Meredith Whitney on Small is Beautiful

Barack needs to kick his econ team to Pluto. He needs to listen up and make the following the econ generals leading the fight:

David Cay Johnston
Meredith Whitney
Muhammad Yunus
Vinod Khosla
Prof. William Black

Under them should be Matt Taibbi and Michael Lewis as special advisors or whatever fancy junior cabinet sounding names you want.

Meanwhile back in reality, EM08 continues to barf all over us, but one of the key things for Americans to keep their eyeballs glued on is the mass-media (mis)handling of it. It is absolutely nuts the way they are shooting Krugman and Roubini blanks everywhere. Oh wait, this is Bizarro world.

Right on time, here's Meredith Whitney breakin' it down on the credit crunch, small business, small banking, and the crucial role both should be playing at this turning point, with chirps from yours truly.

Before I turn you over to Meredith, I'll make the point that one of the important things completely absent in mass media coverage of EM08 are the messages that are being sent out to Americans. Think about the TARP, GM & Chrysler bailouts, AIG bailouts, and the utter madness of banks who, with public money, didn't help the public but instead helped themselves. The executive/management bonuses while reprehensible are just mis-direction by mass media; the TRUE damage is in the further conglomeration the banking system has undergone. Thus, welcome to the era of the super banks, led by JP Morgan/Chase and Goldman Sachs. As I've said but will say again until everyone knows, if you think mass-media conglomeration is bad, think about the unprecedented power these super banks now wield.

Is the irony of "too big to fail" lost on you...?

Meredith Whitney's following take makes me think about those small banks and community oriented credit unions that didn't buy into all of the toxic mortgages much less the ultra high risk gambling committed by the banks and AIG (Well, it was risky... for TAXPAYERS).

Then these law-abiding small banks and community oriented credit unions had to stand by and be humiliated as the government dumped free money on these criminals in the biggest heist in history.

Here're the questions;

How do you think those banks and credit unions feel?

As an American, how do you feel about that?

What kind of message is that to be sending?

Why isn't the mass media addressing this?

Will you continue to bank at a large bank? (Disclosure; I don't anymore. I bank at my local credit union exclusively now)

One more thing I'll say about Whitney's take; I stand and applaud her, because it's easy to see that she's sticking up for the little people and, lest we forget, sounder economic practices. But in her own way, she's really talking about communities. I believe that is one of the things Americans desperately need to get back to.

I said it before and here again; That Meredith Whitney - she's one smart gal.

Meredith Whitney

* The Wall Street Journal
* OPINION
* OCTOBER 1, 2009, 6:58 P.M. ET

The Credit Crunch Continues
Taxpayer dollars have supported institutions that are 'too big to fail.' Small business has been left out in the cold.

By MEREDITH WHITNEY

Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.

jp: Emphasis mine. In textbook journalistic inverted pyramid form, there's the theme, in perfect accord with TARP strategy. In Bonzo Ronnie's time it was "trickle down" economics. Today it's "too big to fail."

Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends. Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.

Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.

Why do small businesses matter so much? In the U.S., small businesses employ 50% of the country's workforce and contribute 38% of GDP. Without access to credit, small businesses can't grow, can't hire, and too often end up going out of business. What's more, small businesses are often the primary source of this country's innovation. Apple, Dell, McDonald's, Starbucks were all started as small businesses.

What's especially disturbing is how taxpayer dollars have supported "too big to fail" businesses yet left small businesses unassisted and at a significant disadvantage. Small businesses do not have the same access to government guarantees on their debt. After all, most of these small businesses don't issue public debt. [Emphasis mine]

As is true in most recessions, banks' commercial lending portfolios shrink as creditworthy customers pay down their debts and the less-worthy borrowers are simply denied loans. Banks, in other words, want to lend only to those that don't want to borrow. Challenging as that may be, in the last cycle small businesses at least had access to their credit cards.

Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels—the first contraction since 1993. Credit cards are the most common source of liquidity to small businesses, used by 82% as a vital portion of their overall funding. Thus, it is of merit when 79% of small businesses surveyed tell the Small Business Association that credit-card lending standards have tightened drastically and their access to credit lines has decreased materially.

Incentives should be provided to smaller banks to step up small-business loans on a greater scale. Smaller banks could not only bridge gaps created by the shut down in the securitization market but also gaps being created by a massive contraction in credit-card lines. Arguably credit would perform better with these types of loans as they would reintroduce and reinforce the most important rule in banking: "Know Your Customer." [Emphasis mine]

I believe that we are only in the early stages of the second half of this credit cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010. This includes not only the large lenders reducing exposure but also the shuttering of several major subprime credit-card lenders. Beginning in the fourth quarter of 2007, lenders began reducing available credit by zip code. During the past four quarters, lenders have cut "inactive" accounts (whether or not the customer viewed the account as a liquidity vehicle).

The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.

Regulators should be mindful that regulatory change during the midst of a credit crisis often ends with unintended consequences. Those same consumers that regulators are trying to help are actually being hurt by a vast reduction in available credit.

Main Street represents the foundation of this country. Reviving it should take priority over any regulatory reform or systemic overhaul. [Emphasis mine]

Why Michael Porter is a Dinosaur

A few years ago I got my first taste of the vaunted Harvard econ brainio Michael Porter whose big wheelhouse is "strategy." He recently had a Businessweek cover story that I'm listening to right now, titled, "America Needs an Economic Strategy." He argues, and I agree, that America never thinks strategically and instead opts for politics, short-term, quick fixes and, by inference, non-analytical thinking - "incoherent thinking" as he says. He goes on to say that education is the most important fundamental. There are other generalities too numerous to name that I also generally agree with.

But that's about the limit of my agreement with Porter - the generalities, such as bolstering our "entrepreneurial spirit" just keep on coming. Whatever he means, it sounds good. But I completely disagree with him in that all of his suggestions bolster the old capitalism because they never address where the true revolution lies waiting. What's needed is not strategy to resuscitate the old system, nor a revision, makeover reform, but a strategy to migrate to true capitalism, where that dormant energy lies waiting.

And what, exactly, is true capitalism, the new capitalism?

It's too much for now and too late to fully flesh out. But if you read this blog then you've had tastes of it. I talk about it in my work with indie filmmakers - it's the very same principles and energy there as in the new, true capitalism; it is true capitalism, albeit in an early stage of development. For now, Muhammad Yunis, Vinod Khosla, Kiva.org, and one guy who was ahead of us all, E.F. Schumacher, are examples and provide further clues; they're pioneers, really, at least in the modern world. Some tribal communities have very different notions of economic development that I'll get into later that I think the new capitalism can use. They are the real pioneers.

More later.

The New Trinity: On Community Building, Sustainability and Green Tech

A lot of talk is going 'round about "sustainability" these days along with "green tech." Already I can see the potential for some confusion, but in their simplest forms, sustainability is a moniker that denotes whether a particular method is able to be readily replenished and ideally environmentally friendly. I say it has a deeper, wider meaning, but that'll be fleshed out below. Green tech is the noun, the thing, whether a hybrid engine, waterless urinals or low wattage light bulbs.

I'm going to go on record here and say that I think we're in the dawn of something. If you noodle enough on the Net you'll see what I mean. There're a couple of caveats...

Sustainability is more than a technology's abilities to replenish - it has to be human as well. It encompasses the revolutionary microlending of Nobel Laureate Muhammad Yunus and Vinod Khosla who are empowering the lowest of the low economically. Think about it like this; any system as brutal as capitalism in its present incarnation that spurns certain people for whatever reasons (race, gender, socially constructed/specific notions of ugliness, etc etc) and rewards certain others is simply not sustainable. At least theoretically, there has to be an end, because what happens when there are no longer any poor mud peeps to exploit? Then what?

Big question, eh?

The other point that must be made is that this new dawn is not fully fleshed out - again, it must incorporate humans beyond market economics. This time, it means community-building. Enough of this myth of the individual and praying to the mold of "individualism" and all of that myth crap which just serves to benefit the status quo. I mean, so much of that doo-doo on a stick I demystify in my own work with filmmakers but it's perfectly analogous because, whether it's the race to become a millionaire or to be a studio filmmaker, unless you've the connects, it ain't happening. And it's sad that I have to spell it out here, but what I mean is the rule, not the exceptions. If you still want to get all anecdotal and pull the exceptionalism card outta the deck, go ahead. See if I care.

So basically, I have this to say to the exceptionalists: Ayn Rand can go to hell.

No, my way of seeing it is a trinity: community building, sustainability and green tech. It's a pyramid with people and community-building at the top.

I'll no doubt expound on this in future posts, but I have to get to something else. Suffice this for now: I'm working on a project that has to do with this triumvirate and it's pretty exciting - I can see it, but making vision into reality is a lot like filmmaking - there's a lot of green in between, as pool players say when a ball's a long way from it's mark.

I'll leave you with this for now; I believe that the following interview of Tom Friedman by John Doerr is a seminal piece in this new dawn. I won't say why for now, but one of the biggest clues, and keys, is there. You just gotta listen.

Press "play" (the arrow in the bottom left-hand corner of the "TV frame" below).

Dig.