Credit Crisis Extends to Plastic

In a sign of the true state of the financial industry, The Wall Street Journal last week reported on the higher standards many credit card issuers, particularly American Express, are subjecting their cardholders to. No longer is a high FICO (credit) score sufficient. Credit card companies now want to know where you live and what you do for a living, in response to the housing crisis that is affecting certain areas harder than others. Housing markets in Nevada, California, and Florida are struggling, while North Carolina is growing. Because of this, identical applicants in Nevada and North Carolina are likely to receive quite different terms.

Michael Shortt is a small-business owner in Georgia who recently experienced this firsthand. American Express reduced the limits on his business card drastically, all because Mr. Shortt did not feel comfortable discussing the details of his business with small-business credit and data agency Dun & Bradstreet Corporation. As a result, the limit on one card was cut from $6,000 to $1,000. On another, Amex dropped the limit from $42,000 to $36,000, and then down to $4,300. Mr. Shortt was dumbfounded at the company’s actions, considering he regularly pays his bills in full and has accumulated nearly 800,000 rewards points. Amex’ only comment on the matter was this: “We are being more targeted in managing risk prudently within appropriate customer segments,” according to The Wall Street Journal.

While this particular article focuses on business credit, the consumer side is no different. Financing for everything from mortgage refinances to student loans is more difficult to find and when found, the standards are much higher and less flexible.

Source:Card Issuers Get Personal To Check Credit,” The Wall Street Journal, June 19, 2008

Coastal Drilling & Alternative Energy

Yesterday I wrote about the potentially negative effects of removing the ban on offshore oil exploration in federal waters. Essentially, I wondered whether this “newfound” production would so distract us from the greater issue of reducing our dependence on petroleum that we would hurt ourselves in the long run. Today’s Wall Street Journal article titled “Benefits of Tapping Coastal Reserves Would Take Years to Surface” seems to dispel that notion. The article points out the many challenges that this new production would face. To begin, the government needs to study the now-banned areas to identify where the oil is. This needs to occur before the government can begin considering lease applications. If leases were sold, there would then be environmental impact studies and challenges from environmental groups on myriad fronts, followed by years of infrastructure planning, review, and development. Since many of these areas have been off limits for more than 30 years, there is currently no way to get the oil to refiners if it could be removed from the seabed.

The Energy Information Administration, part of the US Department of Energy, has acknowledged the limited impact that drilling in the outer shelf will have on the petroleum market. The EIA said, in part, that drilling in “Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030” (2007 Annual Energy Outlook Analysis).

The biggest takeaway from this article is this: drilling in the outer shelf is neither or short- or long-term solution. It is one of many ways that the US can cope with and respond to higher oil prices, just like alternative fuel sources. Politicans and the American public shouldn’t think for one minute that the possibility of drilling in the outer shelf has changed the rules of the current energy game at all. Alternative energy is still as hot a topic and industry as it was last week.

The Gas Tax Doesn’t Work Anymore

The current system for funding the Highway Trust Fund just doesn’t work. Evidence of this was reported in this morning’s Wall Street Journal. Just weeks after presidential candidate Barack Obama warned of the fiscal consequences of suspending the gas tax that funds the system, the trust fund reported an anticipated $3 billion shortfall in next year’s revenue. Americans drove 1.8% fewer miles in April than in the year prior, and that followed a 1.7% decrease in the five months prior. With ever rising gas prices and a contracting economy, this situation is unlikely to reverse itself in the near term. This leaves Congress and the Transportation Department in a particularly uncomfortable situation. Raising the gas tax (currently 18.4 cents for gasoline, 24.4 cents for diesel) is political suicide. That notwithstanding, Transportation Secretary Mary Peters has no interest in raising the tax, instead favoring a reform of the funding system altogether. “We’re burning less fuel as energy costs change driving patterns…which is exactly why we need a more effective funding source than the gas tax.” Ms. Peters, however, offered little in the way of ideas for how to accomplish this task beyond expressing a desire for increased involvement from the private sector. This idea is nothing new; earlier this year Pennsylvania announced plans to lease its turnpike to a private operator. Chicago has already done the same with its Skyway, signing a 99-year lease with a company jointly owned by Cintra Concesiones de Infraestructuras de Transporte S.A. and Macquarie Infrastructure Group. While this option may be feasible for the nation’s toll roads, it is unlikely that private industry would be willing to lease a road from which it cannot derive any toll revenue. For now, this leaves the problem at the doorstep of Congress. The Journal reports that Senators Max Baucus and Chuck Grassley have proposed a $5 billion infusion to both close the gap and fund approved projects, while others in Washington would like to include infrastructure funds in a second economic stimulus bill being considered for later this year.

Sources:

GAO Decision Could Lead to Airforce Tanker Contract Redo

Today the Government Accountability Office (GAO) released its decision regarding Air Force contracts for mid-air refuling tankers. The GAO found that the Air Force made serious errors in awarding the contract, a complaint Boeing has made since the February 29 announcement that the contract would go to Northgrup Grumman. According to Boeing, the Air Force changed its requirements during the bidding process, resulting in a more favorable proposal from Northrup Grumman and its partner European Aeuronautic Defence & Space (EADS), parent company of Airbus. Boeing contends that it would have offered a modified version of its 777 series instead of its 767 model to better compete with the modified A330 from Airbus, had it known from the start that the Air Force wanted the larger model.

I’m not sure if this is a good or bad decision. On the one hand, Boeing is a US company with a predominantly US-based workforce (the 787 Dreamliner is another story). On the other hand, this contract was the first major agreement of its type with a non-US defense supplier. It represented the cooperation and trust between the US and Europe, and also showed the world that the US markets are open to foreign competition. At a time when the US is regularly signing free trade agreements, we showed that we really believed what we were selling. Now, the picture is not so clear. To be fair, while Boeing would utilize its US workforce, Northrup is also a US company with a strong, homegrown workforce. Northrup has already said it would perform as much as 50% of the work in Alabama, though at least some work would be done overseas simply due to its partnership with EADS.

UPDATE: WSJ posted this expanded article on its site late in the afternoon.

Obama Unveils Economic Plan

After much anticipation, Democratic Presidential Candidate Barack Obama revealed parts of his economic plan in an interview with The Wall Street Journal. As reported in their June 17, 2008 article “Obama Plans Spending Boost, Possible Cut in Business Tax,” Bob Davis and Amy Chozick highlight some of the major proposals in Senator Obama’s plan.

Senator Obama’s plan focuses on three proposals: significant government spending on energy projects (infrastructure projects are included in the Senator’s plan), tax code reform to “narrow the gap between winners and losers in the U.S. economy,” and a reduction in business taxes.

The first leg of the plan, energy projects, is intended to spur the economy by providing work for the many unemployed. Included in these projects would be highway construction, along with power plant and other energy-related construction. Senator Obama proposes spending $15 billion over 10 years on these projects, paid for with revenue from a carbon trading system. The proposed trading system is projected to generate revenue of roughly $100 billion by providing a platform for trading pollution permits. The Senator also plans an infrastructure reinvestment bank which would spend $60 billion on high-speed rail service and improved energy transmission, among other projects. To further encourage development in the energy sector, Senator Obama wants to provide funding to “middle stage” companies invested in new energy technologies. In his view, these companies, which find themselves at a stage between innovation and commercialization, often struggle to raise the capital necessary to move their products to commercial viability at the same time that their products could provide the next step in the energy puzzle. (This program is similar to one under the Clinton administration which faced strong headwinds from Republicans and never expanded beyond small-scale projects.) Senator Obama also intends to establish a “green technology” fund to promote environmentally-friendly development.

For his part, Republican Presidential Candidate John McCain agrees with Senator Obama on the need for a cap and trade system, though his would be much smaller in terms of projected revenue. As for green technology and middle-stage funding, Senator McCain feels that Silicon Valley and venture capital have things covered. But I digress…

Senator Obama proposes a wide variety of changes to the tax code, focused on equalizing the tax burden faced by individuals and corporations. For starters, he would like to eliminate President Bush’s tax cuts for those families making more than $250,000 while maintaining them for those making less than that threshold. He would also eliminate the capital gains taxes for start-up companies, so that these entities can “accumulate capital [and] reinvest profits…to the point that they stabilize.” (Unfortunately, Senator Obama hasn’t defined a startup company.) For individuals entering the public service sector after college, the Senator proposes $4,000 annual tuition credits on the individual’s income tax return. His final proposal would eliminate income taxes for those individuals over the age of 65 who make less than $50,000 annually. The Senator anticipates that these changes will help “level the playing field” and allow him to reduce corporate tax rates as well as maintain the capital gains rate reductions President Bush implemented. In the article, Mr. Obama asserts “How much you pay in taxes as a corporation a lot of times depends on how good your lobbyist is.” His proposed changes aim to eliminate the lobbyist effect from calculating tax rates.

Early in the article, Mr. Obama states “Globalization and technology and automation all weaken the position of workers.” Many of his proposals aim to encourage technology development for the assistance and empowerment of workers, demonstrating his attempt to use technology to strengthen employees rather than weaken them.

One small item of note that could be lost in the sprawling article: Senator Obama’s plan to subsidize high-speed internet access as part of his infrastructure reinvestment bank proposal.

So what does all of this mean? We’re finally seen a bit of what Senator Obama’s economic policy may be. He has some interesting ideas, some new and some recycled. I think one of the biggest things his proposal shows is that he is focused on helping the average American in a time of increasing economic pressure and uncertainty. He has woven his “change” mantra into the proposal with some new, somewhat radical spending plans, while showing his critics that he can also learn from his predecessors by rehashing some long-debated concepts and ambitions. I am very interested to see the further details that will invetitable emerge in the coming months regarding Senator Obama’s economic policies.