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We’ve covered a lot of ground in the past few weeks, and there are a lot of questions, so let’s get started.
Q (Re: The Truth About Prepaid Cards): If you have the cash to buy the card, then why not use the cash to buy things with? Am I from a different planet or something? ~ S.
A: People buy cards with cash because they can pay bills with it (over the phone, or by filling in the card account number etc. on the return bill and mailing it), buy stuff online, buy stuff at locations that only take cards, swipe quickly at merchant outlets that have shorter lines for card users, not have to deal with change, a host of other reasons (a lot of them for security and convenience) and still access cash when they need it at ATMs.
Q: I was surprised that AMEX decided to go so down-market, which might well affect their image. However, they are going where the money is, perhaps big time. ~ Malcolm F.
A: I’m speculating here because I’m not privy to American Express’ corporate strategy. Since they already have a huge chunk of the “upscale” credit card market (especially business accounts), why not expand to where there are significantly more customers?
Behind the scenes, on a “technical” basis, the prepaid card business (unlike AMEX’s credit card business) requires users to “deposit” money onto the cards. Banks accept deposits and use deposits to fund loans, maybe trade it across different markets, and perform other banking business functions with depositor money as “capital,” which technically it is NOT. Nonetheless, AMEX can do the same thing with the money that’s deposited onto Bluebird cards. Of course, at a minimum, there’s some “float” (interest) that they earn sitting on all the cash they are collecting and don’t have to pay depositors to fork over.
As far as it affecting their image, I doubt it will. Unless the Bluebird card business does something stupid and has financial problems, upscale customers won’t give a hoot. Besides, there are plenty of AMEX card users who shop at Walmart. The next thing will be cross-marketing opportunities, whereby you’ll get deals sent to you, online or in the mail from AMEX for Walmart merchandise (or wherever Bluebird cards will be accepted) based on what you buy with your AMEX card.
You do know that “they” track all your purchases, don’t you? And that you are profiled eight ways to Sunday, you know that, right?
Also, it may be to some of Walmart’s customers’ credit (even just psychologically) to be associated with AMEX, especially if they can’t get an AMEX card. And you know, that if they become good Bluebird users, they may get an invitation from AMEX to step up and pay them an annual fee to become a “member.”
Wow… there’s an offer you can’t refuse.
Let’s keep going…
Q: It reminds me of the Xmas card scam run by the S&L some years ago. You saved your money for gift buying without interest on the savings, and then when Xmas came around, you withdrew your money without interest. Pretty cute! ~ Ashley G.
Q: Your premise is somewhat flawed. NetSpend, one of the major companies behind quite a few of the prepaid cards out there, IS a bank. And their card IS FDIC insured. They act like they’re not a bank, but according to their website, they are… or at the very least they are FDIC-insured. So if this AMEX/Walmart card is NOT FDIC-insured, it’s not likely to last long, or at the very least will have a tough time in the marketplace. ~ G.
A: NetSpend is not a bank. They partner with a bank, in whose name the cards are issued. That bank is MetaBank. Here’s some old dope on MetaBank from a report created by the Community Reinvestment Association of North Carolina (CRA-NC) and sent to the old Office of Thrift Supervision (which was subsumed into the Office of the Comptroller of the Currency back in May 2011).
Here’s what CRA-NC research director Adam Rust had to say about Metabank:
We believe that MetaBank’s prepaid card division, Meta Payment Systems, should provoke regulatory attention not just to this institution, but also to the prepaid card sector as a whole.
The fear, in our minds, is the expansion of a second‐class payments system for poor households to include high‐cost credit that mirrors payday lending.
NetSpend has probably cleaned up its act since this report, but like I say, if it walks like a duck…
Q (Re: Why Today Matters More than the Election): A friend recently cashed in his 401(k) and bought a five-unit apartment building. He now has zero in “the market.” I’m betting he’s onto something. ~ David
A: He’s definitely onto something. I’d be willing to bet that if the market crashed and housing took another hit, the market would fall further and faster than real estate from current levels. On the upside, there are plenty of headwinds for the stock market, but fewer for real estate. If your friend has all the apartments rented and is covering all his expenses and finance charges and is cash flow positive, he’s in a great position. Me personally, I’d take the excess cash flow and invest it in the market, in good dividend paying stocks, especially if there’s a big downward swoon.
Q: Most people are ready to sell out and move to Costa Rica. It is the “sky is falling” mentality. That is an opportunity for the rest of us to buy stocks at the lowest possible price. When the dust settles, you will see all kinds of bargains. It is not a catastrophe! It is an opportunity! My best bargains in stocks came when “all was lost” and everybody was running away. I bought public utilities at a 90% discount when everyone thought they were going out of business. ~ Thomas
A: I couldn’t agree with you more, Thomas. The really tough part is being in the market when it falls, not getting in when it looks horrible. Getting in at the bottom is how the rich get richer. They always have money to invest at the most opportune times. That’s why I always like to have an exit plan on all my positions. If there’s a downtrend that hits my stops, so be it. I’ll look for a good bottom to get back in at lower prices. You can’t win in a gunfight if you don’t have any bullets.
Q (Re: Politics, Polls, and Big Bank Buybacks): Something is wrong with a system that when a bank has to be bailed out, the people at the top that made the decisions get bonuses, and the cubicle people that did the paper work as instructed get laid off. ~ Mark
A: Amen. The system is so screwed up that the guys who are the greediest are the most protected. Their associates and workers are all pawns to them. It would be great if there were corporate bylaws that automatically clawed back compensation, etc. from executives who’ve failed their company by recklessly driving them into trouble for their own benefit. There should be automatic pay cuts and demotions and firings for things that can be measured “objectively” that injure shareholders and the company.
Q: Sheila Bair is one of the better bureaucrats around. It was under her watch as chair of FDIC that Wal-Mart was (essentially) denied a bank charter. ~ Rick B.
A: I like her immensely. She ought to be President. She’s tough and tells it like it is. Her book “Bull By The Horns” is a must read!
Q: The big banks have gotten too big and misbehaved. They now own our country and government. We need a president who will pass a new Glass-Steagall to break them up the way Teddy Roosevelt broke up Standard Oil and other monopolies. Obama was owned by the banks ever since they discovered him in Chicago’s rough section. That is why none of the Wall Street gangsters went to jail in 2008 for the greatest robbery in human history. Clinton sent 300 of the crooks to jail for their role in the S&L scandal of 1990. ~ Will H.
A: Will, I don’t think there’s a single reader of WSII that wouldn’t agree with you 100%. I sure do. The big banks are a cancer that’s riddled our government and economy. They have to be cut out of the fabric of our society and blasted apart into both smaller commercial banks and independently capitalized and not taxpayer-backed investment banks, preferably set up as partnerships and not public corporations.
Q: Could it be that [the banks] are receiving interest from the government on their reserves for not lending? ~ J.W.B.
A: Indeed it could. Paying banks (interest) to deposit money at the Fed is plain stupid. The money they have to keep on deposit at the Fed has to do with maintaining “reserves.” There should be no incentive to keep any more money at the Fed than what is required for reserves. The excess money they have should cost them something in terms of lost income, or cost them on account of having to pay something to depositors for the use of their money.
Of course, it should be both.
If banks have excess money (they have to do a tally daily), they used to try and lend it out to other banks overnight in the fed funds market. At least that way they’d get some interest on their cash, at the fed funds rate. In the good old days, when the Fed wanted to combat inflation or slow down a frothy market (say, for instance, a frothy housing market goosed by low borrowing rates) they would raise overnight lending rates (the fed funds rate) so it cost banks more to borrow from each other.
The Fed does this primarily through its “open market operations,” which means they sell (in what’s called a reverse-repo) Treasury bills, or notes, or sometimes bonds, to the primary dealers (a bunch of big banks and approved financial institutions) that have to do business with them.
The money that those banks have to come up with to pay for the stuff the Fed is making them buy comes out of the banking system, so there are fewer excess funds for banks to lend each other. When there’s less money available to borrow, and there’s still demand to borrow money, the cost of borrowing goes up (interest rates rise) because demand exceeds supply.
Or at least that’s how it used to be.
Now, the Fed has flooded the system with so much money to keep rates low, they’ve essentially lost control of being able to affect the fed funds rate. In other words, they couldn’t sell enough Treasuries to soak up enough loose money they threw out there to move interest rates higher. That’s why they’ve been saying that their new tool to control rates will be paying interest on reserves that banks park with them. We’ll see about that when the time comes.
In the meantime, banks are making more loans, but it’s not much. It looks like they’re making loans, and they are, but all the measures of new loans are based on 2008, when they weren’t making any. The Fed doesn’t care if the banks are making loans to individuals, they only care that they are making as much money as safely as they can. And right now, that’s by lending to the Treasury by purchasing their issues with free money they get from the Fed. Sure the Fed has lowered rates, but at the same time banks have raised lending standards. You do the math: who’s really benefiting by the Fed’s no-interest rate policies?
Q: Shah, I am new at this money stuff and have learned a lot from you. Sometimes I bust out loud laughing at your colorful verbiage combining everyday allegory, the “tortoise and the hare,” with street talk “crap” and “texter” talk, “WTF and OMG.” It breaks up the seriousness of what’s going on out there. The mix of truth talk and funny stuff is a good balance and much needed so we do not get too down-hearted about what the world has become. We will survive this mess, so hang on to your hats everybody and listen up to Shah. Thank you. ~ Laurel E.
A: Laurel, WTF? You’ve got me all wrong. I’m not trying to be funny. OMG this is serious stuff. LMAO!
Q (Re: With the Fed Out of “Bullets,” a Market Crash Will Really Hurt): So then what? Do we entangle in the Middle East with another war? Do we huddle in the middle of some forest with tanks of fuel and food? Or do we just look at our pile of gold and silver and smile. I mean, what are the choices here? ~ S.
A: Our choices are obvious, to me at least.
We make sure we have our stops in place and get to the sidelines if there is another huge sell-off. We all take all our cash out of all the banks (you’d have to leave in what you have to in order to conduct business, etc.) causing a run on all of them. But we do this after announcing that’s what we’re going to do because we want to control the banks and will make them insolvent to prove we can. At the same time we protest outside the Fed, outside all of the regional Fed Banks (especially the New York Fed) and demand that the Fed be knocked off its pedestal, that it’s mandate gets totally changed, that it’s never again run by bankers, but by academics, and that all it can do for insolvent banks is prop them up (for no more than a year) until they are broken up into smaller banks or unwound completely.
Then, once we’ve gotten Congress to subjugate the Fed to the public will, we ALL head over to Washington and set up public trials and prosecute all of them in the full light of day for crimes against the people, because WE ARE THE PEOPLE and we are getting screwed by Congress and the Fed.
Hey, my phones are already tapped and I’m already being watched. Saying that we need a revolution is nothing new for me. It’s the only way. We need a People’s Peaceful Revolution to take back America.
(BTW, if I end up MIA, look for me in any of the Costa Rican rendition houses our government controls or under the sun down Guantanamo Way, either way, please come get me!)
Q: Implying that the FHA would need $100 billion to cover mortgage losses is somewhat disingenuous. The FHA only needs to cover the difference between the sold price and the loan amount. Any loans since the crash won’t have losses; so we are only talking about previous loans. Clearly that is going to be but a small fraction of $100 billion. ~ Bud M.
A: You’re right, Bud. But, then again, we don’t know many defaults will eventually impact the FHA.
Q (Re: The Jon Corzine Report): Wouldn’t be the same ineffectual regulators who missed Bernie Made-off (pun intended), would it? ~ J.L.
A: Naw… they always learn from their little mistakes. BTW, love the “Made-off” thing, I’ve never seen that before. Can I use it?
Q: Shah… I want to know the loophole that allowed Corzine to use client funds. ~ Ray
A: Sadly, it’s not a loophole. It was allowed. Sick, I know.
Q: I liked your essay; but don’t blame the regulators; [I’m a trader and] they already have put the squeeze on me with their stupid regulations. I used to have 200 to 1 leverage; now I am down to 50 to 1. So sad. ~ Jerry C.
A: Jerry, WTF 50:1 isn’t enough? LOL
Q: I feel sorry for Jon [Corzine], who was only following in the footsteps of countless greedy, venal, Wall Street heroes who had gone before – just got the timing wrong! ~ John K.
A: You’re right John. If his trades were winners, I can almost promise you he’d be a candidate for the next Treasury Secretary, or some other peach position in the Obamaramaslamma administration.
Q: What’s missing in our society is a basic sense of right and wrong, which honest people have in the absence of laws, anyway. The complex of laws that regulate the investment community – and all the regulations Elizabeth Warren advocates – are the result of people in responsible positions failing to treat customers like they’d want their mothers and children treated. ~ Mel S.
A: Okay Mel, I agree. Now how do we imbibe society with character, honor and integrity? Or as Jimi Hendrix sang, “Y’all pass me that bottle, and I’ll sing you a real song.”
Q (Re: My Case for Jumping Off the Fiscal Cliff): So you really think the politicians, who are the ones who get to decide whether or not we jump, are going to put themselves into a position to get the entire electorate all pissed off at them? ~ David B.
A: Yep. They’re that stupid and that arrogant to think that the other party will be blamed.
Q: Shah, I do not agree. If that happens we will go into a depression, not a recession. The rich will get richer by buying the foreclosed assets of the middle class and they will move into the lower class with no jobs and no assets. Many are now, just living paycheck to paycheck. We must avert financial disaster and solve the debt problem by BOTH raising revenues and cutting spending. ~ Siera
A: You may be right, but I still like jumping off a lot better.
Q: Well, I’ve been hoping for some kind of “deal” to be made to avoid the “cliff”, mostly from a selfish point of view: I don’t want to be taxed even higher. ~ John K.
A: John, think of it this way, you’re better off being taxed higher as long as they leave the loopholes in place. You see, it’s about the loopholes. Do you think for one second that Warren Buffet (et al) are going to have to pay a higher rate? NOT. As long as there are all those great loopholes, and oh yes they are totally legal, they won’t have any more taxable income tomorrow than they had yesterday. And if they do, they’ll be happy to pay a higher rate, so they say, which is HOGWASH. Good thing loopholes don’t lie.
Q: Maybe we could create a productivity chart for politicians. The bottom 50% are terminated. That would clean things up quickly. ~ Richard R.
A: Poor Richard (unless the initial R following your first name stands for RICH), you don’t get how productivity charts are constructed, do you? There’s no such thing as a functional chart with a zero at one end and a zero at the other end. Or as the late, great Billy Preston sang, “Nothing from nothing leaves nothing.”
Q: Frankie Valli, not the Bee Gees! ~ Rooster
A: Thank you, Rooster. You’re the only one who corrected me on that. It is a Frankie Valli song, and he sings it in the movie. The Bee Gees did record it and performed it in concerts.
Q: Why never a mention of cutting the HUGE “secret” Black Ops budget (tunnel/city networks, black helicopters, etc.)? Why is such a “given?” Do the American people know about it enough to “just say no’ if they DID have a say in the matter? Do all the Congresspersons have a guaranteed spot in the underground safe haven when the sh*t hits the fan, so what do they care, or what? This is real, and it merits some serious investigation, imho. ~ Jim H.
A: Shhhh, Jim. It’s a secret budget… like what goes on in the dark halls and back rooms of Congress.
Q: Until we get back to a well-educated, disciplined electorate who can be critical thinkers and not “buy” into all the false promises made by politicians who then ignore what was promised, it will be business as usual. ~ Elaine
A: “A well-educated, disciplined electorate”… what’s that? Critical thinkers, I know what that means. If you don’t think the way I think I’m going to critical-ize you over the head, right? Forgive me, I learned that from cable TV.
Q: Hi Shah, I will go lemming with you. Either way we are screwed… Buy stocks, or gold, or stuff $ in my mattress? What are the rich doing? ~ Jerry C.
A: Jerry, my man, we are all basking down here in the Islands, the ones we own, silly. Gold and silver are too “heavy.” But, you’ve given me a new business idea. I’m going to offer no-interest financing on huge mattresses with special cloud-based combination locks and when that little trigger in the mattress says it’s full, I’ll pierce the cloud, lock all of you out and repo the mattresses. Or, I could just start a bank.
Thank you all for your questions and comments. Please keep sending them my way.