Archive for the ‘FogOfWar’ Category

Guest Post: What does it mean to “create jobs”?

This is a guest post by FogOfWar.

The phrase is used constantly by politicians and economists, but what does it actually mean to “create jobs”?

Here’s an example: I open a coffee shop and hire two people. So I’ve created three jobs (counting myself), right? Really? Let’s assume for the moment that I’m no more or less efficient at making and distributing coffee than my competitors and also that the total amount of coffee required in the world is constant. Then my coffee shop must be taking customers away from another coffee shop, and at a frictionless level, there are three coffee jobs lost for the three coffee jobs I just created.

Yet no politician, and indeed no economist quoted on TV or newspaper, will go into the distinction between gross job creation (3) and net job creation (0). For politicians this makes sense because they want the appearance of good results to be reelected (and often nothing more than that). For economists, or at least economists dealing with journalists, it may well be that it just gets too fuzzy to make a simple point, and a story without a simple and strong hook is killed by your editor.

Another point: I can think of a specific example of something that really did “destroy jobs”–it’s the invention of the EZ Pass. When I was growing up (yes, I’m ancient), there were dozens of people working at each of the toll collection booths on the highways, each counting out miserable hours collecting change from surly passengers and inhaling vast amounts of carbon monoxide. Now there are a handful at each on ramp and a row of EZ-Pass computers.

There’s no question in my mind that EZ-Pass destroyed jobs, but this seems like a good thing rather than a bad thing. Should we strive to keep really crappy jobs that are obsolete by technology just so that people have something awful to do with themselves all day, instead of doing something equally unproductive like watching TV all day, or maybe even spending time with their families and community? I think this is a variation of the “broken window fallacy” if I remember my intro economics correctly.

Lastly, I’ve assumed a closed system, but let’s relax that assumption. Here are two things that definitively will create jobs: (1) start manufacturing cell phones in the US; and (2) have 20% of the US consumers buy American when they have a choice. Both of these actions will move actual jobs from overseas to the US and thus will “create [US] jobs” in a very real sense of the word.

One other thing that must be true: I’m not the first person to think of this and suspect there are people who have dedicated more serious time and attention to the question than my casual observations. Thoughts?

Categories: FogOfWar

The Numbers are in: Round 1 to #OWS

This is a guest post by FogOfWar:

CUNA (a trade industry group for credit unions) just announced that at least 650,000 customers and USD $4.5 Billion have switched from banks to credit unions in the last five weeks. I think this is a pretty impressive showing for the lead up to “Bank Transfer Day”, and, as posted before, am a supporter of the CU transfers. A few quick points on the announcement:

Are those numbers driven by “Move Your Money” or BofA’s $5 Debit Fee?

A little of both, I suspect, and there’s no hard survey data (that I know of) splitting it out. The two points aren’t completely separate, as one of the points of “move your money” (at least in my mind) is to let people know that credit unions generally have lower fees than large commercial banks & it often makes financial sense to shift your account over regardless of your political views on “Too Big To Fail (TBTF)”.

So is 4.5 Billion a lot or a little?

It isn’t a big number in the scope of overall deposits, but it’s a really big number for transfers in just one month. For scale, the total deposits in all 11,000+ CUs nationwide are somewhere around $800Bn, and that’s roughly 10% of the total deposits in the US. So $4Bn (to make the math easy) is a 0.5% increase in deposits for CUs and somewhere around a 0.05% reduction in the deposit base of US banks in the aggregate. I suspect the transfers are concentrated in the large “final four” banks (BAC, JPM, C, WFC which, if memory serves, account for somewhere around 40% of deposits), so the reduction might be closer to 0.10% for the TBTF quartet.

Wait, those seem like really small percentages—why do you think this matters?

Well, because it’s a greater increase in deposits in one month than credit unions (in aggregate) got in the entirety of last year (and last year was a good year for CUs in which they saw their market share increase). People (rightly) don’t change their checking accounts lightly (there’s a lot of “stickiness” to having direct deposit/ATM cards/etc.—in short it’s a pain in the ass to change your financial institution), so this is a pretty impressive number of people and amount of deposits in this span of time.

Also (and this will play out over time), this could be the start of a trend. Certainly there seems to be a large uptick in discussion of “move your money”, and, as the idea percolates around there’s a lag between thought an action, so this well could be a slow build.

“A Slow Deliberative Walk Away from the TBTF Banks.”

Another important point is that, in fact, you really don’t want too many people moving their accounts in a short period of time for two reasons. First, a rush of people all removing their deposits at the same time is, in fact, a “run on the bank”. This is destructive for a host of reasons—in particular it can cause the institution on which there’s been a run to go into bankruptcy (regardless of whether that bank is otherwise solvent), and, let’s not forget, we the taxpayer are ultimately on the hook for the deposits of bankrupt commercial banks through the FDIC, which is funded by bank fees but backed by the full faith and credit of the taxpayer (and a BofA bankruptcy might put that backstop to the test). So, much as I disagree with many of the decisions of the mega banks, I don’t want the “move your money” campaign to be a catalyst for their insolvency proceedings.

Instead, what I’d really like to see is a slow steady whittling down of their deposit base, and thus their overall size, until they are no longer considered “to big to fail” and thus pose no danger to the taxpayers, as they will be free to make good or bad decisions and live or die, respectively, by them. In short, I’d like to see a “slow deliberative walk away from the TBTF banks” playing out over the course of the next 2-3 years.

The other reason is that credit union’s can only take deposits at a certain pace without running into issues with their own capital buffers and operations. This is a slightly technical issue, but with a substantive point behind it. In essence, absorbing a large growth in new deposits takes some time, not just from an operational perspective (ramping up staff, at a certain point opening new branches and ATMs), but also because more capital needs to be accumulated to provide a safety buffer for the additional deposits that have been taken on. From this perspective, the $4.5 Bn in 5 weeks is a “goldilocks” level—not to much to overheat, not too little to be a rounding error, but just right (OK, actually think it could be 2-3 times the pace without overheating, but everyone else loves to use that hackneyed “goldilocks” metaphor and I just felt peer pressure to frame it that way).

I read that it won’t have an impact on the banks—is that true?

In a word, “total fucking bullshit”. The deposit base is the skeleton of a bank—it’s what holds the whole thing together. Deposits are steady (essentially) free money. Money that can be deployed wherever the bank finds interesting at the moment: loans to customers, speculative exotic derivatives, new branches, foreign investment, whatever. Moreover, if retail deposits mean so little to banks, then why in the world do they spend so much advertising coin chasing them? Generally for profit institutions advertise for products that are profitable to them, not one’s that are irrelevant. QED.

That’s true over the long term. It is worth noting, however, that at this exact moment in time the banks are flush with cash sitting idle on deposit with the fed. Which, by the way, makes it perfect timing for the “move your money” campaign. As I said before, I really don’t want a “run” on the banks, and the fact that banks are flush with cash currently means they’re relatively safe in the immediate moment from a loss of deposits.

But the real reason you’re still seeing Chase commercials on TV even though they’re flush with cash doing nothing at the Fed, is that Chase knows that most people rarely change their primary checking accounts. The accounts that are moving over now are (statistically) gone for good. Later, when that flush cash at the Fed is no more and the banks want the easy money of a wide retail deposit base, they’ll find it very difficult to bring those people back. Not because credit unions are really awesome, just because people really don’t like switching accounts—BofA has to spend a lot of energy to bring in a new account from another institution and doesn’t actually care if it brings it in from lower east side people’s or from Citibank (money is fungible).

Lastly, and perhaps most important, the primary checking account is the primary point of entry to our financial lives. Big banks like the free money you give them on deposits, but equally much they like the chance to have your credit card business, your mortgage and car loan business, your insurance business, your investing business and possibly your retirement and college savings business. All that ancillary business can be (and very much is) statistically quantified on a per-account average basis. All those cross-sells add up over time to big numbers.


Categories: #OWS, finance, FogOfWar, guest post, news

#OWS Alternative Banking update

I’m excited about the meeting from yesterday and I’m trying to help coordinate next steps. As before, the caliber of the people and the conversation was inspiring – people from all over the place, with so many different background and perspectives. Really exciting! At the same time, we were left with a bunch of open questions and issues; we could really use your help!

The group was quite large, on the order of 55 or 60 people, and after some deliberation we split into two groups: Carne’s group went to the other side of the room to discuss a true alternative banking system, and quite a few of us stayed on the first side of the room to discuss problems with our current system and incremental (but not minor) changes to improve it.

We discussed, (not in this order) how the financial system can be divided into four parts, according to FogOfWar:

  1. Traditional Banking: taking deposits, checking accounts, CDs, making loans/mortgages, credit cards, debit cards, banks, Thrifts, Credit Unions, Payday Lenders
  2. Investment Funds: collecting money from investors and making investment in the capital markets: 401(k), 403(b), IRAs, pension funds, mutual funds, index funds, hedge funds (also money market funds with a big asterisk)
  3. Investment Banking: traditionally two categories: I-banking (giving advice to companies on raising money in the capital markets, M&A, etc), and broker/dealer activities (making trades on behalf of clients and market making) including derivatives
  4. Insurance: pooling risks amongst large statistical pools to spread large losses into smaller, manageable premiums. Home insurance, life insurance, car insurance, etc.

We also talked about the power grid, how the capital markets and the players in the capital markets control the small businesses which leads to what we see today, with people feeling disempowered from their own money and their own business. We talked about the shadow banking system, politics and the power of lobbyists, and about how we might be able to effect change on the state level by trying to influence where pensions are being invested. We also heard from a fantastic woman who helped form the Dodd-Frank bill and is an expert on the FDIC and various other regulators and understands where their vested interests lie (this line of thought makes me want to write a post on an idea my friend has of paying SEC lawyers on commission, in reaction to the Citigroup – SEC debacle).

[We will write the minutes of the meeting soon, hopefully; the above is just my recollection. Please comment if I’ve missed something.]

It was all very stimulating, and made me want to draw a bunch of visuals to help with the (very large) educational background required to really tackle these problems. Visuals like this or this would also help me prepare for my upcoming Open Forum this Friday.

At the end, Carne invited us to form a separate group from Alternative Banking, which makes sense as we are on the one hand quite large for his office and on the other hand interested in improving the current system more than a completely alternative one. That leaves us with a bunch of things to do though:

  1. Formally create a new working group through #OWS
  2. Choose a name
  3. Choose a representative to go to the #OWS meetings and explain our activities
  4. Find a place to meet
  5. Find a way to communicate
There may be more! Please comment if you have suggestions for solving these problems, or if you want to join the group; I will definitely be creating an email list at the very least so I can announce the next meeting once we figure this stuff out.
Categories: #OWS, finance, FogOfWar

Credit Unions in NYC flyer

Also from FogOfWar; see also this post where FoW discusses “Why Credit Unions?”:

Categories: finance, FogOfWar, guest post, news

Why Credit Unions? (#OWS) (part 1)

This is a guest post by FogOfWar. See also the “Credit Unions in NYC flyer“.

Moving your money from a megabank to a credit union or community development bank makes for a good sound bite, but is it really an action that can have an impact in the right direction?  I think so (although the matter is not free from doubt), and thought it would be worthwhile to lay out thoughts on the subject as a follow-up to the “What is a Credit Union?” post.

I’ll focus this discussion on credit unions, rather than community development banks or smaller locally owned banks as that’s where my knowledge lies.

Credit Unions are not Too Big To Fail

A quick google search indicates the largest credit union in America is Navy FCU with $34Bn in assets. (Internationally, it may be the Dutch Rabobank, although I’ve never gotten a good handle on whether Rabo is still a cooperative or not.) Individual credit unions fail regularly, just like individual banks, but there isn’t one CU that’s in danger of crashing the entire financial system in the same manner as BAC, C, JPM or WF.

During the 2008 crisis and aftermath the only credit unions that got a federal bailout were the corporate credit unions. There’s a good article about that here.  The corporate credit unions definitely got into trouble buying structured products and I don’t want to gloss this fact over.  There’s a split between the retail credit unions, who are going to have to pay for these mistakes, and the corporate credit unions which made the bad investments as well as the NCUA, who was asleep at the switch when the corporate CUs were making that investment.  Also worth noting that the NCUA has filed suit against the banks for selling crap product to the corporate CUs.

The corporate credit union bailout was small proportionate to the overall credit union size.  $30 bn of  gov’t backed bonds equates to $270 bn proportionate for banks—less than ½ of the official state of TARP and a small fraction of the overall size of the taxpayer support given to the large (non-CU) banks indirectly through TAF, TSLF, PDFC, TARP, TALF, etc.,… (see this for an explanation of term).

All in all, I’d say CUs come out somewhat ahead by this measure.

Volker Rule/Glass Steagall

Unlike commercial banks, credit unions never revoked the Glass Steagall act and remained segmented as “pure” traditional banking entities.  This means that CUs don’t mingle traditional banking (deposits, checking accounts, loans to customers), with investment banking activities (IPOs, M&A advisory) or derivatives trading or sales desks, let alone prop desk frontrunning of client information.

There’s a lot of ink out there on Volker and Glass Steagall.  In short, it seems like a good idea, if not sufficient as a complete solution, to keep traditional banking segmented from investment banking and proprietary trading.  The core point is that trading risk should not infect the core banking business putting it (and the taxpayer standing behind the federal deposit insurance) at risk.  Very good recent example of this here.

CUs come out dramatically ahead on this measure.

Lobbying—just as bad?

Credit Unions do lobby, largely through two groups, CUNA and NAFCU.   In fact, NAFCU has been an opponent of the CPFB, and the CU lobby got itself removed from the debit swipe fee cap.

There was a time I can remember when CUNA and NAFCU just went up to the hill to remind Congress that they existed and defend against the ABA’s occasional attempts to change the tax status of CUs.  It seems times have, rather unfortunately, changed.

Regrettably, no advantage to Credit Unions here.

Part 2 will talk about investments in local communities, democratic control (the good, the bad and the ugly) and securitization/mortgage transfers.


Categories: #OWS, finance, FogOfWar, guest post, news

What is a Credit Union? (#OWS)

This is a guest post by FogOfWar:

There’s been a call (associated with the “Occupy Wall Street” movement) for consumers to move their bank accounts from large TBTF banks into local credit unions. Nov. 5th is the target date. This is a similar message to one Arianna Huffington gave a few years back.

The above inspire a quick post on the subject of “What is a Credit Union and why is it different from a mega-bank?”

What can I do at a Credit Union?

Pretty much all the same stuff you can do at a bank. They have checking accounts (although they call them “share accounts”, it’s the same thing), savings accounts, CDs, credit cards, debit cards, auto loans, mortgages, lines of credit. All of the stuff a normal bank offers. Some of the smaller CUs (just like some of the smaller banks) don’t offer everything, but it’s substantially the same.

The only difference in services is that you generally can’t make investments (stocks, bonds, etc.) through your credit union. IMHO, this isn’t much of a downside, as the brokers associated with major banks generally aren’t as good as the standalone retail brokers (like Fidelity, Vanguard, TIAA-CREF, etc.)

The other difference is that you can’t just walk off the street and open a credit union account; you have to be eligible in their “field of membership” (more on that below).

How are the rates?

It varies, but in general you’ll get better rates at a credit union than at a bank (certainly than at a megabank). An easy way to check is to look at your checking account statement now (or call your bank) and see what the APY is (Annual Percentage Yield), and then check the credit union to see the APY on their basic share draft account.

There are credit unions with sucky rates out there (often the really small ones—they have a lot of operational costs), but I’ve usually found that I get better rates on savings and better rates on loans from a CU.

What’s the real difference?

The real difference is ownership. Banks are owned by outside investors—usually people who own the stock for a big bank—and they need to pay those owners a profit in the form of dividends (or share repurchases which are economically equivalent). Credit Unions are owned by their depositors (called “members”). That’s why the “checking account” is called a “share account”—you own a “share” (another name for stock) in the credit union. The board of directors is elected at an annual meeting, one person, one vote. BoD members are not paid for serving on the board.

This also explains why Credit Unions can offer better rates: they don’t have to pay a profit to their stockholders, instead that “profit” is returned back to you, the owners. Note that CUs are also exempt from corporate tax, and this makes some difference, but IMHO, it’s the absence of needing to pay dividends that really gives CUs the ability to pay better rates to their customer/owners.

Am I supporting the community when I deposit with a Credit Union?

There’s a good argument that yes, you are. Credit Union’s make loans back to the people in their membership. So the money you put on deposit is being leant back to people in the community of the credit union. Credit unions don’t trade derivatives or run speculative investment books. By and large they make loans to members and then hold on to those loans (i.e., they don’t “securitize” those loans out to other people).

For those who know the movie It’s a Wonderful Life, it’s a pretty good description of how a credit union can work within a community. Technically the movie describes a Thrift (somewhat similar), but it could just as easily been about a CU.

Who is eligible to join a Credit Union?

Each credit union has a “field of membership”. Some are employment-based, so you are eligible if you or an immediate family member works at a certain place. For example, NBC has a credit union for its NY employees. Note that NBC does not own the credit union, the CU is owned by its members (one person, one vote), it’s just that the credit union is there for NBC employees.

Some credit unions are associational. A good example of this is church credit unions (which are pretty common). There are also Community Development Credit Unions, which are set in lower-income areas and anyone in the area can join (Lower East Side People’s FCU is a good example).

There are a number of educational credit unions—these vary, but often faculty, students, employees and alumni are all eligible to join. Again, note that the university does not own the credit union—the CU is owned by the members—it’s just the prerequisite to join that particular credit union.

How do I find a credit union I can join?

There are some “credit union locators” online, but the one’s I’ve seen kinda suck. I’d say try a Google search. So if you live in Boise, I’d search for “Boise Credit Unions”. You can also try, which will give you all the credit unions in a particular area. I tend to like the larger credit unions (at least $20m in assets), as they tend to have hit a size where they’re operationally more together (making mistakes on your money is no fun).

You can also ask at the HR department at your job “hey, does working here make me eligible to join a credit union?” If they say “no”, you can say “why not? Is anyone working on having us join up with a good CU?”

Are there any downsides?

There aren’t a lot of ATMs, so every time you need cash & use a bank ATM, you’ll be paying that ridiculous fee. This can definitely suck, although one way around it is to have a debit card and take cash back all the time when you buy stuff (there’s no charge for taking cash back on a debit card—it’s just a question of whether the merchant lets you do it, and most supermarkets and drug stores do).

Also, this makes depositing paper checks a pain in the ass: you actually have to put them in an envelope and mail them to the credit union. How did society function before we had the internet?

Also, if it’s a work credit union, you can check to see if they have a branch at your office—this can make things a lot easier.

Anyway, that’s a quick rundown. Sure I missed something, but I’ll drop it in the comments if I remember later.

Here’s a flyer I made for OWS which contains information on a few credit unions in New York City:

Credit Unions in NYC


Categories: #OWS, finance, FogOfWar, news

Occupy Wall Street—Report

September 27, 2011 10 comments

This is a guest post by FogOfWar.

I was originally going to lead with a tongue-in-cheek comment (later in the post now), but then the NYPD did something colossally stupid.  If you haven’t seen it, here’s the video from this last weekend. It pretty much speaks for itself.

There’s a lot to be said about freedom of expression and police overreaction.  I’ve been to see the protests a number of times, and they’ve never been violent and in fact seem pretty well trained in the confines of freedom of assembly in the US legal system.  Using mace against an imminent threat of violence is OK for the police, but the video seems to show no threatening moves made at all (and it runs for a good period before the police attack so it wasn’t edited out).

I’d suggest the NYPD be shown the following video (taken from the protests in Greece) to demonstrate when things reach a level where force might be an appropriate response. Note that the crowd is attacking with sticks, Molotov cocktails and a fucking bowling ball.  In contrast, the NYPD appears to be pepper spraying people for just holding signs and walking down the street.  What the fuck?

There are maybe a few hundred people consistently protesting at “Occupy Wall Street” for about 10 days now.  It’s got a definite crunchy vibe to the center.  Drumming and Mohawks are mandatory:

But also a (growing?) contingent of more mainstream participants like this one:

Here’s a crowd shot for scale:

And some people painting signs:

And then of course, there’s the dreaded “consensus circle”:

It’s hard to tell what they really want to happen—this was up at one of the information booths (but then down the next time I went):

Misspelled “derivatives”, and there are some things on that list that are spot on and then others that are just weird and irrelevant (DTC?  Really?). I don’t think you can hold that against them though.  I work in the industry, and I’ve been spending the last three years thinking about this stuff and I still find it confusing and hard to come up with a cohesive plan of what I think should be done.  At least these people are doing something, even if it’s a bit incoherent at times.

I have to end with my all time favorite sign from the protest.  Someone was looking for good cardboard and inadvertently came up with the following:

“Delicious pizza to pay off the taxpayers”.  Now that’s a slogan I think we can all rally behind!


Categories: #OWS, finance, FogOfWar, news, rant