That’s the story we all know.  But there’s much more to it than that.  The middle class was not known for the type of reckless borrowing that created the sub-prime mess.  Investment banks had built decades of good-will on being reputable and stable.  What turned the status quo on its proverbial head?

Gary Rivlin wrote Broke, USA to tell the story of the growth of what he terms “Poverty, Inc.,” the big businesses that target the working poor with services like check cashing, payday loans, and rent-to-own.  But in the process, he reveals something much bigger: how the success of that industry gave rise to an insatiable greed in the financial sector, causing rational thinking to be cast aside even while the warning bells of the impending crisis were ringing loud and clear, yet unheeded.

Poverty, Inc. has honest roots. The working poor make just enough to get by most of the time, but when an unexpected expense pops up, they often are unprepared to handle it.  With limited options, the ability to get a payday loan can be a real life-saver.  That’s where the story begins: a few businessmen who provide a service to their neighbors.  It doesn’t take long, however, for the check cashers and payday loan men to recognize that there’s a lot of money to be made here, mostly because people easily get trapped in revolving debt.  Poverty, Inc., strikes it rich, earning huge sums by taking advantage of the working poor.  But that’s still early in the story.  Soon, corporate American begins to recognize the profits being made by these companies who cater to the lowest strata of our economic class system, and the little guys get bought up by well-known banks who have never even recognized the working poor as a market.  The real danger, however, comes into play when those corporations begin to recognize that it isn’t just the poor who can be trapped in revolving debt; they take the lessons and products developed by Poverty, Inc., to the next level, and all hell breaks loose.

Broke, USA serves as both a primer and an expose.  You’ll learn a fascinating history about the origins and growth of an industry.  You’ll also find yourself dumbfounded at the sheer temerity with which the big players in the financial world conducted themselves leading up to the collapse of 2008.  Rivlin has performed an invaluable service, illuminating important parts of a story that we, as a nation, think we know.

Beyond the contents of the book, Broke, USA raised some important questions for this reader: how do I, as a business person, see my clientele?  Am I engaging them on the basis of the Golden Rule, or am I manipulating the relationship to squeeze everything I can out of it?  On a grander scale, should corporations have moral requirements?  Is there a point where doing the right thing should trump making the most money?  While I work to stay true to a moral compass in my own dealings, we, as a society, need to be wrestling with the bigger questions.  How we decide that debate will determine, in large part, how long we have before the next 2008 appears.

A review copy of this book was provided by Harper Collins.  The opinions expressed are those of the reviewer alone.

Photo credit: waving at you, flickr.com

A dangerous game of political chicken is being played in our country with the debt ceiling, and it stands the chance of bringing the further downfall of the American Empire. I wouldn’t say that this “crisis” of the debt ceiling would be the major cause of this downfall, it is a symptom of a larger problem. I have often said that arrogance has led to the downfall of almost every empire throughout time, and what I see now when I turn on the news is arrogance and politicians who seem to be out of touch with many Americans. It is not my goal to make a political comment in this blog, as I don’t align myself with any political party, but to bring attention to the psychological games that are being played in our political system.

For As Long As the Sun Has Risen

Political conflicts have been happening for longer than humans could say “election”; however, in the past decade, it seems that our political parties decided that they were going to spend more time undermining each other than they were going to spend getting the job done that we pay them to do.  They have learned the art of the media machine and use that voice too often to spread misinformation and disinformation to evoke emotion and reactions in the voter base. When these actions lead to the death of others, as it did in Gabrielle Giffords, no responsibility is taken and fingers are pointed.

Many politicians “bank” on your blind allegiance to the “party line”, and they want you to fight their battles for them, especially on election days. Fear, mistrust, and manipulation are often the emotions that are played upon under this dubious shell game. And this has become very dangerous indeed, and we, as a country, stand the chance to negatively impact our lives and the lives of our children for years to come, because of their arrogance and selective ignorance. Trust has been compromised at the hand of greed and power grabbing. We all suffer when we can’t trust those who we elect, and according to most politicians, it is most other politicians who can’t be trusted.

One Term President??? How About Term-Limited Congressmen

This past week, John Boehner made a comment that “There was an elephant in the room” that no one was speaking about, and that was that Obama was going to have to focus on his re-election next year. True as the fact is, the most disturbing aspect of this comment was the look of arrogance that he displayed in making this comment. Furthermore, it seems through this and other events, that he, Mitch McConnell and their republican cronies are invested in destroying his re-election more than they want to work for the best interests of our country.  Don’t get me wrong, there are events of political manipulation that can be cited on each side of the aisle, this is merely recent and salient. It is clear that this game is about power, and it is at the expense of the American people.

What my biggest concern is that our political system has deteriorated to our focus on often electing the politician with the least amount of mud on them, rather than the best man for the job. It has been said that the best people for the job are too smart to put their hat in the ring, and many well-meaning individuals lose their moral compass on the road to Washington.

The Buck Stops Here

All of this has happened on our watch, and we are participating, blindly or actively. How do we fix this problem? I don’t know. The Tea Party was born out of good intentions, but even that has begun to be swallowed up by “the Game” that is played on Capitol Hill. After all, we know what the road to hell is paved with.

It is my hope that we resolve this issue of the debt ceiling before it is too late. What is already too late is that we have lost faith and trust in our political system, and it is lacking in honor, respect and integrity. If we are going to rise out of this, we have to set a higher bar in Washington than destroying our rivals and take personal responsibility for how those who represent us behave. As for integrity??? Structures that have no integrity crumble under pressure. What will also come tumbling down should our political system crumble, and what will be the ultimate cost?

I will leave you with this, Washington is not a school yard playground to settle scores and see whose got the biggest “feet.” The intentions of our forefathers were to create a center for our nation’s government with the ideal that intelligent, honorable, respectful men would meaningfully solve problems facing our Republic to benefit the greater good. We say we are the greatest country in the world… It is time to act like it.

The aftereffects of the earthquake and tsunami in Japan are still a major cause for concern as the auto industry tries to pull itself up from recession, but that isn’t the only thing that is giving industry experts pause these days. Now the car business has been confronted with new data that is causing yet more concern: Home values are continuing to fall, and they hit new lows in March, tumbling even below the level we experienced in the depth of the Great Recession in 2008. While the recession is over by conventional definitions, the continuing slide in home values is a red flag for the auto industry, which would like to believe recovery will actually gain momentum in the second half of the year.

Here is what’s behind the industry’s latest crop of fears: The 2011 Standard & Poor’s/Case-Shiller index of housing prices in 20 metropolitan areas has declined for the sixth consecutive month. Worse yet, the most recent drop put the index at a mark below the previous recent low-water mark that came in April 2009. While the economy as a whole has not experienced a so-called “double-dip” recession, there is no doubt that home values have. The question is: Will the drop in values have a negative effect on new-car sales?

If the March values represented the bottom of the trough, experts might be relatively sanguine about the industry’s prospects going forward, but many analysts project continued erosion in home values, largely because falling prices scare some homebuyers from the market and prompt others to delay home purchases. Further, in a traditional recovery, home construction most often is one of the biggest engines of growth, but now residential construction is lagging manufacturing growth by a large margin. That begs the question: Can manufacturing continue to surge while home-building lags and home prices are in decline? The quick answer is likely “No,” since unemployment in May rose back over the 9-percent mark, another indicator of a weakening economy.

One important effect of declining home values is it makes consumers feel poorer, and when they feel poorer they are reluctant to puchase big-ticket items, like automobiles. Declining property values also affect car dealers, because the lessened value of their real estate holdings can make it more difficult and more expensive to borrow money. Even government is affected: State and local governments face lower property tax revenues as property values fall. This, in turn, could prompt state agencies to acquire fewer vehicles. While some analysts feel we have essentially reached the bottom for home values, others are not nearly as optimistic. That’s an important cause for concern through the balance of this year, because the fragile recovery of the auto industry and the economy as a whole can’t take much more bad news.

Tom Ripley is a Driving Today contributing editor who writes frequently about the global auto industry from his home in Villeperce, France.

One of the criticism often voiced of Barack Obama is that he is not proud of his own country.  That conclusion, reached primarily (though not exclusively) because of a lack of pro-America content in his public expressions, may be unfair.  After all, the lack of an expression of pride in American is not the same as a denial of that same pride.  Indeed, many (perhaps most) politicians hide behind overt expressions of patriotism rather than deal with the real issues of the day.  At the same time, Americans want to be proud of their country, and there is a certain expectation that the Commander-in-Chief will also be the Cheerleader-in-Chief.  This does not require constant expressions of patriotism, nor does it require dishonesty.  What it does require is a willingness to stand up and say, in a way that few others have the position or influence to do, that America will continue to be the standard-bearer for the ideals on which she was founded and for which her people have died.

The rallying cry of the 2008 campaign was, “Yes we can!”  It was an anthem for those who felt they had been abandoned by their government, a uniting force for those who were reasserting their influence in the political process.  For those people, the ardent supporters of Barack Obama’s run for the presidency, it was patriotic.  But it was not a unifying message for the entire country.  Mr. Obama’s campaign rhetoric did not need flag-waving; after all, that was what Republicans and hawkish Democrats did.  His people were wary of such expressions.  Once the election was over, the tenor of the political conversation in America remained essentially unchanged.  The party in power stuck with what had worked for the election, while the Republicans, always comfortable draped in the flag, had a near monopoly on traditional patriotic expression.

The times, however, were not in the Democrats favor.  In the face of continued economic downturn and stiff challenges abroad, the mood in the country was, to put it lightly, glum.  The American dream was proclaimed dead in one opinion piece after another.  But this was not the natural state of things.  Underneath all of the layers of American culture is a constant current, a drumbeat that this country is always moving upward, able to surmount any challenge.  Americans know this, not in a cognitive sense, perhaps, but it is the norm that they expect.  Increasingly, Americans became weary of doom and gloom and, most of all, of feeling un-American.

And so the sitting president found himself in a peculiar position.  His own lack of patriotic expression put him on the wrong side of the fence, allied with the depressing and, ironically, hopeless times.  His approval ratings dropped.  Moreover, his country was in desperate need of the clarion call that many presidents before had sounded, the message that would lift their spirits, restore hope, and embolden them to action.  It was message that he, by way of his own style, was ill-equipped to deliver. His ratings dropped.

The resurrection of such a presidency cannot come easily.  Nor can it come on the back of disingenuous expressions.  Fate, however, was kind to Barack Obama.  In the tragedy of the shooting in Arizona, he was provided with an opportunity to bring a change to his own rhetoric.  The occasion called for a reassuring, uniting message.  He could introduce a pronounced patriotism to his remarks and there would no need to question his motives.  In this year’s state of the union address, the president delivered.

The new Barack Obama, sporting a flag pin on his lapel, waved the flag all over the chamber of the House of Representatives.  He reached back to the country’s roots, citing principles established in the Constitution.  He recounted our victories over challenges in the 20th century.  He stated clearly — and proudly — a number of areas where America continues to lead the world, despite our battered economy.  He declared the American dream alive and well.  And he called Americans to rise to the occasion and tackle the challenges of the future.

It was inspiring and, more importantly, refreshing.  And Mr. Obama delivered the message convincingly, with genuine charisma.  Were this Bill Clinton, I would be tempted to say it was all a show.  But this is not the Clinton era.  Mr. Obama, for whatever faults he may have, is not an disingenuous person.  He is a person of principle.  His message tonight rang true.  But is this revelation of patriotism something that will last?  And is it too late?

You may call me naive, but I believe that the words spoken in the state of the union were the words of a changed man.  Whether it was the tragedy in Arizona, or the compounding negativity of a nation adrift in economic downturn, or both, or even something else, Barack Obama has recognized the call and risen to the occasion himself.  He has unearthed his own patriotism and found reason to proclaim it proudly.  It will last.

Is it too late?  That question remains to be answered.  Two years into his term and barely a year away from the start of the next election cycle, he has a lot of ground to cover.  A consistent presence of a genuine and encouraging pro-America message will go a long way, but he will also need to demonstrate that he can compromise, work across the aisle, and bring his own party along for the ride.  That’s a tall order, and it could be short-circuited by both Republicans and Democrats on Capitol Hill.  If he can continue to convincingly communicate a pro-America message directly to the people of the country, however, he can get them on his side.  If he does that, Barack Obama can do big things.

Tour of Toyota’s plant proves manufacturing survived the recession.

PRINCETON, Ind. – Manufacturing survived the Great Recession.

It’s easy to think this once-proud sector of the American economy died during the recent economic downturn. But it’s alive and well in southern Indiana. I had an opportunity to see this glimmer of hope last week as I toured Toyota Motor Manufacturing, Indiana, Inc.

The four million-square-foot plant produces the Sequoia and Highlander SUVs as well as the Sienna minivan. The plant sits on 1,160 acres in Princeton, Ind., and employs 4,100 people – mostly men.

The recession has been hard on men, particularly those in hard hats and safety glasses. Manufacturing and construction have been hardest hit by the downturn. It’s easy to see why. Walk into any store and look at the tags on the merchandise. There are not a lot of products marked ‘Made in the USA’ anymore.

It’s ironic that a car company headquartered in Japan would be bucking that trend. But there I was on a tram tour of the sprawling plant that spits out a new Sienna minivan every 97 seconds and upwards of 430 new SUVs everyday.

That’s not to say that ALL Toyotas are made in the states. In fact, most of the automaker’s luxury vehicles (Lexus) are manufactured in Japan. Still, Toyota manufactures its Avalon, Camry, Highlander, Sienna, Sequoia, Tacoma, Tundra and Venza in the USA. The company also plans to open a fifth assembly plant in Mississippi soon. It will manufacture the Prius hybrid there.

But while Toyota seems to be ramping up its American manufacturing, the overall outlook for this sector isn’t good. Most experts predict a continued outsourcing of manufacturing jobs to countries that offer cheap labor and lax environmental requirements.

“The U.S. economy has transitioned from brawn to brain over the past three decades,” according to Newsweek. The magazine’s cover story from Sept. 27 was titled “Men’s Lib.”

This Newsweek article and others like it have looked at this shift in the American economy and used it to encourage workers (particularly men) to purse careers in growing fields that have traditionally employed women, such as teaching and nursing.

Of course, not everyone can be a teacher or nurse. And at the Toyota plant, workers earn $18 per hour to start and upwards of $28 per hour after two years on the job. The plant also employs mostly men. Females make up 18 percent of the workforce.

Howard Ludwig in his best supermodel pose, outside the plant in Indiana

All of Toyota’s plants in North America are non-union shops. According to the public relations guru on the tour, employees have had the opportunity to vote in favor of unionization on several occasions but have consistently voted against the effort.

Walking through the plant, I admit I had a change of heart. I’ve always driven American-made vehicles. Part of this is because I like to tinker on my cars. But this backyard mechanic doesn’t have many tools, let alone a set of metric wrenches.

A more subtle reason that I’ve never purchased a foreign car is because I didn’t want to feel like I was contributing to the problem. Meaning, I felt that driving an American car made the statement that American jobs were important to me.

All those folks driving foreign cars clearly didn’t care about the American autoworker. But having been in the Toyota plant, I know now that’s not true.

In fact, I never even bothered to investigate where my Chrysler Grand Voyager was manufactured. Turns out, my minivan was made in Windsor, Ontario, Canada.

Figures, my American minivan is actually made in Canada while the Japanese minivan is made in Indiana.

In the war against distracted driving, banning of texting while driving has been a major battle.

But now, research from the Auto Club of Southern California has found that after an initial drop, texting while driving appears to be on the rise 15 months after California’s texting ban was implemented.

The auto club says the observational roadside survey of drivers is the first examination of the long-term effects of a U.S. texting law. It is unlikely to be the last.

Before the texting law went into effect in California in January 2009, three auto club surveys conducted in mid- to late 2008 showed consistently that about 1.4 percent of motorists were texting at any point in time. Two surveys conducted shortly after the texting ban (May and July 2009) showed that texting (or manipulating electronic devices) had dropped about 70 percent, to about 0.5 percent. The latest survey, conducted in late March and early April 2010, shows that texting has more than doubled from the earlier studies, to 1.1 percent.

Many studies have clearly demonstrated the risks related to texting while driving. One study shows texting and driving raises the probability of a crash eightfold, while another shows it increases a truck driver’s chance of being in a crash by a factor of 24. Researchers call texting a “perfect storm” of danger because drivers take their hands off the steering wheel, and their eyes and minds are off the road.

“These results are disappointing,” said Steven Bloch, the auto club’s senior researcher. “The fact that we’re seeing a statistically significant rise in texting despite the state ban indicates that additional efforts are needed to help deal with the problem. It’s just over a year after California’s texting ban was implemented, and texting is rising toward the level it was before the law.”

Several states have imposed similar bans of texting while driving, so the problem is potentially nationwide. One approach to change the tide against texting while driving is for law enforcement to issue more citations. However, it’s difficult for law enforcement agencies to cite texting motorists. Drivers typically hold devices in their lap, making it hard for law enforcement to see what motorists are doing. Texting citations are often given out by motorcycle officers, who have a better view of driver actions.

Because of this challenge, the California Highway Patrol reports issuing an average of only about 150 citations per month since the texting ban went into effect. By comparison, over the past year, the CHP issued about 11,600 hand-held cell phone citations each month.

“Agencies may need to rethink how they cite drivers for texting,” said Bloch. “A targeted New Jersey enforcement program uses officers standing on street corners to locate, pull over and cite cell phoning and texting drivers. That method of enforcement may be more effective.”

A second way to deter drivers from texting is by increasing penalties. The Auto Club of Southern California is currently supporting a proposed state bill that would raise the texting fine to $100 plus penalty assessments, up from $20 for a first offense and $50 for subsequent offenses. The bill also imposes a point on a motorist’s driving record.

“Moving violations typically require the DMV to impose a point, and there is little reason that this dangerous traffic violation should be treated differently than others,” said Bloch. “Studies have established that imposing points on driving records is a very effective deterrent to hazardous driving.”

So while legislation to ban texting behind the wheel is a good and necessary first step to eliminating this hazard, those laws need to have real teeth to be effective.

Luigi Fraschini Driving Today Contributing Editor Luigi Fraschini, who is based in Cleveland, writes frequently about distracted driving and other auto safety issues.

Image credit: laurakgibbs

Fiat Currency. Global Reserve Currency. Gold Standard.

You might have heard terms like this, but what exactly do they mean? How is what’s happening in Greece related to what’s happening here and why should I care? We’re going to use some ink in the next several articles laying out the basics of the ongoing financial crisis – no, it never actually went away – and what it means to us.

But first, permit me to share a true story.

My father once bought a third car since my older sister was now driving. Because he had what I now recognize as a blossoming mid-life crisis, he pulled into the driveway in a sporty, low-slung, forest-green convertible thinking that he’d bagged a two-fer. This car was a Fiat Spyder and it looked fabulous, the best that he could do with the money available.

We soon learned that the joke that Fiat was really an acronym for “Fix It Again, Tony” and it was a car that demanded unrelenting vigilance and discipline, more than any car that we’d ever owned. It was a mechanically unforgiving vehicle and if it wasn’t assiduously maintained it would wind up at the shop. There were times it went in despite his best efforts. Because the engine didn’t like the Pennsylvania winters, he kept it in the garage and covered the engine with a canvas tarp to protect it. So the morning routine was to enter the garage, lift the lid and remove the tarp, recite a Hail Mary and turn the key.

This car remained in the family until one late winter morning when Mom needed to drive it. She was running late so she jumped in the Fiat for a quick run to the bank. She sat waiting in the drive-thru lane when she noticed the window teller banging on the glass and yelling at her while pointing furiously at the hood. Mom glanced ahead to see that smoke was billowing out from under the hood where the tarp – which hadn’t been removed – had caught fire. After the tarp went up, the engine soon followed and within minutes, there was a toasted Fiat blocking the bank’s window lane.

Fiat: A Currency As Well As a Car

Our dollar, as are all of the world’s currencies, is called a fiat currency. It isn’t an acronym, but actually the latin term for “faith.” Each currency is considered a fiat currency because it is backed only by the globe’s faith and confidence in the ability and will of that particular country to support it in terms of competitive ability, resources and capacity to service its debt. That faith is demonstrated in the daily global transactions involving the buying and selling of the various currencies. All manner of entities engage in currency transactions – companies, banks, hedge funds, individuals and central banks – and it’s the point at which what buyers are willing to pay versus what sellers are willing to accept that the valuation occurs. And with globally networked computers, valuation occurs quickly and widely. Because the Norwegian Krone is used by a country with solid governmental finances and an oil exporting economy, the world demonstrates its respect by valuing their currency higher than Argentina’s, whose government burned international investors by defaulting on its debt. It takes far more pesos to buy one krone now that it did ten years ago.

That’s the key to my father’s Fiat and today’s currencies. Fiat currency is based to a significant degree upon the perception and faith of others. Maintaining that faith and supporting that perception requires a large degree of self-discipline and vigilance on the part of the owner to assure that it continues to be deemed worthwhile by others. If a country gets a poor valuation, like the Italian car, then the global economies vote against it in valuation.

How Did We Get To a Fiat Currency?

For many years, the American currency – like all of its peers – was backed by gold and silver and its control was mandated in the Constitution. What that literally meant, after paper notes were issued during the Civil War, was that the holder of a dollar bill was able to go into any bank and trade that paper dollar for a fixed amount of gold or silver. People learned to accept the dollars because the amount of metal was fixed and also because it was simply easier to carry paper bills than deal in gold. Because the dollar was thus backed by the metal for which it could be exchanged, it had a steady store of value that buoyed the people’s confidence in it as a currency.

This gold standard was a staunch enforcer of discipline upon the international markets. If America purchased more from England in 1866 than vice-versa, England could take all of the dollar bills it had received and return them to the US Treasury for an equivalent amount of gold from the government’s vaults. Consequently, the US Government then had less gold than could support the number of its own dollars in circulation and ran the risk of default should enough citizens opt to trade paper for metal. Dollars would then have to drop out of circulation and the result was less money for the citizenry. Countries had to live within their means or find new ways to grow wealth.

We’re not finished with the gold standard yet, but we need to cover something else first that will make the final days of the gold standard make sense.

What’s a Global Reserve Currency?

People generally believe that simpler is better and that view even runs to the handling of international financial transactions. To keep from having to constantly recalculate the value of one currency to another in international transactions, banks and merchants long ago opted to assure that international transactions were usually handled in one currency only. This is referred to as the Global Reserve Currency (GRC) and it’s a role presently held by our dollar because it serves as the medium of exchange for almost all international business transactions.

The status of GRC is bestowed by the world upon that currency which, in its view, is the steadiest and best able to weather the various storms – political, economic, natural – that occur. The dollar became the GRC at the end of the Second World War after a meeting of allied financial leaders at Bretton Woods, which lent its name to the ensuing agreement that formalized it. At that time, the US was literally the last country standing after a second global world war which devastated dozens of nations and exhausted the country with the GRC, Great Britain. It was agreed that going forward, all international transactions would be handled in dollars.

Remember something. The dollar was now the GRC but it was still backed by gold. The dollar’s status as the “anointed one” was only peripherally related to its gold backing and it hadn’t yet become a fiat currency. At that time, the US had roughly 20,000 tons of gold in its vaults at Fort Knox and elsewhere.

This gold-backed GRC system lasted for almost thirty years. And in that time, the country began to persistently run trade and government deficits so that we were sending more dollars overseas than we were bringing in from elsewhere. Our standard of living rose dramatically and we dreamed big dreams and tackled big projects but that meant that periodically, our gold flowed out of Fort Knox. Financing the Vietnam War, the Great Society and the Space Program took huge sums, and those dollars were returned by foreigners for gold.

Gold to Fiat

Around 1969, the US Government started acknowledging that the US was going to eventually run out of gold if things weren’t brought under control. There was yet another meeting of international finance ministers and they hashed out what’s now referred to as Bretton Woods II. In this agreement, the dollar – still the biggest kid on the block – continued to be the GRC but it was agreed that all of the world’s currencies would “float” in valuation against one another and gold would no longer be used to back the store of value as it had. Those valuations would be set by tracking transactions within the global markets and updated by computer, which now made this possible. The dollar’s value now floated against other currencies, which was good because we’d lost over half of our gold reserves in the preceding thirty-odd years. If the US handled our economy and budget well, the dollar’s value rose against other currencies. The flip side was that if our country didn’t pay attention, exercise discipline and maintain our fiat, it would eventually become toast as others punished it in the global marketplace.

So What Do You Need To Remember Going Forward?

• The dollar is a fiat currency with a value based solely upon the willingness of countries worldwide to accept it. That means that their perceptions, beliefs and biases play a major role in how well it holds value – especially to pay for things like oil.
• The dollar is the Global Reserve Currency, which means that almost all of the world’s business transactions occur in the dollar. It also means the dollar’s value is determined not just by folks in this country, but again, by others throughout the world.
• Financial systems can change and if there’s a pressing enough reason, change quickly. We went through two massive changes – Bretton Woods I and II – within a thirty year period. It might seem like a long time personally, but in history’s timeframe, it’s the blink of an eye.
• Covering a Fiat with a tarp is ultimately bad for the Fiat.

Thanks to Jesse at Jesses Crossroads Cafe for reviewing this article. Any errors are mine only.

Next Article from Don Harrold: Markets and the Law – The Gov, the Fed and the Goldman

Image credit: Paul Sapiano

There was a big drop on Wall Street last week. You probably heard about it. It seems that our stock market, the Dow, the heart and soul of our nation’s market economy, dropped nearly 1,000 points in one afternoon before rebounding a bit before the close of the day. This sort of thing doesn’t happen very often and is typically a harbinger of very bad things. Recessions. Market crashes. Bursting bubbles. People tend to take note of these sorts of events and they’re usually tied to some level of impending doom.

So what happened? Well, that’s the worrisome part. No one knew until 5 days later, an eternity in the trading world. That should concern us in and of itself. We should be concerned that our stock market dropped 10% and we didn’t know why.

Of course there was no shortage of theories as to why this happened. Some thought it was the result of a “fat-fingered trade; a typo from a trader who accidentally placed a transaction for a billion shares of Procter & Gamble stock rather than a million shares. It appears that may have been a contributing factor, but I have to agree with Seth Myers of Saturday Night Live’s “Weekend Update” when he quipped that even Facebook makes him confirm when he wants to delete a photo, how could our stock market not have something more robust in place to confirm such large transactions?

The other theory floating around was that the European debt crisis stemming from Greece’s near economic collapse caused investors to lose confidence and the market to drop. That was certainly a factor. The current European crisis has deep implications not only for the Euro currency but the European Union itself, and the global banks who have found themselves in the mix. World events certainly affect our markets, but rarely to the extent we saw last week. The last time world events rocked a market like that was immediately following 9/11. Sure, Greece faces some problems (to put it mildly), but it’s not a 9/11-caliber event.

It turns out, according to a Tuesday article in the Wall Street Journal, that the trigger for Thursday’s scare was the result of a “black swan,” a highly unlikely event that has unprecedented impact. It seems that the hedge fund Universa placed a big bet that, because of the European volatility, the market would continue to fall. That it did.

And this, in a roundabout way, brings me to my point. That whole thing that happened last Thursday? Get used to it.

The reason capitalism has worked for so long is because, despite the inherent risk of buying and selling things, the risk is spread out over such large markets that the overall system is very stable. And that inherent stability is what we have to thank for our nation’s existence and success. This is why the stock market is generally a sound long-term investment; park your money in a mutual fund and watching it increase over the long haul. Average citizens look for stocks with solid companies and than park their sound investment.

But the advent of electronic trading has changed all that. We’ve understood that by using technology and algorithms, we can make bundles of money almost automatically off of fluctuations in the market. We’ve entered what I’ll call a new era of ‘inherent instability‘ because by taking this approach we’re programming the markets to fluctuate. And that, I would think, breeds instability.

I do love today’s electronic trading as much as the next guy. I love that I can place trades effortlessly on my iPhone; it’s quite incredible really. What’s happened, though, is that the name of the game is no longer stability. I don’t buy stock to invest in a company whose brand I trust. I buy stock I think will fluctuate to my benefit and then I get out when it does. That doesn’t add stability to the market. And it’s hard for me to ask if what I’m doing is creating more harm than good. After all, everyone’s doing it, right?

There are many folks like me and more and more big banks getting in on this action. Thursday’s bet made Universa several billion dollars. Folks aren’t investing for stability anymore. They are investing to profit from volatility, and that has the potential to change the nature of our markets and the stability of our nation. Given the interconnectedness of today’s global economy, we’d better figure out the implications of our habits before these black swans come home to roost.

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