Costco: a Model for the Economy?

For months the U.S. Congress has been sparring among itself over whether or not to raise the national debt limit.  Since both houses of Congress are no longer controlled by a single political party, the debate has raged on with no end in sight.  Unable to stand at a distance from the problem, President Obama has been reluctantly pulled into the fray.

Costco, at The Promenade, Bridgewater, NJ (Bergeron Image)

The issue is how to contain the seemingly irreversible spiral of national debt – currently in the trillions – that burdens our nation and threatens to stall the economy.

It’s not as if one could not have seen this problem building up.  The national government has been spending beyond its means for years.

Why not?  All that politicians needed to do was to keep borrowing printed money to cover their spending habits.  A war here, a war there and the economic costs begin to add up.  Afghanistan.  Iraq.  Libya.  Add to the mix all of the unfunded domestic programs and . . . . Well, I won’t keep annoying you with facts.

Which brings us to Costco.  I like its business model.  It’s not the place to go if you want to keep a tab running like the Feds do.  At the checkout, you are expected to put cash on the barrelhead (debit card’s the same thing), or you may use Costco’s own American Express vanity card. 

Congratulations, Garden Staters!

I found another online jewel in the tiara of the Somerset County Library: It’s called “Facts on File, the World Atlas.” Sounds boring, doesn’t it? But I like digging, so I started browsing, pulled up some numbers about New Jersey and a few other states, entered the data into an Excel spreadsheet, plugged in a formula, and here’s what came out:

Do you know that despite all of the lackluster governance at the state level; despite the highest real estate taxes in the nation; despite being at the center of one of this nation’s worst economic debacles; that we in New Jersey are – by one hard, irrefutable measure – one of America’s best economic producers?

That’s right, we are. According to figures from the U.S. Census bureau, New Jersey tops California, Texas and Florida when measured by Gross State Product per Capita, a prime economic indicator. Yup, we beat out three huge states which are much bigger than we are in population, land mass and, you would think, greater in economic power.

On a head-to-head comparison of economic output by citizen, we outdid all three. Per Capita GSP for New Jersey is $49.4 million per person, $4.92 M more than California; $7.61 M more than Texas; and $12.14 M more than Florida. Not bad for New Jersey where it seems at times that government is doing its best to de-incentivize so many of its citizens and businesses.

Those results prove that it’s hard to keep down a team of self-motivated citizens and businesses! Give yourselves a sound pat on the back, New Jerseyans. The facts corroborate it, and you deserve it.

Note: According to the Bureau of Economic Analysis, “GSP is the state counterpart of the Nation’s gross domestic product (GDP), the Bureau’s featured and most comprehensive measure of U.S. economic activity.”

Running a Healthcare System

If some of the large hospital systems in New Jersey were managed like some of the large Wall Street firms, supersized commercial banks, and government agencies that contributed to derailing the economy, we’d all be in an even worse pickle.

This was brought vividly to mind up close and personal this week. When Priscille was admitted for surgery, I saw professional healthcare providers at work – all the way from a highly-trained surgical team, to nurses, to nutrition specialists, to personal care assistants, right down to the diligent people who sweep the floors and empty the waste baskets, etc., etc., and many others that I don’t even know about.

It may seem that there is no comparison between the operations of the U.S. financial system and the U.S. healthcare system, but there is a significant resemblance – not in what they do, but in how they do it. In the former, it seems that far too many people just didn’t give a damn.

And that’s all the difference in the world because, for over a week now, I’ve observed part of a healthcare system in Passaic County where people who take care of other people really do give a damn.

It’s not mere coincidence that St. Joseph’s Regional Medical Center in Paterson runs an efficiently tight ship. That hospital operates under the direction of the Sisters of Charity of St. Elizabeth, a religious order.

Now, don’t misunderstand: I’m not saying that a hospital has to be run by nuns to be efficient. But I’ll wager any day that if the boys running the U.S financial system and the people who abused it had operated under a code of conduct at par with a religious order of nuns, we wouldn’t have been listening to President Obama last night telling us how he proposes to pull us out of the economic mess this nation is in.

Thanks for checking in, and take care of yourselves. You deserve it.

Saudi Arabia: A U.S. Friend?

While catching a break from my backyard chores today, I caught a TV glimpse of Bernie Sanders (I), Senator from Vermont, excoriating the Saudis for capping the production of oil from their fields in the Middle East. The man from Vermont has a point.

Sanders wants the U.S. Senate to prevent a pending arms deal with Saudi Arabia from going through, until the desert monarchy decides to pump significantly more oil in order to throttle down the speculative activity in this commodity. I think Sanders is onto something fundamental.

Yesterday, the price for crude oil futures on the New York Mercantile Exchange (NYMEX) was $118.30 per barrel. A year ago, on April 02, 2007, it was just above $65 a barrel. The year before that, it was significantly lower. The issue is complex, and there are many reasons why oil prices are skyrocketing. But Sanders has hit on a point which I have advocated for many years: Break up the OPEC oil cartel.

If any consortium of U.S. producers were to conspire to control the output and, thereby, the price of a basic commodity by meeting regularly to set production targets (as OPEC does), the whole lot of them would be set upon by the U.S. Justice Department like a Peregrine falcon hurtling from the sky toward its prey.

Somehow, our erstwhile friends from the Middle East (15 of the 19 terrorists who attacked America on 9/11 were Saudi citizens) continue to demand more U.S. oil dollars, blithely ungrateful that U.S. forces saved their collective rear ends in the first Gulf War.

They seem to have an institutionally short memory of the time when New Jersey native, General Norman Schwarzkopf, led a U.S. expeditionary force which prevented Saddam Hussein from annexing Kuwait and from threatening the security of Saudi Arabia.

Good friends remember. They return favors. Just how good are the Saudis as friends of America?

What Recession?

The official measure of a U.S. recession is two successive quarters of negative economic growth. But, as I heard one commentator recently, present economic expansion – though still positive – is very low and, he opined, if it feels like a recession, then it is.

I don’t know if that last statement is true or not, but anyone who found himself at Costco in Bridgewater Sunday afternoon would have to rethink this whole recession issue. Every checkout register was busy recording purchases. Each line reached into the shopping area, and all of Costco’s oversized checkout carts were brimming.

My wife and I were in one of those serpentine lines that day with only an outdoor table umbrella. At $99.99, it would be hard to find a better comparable value. But the place is a madhouse on weekends. Anecdotally, at least, most people who shop at Costco in Bridgewater don’t seem to have changed their consumption habits much.

I wish we could get a micro-economic assessment of GDP growth specifically for Somerset County, New Jersey. If that number were reported side-by-side with national data, it might show better results, even though the housing market in Somerset County is still depressed.

Within spitting distance from our home, there is a better-than-new ranch house on a large parcel of land that is on the market at a price far below what it would have fetched just 18 months ago. Now, that’s depressing!

Cats, Squirrels and Speculators

Our daughter and her family, who live in Potomac, Maryland, have two cats who like to roam in their spacious home. They are the same age and play constantly with one another. These are young house cats, in good shape, and not declawed.

The kitchen eating area is situated in a spot near window walls which look out upon a ground-level deck, facing a lawn which runs up to a line of trees and a woodpile further out in back. The deck sits near double-pane glass doors which form the window wall.

One Friday morning, at breakfast, my wife and I watched two squirrels who like to hop on the deck in search of bird seed fallen from the feeder. The two active cats like to watch them as well. The cats run along the perimeter of the glass, looking for a way to get at those squirrels.

The squirrels have come to know that the glass barrier protects them. They are very audacious, having lost all fear as they run alongside the outer perimeter of the glass doors, taunting the cats. Indeed, one Friday morning, my wife spotted one of those squirrels which came right up to the bottom of a glass door, stood on its haunches, and defiantly began scratching the glass, a mere half-inch away from Lightning, the male cat on the opposite side.

The following Saturday evening my wife and I, just after retiring, heard a ruckus outside the bedroom door. Early the next morning, I discovered the source: Lightning the cat had found an unwelcome intruder -- a mouse. I don’t know how it entered the house, but it would not be leaving intact. Unlike the audacious squirrel of the previous day, the mouse did not enjoy the protection of a glass wall.

Investment bankers and their minions who ginned up the sub-prime debacle threatening the economy (hedge fund executives of Bear Stearns are a few that come to mind) might have thought they were like that squirrel on the opposite side of the glass. They teased the ‘cat’ incessantly, thinking that they could get away without penalty, gorging on ‘free seed.’ Like those Potomac squirrels, investment bankers believed they were safely beyond reach of the regulatory ‘cat.'

What they discovered is that the protective window wall of financial speculation was a mirage and that, for some of them, their fate would become that of the mouse.


Note: For recent articles about proposed regulation of the nation's financial services industry, including securities firms, mortgage brokers and insurance companies, see www.washingtonpost.com/

No Immunity for Bridgewater or Somerset County

The financial tsunami engulfing Wall Street threatens to drown markets and to tank the economy. The effect is being felt locally. Three factors brought this about:

1. Sub-Prime Loans Fed by Complex Financial Instruments. It was like a financial merry-go-round. A person went to a local bank, obtained a loan for a home purchase at an absurdly low introductory rate and left happy as a pig in mud.

The bank, though, did not hang onto that mortgage note. It worked with financial ‘wizards’ on Wall Street, who repackaged those mortgages into bond-like securities. Those securities were then traded in the financial markets. At that point, the borrower no longer knew who actually held the debt. Neither did the bank. In fact, neither did the ‘wizards’ of Wall Street.

These derivative securities allowed banks to off-load entire mortgage portfolios. By getting those loans off their balance sheets, banks and their Wall Street partners were able to slice and dice loan portfolios and to push them out into the bond markets. This enabled a continual remarketing of loans, thereby providing even more cash to fund housing construction .

2. Over-Extended Consumer Housing Demand. Hundreds of thousands of consumers, if not millions, were lured into buying homes at temporarily low teaser rates. The mortgage agreements specified that these initial rates would rise to normal market levels. However, many of those contracts were well below the repayment ability of borrowers who should have exercised far more prudence and restraint than they did. These were not good deals. When the hammer came down, too many of those borrowers found themselves unable to meet the higher monthly mortgage obligation.

3. The Federal Reserve. When, in the early 2000’s, Alan Greenspan, then Chairman of the Federal Reserve depressed interest rates to their lowest levels in 50 years, he set up the conditions which led to the current mess in the housing market. His purpose at the time was to stabilize the stock market and to stem any further damage to the economy. It was a good strategy because it pulled the country out of a pit. But Greenspan kept rates too low, too long -- he admitted as much in his post-retirement book.

Those artificially low interest rates had a corollary effect. They fueled a boom in the real estate market. Lured by the availability of easy money, Wall Street firms kicked into high gear to market an alphabet soup of derivative instruments (CDO’s, SIV’s, MBS’s, etc.) to keep the party going. But it could not be sustained.

Ben Bernanke, the current Fed Chairman who inherited today’s housing market bust may be repeating Greenspan‘s mistake: Lower interest rates quickly and hope that it doesn’t create more problems than it cures.

What Greenspan and Bernanke seemed to have glossed over is that existing legislation authorizes the Federal Reserve to prevent the errant behavior of financial institutions. Prudent regulatory oversight would have pre-empted the excesses of banking and financial houses. Both chairmen were asleep at the switch.

Opinion. The conservative behavior and fiduciary responsibility which America should be able to expect from its large financial institutions is a myth. If it were not, the deplorable condition of some of the biggest U.S. fiduciary establishments would not require a Federal Reserve bail-out and infusions of cash from Middle-East kingdoms

London-based Breakingviews.com is harsh on some of those bearing responsibility. Quoted in Saturday’s edition of the The Wall Street Journal, it refers to, "…the periodic recurrence of banker stupidity." Enough said.