, largely middle class workers including approximately 10 percent at or below the poverty level.5 Someone has to pay the piper. (With the exception of Indian tribes, Amish, wage earners of under $9,500 annually, or qualified hardships) But remember, there is no governmental control on businesses to maintain your level of benefits, period.

More than 80 percent of employers provide health care insurance to employees but this will drop considerably, if not by 50 percent. According to Price Waterhouse, at least 84 percent of employers are considering changes to health care plans to offset costs of taxes and regulations.6 Further, 50 percent are considering the elimination of health care plans presumably paying the expected penalty of $2,000 per employee to the IRS. Realizing the cost implications, this penalty is less costly than health care contributions.

Many employees, who have counted on total compensation packages including health care, will see an end to their options for benefits. But, if you have unlimited, pre-tax flexible spending accounts for medical expenses, anything over $2,500 will be taxed starting in 2013. There will be a 2.3% excise tax on medical devices and equipment that will be passed on to the patients. And starting in 2018, for employers that retain ‘Cadillac’ premium health plans, you will be taxed 40 percent for the privilege. It cuts both ways.

Call it fate, call it karma. More people to be covered, more expenses to recoup, more businesses to tax. So gather ye sugarplums while ye may. You are about to experience a change to your budget that will affect your lifestyle. This will not only affect the top one, two, or five percent. The average American family will see dramatic increases that will limit your spending ability. Perhaps there will be an eleventh hour rescue to avoid your portion of the fiscal cliff. Asking for a Congressional miracle, you may have to tug on Santa’s beard to see if it’s real.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!


About the Author

Wendy Powell is the author of Management Experience Acquired. With more than twenty-five years of human resource and management consulting experience, Wendy has spent most of her career at the University of Michigan. She is currently on the business faculty at both Palm Beach State College and the University of Phoenix. A member of the Society of Human Resource Management, she received a leadership award in 2002 from the Midwest College and University Professional Association for Human Resources. She is routinely featured on The Huffington Post and has appeared on Fox Business’s The Strategy Room. Wendy holds a Bachelor of Science degree in business management and a Master of Arts degree in organizational management.


References

  1. http://americanresearchgroup.com/holiday/
  2. http://abcnews.go.com/Travel/vacation-1180-buy-bargain-vacations-american-average-cost/story?id=16509865
  3. http://www.taxpolicycenter.org/UploadedPDF/412666-toppling-off-the-fiscal-cliff.pdf
  4. http://www.forbes.com/sites/gracemarieturner/2012/07/24/how-much-is-the-obamacare-mandate-going-to-cost-you/
  5. http://www.nytimes.com/2012/09/20/us/more-expected-to-face-penalty-under-health-law.html?_r=0
  6. http://www.pwc.com/us/en/press-releases/2011/employer-medical-costs-expected-to-increase.jhtml
StrategyDriven Podcast Series

StrategyDriven Editorial Perspective – America: Are Entrepreneurs the Bad Guys?

Watching media coverage of ‘business’ in the United States, one might imagine he is living in a socialist country where capitalism is almost a crime. From certain sectors of the media and within the circles of certain political campaigns we hear cries of anger at the ‘wealthy’ and the need for business owners to pay a bigger slice of the tax pie. According to government classifications I am ‘rich’ – As a New York City resident, I pay more than 50% in taxes, and as a 37 year old entrepreneur I ask myself when is enough, enough?

A product of a single parent household and the New York City public school system, I have worked very hard for what I have, and today own one of the 25 largest U.S. Public Relations Agencies, 5WPR. My firm employs a little less than 100 people; we have no debt, we pay vendors on time, and have always operated a profitable business. We never had an open line of credit, nor do we carry credit card balances beyond the billing period. We pay our bills.

Entrepreneurs absorb the cost of jury duty for employees, we match Medicare tax rates (with little faith the system will exist when employees will eventually need it), we pay increased commercial real estate taxes with growth, and deal with many regulatory and financial burdens. Additionally, my taxes pay for NYC public schools, and do not get tax credits even though I don’t use the schools and pay an additional fee for private school. Yes, that is my choice, but through that choice, I believe that I lend a service to the public schools. My portion of the tax load subsidizes another New Yorker’s child’s education in the school system. All I seek is a little appreciation for that.

President Obama seems to be consumed with the popular pitch of ‘taxing the rich,’ and New York’s governor recently agreed and is seeking to assess anyone who earns over $200K with a greater burden. The demonizing of the rich is a bad policy. These so-called rich people are the ones who create jobs, take risks and sacrifice a lot.

People who work hard are the best hope for our country in these economic times, especially when China and other rising nations are consuming the work that used to be America’s. The work ethic has shifted to people who can understand and appreciate hard work, a sensibility that is lost today on many of America’s emerging workforce.

It’s about time a Public Relations campaign for entrepreneurs and business owners commenced. Today’s political environment is putting more strain on the hardworking entrepreneur. It is taxing energetic people who forgo personal time and money every day in the race to create opportunities which often end up generating opportunities for others as well. Taxing the wealthy even more is simply not the answer to the nation’s devastating problems. Countless small businesses are stagnant and need stimulation; it’s not their responsibility to bail out individuals. The drivers of the American economy are not the poor and the jobless, but the entrepreneurs who create the opportunities for most of the American workforce.

Increased government taxes will result in more job loss. It will serve to pound motivation out of the entrepreneur, making it even harder to create jobs. This hurricane sweeping through our businesses will change the country’s landscape for the worse. It’s un-American to say the least.

P.S. When I die, my children will be taxed another 50 percent on the money that I already paid taxes on.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!


About the Author

Ronn Torossian is CEO of 5WPR and author of For Immediate Release: Shape Minds, Build Brands, and Deliver Results with Game-Changing Public Relations. To read Ronn’s complete biography, click here.

StrategyDriven Podcast Series

StrategyDriven Editorial Perspective – Socialization of Medical Care

The socialization of medicine is not a new discussion. Indeed, government involvement in healthcare has increased for decades. Regardless of the noble intentions of those desiring ‘healthcare for all,’ economics reveals that in the end everyone suffers.

The following video is that of a lecture made by Nobel Laureate and Economist Milton Friedman. In his discussion, Dr. Friedman reveals how government involvement in the healthcare system will necessarily diminishes care and the industry’s prosperity. By extension, Dr. Friedman illustrates how prosperity is similarly destroyed in any industry in which the government becomes heavily involved.

Dr. Friedman’s assertions are not political. His point of view is founded on sound analysis of the socialization of medicine in other countries.

The purpose of this editorial is not to suggest a specific course of action. Instead it’s purpose is to suggest a need to closely monitor the level of government involvement within your industry and to consider the propensity for involvement as a risk to your business’s future.