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Table of Contents

Lead Story

Making hay of new IRS reporting requirements

Adam Atlas
Attorney at Law

News

Industry Update

TCF Bank lawsuit challenges Durbin Amendment

Reaching out to medical marijuana dispensaries

Mercator explains growth in micropayments, virtual purchasing

New MasterCard credit card generates passwords

Trade Association News

Features

Research Rundown

Selling Prepaid

Prepaid in brief

Open-loop prepaid part of CTA's new fare system

Prepaid's emergence in India

Views

Challenges to Dodd-Frank, Durbin heat up

Mark Brady and Ross Federgreen
CSRSI, The Payment Advisors

It's the economy, again

Brandes Elitch
CrossCheck Inc.

Education

Street SmartsSM:
What the feet on the street need from acquirers

Ken Musante
Eureka Payments LLC

Content marketing delivers by engaging prospects

Peggy Bekavac Olson
Strategic Marketing

Going beyond PCI

Tim Cranny
Panoptic Security Inc.

Where is our industry heading?

Jeffrey Shavitz
Charge Card Systems Inc.

Become a payment superhero

Jeff Fortney
Clearent LLC

What PCI DSS 2.0 means for financial institutions

Gary Palgon
nuBridges Inc.

Company Profile

Global Electronic Technology Inc.

New Products

Encrypting, entertaining self-service terminal

KST9000
Key Innovations Ltd.

Inspiration

The pursuit of happiness

Departments

Forum

Resource Guide

Datebook

A Bigger Thing

The Green Sheet Online Edition

November 08, 2010  •  Issue 10:11:01

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It's the economy, again

By Brandes Elitch

Last night I dreamed it was still the 1990s. Life was good. The economy was booming. I was thinner. My colleague in the next cubicle quit her job to work in the stock market and do day-trading, whatever that was.

The biggest question in Washington was how to spend the federal budget surplus. I was about to call "WaMu" or "Indy Mac" for one of those liar-loan, no-doc, home equity refis so I could do just one more cash-out and buy another car.

But then I woke up, and I could tell I was living in the present. All that stuff from the 1990s was gone - the unbridled optimism, the budget surplus, my 401k, the equity in the house, my line of credit - well, you get the picture. And I had put on a few pounds.

Today, the biggest question in Washington is, when is the economy going to come back? The tech bubble morphed into the real estate bubble, and now potential bubbles exist in fixed income, commodities and emerging markets.

The long road to recovery

As the analyst Bob Prechter said, "We've had a whole decade of investment insanity, and in the last decade people fell in love with buying." For ISOs, this is a particularly important issue, because you get paid on the clicks that happen when somebody buys something from one of your merchants. If consumers aren't buying, you don't get paid. But you knew that already.

So, if you are an ISO or merchant level salesperson, what are the implications for your future revenues? Some people, like investment manager Ken Fisher, are optimistic.

He said, "The next 10 years are going to be just as good as the 1990s. The problems in this environment we think are so different and so new and so unique ... it's the same, stupid, old normal we've always had. We've got a great future."

Fisher feels that skepticism and pessimism are normal sentiments for investors 18 months after the bottom of a bear market. In the 1990s, the Standard & Poor's 500 Index climbed for eight of the 10 years, including five consecutive annual gains of at least 19.5 percent.

Unfortunately, the reality is that we're in a cycle. Here is a succinct explanation from writer William Galston: "As the value of assets used as collateral collapses, so does borrowing. This depresses consumption, and the real economy dips, making it harder for businesses and households to service the debts incurred during boom times.

"Consumption remains sluggish until debt is reduced to a level that can comfortably be serviced out of current income, a process that cannot proceed without an increase in the household savings rate. The larger the debt overhang, the longer it will take to work off the excess."

Some economists estimate this could take 10 years. Democrats believe the economy needs more stimulus; Republicans feel it needs lower taxes and less regulation. Meanwhile, consumers are not buying.

They are so spooked by the current unpleasantness that they have curtailed credit card usage, substituting debit for credit and paying down credit card debt with a vengeance.

This will take a big bite out of the card issuer's profits. Moreover, the economy needs 100,000 new jobs a month just to absorb entrants to the labor force. With more than 15 million people out of work, even a strong recovery will leave a large number of people on the sidelines for years. And no one can predict what job growth will be over the short term.

International pressures

Traditionally, three sectors create economic expansion: automotive, construction and financial. As a car collector, I follow what goes on in Detroit. And what has happened in the auto industry is especially pernicious.

I am reading a book called The End of the Free Market: Who Wins the War Between States and Corporations? The author, Ian Bremmer, documents the rise of state capitalism and its threats to the global economy. Nowhere is this more in evidence than in Japan's approach to the American automobile market.

Guided by the official policy of full employment for all Japanese workers, the Japanese government manipulated the value of the yen and encouraged manufacturers to dump cars in the United States for most of the 1960s and 1970s at prices cheaper than they sold for at home - until they could build a dealer network and get market share here.

Recently, states lacking strong unions threw in billions of dollars worth of concessions (free land, utilities, tax abatements, etc.) so Japanese companies could build local plants in the United States and avoid tariffs. However, manufacturing comprises less than 20 percent of the price of a car; meanwhile, the profits are all repatriated to Japan.

Of course, this example is mild compared to today's state-owned companies (in China, Russia and the Arab monarchies, for example) that control the markets for oil, aviation, shipping, power generation, arms production, telecoms and more.

These governments own enormous investment funds, which are now important sources of capital and threaten American economic stability. This does not bode well for the auto industry and for U.S. industry in general.

The plugged money supply

Home building will not recover until the inventory of short sales and foreclosures is worked off - probably at least three years away. And many borrowers, including small business owners and investors, who should be able to refinance or buy homes can't do so.

Either they cannot meet new, onerous underwriting rules or they are impeded by rate penalties for non-FHA or VA loans. Conventional lenders are dependent on Fannie Mae and Freddie Mac to sell their mortgages. As a result there are now just three main lenders: Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co.

Banks have the money to lend; they have sharply curtained the supply of money to new ventures and small businesses. Corporate cash in the bank is at an all-time high of around $2 trillion, but businesses are loading up on cash and not spending it. This is not a virtuous cycle.

For the economy to grow, productivity needs to grow. That is what boosts economic growth and living standards. The big increase in productivity began in the mid-1990s, when productivity growth (the growth in goods and services for a given level of input) rose at 2.8 percent a year - double the rate during the preceding 22 years.

While economists disagree on why this happened, a consensus is that it was due to the increased use of information technology (IT) capital, and the rate of improvement in the efficiency with which our economy produces IT capital. I have a hunch that some of the current innovations we see in the IT sector will boost productivity again.

I see new products in the payments space that, I believe, will bring big changes in payments soon, and they will benefit both merchants and consumers.

New perspectives

Sonoma County writer Michael E. Duffy said that in the midst of all our technical innovations in the payment system, "it's easy to forget that there's no economy without people. The trading of goods and services has a purpose that sometimes seems overlooked as we envision our brave new world.

"Quite simply, we need to feed, house and clothe ourselves, and to do that, we perform work in exchange for money. ... What worries me most about the future is that work is disappearing. There are only so many jobs for people without advanced training and stellar talent."

By now, you might be asking when economists became sociologists. For perspective, keep in mind that in 1979, right at the beginning of the 18-year run of bull markets, Business Week ran a cover story called "The Death of Equities," predicting a long-term bear market. It's hard to take Business Week seriously after that.

Things are not always what they seem. There are silver linings, even in a recession. For instance, here in Wine Country, we say, "With money tight, and French oak at $1,100 a barrel, we're gonna get a lot less oaky wine - and that's a good thing." So it's not all bad. Stay tuned.

Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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