I may have lost faith in Wall St., but today I regained faith in Congress.  The House shot down the $700 billion bail out… and I could not be happier.  And you wanna know why… Ok, but first let me lay the groundwork just in case

The gist of the bailout plan

HR 3997 would have allowed the Secretary of the Treasury to establish the Troubled Asset Relief Program.  This program would have been allowed “to purchase and to make and fund commitments to purchase, troubled assets (shaky mortgages and mortgage-backed securities) from any financial institution.”

My president, our president decided that it would be a good idea to use $700 billion of our tax dollar to save the finance industry.  He wanted to buy shaky mortgages and mortgaged-backed securities.  We all know what a mortgage is, but…

What is a mortgaged-based security?

It is sort of like a bond… an IOU.  Potential homeowners go to banks to apply for a home loan.  The bank issues the mortgages.  And then, the bank pools the loans into neat little packages and sell them on the market.  The people who buy these neat little packages receive interest and principle payments every month whenever the homeowners pay their mortgage.  In essence the investors are lending the money to homeowners and expected to receive payments every month.  The bank’s role in this is as the middleman.  For its services of connecting the buyer and lender, the bank receives a service commission.

Plan English…

Ok I got 10 friends who need a hundred dollars each.  They all ask me if I can loan them the money.  I shell out the $1,000 at 15% and get them to sign an IOU.  Then I turn to my friend Joe Blow and I say look Joe, buy these IOUs from me for $1,000. And when my 10 friends pay the bill, I’ll send you all the principal ($1,000) and interest ($150).  All I want is a small services fee of $2.

So I make $2 and Joe gets $148.  However, Joe now assumes all the risk.  If any of the friends don’t pay the bill, it is Joe who will be shafted, not me.

The problem with mortgage-backed securities

Generally, there is no problem.  Most times mortgage-backed securities are a safe bet.  Yeah, there is some risk involved, but usually not much.  The way it works is that the IOU is secured by an asset… the house.  The house is appraised by the bank, the applicant has adequate income to repay the loan, and the bank verified the homeowner’s financial credibility.

But… What happens if the house is over-valued, if the applicant overstates his ability to repay the loan, and if the banks did not adequately qualify the mortgages? 

So here enters the problem…

Well what happens is… that those mortgage-backed securities are worthless and investors will lose a lot of money.

Lately, investors have been taking a lot of losses on these mortgage-backed loans because the mortgage pools are filled with subprime products, foreclosed properties, soon to be foreclose properties… just a mess of worthless assets.  (I’m not really sure if “assets” is the right word to use here because asset implies value.)

Who are these investors?

Mortgage-backed securities are big business.  And because of the perceived low risk, many entities buy them…banks, hedge funds, pension funds, mutual funds.

Alright now back to why I am glad that this bailout was voted down. 

The bailout would have rewarded corporation for bad behavior

The bailout would have alleviated the mortgage risk exposure of financial institutions (and only financial institutions).  Aren’t these the people started this mess in the first place?  Financial institutions were being careless and greedy.  They knowingly exposed themselves to subprime lenders in order to increase short term profits.  Not only did these financial institutions give money to those with questionable financial credibility, but they also engaged in other greedy and deceitful behaviors.  They overvalued houses so that they can issue first and second mortgages.  They came up with all these colorful ways to qualify borrowers… balloons, no interest mortgages, one year ARMs, etc. They made stupid choices in order to fatten their pockets, but it backfired. 

I hate to get on the Harper story again, but just think about this… JP Morgan Chase loaned a family a half a million dollars.  The borrowers… a house wife and a home security alarm installer (not wealthy people).  The loan was secured with a house that cost almost a million dollars to build (the house was a free gift from Extreme Makeover: Home Edition).  At one point the family was trying to sell the house for $950,000.  It did not sell.  Why… because regardless of how much the house cost to build… a house (or anything else for that matter) is only worth as much as someone is willing to pay for it. 

The house is Lake City, GA.  The median income in Lake City $38,000, the median house value, $125,000… both less than the medians for the state of Georgia. 

Now granted I don’t know much about the neighborhoods in Lakeland, GA… but the Harper’s old house was ummm… a dump (I’m not trying to be ugly, but it was).  The dump was torn down and replace with a mansion.  Great! 

But if the Harper’s old house was a dump… then chances are that the houses around it are dumps too.  What sane person with a million dollars or even a half a million dollars would buy a mansion that was surrounded by dumps? I know if I had that kind of money to spend on a house, I would not be looking to buy a mansion that sits in the middle of dumps.  I would want a mansion that is surrounded by other mansion. 

No matter now much it costs to build, nobody is going to buy that house for so much money.  The house is not worth a half a million, it is only worth what someone is willing to sell it for.  Location, Location, Location - that is what the realtor says.  I am no realtor and I understand that.  So why would JP Morgan Chase value that house at a half a million dollars plus. 

Anyway, the family could not repay the loan and it went into foreclosure.  The house went up for auction.  I am not sure what it sold for, or if it even sold at all… but either way, that was a horrible business decision on JP Morgan Chase’s part. 

Taxpayers should not have to foot the bill for the bad decisions of borrowers and lenders.

The federal government has never come to my rescue when I did something stupid.  So why should they help stupid… (greedy) banks? And anyway a bailout out does not solve the problem.  It is just a band aid.  Bailing out banks just frees them to go out and make poor bad decisions.  So way to go House!  I think you all really voted for the people on this one.

Friday as I was getting ready to go to work, I heard a brief comment on the local news about Washington Mutual being sold to JP Morgan.  They did not mention much else… just that simple one liner. As soon as I got to a computer, I went to CNBC.com to see what was going on.  And OMG!  What was going on was a mess! That one liner definitely did not suffice to explain the gravity of what happened.

Washington Mutual… the WaMu Whoo Hoo… gone! What the @#%$?!?!

A 120 year old bank disappeared over night.  According to what I hear… this is the biggest banking failure in history.  This seems like a bit of déjà vu.  I could have sworn I heard the same story last week, last month.  It seems that everyday… we are seeing the “biggest failure in history”.  How many more “biggest failures” can we endure?

Really people, I must be sleeping.  I am going to wake up any day now and realize that the collapse of the financial industry is a bad dream… a horrible nightmare.  But sadly, I know that I am not sleeping and no pinch is going to cure this mess.

So what happened to WAMU?

Basically, Kerry Killinger, former CEO of Washington Mutual, was paid more than $10 million dollars a year to run the bank into the ground.  And he did a great job.  A bunch of bad judgments and greedy decisions later… WaMu no longer Whoo Hoos.

Killinger left WaMu in utter ruin earlier this month.  Towards the end, he tried to redeem his egregious mismanagement by resigning his position as Chairman of the board, raising capital (TPG raised $7 billion dollars - $2 billion of their own money), laying off employees, and restructuring business lines. And to be honest, I thought his attempts to save WaMu might actually work.  (But boy was I wrong!) Apparently using bicycle patches to fill a gigantic hole ain’t enough to keep the Titanic from sinking.

But what finally took the stern under… since the fall of AIG, Lehman Brothers and Merrill Lynch on September 15^th, WaMu customers withdrew nearly $17 billions dollars in deposits.  The run on the bank rendered it virtually insolvent.  And as we learned from the recent descend of Indy Mac, for a bank… no liquidity means the feds will be arriving soon to put it out of its misery.

The FDIC came in, took over Washington Mutual, sold it to JP Morgan for $1.9 billion dollars… it was all a rather seamless transition for accountholders.  But for WaMu stockholders, for WaMu bondholders, for TPG who had just invested $2 billion dollars in WaMu… well they are up the creek without a paddle.  Or to describe it more accurately, the value of their portfolio is as deep as Atlantic seafloor… (Yeah…  chilling with the Titanic.)

But seriously this is the one thing that really bothers me about WaMu’s downfall… stockholders and bondholders got screwed.

You see… When you buy a company’s stock, that means you are buying equity… ownership in the company.  For WaMu shareholders… holding equity in a company that no longer exists means you are left with nothing.  The value of the stock… $0!

And… When you buy a company’s bonds… that means you are giving the company a loan.  The bond is like an IOU.  For WaMu bondholders… having bonds from a company that no longer exists means that the paper it is written on has more value than the bond itself.  The value of the bond… $0!

And just because you may own individual WaMu stocks and bonds… don’t think this will not impact you.  It will.  Many institutional investors, such as pension funds, mutual funds and other banks and insurance companies, owned the majority of WaMu stocks and bonds.  These pension funds are in charge of our retirement security.  These mutual funds are a part of our 401Ks… our children’s 529 accounts! If you have any money invested anywhere… then odds are you held some stake in WaMu’s success or failure.  And because WaMu failed, the value of your assets dropped.

And aside from the financial impact, the psychological impacts are more far reaching.  If consumer confidence wasn’t completely shot before, you can be guaranteed that it is now.  Consumer confidence measures how consumers feel about the current and future state of the economy.  When consumer confidence is low, then people stop spending (which contributes even more to the economic depression) and start stockpiling money… just in case.

But this situation is different in that consumers no longer feel confidence in the finance industry.  This means that instead of stockpiling money in savings accounts, folks feel more security with stockpiling it under their pillows.  And when people began taking their money out of banks… well you know what happens next (IndyMac, WaMu).

The whole thing is cyclical and as it  continues the problem gets worse.

I, for one, tend to be an optimist.  And I am certainly a strong believer in free enterprise and the ability of the market to correct itself.  But even I, with my typically rosy outlook, am getting worried.  I keep looking for the plunge to end, but the end is nowhere in sight.  Every time I think it can’t get any worse. ..  it gets worse times 2.  I just hope that WaMu will be the last to sink, but for some reason I feel that the dominoes have just begun to fall.

Everyone has heard the big financial news of this week.  Bank of America acquired the troubled Merrill Lynch for $50 billion dollars. With this acquisition, Bank of America as upped it ranks as the biggest and largest everything… brokerage, mortgage lender, credit card issuer, bank. For just about every segment in the finance business… Bank of America is now the biggest.  They can easily be called thee monopoly of the finance industry.

Is this good…?  Is this bad…?

Ok I am going to tell you all my opinion… but first I must preface this with a disclaimer.

Neither am I nor have I ever been a big shot corporate executive.  And actually… I have no desire to be one.  It is too much responsibility and stress. And there too many people sneering down your back waiting for your next screw up.  Even with the millions in compensation, the loss of peace and sanity is not worth it to me.

Anyway, my opinion about Bank of America’s situation is entirely that of an outsider.  I am just the little man (woman) at the bottom of the totem pole who has something to say.

With the being said… I would like to present you all with a scenario. (I like to put things in simple terms so that I can get a better perspective.)

Ok for a moment… let’s pretend my name is America and I have a 10 year old Honda Accord.  It runs ok for now.  I have had a break down here and there.  But the mechanic had to put some patches on it and it is still rolling (for now).  And even though I get a clicking sound here and a clacking sound there, it gets me to where I need to go.

Now enters my friend… let call her Merrill.  Merrill has an Accord too.  Her car has also had some break downs here and there, the mechanic tries to put on a few patches… but the patches do not work.  As Merrill drives away from the mechanic shop, the wheels fall off and the engine drops to the ground.

So Merrill calls me (America) and says…

“Hi, my good ole’ buddy, America!  How are you today?…

Barely surviving yourself, huh? Yeah… good, good!…

Look America, I need a favor from you.  I am having problems with my little jalopy.  The wheels are gone, the engine is gone… all that is left is a shell of a car… and even that has dents and scratches…

No silly, I don’t need a ride.  What I need is for you to buy this jalopy from me for… umm… $50 billion dollars.

No, I am not kidding.  Seriously, $50 billion for a shell of a car is a bargain. You ought to jump on this deal while it is hot.  I’ve got three other people lined up waiting to buy it, but since you are my friend… I am making the first offer to you.”

My response… Yeah Merrill, I think I’mma have to pass on this one.  My little Accord is not in the best shape.  It’s getting me to where I need to go, but just barely.  I still hear a lot clicking and clacking coming from the transmission.  I need to get my car back to pristine running condition before I can take on your jalopy.  Thanks for thinking of me, but no thanks.  But, hey, maybe we can do lunch next week.

You see where I am going with this.

No PFA, I am not opposed to mergers and acquisitions.  It is usually a good thing because it creates opportunity and synergy.  But what opportunity does Bank of America have here?  The opportunity to add nearly $6 billion dollars of subprime assets to its portfolio.  Ain’t enough synergy in the world makes to make this a good deal.

September 15, 2008 was a sad day on Wall St.  Yesterday, three well respected, heavy hitters died.  Lehman Brothers, AIG & Merrill Lynch were all taken out in one foul swoop.

As I reminiscence about the better days, I can hardly hold back my tears.

The Lehman Brothers… high hopes, big dreams and endless optimism.

One of the world’s largest investment banks, Been around over 158 years, Managed over 280 billion dollars in assets, 30,000 employees, named one of Business Weeks best performing companies in 2008… as of yesterday BANKRUPT.

I can remember when AIG just a baby waddling around, trying to make his way to the top of the finance world.

One of the world’s leading insurance corporations, been around 41 years (the baby of the group), over 100,000 fulltime employees, made it to number 10 on the 2007 Fortune 500… One foot in the grave, the other on a banana peel.

Merrill Lynch, ahhh… Merrill, there are so many things I can say about Merrill.  He was the tenacious, strong willed… the driven type.  There was never an obstacle he could not overcome.

Another one of the world’s largest investment banks, been around over 94 years, 60,000 employees, Fortune 500 company… and as of yesterday SOLD to Bank of America.

The Lehman Brothers, AIG & Merrill Lynch each had their own methods, but they all had the same goal… to be industry leaders in the world of finance.  And they were the leaders… and this is why I am deeply saddened by their untimely demise.

The collapse of these three highly respected mega giants has got me seriously thinking about the poor state of the US economy.

What is the cause of this economic crisis?

Yeah, we all understand that the market must correct itself every now and then, but these current economic conditions are unheard of. We are living through the most massive market collapse since the Great Depression.  And why?

Well there have been several major events that lead to this.  The one that gets the most attention is the real estate market.  Call it incompetence, call it greed… but for whatever reason bankers were handing out loans to anyone who walked in the door.  This was their dastardly attempt to milk consumers and increase the bottom line…. And the plan backfired.

Even if you overstuff a money bag, it will start busting at the seams.  Eventually, the bag will have to give way and all the money will start flying out.  But the bankers gave no regard for the eventual consequences.  And my goodness… what a destructive consequence it has been?  Financial institutions are crumbling all around us.  And not just the little local bank in Podunk, KY… no I am talking HUGE - everybody knows their name - institutions are being chopped at the knees… one after another, falling all over each other… it is like they are in a competition to see who can hit the ground the fastest… and the hardest.

And what else contributed to this crisis… the unveiling of creative accounting that exists to create an illusion of financial stability.  Believe me folks, creative accounting is alive and well.  In the midst of the crisis, executives are doing everything they can to make their companies appear stable.  I do not see how Lehman Brothers can be on the Fortune 500 list a few months ago and bankrupt today.  It just sounds fishy to me.  But in the end… it will all come to light (Enron).

Another contributing factor… a loss of investor confidence.  With all the trickery, lies and deceit… how can and why would investors be optimistic?  I, for one, have lost complete confidence in those companies I once admired and respected.

The culmination of all of this has resulted in the worse financial crisis in history.

The government has made some modest attempts to save the economy…  brokering deals between drowning institutions (Merrill Lynch) and damn near drowning institutions (Bank of America), coming to the rescue of Fannie Mae and Freddie Mac, insuring billions of losses from deposit accounts. But is it not just the financial markets that have us in a rut… our own federal government is in a four billion dollar… no, I am sorry… I mean four hundred billion dollar deficit!  With a $400 billion dollar deficit already, the Iraqi war that seems as if it will never end, rising unemployment rates, and the domino effects of bank failures…  how many more hand outs can the feds afford to give?

Can the economy be revived?

The economy will fixed itself.  It has no choice… eventually it will hit the bottom and the only place to go is up.  By the time the market rebounds it would have shaken off all of the dead weight… no more greedy executives, no more careless boards of directors,  more accountability, and  many new lessons learned from those companies that did not make it.

This massive market correction is a test.  The survival of the fittest… and in the end… the best of the best will be revealed…  badly damaged and bleeding all over… but stronger, more learned and ready to propel back to the top.

HSBC can easily be considered a global financial institution.  The London based company parents over 9500 offices throughout 85 countries.    Their two primary US subsidiaries are Household International, Inc and HSBC Bank USA.  Though their US assets measures in the hundreds of billions of dollars, the company is also seeing its share of losses amidst the mortgage collapse.  In 2006, their losses from bad mortgages were nearly 10 billion dollars.  But as we move into the belly of the collapse, their annual losses are even more staggering.

HSBC has been making efforts to mitigate these losses.  One plan of action is to shut down offices and lay off employees.  The most recent lay off is happening in Chesapeake, VA right now as I am writing this blog.  Their mortgage services unit is reducing its staff by 48 employees. 

Forty eight may be a lot, but it is only a small fraction of the HSBC lay offs that have been occurring over the past couple of years and that will be occurring in the future.

Just this May, HSBC laid off 70 San Diegans.  And over the next three months, 400 more HSBC Auto Finance workers will be let go from San Diego area offices. And another 200 Lewisville Texans are on the slate as well. 

In June of this year, 460 employees at White Marsh, MD HSBC call center were notified that their jobs would soon be gone.  Plus, in Jacksonville, FL, another 240 call center jobs are being eliminated.

Late in 2007, HSBC execs decided to completely abandon its Decision One Mortgage company, which specialized in the subprime wholesale lending market.  This move resulted in the loss of 750 jobs throughout South Carolina, North Carolina and Arizona.  However, dumping these risky wholesale lending sections is the growing trend in the finance industry.  WaMu and other major lenders have been doing the same thing.

These kinds of massive lay offs are a pity, but this is what typically happens during a recession.  If you are unfortunate enough to get caught up in one of these “restructurings”, don’t panic.  Just make sure you have a good plan.

First, don’t take it personal.  It’s just business, right?  (That’s kind of easy to say if you are the one handing out the notices.)  When people are laid off, they may sometimes feel as if it was a personal slap in the face.  Though it may feel that way, don’t let this affect you mentally or emotionally.  Because now, more than ever, is the time you must be strong.

Sometimes, people are given severance packages to help them survive until they find a new job.  But if severance pay is not a part of your lay off package, make sure you apply for unemployment right away.

And think about what you want to do.  This can be an excellent time to take a different career path, learn a new trade or become that rock star you always wanted to be.  Also, look for alternative ways to earn income.  

However, this is not the time to begin making hasty financial decisions.  Put the MasterCard away.  Leave the 401K alone (unless you plan to roll it over into an IRA).

In this worsening economy, it is best to have a plan and to be prepared to put that plan in action in the event you are taken by surprise.

Congressional hearings, under investigation by the FBI, sued by the states of Illinois, Florida, Connecticut, West Virginia, and California, the U.S. Justice Department throwing wrenches in its bankruptcy agreement, Bank of America merger not working out as planned….  What is the deal with Countrywide?!?! In a nutshell… they are having issues.

Back in March, former Countrywide CEO, Angelo Mozilo was carted to the hot seat.  A congressional committee grilled him about his heft pay package.  In 2007, Mozilo pocketed over $120 million for providing his chief executive officer-ing services to Countrywide.  While Mr. Mozilo was living fat, the mortgage industry was drowning in a sea of $20 billion worth loans losses… which, many of these loans were thanks to Countrywide.  And how was Countrywide CEO punished for his diligent fleecing of the American people… he got to take home a $2.3 million dollar pay check every week. Nice bit of retribution if you ask me.

In the midst of the crumbling empire, Mozilo eventually left Countrywide.  But the residual fall out from his shoddy leadership is ever present.

So far, the Attorney General Office’s of five states have sued the mortgage lending giant.  In one way or another, each state claims that Countrywide hookwinked homeowners by using deceptive practices to sell dubious mortgage products.

They are being accused of things such as exaggerating home values and then writing mortgage loans for more than the house is worth.  If you have even been upside down on an auto loan, then you know what a pain that can be if you need to sell the car.  Now just imagine being upside down on a $250,000 mortgage?  Not a nice image, right?

And something else the states accuse Countrywide of doing… issuing balloon style mortgage loans. They offer these tantalizing interest only loans or low rate ARMs… when the honeymooning is done, they hit folks with huge, ballooning payments. 

I once got caught up in the same kind of bamboozlement when I bought my first new car.  I was offered a low payment, but after 3 years… I would either have to make a huge balloon payment or refinance the remaining balance.  Sounded fair enough at the time… I wasn’t too concerned with all the particulars, I just wanted the keys.  But when you are paying less on an asset than its worth, you can dig yourself into a deep financial hole without even realizing it… because when the honeymoon is over, what decent bank would refinance a $5,000 car for $10,000? 

In my case, it was a car… cars depreciated over time.  In Countrywide’s case, it’s a house.  It is supposed to appreciate.  But that usually happens over time.  In the short term, home values can fluctuate up or down.  And in the last few years, home values are falling.  Not a good situation to be in if you planned to refinance to avoid a balloon payment or to avoid the increased note when the interest on an ARM adjusts. 

And this just makes it even worse for those homeowner’s who opted for interest only loans… that means they have no equity or even negative equity.  It’s just a bad deal all the way around.

So anyway, foreclosures, lawsuits and poor management has forced Countrywide into bankruptcy.  And even the bankruptcy proceedings aren’t going well.  The federal judge presiding over the case recently rejected a settlement offered by Countrywide’s lawyer. 

The outlook for Countrywide is very bleak.  Maybe Bank of America has the savoir faire to whip Countrywide back into shape.  But I doubt that even Bank of America can save them.  Countrywide was once praised as being a great American success story, but now it’s a fiasco.

Nearly all of the large banking institutions have a wholesale lending division.  Wholesale lenders work directly with mortgage brokers.  The broker originates and underwrites the loans.  Then the loans are packaged into blocks and sold to the wholesale lender.

Quite often, many of these brokers specialize in subprime or alt A lending.  Subprime lending, which is being touted as the cause of the mortgage crisis, is when loans are given to those with poor credit.  Alt A lending is when loans are made to those with less than good credit, but better than poor credit. 

The wholesale lenders that buy these loans are completely dependant on the brokers to verify and qualify borrowers for the loans.  With some brokers this verification and qualification process is thorough and with other brokers… well, the process is not as thorough. 

However, when lending to the subprime and alt A markets, it is vital to make sure that borrowers have the ability to repay.  When brokers aren’t absolutely sure, situations like those with Indy Mac are bound to occur.

Wholesale mortgage lending in the subprime and alt A markets has attributed to most of the financial troubles that banks are currently experiencing.  For this reason, banks have begun straying away from the wholesale lending business.  They have begun to refocus their mortgage loan strategy towards direct retail lending.   This way, there is no need to depend on brokers to verify and qualify borrowers. 

WaMu is no exception.  They too are dumping their wholesale lending business.

In 1999, Washington Mutual purchased one of the largest subprime mortgage lenders, Long Beach Mortgage Company which operated out of Anaheim, CA.  After the acquisition, Long Beach continued in its objective of originating loans with those with unfavorable financial circumstances.  And they remained a leader at it.  In 2005, its nearly 1,000 employees managed to originate over $30 billion in mortgage loans. At that time, WaMu was steadfast about expanding Long Beach Mortgage Company.

However, today, as a part of its refocusing efforts, WaMu put the brakes on Long Beach Mortgage Company as well as all of its other wholesale lending subsidiaries.   As of April 10^th, the wholesale sales centers stopped accepting applications.  As of May 31^st, the doors of the wholesale sales centers were locked forever.  And on June 30^th, the wholesale loan fulfillments centers were closed as well. 

And this, folks, sums up WaMu’s exodus from the wholesale lending business.

For over 100 years, WaMu had been a première lender in the direct retail home loan business.  But I am sure the decision to move into the wholesale subprime market is one the big wigs have come to regret.  Over the past year, WaMu’s market value has plummeted.  Its shares are trading at 30% less than the company’s book value.  Obviously WaMu execs did not forecast it at the time, but WaMu’s eventual ill-fated downturn would be wholly attributed to their little snafu… the decision to enter wholesale subprime lending.

However things are looking promising for WaMu.  They are positioning themselves for a bounce back.  First… they decided to cut their losses with this wholesale lending thing.  Second… they secured a $7 billion dollar bailout from TPG. Third… Kerry Killinger resigned from his post as chairman of the board, though he still remains as CEO. However, some say he is the reason WaMu is in this mess and that he should be relieved of his CEO responsibilities.  Maybe so, but since he is no longer chairman of the board, he is also no longer the be all, end all.  Now, the opportunity exists to bring in a new chairman that can help Killinger move WaMu in a positive direction.  I’m optimistic that WaMu will survive.

On July 24^th, the federally required minimum wage increased to $6.55.  This is the second hike of a 3 tier increase.  The third hike will occur on July 24^th of 2009 and the minimum wage will go up to $7.25.

There has not always been a minimum wage.  Minimum wage laws were first established by the Fair Labor Standards Act in 1938.  The law was brought about to protect unskilled workers. 

In the thirties, there was a high supply of workers, yet a limited number of job opportunities.  Often unskilled workers were cornered into accepting extremely low paying and hazardous jobs.  Enactment of the wage law required employees to be compensated a minimum wage, at that time… 25 cents per hour. 

Since then, there have been several changes to the act.  It has been amended to extend coverage to more employees and, of course, to adjust the minimum wage as to keep up with inflation and the changing economy. 

More often than not, the issue of minimum wage makes its ways into political platforms.  Some candidates focus their campaign agendas on increasing the minimum wage.  Senator Obama proposes to index the minimum wage to inflation so that the wage increases with inflation.  Senator McCain has no strong stance one way or the other on the issue.

Though many people support an increase in the minimum wage, often the economic implications of forcing a minimum wage is overlooked.  In the short term, increasing the minimum wage has negative economic effects.  And in the long run, the impact is nullified as markets adjust to accommodate for the changes.

Let’s look at this a little closer…

In the short term

There is a limited supply of jobs and a certain amount of demand for those jobs.  Generally, the demand is greater than the supply.  This is what creates unemployment.  As the minimum wage increases, the labor force tends to grow as well.  This is because there are more people willing to work more jobs or longer hours at the higher wage rate. At the same time, the supply of jobs decreases because the jolt in labor costs causes employers to scale back jobs or hours.

So you have… more demand for jobs and a lower supply of jobs … or… more supply of labor and a lower demand for labor… either way you look at it, the end result is more unemployment.

Increasing minimum wage may benefit the few who are fortunate enough to have or find minimum wage jobs.  They get to bring home a bigger paycheck.  But that bigger pay check for one person may mean a smaller or no paycheck for another person. So, for the economy as a whole, changing the minimum wage is not a good thing.  It just means more people are looking for jobs, but there are fewer jobs to go around.

In the long run

In a free economy, over time the supply and demand markets will automatically adjust to new equilibrium.  In order to accommodate for the forced wage increase, other markets change.  The higher labor costs are eventually distributed to everyone in the form of higher prices for goods and services.  These higher prices affect the Consumer Price Index (CPI), which contributes to inflation rates. 

So in the long run, the economy is basically right back where it began.  The increase in wages eventually results in market adjustments… which results in higher prices… which results in inflation.  So whether you are making a lower minimum wage a year ago and a higher minimum wage two years from now… it still buys the same thing because of the changes in prices and inflation. 

Bottom line, while it sounds nice when politicians say they will increase the minimum wage… changing wage laws does little to improve the economy overall.

Do you get the feeling that your dollar is not worth much these days? Well believe me, I do. A gallon of milk costs $5, a gallon of gas is $4.15, a family dinner for 4 at Applebee’s $100! Do you know how long it takes me to earn a hundred bucks? And in an hour… one family meal takes it all away. So, no, a dollar does not get you much these days. In some states, it won’t even get you a can of Coke.

It wasn’t that long ago when the US dollar reigned supreme. However lately, I have been reading all the stories about how weak the dollar has become. But I did not need to read a fancy article in the Wall Street Journal to figure that out. I realize it every time I buy groceries or fill up my gas tank.

I saw a story on Fox that talked about how many foreign tourists are vacationing in the US. They said it was because their native currency is more worth in the US because the value of the dollar is declining. But reading this story got me thinking… are there any places where the dollar is still gold?

And actually there are… you can get 7.5 South African Rand (ZAR) for a dollar. I have always wanted to visit Cape Town. And there is no better time than now because at 7.5 ZAR to a dollar… I can live like a king for hardly anything at all.

Cape Town is one of the largest industrialized cities in southern Africa. It’s known for its picturesque landscapes and waterfronts. And there is so much to do there.

For only 312 ZAR or $42 a night, you can stay at a luxury Cape Town hotel. The 18 on Crox seems like a quaint place to stay. They offer all the amenities that us Americans expect, yet with an old fashion Cape Town elegance. And the rooms start at only $66 a night.

At Marimba restaurant, you can dine on fine cuisine at a fraction of what is costs in America. Look at this… I took this straight from Marimba’s menu - Trio of Dukkah Spiced Lamb Cutlets with baby jacket potatoes, rosemary jus and buttered green beans - all this for only 73 ZAR (or $9.73!) And many nights, a live South African jazz band serenades the patrons. (Take a listen at this sample selection… isn’t that enchanting?)

And at Azure’s, you can have a romantic dinner and a private movie showing for 195 ZAR ($26). This even includes the popcorn and candy.

One of Cape Town’s biggest attractions is Table Mountain. Many famous people have been spotted scrolling around the mountain. And it easy to understand why. It’s a tranquil getaway lined by a calming sea shore. But there are also restaurants, bars and a lively night life.

And for the more adventurous PFA’ers… Its rugged terrain and mountainous landscape makes Cape Town an excellent place for backpacking.

There are other places around world where you can live lavish on a dollar… but first you have to get there.

Check out these sites to find the cheapest prices on international flights:

Cheap Flights Airline Consolidator Fareline International Globester

And here you can find some tips that’ll help you get the lowest fare.

Indy Mac Bank is the most recent on a long list of banks that did not make it. The FDIC has shut down 6 failed banks in the past seven months. That is the same number that they closed down in 2007 and 2006 combined.

Indy Mac was one of the power movers in the industry. If they could not mange to stay afloat during the mortgage bust, how can the regular ole’ banks survive?

When the big ball starts rolling… it is sure to knock down quite a few little balls along the way. Can the FDIC keep up at this pace? Will the insurance money run out?

This FDIC has been around since 1933. Its sole purpose is to encourage consumer faith in the banking system. When thousand of banks failed in the 20’s, many people lost their life’s savings. Consumer confidence in banks was shot. No one would dare put a penny in a bank for fear it would not be there tomorrow. So the FDIC was created to assure people that is was safe to bank. The government, by way of the FDIC, promised that even if the banks lost, consumers would not lose.

Eventually, people began to believe in the banking system again. Well some people… I still know many elderly Americans who do not trust banks, FDIC insured or not… they would rather stick their cash in a mattress where it’s safe. But for the most part the FDIC has served its purpose of building people’s comfort and trust in knowing that their money is A Ok.

Over the years the FDIC has had to come true on its promise many times over. As it now stands, the FDIC insurances bank deposit up to $100,000 for checking and savings accounts and $250,000 for retirement accounts. Although the FDIC is a federal agency, they are managed by a 5 person board and operate like a corporation. (The C in the name is for Corporation.) And unlike most other federal agencies, it operates solely on revenues it earns, i.e. our tax dollars does not support them.

So where does the money come from? Well, just like every other insurance company, they make their money off of insurance premiums. Nearly every bank in the US, which there’s more than 8,000 of them, pays a hefty price to put up that FDIC-insured sticker in their window.

At last count the FDIC had about 50 billion dollars set aside to insure more than 3 trillion in deposits. So that takes me back to my original question… with the increasing pace of bank failures, will the FDIC run out of money?

It has been estimated that this Indy Mac thing will cost the FDIC up to 8 billion dollars. In just one day… more than 15% of their insurance fund is gone. And rumor has it that there are more banks slated for closure. At this rate, I don’t see how $50 billion, now $42 billion, will carry them very far.

The FDIC is infamous for bragging about how in 75 years no one has every lost a dime that was FDIC insured. Well I say they oughta stop bragging. With only $42 billion left in their stash and banks collapsing all around us, the end of their winning streak may be near.

So what will happen if the FDIC has no money to back up its promises?

Luckily for me this is not something I have to worry about, I don’t have any money. But for those PFA’ers who are fortunate enough to have money in the bank… keep a eye out to make sure your bank ain’t next.