2009.MM.DD - Playboy - Duffonomics (Duff's column)

2/2/2009

Duffonomics: Watch This Space!

Appetite For Investment

By Duff McKagan

My name is Duff McKagan. By way of introduction, I play rock & roll music as a profession and have been fortunate enough to have been a founding member of both Guns N’ Roses and Velvet Revolver. I’m not tooting my own horn here, just letting you people know who I am. The beer on The Simpsons was named after me and not the opposite. You see, I was also known to be a big drinker.

Playboy has asked me to pen a weekly column on finance. This first piece will serve as sort of “mission statement” to inform you of what to expect from now until they fire me. You may be asking yourself at this point, “What the hell does this dude know about money?” Well, here is a quick version of my story:

I got sober in 1994. I suddenly found that I had a ton of time on my hands—bars and drug runs are very time-consuming passions. I found a file cabinet in my basement that held all of my GN’R financial statements from the previous six years. I began to try to make sense of these. The problem was, they weren’t written for the common person to read, and perhaps they were even meant to mislead a typical over-busy rock guy. I was 30 years old and didn’t know what any of the technical terms meant. I didn’t know what a financial “vehicle” or a “bond” (tax-free or otherwise) was, never mind the inverse relationship of supply and demand! I enrolled in a class at Santa Monica College the very next week, and it was there that I found my calling and—don’t laugh—my love of academia.

As an aside: From my experience, once you are pegged as a “rock guy,” people just assume that you are either brain-dead or off high-flying on a private jet with hookers and cocaine. While I have definitely been guilty of both of the aforementioned clichés, my life these days is just kind of simple and book-filled. Yes, I still tour and make records, but I am much more informed and therefore involved in the everyday commerce that is the music business. My business.

From my short stint at SMCC, I moved back home to Seattle and got myself into the Albers School of Business at Seattle University. Suddenly, the world of finance became a living and fascinating thing for me. I found that I could apply lessons from class immediately to my work in the music business. The more word got around that I was serious about getting my degree in finance, the more serious I was taken in business meetings. I do think that there was, in a sense, fear that one of the “rock guys” was going to knock down the house of cards that is the record business. Cool shit.

As soon as Velvet Revolver started in 2004, all kinds of financial media wanted to talk money with me. From the Wall Street Journal to Neil Cavuto, PBS’s Frontline to Greta Von Susteren, everyone seemed to come to me as the voice of business from within the music industry. Pretty surreal.

Now, on to my mission statement. Initially, I think that this column should serve two purposes:

1) To educate
2) To bring down The Man

As for the first point, when I stated before that I found myself at 30 not really knowing which way was up as far as financial terminology and complexities went, I also found that I was not alone. I know that I was too embarrassed to actually cop to the fact that I was in the dark when it came to finance. I think this rings true for most of us. Unless you are a CPA, lawyer, or stockbroker, why would you know much about what they are talking about on the financial news? Those boneheads on TV just want to make themselves come off as smart anyway…hoping to maybe score some pussy that they didn’t get in their youth! I hope to shed some no-nonsense light on day-to-day money issues. In these days of financial woe, we can all use a little help.

And as for the second one, I am sick and tired of hearing of these Wall Street assholes getting huge bonus packages from our bailout tax dollars. What a lot of these people did to all of us in the first place is just plain criminal. I have never been keen on executives getting golden parachutes; I’m more apt to give them a golden shower. I will do my best to expose frauds and criminals, one at a time. Care to join?

I also look forward to comments from readers to let me know how I am doing and whether there are directions you would like me to take. Until next week.

2/4/2009

Duffonomics: What Got Us Into This Mess? (Ignorance Is No Longer an Excuse!)

By Duff McKagan

As I previously stated in my Monday mission statement, this column will be a place to come for some basic education on financial terms. I think by now, a lot of us would have maybe done things differently over the last couple of years if we had some knowledge on the bigger picture of what credit is and what a “subprime” loan can do to the lendee (that’s you and me, the ones who take the loans). I also think that we will no longer be using the phrase “I didn’t know what I was getting into” when it comes time for our next mortgage or even “payday loan.” Ignorance is no longer an acceptable excuse.

Questions from you readers have already been coming in to me on a wide variety of subjects (i.e. “What should I do with my 401k?” or, “Is now a good time to invest in the stock market?”). Before we get into any of that, however, let’s take an informed peek into some of the factors that drove us toward what the media has dubbed the “credit crunch.”

Ah, the “subprime” loan. What is it? Is it bad? A subprime loan is money lent at a rate above the prime rate. Someone with good credit ( a score above, say 680) should be able to get a loan at the stated prime rate. Banks borrow from the Fed at a stated rate and the prime rate is what banks charge to in turn give me and you that loan. Pretty simple. The moniker subprime is misleading in this context as it would seem to be below (or sub) prime. In fact, it is the opposite.

The market opened up sometime in the 1990s for loans to those of us who had imperfect credit scores. Mortgage and car loans started to go out to previously disallowed participants under name like “second-chance loans” or “non-conforming loans.” The loan companies offering these would charge an additional fee above “prime” for the perceived risk—and business got good real quick. As business got better, companies started to loan money out to riskier and riskier loanees.

This now brings us to the dreaded Adjustable Rate Mortgage (referred to as ARM) and its eventual fallout. Banks and lending institutions began to make subprime loans (to higher risk lendees) at an initial low interest that lasted usually for two years—the ARM’s initial low rate and resultant low monthly payments made the loans attractive. And for the loan companies, it was all about getting paid on the initial loan that you wrote without any real regard for the long-term implications. At the end of the initial period, these low interest rates would skyrocket to something around 20 percent. In essence, these were unpayable loans from the get-go, but the selling point of these loans was that that you and I could just refinance (that is, get a new low-rate loan) before the interest rate would adjust up. Loans, however, became harder and harder to get as housing prices fell. A lot of borrowers defaulted on these loans because they couldn’t refinance or sell and the whole thing snowballed.

Meanwhile, these loan companies were also the first to feel the hit of a default (or non-payment) of a loan. But shit, the stock market was going up, and the real-estate market was going through the roof—so they thought, Hey, let’s just sell some of these risky mortgages and car loans to the bigger financial institutions and they’ll re-package them.

Re-package? These firms (Merrill Lynch, Goldman Sachs, etc.—the big boys) would bundle these bad loans in with good ones and sell these bundles as a new investment opportunity to you and me. (Do you actually know what your 401k consists of?) Everything went okay until the panic hit. Information about these bundled loans hit the news; in about a week, the bottom fell out.

The problem with the situation we are in right now is: How many of these loans that our troubled banks are holding are actually good and actually bad? There are hopefully some smart minds at work sorting this mess out. There are a ton of good loans out there, but the stigma of the bad ones and panic about where they are and what ratio of the whole they make up have helped to cause this crash. Let’s try to educate ourselves from now on. Let’s not get bullied and confused by stockbrokers and mortgage lenders from here on out. The Man has had us down for too damn long!

2/11/2009

Duffonomics: Stimulate This!

By Duff McKagan

As a slight disclaimer, you will notice some of my writings may contain a bit of a political or ideological slant. While I will do my best to convey “just the facts” for the most part, I may get somewhat righteous when I feel strongly about a particular subject.

If you are at all like me, then you are probably trying to navigate the murky waters of this new federal stimulus package, trying to figure out what it actually means to us as a country and to you as an individual. I am going to do my best this week to try to shed some elementary light on the many confusing aspects of this proposed bill.

First off, let’s take a real basic look at the fundamentals of why the Democrats and Republicans are bickering over the basic tenets of this bill in the first place: The Republican Party has always been about “less government” and “more business.” As far as the stimulus package, they are striving for more tax cuts and incentives in the loan market—ostensibly making it cheaper to forge ahead with entrepreneurial endeavors. Personally, I don’t believe a bunch of new small business start-ups will be enough to get us back on our feet. Business left alone is what got us into this heap of trouble over the last eight years.

The Democrats believe that a larger government role in our day-to-day life will even out the highs and lows of the economy. In this new stimulus package, a large chunk of the money is earmarked for building infrastructure (roads, wind-powered energy, dams and the like). Some may think that these create only short-term jobs. But I would argue that new roads will open up more of our country for commerce; repairs to existing roads and bridges will ensure the continuation of commerce on them in the future; dams and other renewable energy projects will need ongoing servicing, creating long-term jobs in addition to the short-term construction jobs; and every kilowatt of power these projects generate is one we don’t have to send money to some foreign oil bandit to pay for. Grants for college students (Pell grants) are also included, and we would all benefit from the education of our youth—not to mention that such grant money would instantly be put back into our schools on our soil.

Let’s take a gander at some recent economic history. When Clinton left office in January 2001, we had (according to CNN) a budget surplus of $230 billion. Also, our unemployment rate was at 3.9 percent according to the Bureau of Labor and Statistics. When Bush left office, we had a $410 billion deficit (according to AP, February 12, 2008) and our unemployment was at 7.2 percent. Hmmm.

In the last 25 years, the two parties have become increasingly polarized, battling each other in the House and Senate and voting along party lines on particular bills and measures. I believe this “party first” atmosphere has done nothing but cause mutual demonization and hinder our progress as a nation. The Republicans are now claiming that Obama’s stimulus package mirrors Roosevelt’s programs in the 1930s and suggesting those didn’t work. Bullshit is what I say! Maybe it wasn’t a fast elevator ride out of a hole, but it was a focused and upward movement out of the Great Depression. My grandfather Jon Harrington, an immigrant from Ireland who had fought in World War I as a new American, finally found work through the New Deal—after many years without a steady income—building dams throughout the West. And you want to talk about long-term benefits? We were able to win World War II in no small part because of air power—air power that would have been impossible to produce without the electricity from two FDR jobs projects, the Bonneville and Grand Coulee dams on the Pacific Northwest’s Columbia River. Those two dams provided the juice to manufacture tens of thousands of bombers and fighter planes in the 1940s as America scrambled to catch up to the military industrial might of the Axis powers. It’s no coincidence Boeing is in my hometown of Seattle!

Larry Summers, our new chairman of the White House National Economic Council, summed up the squabble succinctly on ABC’s This Week by stating that “those who have presided over the last eight years, eight years that brought us to the point where we inherit trillions of dollars in deficits, an economy that’s collapsing more rapidly than at any time in the last 50 years, don’t seem to me in a strong position to lecture about the lessons of history.” Indeed.

2/19/2009

Duffonomics: It’s Go Time (If You Are Ready)

By Duff McKagan

Playboy is a high-profile publication; we are all aware of this fact. But it’s really hit home for me lately. I have suddenly been thrust into a very interesting position with newfound celebrity as Playboy’s financial columnist. Instead of people coming up to me and saying the usual, “Hey dooood, I saw you play Madison Square Garden in ’93—I was sooo stoned!” it is now suddenly, “Duff, I have some extra cash in the bank, what should I do with it?” or some such financial inquiry.

First off, I am going to do my best to shoot straight in this column while also keeping financial jargon to a minimum. I am qualified to write this column if only for the simple fact that I too am sick and tired of trying to figure out what the hell is going on right now in our economy. This column is a place for you and I to go back to square one and rebuild our financial confidence through knowledge.

Someone e-mailed me with timely question: Is now a good time to buy a house? In the case of this particular e-mailer, this would be a first ever foray into potential home ownership. Luckily for me, I have the go-to guy for just this question. My best friend has been buying and selling real estate in the Seattle area for the last 22 years and was more than happy to field a few inquiries from me. Here’s what I learned:

A lot of you may be sitting on a chunk of cash wondering how to time this real estate market. Markets around the country vary widely, of course, but they are all most assuredly down from the highs that we witnessed recently. How much lower will they go? No one knows for sure, but I have discovered a few factors that may help in your decision-making.

This recession will certainly not last forever and the drop in home prices will have to plateau at some point. Meanwhile, interest rates have sunken in the hopes of stimulating this economy. If you are waiting for that $300K home to perhaps reduce its price by another $5K to $15K by late summer, you’d better just hope that interest rates don’t go up in the meantime. If interest rates go up by just half a percentage point, you could end up paying 10 to 20 times the money you may have saved waiting for the “perfect” price of your home. Now, interest rates could drop further, but certainly not by much. If you are looking to get into your first home, now just may be the perfect time factoring in the massive amount of inventory out there, the “fire sale” prices and, most importantly, these low interest rates. Interest rates are what will kill you over the length of a loan.

Let’s talk about your credit score for a second. If it is below 640, forget buying for now. Rent. If it is above 720 and you have verifiable income (verified by the bank), you are golden and should qualify for the lowest-fee loans. Most of us however, have a credit score somewhere between 640 and 720 and will end up paying higher fees on a loan. Expect an additional half to two-and-a-half percent, depending on where your score sits within this range. There are things that you can do to better your credit score, such as paying off your credit cards. (Do keep the credit card, though, and make small purchases that you can pay off at the end of the month, thus building good credit). Also, pay all of your bills on time! A reported delinquent bill (to some creditors that can mean just 30 days late) will take three years to clear. There are some great non-profit organizations that will help with advice on your credit woes. Simply Google “credit counseling” and you should find something that suits your particular malady.

Federal guidelines are again being followed by loan underwriters (banks and other loan institutions) as to what percentage of your monthly income is recommended for a mortgage payment. Full documentation of workplace and income is now again being required. (Yes, they were giving loans to people without a stated or proven income before this “credit crunch.”) Just so you are aware, The Man (Fannie Mae) looks for your mortgage payment to represent 30 percent or less of your monthly income.

Once you have gotten yourself into a new home, just remember this: A house is your home and not your bank! This is where a lot of us have headed in the past. A bunch of us will buy a 300K house and start to think it is somehow wise to take out a second loan against your house so that you can buy flat-screens, Gucci, jet-skis, and hookers and cocaine to fill out this new lush pad. Three words: Bad fuckin’ idea.

Until next week fellow voyagers—breath deep and look at pictures of naked chicks!

2/26/2009

Duffonomics: Hey, Ho, Let's Go

By Duff McKagan

The stock market indexes are as low as we’ve seen for a decade or so and hopefully won’t dip much more. Last week, I tried to offer some helpful ways to figure out if now is a good time to buy your first home. But I think we should also be prepared to make our own decisions on when and how to capitalize on the stock market when it finally begins to turn.

Part of making those decisions is feeling you know the lay of the land. For that, you have to be able to make use of all the info out there. The most frequent complaint I hear from the casual MSNBC or FOX Business Channel viewer is that there is so much damn financial jargon that the underlying info goes over our heads. Articles in newspaper business sections also presuppose knowledge of a lot of terminology. For 99.9 percent of us, it’s fucking confusing and we’re sick of it. Well screw that! The average consumer—us, the ones over whose heads they try to talk—makes this economy tick. To bring some power back to us, we need to demystify the jargon. Let’s start with something that will have a direct impact on what you buy when you get back into the stock market. For those of you who already know some of this stuff, I hope you stick around. And for the rest of us, here’s lesson number one: “Market capitalization.”

Market capitalization (or “market cap,” as the talking head types shorten it) is simply a company’s market value. The way to determine it is shockingly easy: Multiply the number of outstanding shares of a company’s stock by the current price a single one of its shares, and you will determine market capitalization. Not exactly rocket science. If a company has a million shares of stock outstanding and the current share price is $20, then the market cap is $20 million.

Companies are generally categorized based on market capitalization. Different brokerages use slightly different numbers, but here’s the basic breakdown.

“Small cap” means a company with market capitalization of $250 million to $1 billion. The upside potential for these stocks can be great—but the risks can be too. If there is a small-cap stock that you believe in and you see potential for the company’s business to grow, research it. Look at the sector it’s in and make sure saturation hasn’t been attained. For instance, when Starbucks first started to expand in the late 1980s and early 1990s, there just wasn’t any competition. If you bought shares in the company then, the upside was huge. But even then it was a risk. If Starbucks failed, so too did your chances of ever collecting on the money you had in it. There was no parent company to come riding to the rescue and absorb failure.

“Mid cap” is what you call a company with market capitalization of $1 billion to $10 billion. This kind of stock represents a sort of happy medium between risk and security. Companies this size tend to have some upside growth (like a small cap) while retaining a larger cushion to fall back on. If you have a girlfriend who you don’t want to lose, but still want to get some on the side, a mid cap might be the discreet call girl you’re looking for!

“Large cap” companies have a market cap of $10 billion to $50 billion. They are also referred to as “blue chips.” These are the big boys. When building a stock portfolio, you should anchor it with a steady amount of blue chip stocks. Instead of huge peaks and valleys, growth in these stocks is just steady. But they can withstand most any financial storm. If you are getting to retirement age, large cap stocks are seen as the safest “equity,” or stock, as they are historically steady. And these are also the companies that are getting the bailouts. So shit, even if they do something scandalous or just aren’t competitive with the rest of the world, we taxpayers still have to keep them running because they employ too many of us and are cornerstones of our economy.

With these basic categories in mind, everyone has to figure out their own tolerance for risk as they go back into the market. Of the money I have in stocks, I keep about 40 percent in blue chips. I keep about 15 percent in high-risk stuff and another 15 percent in medium-high-risk. But the key is making the ratio work for you and your situation. Then the biggest thing is to stick to the plan you come up with. Because if there is one absolute truth in all of this, it’s that everything is cyclical—no matter the scale of the downturn, if we can wait it out, it will turn back in our favor. Just look at the stock market crash of 1929. It’s the famous example they showed us in Finance 101. Anyone who stayed in their positions in 1929 came out ahead in just a few years. So you don’t have to just hope things will turn around, you can be sure they will.

3/4/2009

Duffonomics: When the Banks Go Bankrupt

By Duff McKagan

“Formal education will make you a living; self-education will make you a fortune.” —Jim Rohn

This week has brought to light the fact that two of our largest U.S. banks are likely insolvent. Bank of America and Citi Group are at the center of this maelstrom. The spin by the CEOs of these banks is that everything is going just fine and that Wall Street and various economists are overreacting. Maybe so. But the discussions about these banks lead me to my latest attempt to simplify some current financial events and maybe even diffuse some of our collective anxiety while I’m at it.

Insolvency, whether perceived or real, is the last place any bank wants to be. Banks must of course carry and show their “financials,” or, financial statements. A basic breakdown of a healthy financial would show that you own more than you owe right at this very moment. Whatever extra you own beyond what you owe is your equity (“assets” minus “liabilities” equals “shareholder equity”). Now there are myriad ways to cook the books—you might value an asset at more than it is currently worth, for instance, or assert that certain liabilities (or debts) can be put off for a year or two—in order to make a current financial statement seem more attractive and less alarming.

Have any of you heard of the term “mark to market” being bandied about in the news lately? This is an accounting term and another example of talking heads in the financial news business pontificating with the assumption that we know what the fuck they are talking about ahead of time. How would we? Mark to market simply means that in the asset column of a financial statement, there could certainly be a difference between what an asset is “marked” (or valued) at, and its current market price. If a bank lists a property as worth X but the current market price is lower, they may have to show their mark-to-market difference. Right now, as you may imagine, this would not be a very attractive prospect for banks. It could well be such an exercise would show that they owe more than they could possibly pay for in the current market. Meaning: Insolvency.

Likewise, some of us may currently owe more on our home than it is actually worth on the open market right now. This is called being “underwater.” Some of us will choose to stay in that house and ride out this storm, but others may have no choice but to walk away (loss of job or loss of confidence in the real-estate mark for instance). The underwater phenomenon, coupled with the number of bad loans to people who could never pay the mortgage they received in the first place (or who got stuck at the wrong end of an adjustable rate mortgage—or ARM—and couldn’t refinance), has left many banks holding sacks full of crap. True mark-to-market transparency at this moment would be alarming for sure. As I said, bank CEOs are working feverishly right now to quell this anxiety—a big job.

On the bright side though, after the infamous runs on banks and the bankruptcy of a large portion of the banking sector from 1929 to 1932, the U.S. government created an insurance corporation to guarantee our bank deposits. Since 1933, the FDIC (Federal Deposit and Insurance Corporation) has provided a buffer against the dire sort of anxiety depositors faced at the height of the Depression. Banks must pay this insurance so that our money is always safe, whether they fail or not. The FDIC was given its first test when a number of big savings and loan banks failed in the 1980s.

I don’t really buy into much of the current alarmist financial news and information, but I have to be honest: The prospect of insolvency does give me pause. I had a couple of accounts at Bank of America. I am not too sure that I want to test the deposit insurance. If B of A were to fail, how long would I have to wait for my dough? In that interim time, will I receive a reasonable interest rate? I’ve been looking at the financials of a few local banks—I’d like to put my money into a bank that played it safe so I don’t have to worry about the particulars of FDIC.

3/11/2009

Duffonomics: Ponzi and Madoff

By Duff McKagan

“There is nothing wrong with men possessing riches. The wrong comes when riches possess men.”—Billy Graham

Before I get too far into this article, let me make a suggestion to everyone reading this; turn off the TV and don’t listen to news radio for a little while—it’s way too brutal to watch. Maybe instead, listen to some AC/DC or Prince and go for a run, or better yet, fuck your brains out. It’s just not going to do anyone any good to watch financial news right now…bleak at best. Okay, I’ve said it.

Today we will apparently see Bernie Madoff appear in court and, according to his lawyers, plead guilty for his part in the 15-or-so-year-long bilking of his investors. Madoff’s reign of deceit was a well-draped Ponzi scheme that collapsed once the financial markets began their downward spiral. But what is a Ponzi scheme? How did he get away with all of this? I will now do my best to speak plainly on this subject so we can all get a general understanding and therefore avoid anything like Madoff’s scheme happening to us!

Charles Ponzi was a young Italian immigrant who came to New York in the early 20th century to find his fortune. He came upon a clever marketing and investment tool in international postage stamps. The deal was pretty simple in that an inexpensive Italian postage stamp could be traded straight across for a U.S. postage stamp; however, the U.S. dollar was incredibly strong against the Italian lira and the profits were something like 400 percent. All of this was actually legal and thought of to be genius. The good word spread regarding the genius of Ponzi the investor. As more and more ordinary people began to invest with Ponzi’s company, it became apparent to investigators that there just weren’t enough postage stamps in circulation to actually back all of Ponzi’s claims. When his earliest clients wanted to get paid on their investment, Ponzi simply paid them with new money he was getting in. But most people stayed in with him—after all, if you were making 50 percent return on your money, why would you pull it out? In basic terms, he was taking from Peter (new investor) to pay Paul (old investor), and there was really no financial instrument making any money. The stamps were a ruse at that point. Homie was found out and went to jail, but not until he had bilked some $15 million in 1920s dollars from his victims—billions in today’s dollars.

Ponzi was in no way the originator of this type of financial deceit. Charles Dickens wrote in the mid-1800s of a pyramid-like money scheme in A Tale of Two Cities. I remember one of my economics professors speaking on the fact that these types of cons have been around since antiquity; Charles Ponzi just happened to do his dirty-deed in a time of modern communication: word spread and the moniker was his.

And then there is Bernie Madoff. Last December, he admitted that his asset management firm was nothing but “one big lie,” a massive Ponzi scheme. Because of Madoff’s high-esteem on Wall Street (even serving as chairman at Nasdaq), he became a trusted name and highly sought-after broker of the wealthy’s investment accounts. Madoff frequented the social events of the posh and even enlisted outside agents (see Sonja Kohn, who is allegedly in hiding now, allegedly trying to avoid Russian mobsters who lost money in the Madoff scheme) to lure big fish from beyond the U.S.

Since the breadth and complexity of Madoff’s financial knowledge ran so deep, few if any questioned his investment methods—they were even marketed as “too complicated for outsiders to understand,” making a value of the opacity of his schemes. Madoff duped even the smartest of the smart, including members of the Securities and Exchange Commission (the overseer’s of U.S. stocks and bonds, simply put), and heads of many financial advisory firms. Rene-Thierry Magon de la Villehuchet of Access International Advisors committed suicide a week after Madoff’s scheme started to unravel; Villehuchet discovered that he had lost $1.5 billion of his investors’ funds.

And to top it all off, unlike a common criminal, Madoff has been permitted to continue to reside in his multimillion-dollar luxury Manhattan home under house arrest. Seems all those connections to the wealthy and powerful are still paying dividends.

All of this points to the importance of understanding what is happening with your money. I don’t want to end up broke with my broker holed up in a luxury apartment, and I’m sure nobody else does, either. Together we can do our best to avoid that situation: The key to protecting yourself is also the reason for this column—getting and using basic knowledge.

3/18/2009

Duffonomics: Bad News Bared

By Duff McKagan

“Beware of false knowledge; it is more dangerous than ignorance.”—George Bernard Shaw

Last week, I started the column out by suggesting we all may be better off not watching any financial news at all now because it’s all just too shitty. Endless negative news does nothing good for the soul or the psyche. The recession of the early 1980s had arguably much worse data than this current one (in terms of jobless rates and decline in gross domestic product, etc.), but cable news was in its infancy then and we didn’t all have instant access to tales of financial woe via the Web to make us knee-jerk and sob.

On Friday morning of last week, two friends emailed me urging me to watch The Daily Show with Jon Stewart from the night before featuring guest Jim Cramer from CNBC’s Mad Money. To me, Jim Cramer is the epitome of what not to do when looking after your own financial portfolio. He is an excitable day-trader, and his tactics are nothing short of Las Vegas gambling. Stewart and Cramer have been exchanging jabs on each other’s shows and Cramer accepted Stewart’s invitation to be a guest and get everything out on the table; Cramer walked into a buzzsaw.

Not only were Cramer’s on-air tactics called into question, but Stewart also posited that guys like Cramer—and, in fact, his entire network, CNBC—were as much to blame for the financial downturn as predatory sub-prime mortgage lenders (see my previous post on this topic). “If it bleeds, it leads” financial news apparently gets high ratings, and that means even higher advertising dollars for the networks. Stewart surprised his guest with previously unseen video footage that appears to show Cramer talking about manipulating the hedge-fund market with made-up rumors that negatively affect a company’s stock price. (Cramer responded that he had been talking in the abstract.) A downturn in a stock-price is an upturn for those, like Cramer, who specialize in the short-selling of stock. (I will cover some of these practices next week.) Cramer was shaken by this unveiling and promised to change the format of his TV show. Jon Stewart is my new fucking hero, a champion of anti-bullshit.

Ben Bernanke, the chairman of the Federal Reserve Bank (usually called the Fed), was on 60 Minutes this past Sunday. If anyone wants a simple primer on what the Fed is and how our money supply works, check the show out. This was my first real look at Bernanke and I must say he impressed me with his common-sense knowledge of all things economic. He is a steady presence at the Fed and a person I now trust at the financial helm in these hectic times.

Earlier this week, both President Obama and Bernanke spoke out against AIG giving almost $170 million in bonuses to their executives. AIG has thus far required four separate federal bailouts totaling $160 billion and executive bonuses at this time seem grossly inappropriate. Obama has responded by proposing a bill that gives the Fed additional oversight and controls over banking practices. This would mean corporate America would have a watchdog other than the seemingly inadequate SEC—the institution that failed to sniff out Bernie Madoff.

In the following weeks, along with continuing discussions about financial basics, I will also try to answer some of the questions that readers have sent in. Maybe together, through dialogue, we can collectively forecast a bottom to this market and be prepared to take advantage of the eventual upswing. A lofty goal? Maybe. But I believe shared financial knowledge will eventually create a more solid market for us all. We will know the worth of things and we will be able to smell out BS. Until then.

3/25/2009

Knowledge Now Means Dollars Later

By Duff McKagan

“Never invest in a business you cannot understand.”—Warren Buffett

Okay, step away from the TV and all of the news about the AIG executive bonuses. Sure, it feels great to get pissed off right now—and it’s completely justified. But we must focus on what we can do in the upcoming months and years for our long-term personal financial security. An economic recession begets a slowing economy as we all tighten the purse strings to try to ride this thing out. Maybe with some understanding of how the economy works, we can feel more confident and perhaps even loosen our purse strings.

I have had a ton of questions regarding your 401Ks and what’s actually in them. Understanding the basics of financial instruments like stocks, bonds, CDs, etc. is important if we want to capitalize on our economy turning around—and it will turn around! Your 401K is simply just a grouping of financial instruments that some financial planner has deemed best for you and the company you work for. Let’s look this week at what a common stock is.

A stock is a type of security (or financial instrument) that indicates actual ownership in a corporation and represents a claim to the assets of that company. (A bond, on the other hand, is a loan to a company or government agency for which you are paid back with interest.) There are many ways to value a stock. It’s somewhat like going to the farmers market and comparing corn sold by two different vendors. Say an ear of corn is 50 cents at one booth but 75 cents at the other, and the quality is the same. You would more than likely buy the 50 cent corn. But if the 50 cent corn is rotten or otherwise inferior, the 75 cent corn is the better choice. The same sort of logic and diligence should be used when choosing a company to invest in. Too often we just send our money to our broker, or press “buy stock” on some Internet site without doing any research on the company we are buying into. We’re not entirely to blame—we have just not been taught how to value an individual company and the industry it competes in.

A price-to-earnings ratio—or P/E ratio—is simply the price the stock is currently trading at divided by the earnings per share. (Earnings per share are calculated by taking a company’s net earnings and dividing it by the number of outstanding shares.) If a share price is $20 and the earnings are $1 per share, then the P/E ratio is 20. P/E ratios are one of the main tools investors use to gauge not only a company’s value, but also where they stand in their particular industry—to be able to compare ears of corn, in the example above.

One way to find a P/E ratio for an entire industry is to look at websites like Yahoo Finance. You can find a chart listing with “industry statistics,” including the sector-wide P/E ratio. By comparing the stock you are interested in to the industry average (as well as by comparing that industry with other industries), you will have another gauge for your decision-making process.

There are other bits of information to look for in the news about a company. Here are a few:

Good earnings reports: It’s often a good sign if a company reports good or better-than-expected earnings. Bad earnings will usually have a negative effect on a company’s stock price.

A new product or service: If a new product is created by a company, it could mean increased profits. The potential downside would be liability issues arising if the product were found to be defective, for instance.

Financial problems: If independent analysis reports problems with a company’s financial health, that’s something to take into account. (A company’s annual report is required to have a statement from an independent analyst. These independent analysts must report their true findings under penalty of the law.)

A new business deal: Keep an eye out for company announcements of favorable business deals such as a joint venture.

Even if you are not in the market right now to buy stock, try tooling around the web and getting in the habit of educating yourself. Figure out what sites offer the information you want in ways you like. As I have said before, if we are prepared and educated, we can hope to avoid another economic downturn like the one we are currently witnessing. Shit, I’d like to prosper on the way up and out of this thing. How about you?

4/1/2009

Bond-age Gear

By Duff McKagan

“Having money ain’t everything, but not having it is.”—Kanye West

Last week we covered the basic definition of a common stock. We also delved into some of the factors that can help decide if a particular stock is a good buy. This week, I hope to clarify not only what bonds are, but also some of the fancy language that surrounds them.

As discussed, a stock is an actual piece of ownership in a particular company—when you buy a stock, you become part owner in the company (you have “equity” in the firm, and this is why stocks are also called equities). A bond on the other hand, is a loan you make to a company or government agency. In return for this loan, there is a stated yearly coupon rate (or interest rate) that is promised to be paid to you as the creditor.

A “corporate bond” is simply a loan made to a corporation and the money you recoup from the coupon rate is fully taxable. Because the payments made to you are taxable and because corporate bonds do not have the solid backing of a bond issued by a government agency, the coupon rates are usually higher than for government bonds. Corporate bonds are often called “paper” on Wall Street—you’ll hear “corporate paper” and “commercial paper,” but they both mean the same thing.

As for government bonds, “treasury bills” are issued in three-month, six-month, and one-year “maturities,” which means the amount of time before the loan will be repaid. They are bought at a discount to “par,” which is a fancy way of saying the face value of the bond. A discount to par just means that they have figured out beforehand how much interest they will owe you at the end of the stated period and hence sell the bond to you at a discount reflecting the value of that interest.

“Treasury notes” (10 years or less) and “treasury bonds” (30 year—also called a “long bond”) differ from the treasury bills in that 1) they will have a higher coupon rate, and 2) they pay the coupon rate usually twice a year and 3) they are bought at their $1000 face value. Notes and bonds already in circulation on markets, however, can change hands for amounts different from their face value. If, for instance, the current coupon rate were higher than last year’s, you would buy that bond at a “discount,” or less than its stated face value. If there were an older bond with a higher coupon rate, then you would pay a “premium,” or a specified sum above the $1000 face value.

The interest paid on all treasury bills, notes, and bonds is exempt from federal income tax. Then there’s municipal bonds—similar idea as treasury bills, but issued by state or local governments. In states with state income tax, municipal bonds offer a double tax-free feature—they are free of state and federal income tax.

Credit ratings are available for both corporate and government agency bonds. (Yep, some cities or towns have been known to default on a loan or two, or try—hello Bridgeport!) The crappier the credit rating, the higher the yield on the bond—it’s just like when we have a crappy credit score, the bank can charge us a higher interest rate. Credit ratings go from really good (AAA, AA, or A), down to really bad (CCC, CC, or the dismal single C). While a bond with a C rating (also known as a “junk bond”) may pay a really high coupon rate, the risk of default may be too high for the average investor. Standard and Poors is the best resource for finding all bond credit ratings.

If you have heard the term “laddered portfolio,” this simply means that you have purchased different bonds with dates that mature when you are ready to receive the money. If you are 30 years old, it may be time to buy a few 30-year bonds per-year (for the next 20 or so years). You could use the interest payments now for other investments like stock; then, when you're 60, you would start to receive your principal back. Hey, I am not your financial advisor, just food for thought!

4/8/2009

Duffonomics: Do We Need to Reconsider the Idea of a Central Bank?

By Duff McKagan

I had the pleasure of watching Senator Bill Bradley guest on Real Time with Bill Maher the other night. This guy is flat-out smart and really understands how our money and banking systems work here in America.

Bradley made an interesting point. He said that if we—that is the taxpayers, via government action—had bought Citigroup, we could have bought it for “$10 to $15 billion dollars” and then, “six months later,” sold the good assets back into the private sector for “eight to 10 times what we paid for it.” This would have taken care of the toxic assets and turned a profit for the American taxpayer. Instead, we have bailout pledges of up to $400 billion to that one bank alone.

Political conservatives think such a move—nationalization of a bank—is just too damn “socialist” to see the obvious upside of it, an upside in an area they care deeply about: taxation. The difference between the plan currently underway to spend hundreds of billions of dollars propping up banks versus the much cheaper takeover Bradley advocates is huge in terms of government spending. And the bill for that spending is going to come due—meaning the result of conservatives’ reluctance to be more aggressive in saving the banking system now will spell higher taxes later, either for us or for our children, depending on when we start paying it back.

In staying with the educational slant of this column every week, I’m going to change gears here. This week I want to give a brief history of the Fed with the hope it will empower you to gain more confidence as we prepare ourselves for the eventual economic recovery—and maybe even change your mind along the lines of Bill Bradley.

The Federal Reserve, or Fed, is our central bank, empowered to regulate the quantity of money and the banking system and serve as lender of last resort when banks are unable to satisfy demands for withdrawals from their own reserves—as happened during the bank runs of 1929. The Fed was established in 1913. But the Federal Reserve was preceded a century earlier by a series of efforts to establish a national bank which would serve as banker to the federal government, stabilizing private banks by providing credit in times of crisis.

The idea for a central bank was always controversial in American politics, condemned, for instance, by Thomas Jefferson as a dangerous centralization of power. The first Bank of the United States was established in 1791, but its charter from Congress was allowed to lapse after only 20 years. The Second Bank of the U.S. was chartered in 1816, largely in response to the disorder following the War of 1812.

President Andrew Jackson disliked the Second Bank, and made it a campaign issue for his 1832 reelection. Jackson felt it functioned to help the rich, it hurt the smaller banks that he felt were crucial to the development of the American West, and it centralized power too much; he also raised corruption charges against bank managers. Jackson vetoed a renewal of its charter and then tried starve it. The result was that the Second Bank, too, lasted just 20 years, closing in 1836, at the tail end of Jackson’s administration.

If not for these failures, the Fed could well be called the Bank of the United States, following the model of other central banks like the Bank of England. But centralized banking conflicted with the American ideal of decentralization, states’ rights, and so forth—Jackson, in fact, had transferred the federal government’s deposits to state chartered banks during his attempts to starve the Second Bank.

I am a big fan of the ideals behind capitalism, but these ideals have been undermined by greedy advantage-takers who have thought only of what’s best for them, and not the country as a whole. Maybe the objections to central banking in the past have actually become the justification for moving in that direction now? Indeed, a centralized banking system to act as a watch dog for us workers and taxpayers may today be a good idea. After all, according to Senator Bradley, we would already be on our way to a profit if we had acted this way with Citigroup. And making a profit is good business! Food for thought at least, right?

4/15/2009

Duffonomics: Why Teabaggers Need to Check Their Junk

By Duff McKagan

Before You Go Teabagging, You Better Check Your Junk

This week, I am going to break away from the educational emphasis that I have thus far maintained. In my Playboy mission statement, I wrote about my hope that we could all perhaps learn together as this column progressed, and that over the course of that process this new knowledge could be transformed into power to help us in these troubled economic times. But this week I’m talking money in only the most general sense. With tax day just past, I want to point out some bullshit that has been going down—a sort of propoganda being spread by network news. My plea: Let us not be sheep.

Have you heard about these so-called anti-tax tea parties that are supposedly a grass roots effort built up by local networks of concerned citizens? Well, I have no problem with protests of any sort, but this has to be one of the most uninformed and politically-motivated that I’ve ever seen. Fox News seems to be instigating this whole mess, and its viewers seem to be following like so many mindless sheep.

Let us get to what I think is the main root cause of this recent protest. Sean Hannity from Fox claims that people are protesting because they have just filled out their tax forms and are horrified to be paying 30 to 40 percent of their income to the government. You can hear the media echo: Obama must be stopped! Of course, this is utter bullshit, as any tax that we pay right now was set-up up by the previous administration. Why is this blamed on Obama? Well, the Republican Party is so beat up right now that they seem to be resorting to lies and innuendo as a last and desperate resort.

Newt Gingrich and Dick Armey (great name, by the way, for someone playing a role in a mass teabagging effort) seem to be the primary idea guys behind this “protest,” and it seems that Fox is the only channel making this story news at all. Neil Cavuto from Fox defended his station against criticism of harboring an anti-Obama slant this week by saying that Fox news was there to cover the Million Man March in 1995. It should be noted that Fox News did not even start until 1996.

Another conservative tool of late is to throw the “socialism” card. They want to convince us that Obama is a socialist and that socialism is a very bad thing. Let us not forget that our economic system takes from aspects of both capitalism and socialism. If we didn’t have aspects of socialism, there would not be Social Security or Medicare, just to name just two government services we take for granted.

I may be looked at as a tree-hugging liberal for writing this piece. The fact is, I am not. I believe in Adam Smith and his invisible hand theory—I just don’t think of it as a sacrosanct or inviolable principle. I believe that government also needs to use a hand to keep corporate greed at bay. I also think that at times like these, a central bank would be beneficial to this country. (Check out the book The Forgotten Man by Amity Shlaes.)

What I am getting at is that it is important to our recovery and sense of confidence for us all to look under the hood when it comes to the news and those who report it. I’ll have my chance to do so soon: I am booked to be on Sean Hannity’s show on May 8. That should be interesting!

4/22/2009

Duffonomics: A New Metric: The NASCAR Index

By Duff McKagan

A lot of you have written in or even pulled me aside on the street asking when and how to get back into the stock market. While there is not at this time a perfect formula for "timing" an economy or any of its machinations, there are things to examine within the information that is readily available. For instance, we have certainly reached some historically low common stock prices when it comes to solid companies that make products that will always be needed. So perhaps it is bargain-hunting time.

I have a friend in Seattle who is a popular DJ for our sports channel known as the Gas Man. He and I have talked a bunch about our views on personal finance and he apparently is a fan of this column. (Well, let’s be honest: what other finance column has naked chicks above it, right?) Gas has recently come up with a pretty brilliant stock-picking formula that falls right in line with what I have been trying to highlight thus far here at Playboy. You could call it a return to quality.

Gas is a huge NASCAR fan and I will quote an email he sent me a few days ago:

“The sport is struggling a bit now because it’s such a sponsor-driven deal and obviously there aren’t as many companies in a position to put money into something nebulous like racing sponsorships. [However,] there are companies still doing it despite the fact that a top-shelf full season sponsorship deal can run upwards of 20 million bucks!”

The Gas Man’s thinking was this: If a company is still willing to shell out that kind of money for a sponsorship deal, they must be doing relatively well even in this down economy. That makes good sense to me.

In March, he bought shares in Caterpillar, Coca Cola, Home Depot, Kraft Foods, Molson/Coors and UPS. In April he added Brown Foreman (who own Jack Daniels), DuPont, Kellogg and Penske Automotive Group. As of Monday morning, his "NASCAR Portfolio" was up five percent! Pretty darn good.

He adds that in doing this, he is paying attention not only to the market as a whole, but also to any news he may hear about the particular companies in his new index. In other words, he is educating himself and getting more informed for eventual further advantage-taking as the market rebounds.

We should all hope that these markets will not rebound too quick. When you have a boom, you will almost always see a bust follow soon thereafter. By investing in solid, slow-but-steady growth companies, you can hedge against a rollercoaster ride in your investment portfolio.

Look around at the tangible things that you see at the office, in your neighborhood, or around your home. In other words, look for the products people are using every day. Are these fad products or things that have been around awhile? Try also to understand what a company does before you invest in it; in this way, you will be able to understand news about the company when it comes down the pipe—good news or bad.

4/29/2009

Duffonomics: West Virginia is the Future of America

By Duff McKagan

West Virginia is the Future of America—and That’s a Good Thing

My band Loaded have just started to tour our new record, Sick, and our first area of attack has been the American South—the region hit perhaps worst by this most recent economic recession. I say most recent because, again, I want to stress that economic recessions and depressions are cyclical—and we have always come out of them.

Traveling to Huntington, West Virginia, from Augusta, Georgia, by bus takes you straight through the heart of Appalachia and its depleted coal towns and “hollers”—valleys known as hollows, or hollers in the local drawl. This area long ago got used to being ignored when it comes to government infrastructure help. Diane Sawyer did a two-hour expose on poverty in the Appalachian Mountains a few weeks back that was jaw-dropping. The stuff she documented just shouldn’t be happening here in the States—but it is.

Huntington itself is the town that holds Marshall University, of “We Are Marshall” fame. Many people in Huntington have still yet to see this film, as the memory of losing more than 30 of its young men in a single incident still burns like a fresh and jagged cut. On the day of my visit, last Friday, it was the day before the annual spring football scrimmage at Marshall, the culmination of spring practice and a peek at what might be in store for the fall season. An event like this is equivalent to play-off baseball in big cities, a real event. Many alumni from the undefeated team of 1999 were said to be in town. But all I saw on that afternoon were closed shops with “for lease” signs and boarded-up storefronts. To my eye, about 60 percent of the businesses were shut down.

As I walked across town, I wondered to myself whether this place would make it through. I looked at a decrepit 15-storey building that once housed a bank, no doubt making loans to earnest young businesses and families at a time when there was plenty and growth had no horizon. Coal was king. Those times, to my northern and untrained eye, were long gone. When I got to the venue for sound check (V-club on 12th), the first signs of how wrong I was in my assumptions about this small town began to become apparent.

The club itself was one of the best of its size that I’ve seen anywhere. Attention to sound and lights was second to none and there was an air of cool that I wasn’t expecting. (I was probably expecting the club-owners to be a bit downtrodden after the walk through town.) A parcel had been delivered to the club from a local investment firm, inviting me to talk with them about new opportunities there in town. They also wanted to talk to me about the things I write about in Playboy, and to explain how a small town like Huntington, once reliant on income from coal, was making a full and vibrant turnaround. I asked the club-owners about all the boarded-up storefronts. They made me feel foolish, revealing that some of the places were actually refurbishing while construction was so cheap.

After sound check, I walked in the darkening night to the hotel for a pre-gig shower. What I saw as dismal in the daytime became lively and dare I say beautiful that evening. While I was approached by a few people on street-corners for a handout (an ever more frequent occurrence wherever you go), it was the people going into brightly-lit and freshly-scrubbed restaurants and bars that turned my head. The streets were humming with life and an unspoken hope for what is to come.

I began to think at that moment that a story like Huntington’s could very well epitomize the true American story. The people here know what adversity is and don’t sulk in its shadow when they very well could (without being blamed one bit). No, this town knows how to dust itself off, put its blinders on, and forge ahead, learning from its history but not getting mired in it.

5/13/2009

Duffonomics: Suze Orman said what about me?

By Duff McKagan

Suze Orman Said What About Me? Find Out—and Learn the Real Meaning of Long-Term.

“The successful man will profit from his mistakes and try again in a different way.”—Dale Carnegie

Now that I have my own financial column, other luminaries in the financial media have been able to publicly comment on the strategies that I have tried to outline here. Case in point: Suze Orman (whom I think is really pretty great) recently stated that my investment strategy was “old-school.” I happily agree.

It has become painfully apparent that the new-school tactics of day-trading, short-selling, second mortgages, and other short-sighted, quick-bang investment schemes have woefully failed. Can any of us really “time” a market? History shows that no one person or strategy has perfected a method to do so as of yet.

I like to think about the long-term. What qualifies as long-term? These days, some would say that anything more than a year fits that description. What I focus on is something different: I would argue that any long-term investment must exceed the need for cash in the times of a recession. Even if you are not planning on cashing in your 401k or IRA accounts for another 20 years, you must take into account economic roller-coaster periods and prepare for a recession of some sort happening at the very moment you want to cash out.

If you don’t prepare you could be screwed. You never know when the economy may take another dive and there are no reliable forecast models for something like that. Which is why I advocate so much diversity in your portfolio. Usually, when one sector (say, microchips) is up, another (maybe telecommunications) is down. Booms and busts often vary by region, too, so you can hedge your bets by holding, say, both emerging Asian market indexes in India and blue-chip Pacific Rim mutual funds. Have an investment plan that gives you the best possible chance of an upside when you finally need the cash.

For the long-term investor, asset allocation plays a key role. The term refers to how much dough you put into each asset class—stocks, bonds, cash, etc. This recession has shown that many of us thought we had a higher risk-tolerance than we in fact have. In good times, a high-risk portfolio can certainly reap higher rewards. But when things begin to fall, a high-yield portfolio can and often does fall faster and remain lower for longer when recovery does come about. It’s a simple concept—high risk, high reward. But you can’t avoid being realistic (and smart) about the risk part of that equation.

The best asset allocation in my opinion is something safe, something that works in good times and bad. If you want a sexy stock that you hear about at the office, that’s fine; just don’t fill your portfolio up with nothing but high promise pipe dreams. Running all hail-Mary plays is no way to win a game. The point here is to retire with your retained wealth remaining just above inflation.

I know this doesn’t sound particularly racy or exciting, but come those golden-years you may look back and think what a wise thing it was to have bypassed the shot at some quick cash in a stock with no real promise beyond Wall Street hype or Jim Cramer-like bluster and bull. It’s guys like him—and people who bought into that mentality—who got us into all this trouble in the first place. And like Suze Orman said, I’m at the other end of the spectrum—as far as I’m concerned, slow and steady wins the race.

5/20/2009

The Dirty Side of the Music Business

By Duff McKagan

Up to this point in this column, I’ve been writing almost strictly about financial vehicles or wading into the economic muck that we as a nation have gotten ourselves into and trying to bring some clarity to the situation. If I may be permitted, I would like this week to go on a little rant about some things that have been going on in my business and also how the business model for music has pretty much been flipped upside down over the last 10 to 15 years.

Back when I was in GN'R, bands like us could pretty much operate at a break-even point on the road because acts were selling more records than is even imaginable these days. The reason for the dramatic downturn in record sales, of course, was the digitizing of music. Putting music on CDs meant it had to be in digital form; eventually this led to the situation where digital files like the MP3 were divorced from any physical product, making the Internet and home computers the prime means of distributing music. A rock tour back then, at the dawn of the digital era, was really just a huge commercial to sell your record. Because a larger portion of people get their music for free via piracy these days, touring, “merch” sales (mostly t-shirts, but also stickers and pins and anything else you can slap your band’s logo onto), and licensing of one’s music for ads and ringtones must support the average music act these days.

The major record labels missed the only real opportunity to get paid from illegal downloading back in 1997 or so. We all remember the Napster conundrum when Metallica sued them, right? Hey, as far as I’m concerned, Metallica had every right to demand payment for their hard-wrought recordings. But there was another deal on the table then from Napster that was never really publicized—and this where the “major labels” fucked up in my opinion.

Napster was making truckloads of dough off banner ads back then. It seemed the site was the most looked-at space on the Web and therefore a hot property. Car companies, cola bottlers, movie companies, and many others were paying top-dollar to get access to those Napster-glued eyeballs back then. Napster offered to share this ad revenue with the major labels so that artists would get paid for the downloading of songs that Napster made available for free. It now seems like the perfect business model for what was then a largely unanticipated future of digitized music. The majors balked and a huge opportunity was missed.

Again, in 2005 or so, the remaining major labels tried a lawsuit against pirate music source Kazaa. And again, the company under attack offered to share its ad revenues but were turned down. Actually one major peeled off from the lawsuit and did a deal with the Kazaa; the rest just simply dug their heels in and are still in the same spot to this day, left in limbo with neither them or their artists getting paid.

Nowadays, if a band wants an even remote shot at getting a deal with a major label, they must yield to the new business paradigm of giving up a portion of their publishing, their merch sales, and even concert receipts to the label in return for the release and marketing of the band’s music. This all seems dirty to me, but it’s the way things are now done—at least in the old corporate music world.

Back in the mid-to-late 1970s, there was a grassroots revolt against the then-bloated music industry (read the book Hit Men to get an idea of just how extreme the business had gotten). Independent record labels like IRS, Slash, SST, and Beggars Banquet began to spring up, giving new and different bands a chance to succeed and reach a national audience. The same thing has happened again in recent years as a result of Internet distribution. But right now, there’s almost too much information out there. A club booker now books bands based on how many views they get on their MySpace page. Bands have to hustle—maybe even more than in the pre-MySpace era—just to get a gig at a shitty bar. What seemed like a revolution fueled by the Web now looks somewhat tenuous.

But maybe the rest of the dominoes are ready to fall—and by that, I mean the ancillary parts of the music industry. I hope there is a true music revolution bubbling right beneath the surface of the underground that will hopefully surprise us all and get us away from, for instance, the vanilla agenda rock radio feels it has to follow these days in order to sell ads. Music blogs, internet radio, mashup sites—there’s a lot of things out there, of course. But with the possible exception of iTunes, the world is still waiting for the next wave of tools and institutions that will allow new acts to ingrain themselves into the popular consciousness the way bands like GNR were able to do—to create generational anthems, to mark moments in time for an entire nation, to unite our culture through music. Here’s hoping their arrival is right around the corner.

5/27/2009

The New American Business Person: It's Not Who You Think It Is

By Duff McKagan

My job as a touring musician allows me the chance to see a lot of places. My job here as a financial columnist sharpens my skills of observation when I’m out on the road and makes me see things differently or to notice things I might have otherwise missed.

A couple of weeks ago I wrote about how Huntington, West Virginia seemed to be a place that exemplified how America can and will recover from this recent economic downturn. I like to be able to highlight positivity and to shine a light on the things we can do to help pull ourselves up by our collective bootstraps. Well, I’ve just stumbled upon another little town that I think needs a mention. Let me explain.

The other day, I woke up on my bus and hopped out to go into my hotel room. Apparently, I was in Freeport, Long Island—in New York state. We drive all night and at times I have no idea where I am at when I wake up. The Freeport Inn and Boatel offered clean, comfortable rooms right on the water (all for $111!). By the way, sometimes I will "tweet" if I make a cool find on a hotel or restaurant (I am Duff64, FYI). I tweeted this place and got a tweet back that this was the hotel where the Joey Buttafuco and Amy Fisher had their now-famous trysts back in the day. But none of this is my point here, actually. What I really noticed about this place was the new paint and clean landscaping. A real pride of ownership was obvious.

I love the water, and as far as I’m concerned anything waterfront kicks ass. I was greeted in the parking lot by the general manager of the hotel, Joseph Creamer, and we started to talk. Joseph is 29 years old and also serves as the VP of the Freeport Chamber of Commerce. Creamer has a plan to spruce-up some of the blight that currently dots many areas on an otherwise pristine and potentially income-producing waterfront area. He envisions the industrial buildings and power plants being moved out of the area to make way for boardwalks with nice restaurants, boat marina services, and clothing shops.

Joe pointed across a little sliver of water to a big vacant building. Right on the water. Apparently, the Freeport Fire Department uses it once a month to do real fire drills; the rest of the time, it stays empty and unused. Joe suggests that another building be built for the F.F.D. in neighboring Hempstead so this one can be leased to a catering service that could hold waterfront weddings, parties and corporate events. The money that Freeport would make on the liquor license would pay for the fire department facility in Hempstead and Hempstead would come out a winner, too. This was only one of many prudent and well-thought-out ideas Creamer had for what he hopes can be a thriving and prosperous Freeport. He is the kind of person we need to eventually lead us out of these muddy financial times.

It seems common in our cities and towns for mayors and city managers to be in their late fifties or older. Many are stuck in an old way of thinking and perhaps a little too comfortably entwined with the business and banking establishment that got our country into the fine mess we are in right now. It might take guys like Joe to see a “toxic asset” like a foreclosed house as an opportunity to put some people to work refurbishing that house and getting money circulating again from the ground up. Simply put, it’s time for you 20- and 30-somethings to get off your asses and let your voice be heard. Get active in your community like Joseph Creamer has. He is the new paradigm of the American business person—tattooed and full of positive energy and fresh ideas.

6/3/2009

This Week: How Important is Consumer Confidence?

By Duff McKagan

Something called the Consumer Confidence Index was measured as having the highest weekly gain in six years last week. The CCI measures and averages the buying patterns of Americans here in the US on things that are not only necessary like utilities, but also non-essential things like movies, books and new cars. Wall Street seemed to momentarily exhale and the Dow Jones Industrial average (the Dow) shot up some three percent the day the news was released. Good news indeed.

Back in 1936, when the US was into its seventh year of the massive Depression Era, unemployment had finally dropped to a national average of 14 percent from a high of 22 percent. Of course, 14 percent had been the peak unemployment during the recession of the 1920s (yes, there have been many recessions), but in the context of 1936, this drop was a welcome and huge relief from the previous few years. During those years, the sight of jobless men wandering the streets had gone from shocking to commonplace. The thought of any kind of progress had long since been replaced by dreams of simple recovery. Our memories are short, and if you are not a student of history, maybe it is time to start to bone up a little on some of the many historical economic recessions since our country’s inception.

It has been only one short year since the Dow reached its all-time high of 14,000. Doesn’t it feel like a lifetime has passed since then? Back then, we all had dreams of our 401Ks doubling again in another five years. The sound of our jet-skis whining on the lake and the sights of our hi-def big-screen plasma TVs were thought to be some sort of God-given right. And, oh yeah, housing prices were going to continue rising through the roof into perpetuity, too. Ah, but we have all learned a most valuable lesson and I for one, think that we will eventually come out of this whole thing a much stronger and healthier nation because of these hard-learned financial lessons.

The “Buy American” segment of 60 Minutes was rebroadcast again last week. Six months ago, shutting off our borders to foreign trade seemed like a good idea. The idea was to buy only American steel, American-grown produce, American cars etc. This was, however, an emotional aspirin that was ill-thought-out and, thankfully, smarter and cooler heads prevailed. Raising any sort off tariff would of course diminish the chances of us selling our goods abroad as well. For a company like John Deere, which exports a lot of its equipment, this could spell absolute disaster and perhaps even bankruptcy. Our American sellers badly need customers right now; a “Buy American” clause in any sector of our domestic production would be likely to create repercussions from outside on a scale we would just not want to contemplate.

This week’s piece is certainly not meant to be any sort of downer or harbinger of future gloom. Actually, I am excited about things ahead. I wrote last week of a gentleman I met in Freeport, Long Island who was already envisioning future boom times for his town. This week, I met and spoke with a young contractor whose business had been slowing to a stop—until he heard a piece on the news about the Federal Government threatening to fine banks that didn’t keep their foreclosed houses in better shape. (Whole communities are becoming peppered with these eye-sores, as banks neglect properties they’ve repossessed.) My contractor friend is now contacting these banks to offer his services as a sort of property manager/upkeep guy.

Necessity begets invention and that is the American way. What are you going to do?

6/10/2009

A Reconstituted GM Might Want to Look to Harley-Davidson as a Model

By Duff McKagan

My manager Rick Canny and I should take a stab at getting our U.S. economy back on track. I swear that by our third cup of coffee on a usual morning, we have pretty much trouble shot every newsworthy business quandary of that particular day. We are well-read dudes in the business world—why not us? Let me invite you all inside one of our conversations.

First off: I am all for government spending. But I am for the kind of spending that creates long-term jobs. It’s tough to say how much of the spending back in the 1930s led to jobs with longevity. Seems as if a lot of WPA projects back then were pet projects of various politicians. Politicians are not a group with a great reputation for seeing things through for the long haul. Obama talks a good game, but only time will tell whether his projects are designed for longevity.

Okay, now on to solving America’s business dilemmas. This past week GM became the biggest bankruptcy in the manufacturing sector in the history of our country. Where do I start? So, as I understand things right now, we taxpayers will end up with a 60 percent stake in GM when it reemerges from Chapter 11. On top of that, via a union controlled trust fund, the United Auto Workers have another 17.5 percent, basically by default because the UAW pension fund is that big at this point.

Obama wants GM to make fuel efficient cars and I think that is great. But folks, we are in a fight to save a gigantic car company—the world’s largest—and one that fuels a large part of our US economy. Let’s face it, as far as I’m concerned, GM makes a lot of crap. I was being driven in a Cadillac the other day and the insides were basically falling apart. It was a new car!

With this in mind, I was thinking that Harley-Davidson might be a good company to look at and find some lessons. In 1969, after diversifying into scooters and boats and all sorts of bikes, Harley merged with AMF, a company with no experience building motorcycles. The Harley brand got pimped to the hilt, and the quality of the bikes became something of a joke. The company sputtered. And the story could have ended there.

But instead, in 1981 a group of 13 heartsick Harley executives bought their company back from AMF. They realized that the only way for their company to recover from the laughing-stock status it had reached would be to return to quality. They instituted a ground-breaking just-in-time production regime. They designed innovative new power trains. They did research to find out what buyers actually wanted and started make those sorts of bikes—customs, heritage re-issues, raked-out choppers, lots of chrome, an emphasis on reliability, etc. They created and nurtured an owners club, called H.O.G., that had almost a 100,000 members within six years and half a million by 2000.

And what do you know, the company made a robust recovery. By 1986 Harley was able to go public on the American Stock Exchange, switching to the New York Stock Exchange the following year. I can personally attest to the attraction of their bikes to consumers—I own two myself, a 2006 Road King and a 2007 Street Bob. I’ve ridden that Road King all over the country. As for an American car? It’s been about 20 years since I bought one of those, I’m afraid. And that’s telling.

At some point in the 1980s, GM seems to have decided that their new business model was to become the world’s largest automaker. They began to buy up other brands such as Opel and Saab; their own brands proliferated with Saturn. The focus seems to have diminished as far as getting a customer a car they wanted at a fair price, and to have increasingly been set on getting the bottom line to soar like a high-performance engine. It is obvious now that neither of those two things happened.

This is my public plea for GM chief Fritz Henderson to return to quality and innovation. Follow an example like Harley-Davidson and make kick-ass cars that we consumers want. It is possible to have high-performance and energy-efficiency. That is probably the defining engineering challenge for the industry, and it would seem manufacturers like Nissan and BMW have a leg up in an arena—car engineering—where US companies took pride in leading the world for many decades. Not surprisingly, those were decades of profitability—and decades when people around the world lusted after American cars. The UAW and the US government must get active through their ownership stakes; their input can help make this all happen. Let’s put our people back to work and have an American car company that we can once again be proud of.

6/24/2009

Don't Believe the Hype—the Recession is Not Over.

By Duff McKagan

I travel a ton. Because of that, I’ve seen this financial crisis from some very different perspectives. It’s proven interesting—especially against the backdrop of today’s 24/7 business news. How financial news is covered affects how the viewer perceives good or bad economic data—and I’m not immune to that. So it’s useful to be able to compare not only various places, but to be able to compare on-the-ground impressions of these places with media reports.

Last fall, some of you may remember a photo used on the cover of practically every newspaper in the world, and run as a header on nearly every TV news broadcast. The shot was taken outside a Lehman Brothers office in London and showed the backsides of a row of financial workers who had just been laid off. It was the beginning of our credit-crunch freak out. I was actually in London when the events in that photo happened.

Last week, I returned to London to find the headlines of The Independent, one of the main British daily papers, declaring the recession over!

Well, there it is folks, that was quite the recession rollercoaster ride wasn’t it? All joking aside, there is an air of confidence building right now—and it is a bit stronger over here in Europe, where I’ve been touring lately. Part of that may have to do with the fact that in the UK and Europe the average citizen is not barraged with politically slanted financial news on a daily or hourly basis. Sure, MSNBC International can be found on your hotel room TV, but the recession and home foreclosures certainly are not a staple in the daily conversations of your average Joe over here. As someone said to me here last week, “We don’t freak out here like you do in the States.” And with perceptions, rather than fundamentals, playing such a significant role in our modern global financial system, this does indeed seem to make a difference.

I was on a plane from Geneva to London last week and the person next to me happened to be some big-time Swiss finance guy. He was going to London to try to poach a financial planner out from under some other firm’s nose. (Talk about confidence.) As we chatted during the flight, I wondered aloud why he shouldn’t give me the job—and I was only half-joking! I mean, when it comes to financial matters, I get stuff right at least most of the time.

But there’s a reason for that. I pay attention. There was a British pension fund that came under fire during my visit for not doing its due-diligence before investing in some Icelandic government bond funds last year. Iceland defaulted on its bonds in the wake of the global meltdown. I guess all I am trying to get at here is that you as an individual must do your own research when determining what is actually going on. That is true with your own investments and, importantly, with investments made for you by others.

Obviously, we can’t avoid mistakes. And there are fundamentals we can’t avoid being affected by. But it’s still important to make up our own minds, to gather our own evidence, to assess things based on our own perspectives. Financial news in America right now is plagued by an underlying political slant. May I suggest for now, close your ears and open your eyes. There is useful information all around you.

Another example: at the end of my stay in the UK, British Airways asked its 40,000 employees to work for up to a whole month without pay. Like I said, don’t always trust what you read—even if it is the fucking Independent. Recession over? Maybe not quite yet.

7/1/2009

A Word That's Too Dirty Even for Wall Street

By Duff McKagan

U.S. Treasury Secretary Timothy Geither stated flatly last week that “capitalism will be different” and that American companies would reset the way they work.

The ideological roots of capitalism were codified by Adam Smith back in the 18th century. A simple distillation of Smith’s ideas would go something like this: In a free and open market society, every niche market will eventually be filled by necessity—because of a profit motive. If that guy is selling apples, then I guess I will sell oranges. Smith went on to state that the need for a large governmental system would be minimized since prices would set themselves, resources would be utilized with thrift and new ideas would be prized and harnessed accordingly.

For the first 140 years of America’s history, that sort of capitalism and a democratic government made for an inventive, hard-working and free-willed society. We made the best of everything and our average citizens were hard-working and full of enterprise because of a realized reward at the end of a hard day's work. One could come to America and simply become anything or anyone that one wanted to be (unless you were a slave or Irish, but that is a whole different essay). Sometime in the 1950s, when all of our men from World War II had settled nicely into their well-deserved office jobs in a thriving post-war economy, corporate America and its underlying greed started to rear its ugly, fat face.

More and more of the economy came to be dominated by corporate entities instead of family farms, small businesses and private companies. One of the downsides of that type of ownership is that corporations are by definition amoral actors. Their responsibility is to the shareholder—profit must be their only consideration. Aiming for profits is all well and good—that’s what drives small businesses, too. But the corporate charter divorces that aim from any other considerations that might affect decision-making at a family or private company (like the effects their decisions have on their community). Decisions being made by corporate executives at AIG and various banks were bad for society, but they were basically the right decisions for the corporations, as they were big money-makers. You could even argue that it would, in fact, have been irresponsible on the part of those executives not to exploit regulatory loopholes and innovative business models that could yield such huge profits. But when the gap between those two ends—corporate good and societal good—becomes wide enough to cause the kind of crisis we’re now in, you have a problem.

We are glad to see people like Bernie Madoff personally punished for their greed, manipulation and insider know-how. Markets, on the other hand, do not care about who did what or how long a jail sentence is. Markets only seek stability and then they move on. Markets will not seek to address underlying issues on their own. After all, those executives who put us in this mess may have been laid off, but they still have their fat bank accounts. And the imperiled corporations are getting our tax money to stay afloat. It’s a win-win for insiders. But it’s not fair to the rest of us.

For markets to function as Adam Smith discussed, regulation is absolutely necessary: How else can you insure the quality of information that allows markets to operate in a rational way, for instance? How else can you avoid fraudulent assertions by a corporation about its own financial health? How else can you keep corporations from over-reaching when their sole responsibility is to create profits, consequences be damned? You can’t. Despite the way “regulation” has been hurled around like a bad word in recent years, a properly functioning market is a regulated market. As the current crisis has shown, the openness Smith lauded—and which is necessary for markets to work correctly—is not something businesses are inclined to foster on their own; insiders stand to gain too much from a lack of transparency. Openness must be forced upon them via regulation.

The machinations of American capitalism may well be getting re-tooled. Ceilings on corporate salaries and new federal watchdog groups could help stem drunken, reckless financial greed. And that’s a good thing. Many of the talking heads right now would not admit it publicly, but it’s possible that the markets may indeed be stabilizing. Why would the commentators admit it—how could the situation be improving if their solutions to the problem have not yet been implemented? As I have stated from my first column here months ago, turn the volume down when FOX News, Bloomberg, CNBC and MSNBC are airing.

Market capitalism isn't perfect, but it’s the best system yet devised and has created the best standard of living for the most number of people in the societies built on it. But for it to survive, it must be regulated, it must be fair and it must be ethical. Transparency and fairness are two principles that must be made priorities as we work our way out of the mess we’re in. With those principles, the markets can hum efficiently to all of our benefit, as they should; without them, we will inevitably face another crisis like the one we are going through now.

7/8/2009

Can Berets Save Washington State Farmers?

By Duff McKagan

I have finally returned home to Seattle after touring in the States and Europe since the beginning of April. During that time I wrote of my travels and how this recession has impacted different parts of the world I have visited since taking up the pen for Playboy. Regional economic awareness is important for us all if we want to fully understand how we are to take advantage of the upswing out of these flat times, no matter where you live. Local knowledge gives us the granular understanding; global insight will give us breadth and scope, which is also important as our economy is part of a worldwide spectacle.

This week, I’ve found myself focusing again at that regional or local level—back home in my own region. In 1998 I bought a little slice of heaven in Central Washington, right on the Columbia River in the valley where most Washington apples are grown. Until the 1980s Wenatchee, Washington had thrived as a clearinghouse for most of this area’s fruit produce. This high-desert plain is the westernmost reach of Big Sky country and is perfect for growing healthy and delicious apples, cherries, peaches, nectarines and various berry crops.

About 30 years ago, real estate along the river began to rival apple growing as a riverfront money maker (crops, of course, are more cost effective to grow with easy access to the river for irrigation). People with fortunes amassed at Microsoft, Oracle and Amazon began to see Central Washington as an easy-access playground, a short distance from Seattle, and a place where things like golf and water-skiing could be done in warmer and much dryer environs.

We all know what has happened over the last couple of years to those people’s wealth.

I have had the chance to see this area expand and contract with an outsider’s eye. I don’t really live here. I visit a few times a year, and when I do, I go to the same restaurants and stores that I’ve always gone to. I’ve seen new houses built where there were orchards before. I’ve seen Jack Nicklaus golf courses sprout up with luxury resorts attached. In short, I believe this area has grown too fast based on the assumption that profit margins and ever-expanding wealth would never wane.

What made this area prosperous for so long was quickly forgotten; the prospect of a fast buck trumped crops on acre after acre. The apple growers have been hurt by it. The nouveau riche have been hurt by it. The Columbia River flows on, unaffected and as unconcerned as when Lewis and Clark first floated down it in 1805, or when the Grand Coulee dam was built on it during the Great Depression.

But this is America’s heartland, where adaptation seems to happen quicker because the average working man doesn’t have much of a cushion to land on in a financial fall.

As of late, farmers and growers have focused their gaze on the steep hillsides above the old apple orchards. The aridness of this area approximates the weather in the best grape growing sections of Italy and southern France. Irrigation is cheap because of the Columbia River and its many tributaries flowing out of the snow-capped Cascade mountain range. Local wineries in this area are now regarded as some of the best in the world.

The central Washington farmer is back in business it seems—though now with slightly red-stained feet and a keen eye for berets and fitted shirts. America will always find a way to adapt, and it’s a nice thing to witness.

7/15/2009

The Pros and Cons of Capitalism, Part One

By Duff McKagan

An economic crisis slows growth, and when countries need growth, they turn to markets. After recent currency crises in East Asia in 1997 and Mexico in 1994—which were far more painful for citizens in those places than our current meltdown has been on us here in the U.S.—we saw the pace of market-aimed reform and "push-starts" speed up. In the years ahead, if American consumers remain reluctant to spend their squirreled-away dough, if federal and state government continues to squirm under a looming shadow of debt, if government-owned companies remain expensive burdens, then private-sector activity will be the only place where new jobs will be created.

I know that I have previously touted FDR-type government spending as a key component of economic recovery and job creation. The simple truth, however, is that despite all its flaws and fuck-ups, capitalism remains the most productive economic system we have yet to invent. This week’s piece is part one of two on the turmoil inherent in that system and how, ultimately, it may be a key component of its success.

The capitalist system means growth, but also instability. It is prone to crashes that cause ugly damage along the way. For about 90 years, we have been trying to regulate the system to stabilize it while still preserving its dynamic energy. We are at the beginning of yet another set of these Herculean efforts ("set" because of course, no single fix will work). I am a student of history, so in undertaking this new set of efforts, I think it is important to train a keen eye on the things that got us here this time. What got us here is not a crisis of capitalism. It is a crisis of finance, of democracy, of globalization and, in the end, a crisis of ethics.

Our financial system got screwed up—or more to the point, financiers screwed it up. In 2007, when the economic crisis began, blue-chip companies like Microsoft, Coca-Cola and Wal-Mart were all running their companies with strong balance sheets and tried-and-true business plans and models. These American companies were highly profitable and they were spending wisely, holding on to cash in case of any economic downturn. For that reason, many such companies have been able to weather the storm well. The finance industry and anything finance-related (including real estate) is a whole other story.

Finance has a history of fucking up, from the Dutch tulip mania of the 17th century, the South Sea bubble of the 18th century, and through a series of panics here in the U.S. during the 19th century, culminating in the prolonged depression following the 1873 crash. The specific causes of these busts has varied, but they follow a mind-numbingly similar pattern. In calm times, political stability, economic growth and technological innovation all encourage an atmosphere of easy money and new forms of credit. Cheap credit causes greed (see my earlier column on that topic), miscalculation and, ultimately, ruin.

To be continued next week.

7/22/2009

The Pros and Cons of Capitalism, Part Two

By Duff McKagan

It seems that monetary incentives for banking executives have been skewed toward the riskier side of things. But the money they have been gambling with is not theirs. As I said in last week’s column, when times are good financiers get reckless. Which in the past few years meant, for instance, bundles of bad mortgages getting sold to the general public without much disclosure or transparency about the real content of those bundles.

Banks were being called casinos because of the way they gambled with people’s money. But that would be unfair to casinos. Las Vegas casinos must—by law—keep a specified amount in reserve to cover their asses. The banking industry does not have the same regulation. You read me right.

This does not mean that we must now over-regulate and clamp down on every last aspect of the American finance industry. We tried that for a while in the 1930s and it just about killed us as loans became too difficult for banks to make, choking business. But I do think continued regulatory tinkering is warranted. Why? Take Canada. That country’s banking system has weathered this latest crisis better than almost any other—because, it would appear, the same basic regulatory framework for their banking industry has remained in place even as industry trends have changed with the times. Canada has not lowered the regulatory bar to suit whatever the financial fad of the day was.

Our past few Presidents, along with Congress, have touted the idea of home ownership. And we the people bought into it. Since the 1980s, Americans have also consumed more than we have produced. For home ownership and all the consumer goods that we have demanded, we have borrowed with an almost reckless abandon. It is true of us as individuals—increasing credit card debt, mortgages that represent bigger portions of our potential earnings, and so forth. And it is true of us at a societal level, as our governments—from local on up to federal—have used debt to cover almost every conceivable burden. Only by raising taxes and cutting expenditures will we begin to lessen our national, state and municipal debt.

The U.S. is not alone when it comes to putting off paying for things like Social Security and health care to a later date. Europe and Japan suffer from the same disease. At some point, though, we will all have to pay for the borrowing and procrastinating, and when that day comes, we had better be prepared. Obama is not a dumb guy, and I hope he is at this very moment studying flubs from the past in order to learn a thing or two about getting us all out of this crisis with the least amount of pain—and in a way that fosters more sensible financial behavior in the future.

What happened to the global financial markets over the last 30 or so years was made possible by cultivating a willful ignorance of the failures of the past that have resulted from boom-time lust. Our current crisis is not a product of failure. It is a product of success.

7/29/2009

What's the Real Deal with Health Care Reform?

By Duff McKagan

This past week, I was fortunate enough to be included in the beginningstages of what could be a breakthrough financial news TV show. If it goes forward, the format will be a roundtable discussion, and all of the people they had me sit in with were ridiculously smart—a good thing for me, because at times I have a really hard time trying to understand what is at the core of some of the more heady financial topics. In fact, I feel that way right now about the health care reform bill. Are some of you with me on this?

I voted for President Obama, and when I cast my vote for him I did so with the understanding that I was also voting for some sort of reform that would make health care, if not universal, at least more accessible to those who needed it. But when I voted for Obama, I thought I was also voting for a guy who could best articulate such reforms to me so that their many implications would be somewhat transparent. With Congress taking five weeks off now, is it time we rethink rushing this bill through? (By the way, this congressional recess dates from the 1800s when Washington got too hot to hold sessions on the Hill—but hey, we’ve got A/C now, people!)

What are the main points of this bill and who wrote it? (Not what members of Congress wrote it, but what interest groups—good or bad—are behind its myriad details?) Exactly who will this money go to and how much will be eaten up by administrative costs? Has anyone in Congress read the full text of the purported 1,080 pages of this bill? Has President Obama read it in its entirety? And all of these surtaxes and “tax the rich” taxes—where does that money go? I also can’t help thinking that perhaps we should balance our budget and deal with the recession and our escalating debt before we adopt new, potentially expensive programs.

Let me add that I'm inclined to support health reform in the abstract. In addition to the obvious benefits, our economy would be stimulated as a result of freed-up disposable income. And I would be the first in line to pay a higher tax rate if I thought a well-planned universal health care program would be the result. I would welcome the burden of those costs falling on my shoulders.

I heard over the weekend that some 47 million Americans do not have health care. Okay, but how many of those are illegal aliens—and do we want to pay for their health care? I think that’s a legitimate thing to discuss and it shouldn’t get lumped in with the jingoistic anti-immigrant rhetoric or glossed over because people are afraid of being lumped in with the anti-immigrant crowd. There is also a large number of people who are offered health care through their workplace but choose not to take it—do we suddenly want to cover them? When I was in my twenties, I thought I was ironclad and invincible, and chose not to buy health coverage of any kind. People like that would now be covered. Hey man, I would have taken free health insurance back then if it was offered. But are we willing to go a reported $1.3 trillion in debt to cover some of these things?

Sometimes debt is warranted—it can even mean long-term savings. Just think about a fixed-rate mortgage. When you go to sign that paper and see the total amount you would pay over those 30 years, you think, Holy shit, that’s a lot of money. But then you realize that renting the same place for those 30 years would cost more, as rents go up whereas your mortgage payment will stay the same. That’s good debt—when you come out a winner despite the initial sticker shock. I think the question with this version of health care reform is—or should be—whether we can be reasonably sure the expenditure now will save us money in the future. Because any halfway decent reform should result in huge savings. As it is, we spend much more per capita for health care than other rich countries and for worse results. If a reform could really move us in the other direction, it would be worth quite a hefty upfront cost.

But I’m not convinced. How can we as Americans be sure where this money is going especially if we are being kept somewhat in the dark about the details of the bill? At this point I am so sick of waste and politics—and I fear this reform may exacerbate both. I’m pretty damn sure that I don’t back this thing at this point. I want Congress and the President to take more time to get this right and to explain it to me.

Write to your representative now via email if you are concerned like me. Demand details about the money trail. Every email counts as ten votes to them. Better yet, Twitter or Facebook this article to your friends. If your representatives are like me, they will listen.

8/5/2009

Cash for Clunkers is More Than a Program—It’s a Paradigm Shift

By Duff McKagan

A couple Fridays ago, I happened to be watching CNN Headline News when a story came on about the then-upcoming “Cash For Clunkers” program. It sounded interesting enough, but to be honest it was just another news story to me. Around noon that same day, I went to my mailbox and saw I had received something from the U.S. Department of Transportation. Huh? It seemed—the DOT explained—that my 1995 Ford Bronco now qualified me for up to $4,500 if I were to trade it in and buy a new car.

Because I had been directly contacted and considered for a government program, I suddenly took some interest in how this program—official name CARS—worked. Apparently, you take your clunker to a car dealership and choose a new car to buy or lease. The dealership must destroy your old engine and show proof to the government that it did so; the dealership must scrap your old car at a scrap yard and show proof of that, too. You get the scrap value in addition to your government credit, then you buy the new car from said dealership. The dealer submits all the paper work and the National Highway Traffic Safety Administration (the part of the DOT that administers the program) reimburses the dealer for the credit you got on your new vehicle. The actual amount of the credit is tied to the difference in fuel economy between your old vehicle and your new one—a difference of four to ten MPGs gets you $3500 and a difference of more than 10 MPGs gets you $4500.

It seems that everyone wins here, right? We are getting some much-needed cash flow into our economy and the car companies are getting a much-needed boost. The program has been capitalized with $1 billion and an additional $2 billion is pending Senate approval, having passed the House. Together this equates to enough cash to subsidize the sale of somewhere in the neighborhood of 750,000 new cars. Last year, the total number of cars sold in the US dipped to 13 million, down from a high of 17 million in 2006 (and America’s Big Three manufacturers saw their sales decline faster than those of major foreign automakers). Some would argue that this new government incentive will barely make a dent, but at least we are getting some money flowing in the right direction.

But what about greed and corruption? We all know that car dealerships are the kings of hidden costs. Are they acting with full disclosure and crystal clear transparency? Do you have an underlying mistrust now that we’ve all been screwed by one greedy bastard or another in the last few years? I do find it very interesting that GMAC is suddenly making car loans again. We have all got to be careful this time around, people.

That said, I do warily applaud this new program. In my case, I won’t scrap my Bronco because I like it, it’s worth more than $4,500, and it’s driven so rarely that we use a full tank of gas only a few times a year-making its de facto carbon footprint negligible. But I think the program has been well thought out—the laws regulating the CARS program specifically target a lot of the areas where dealerships and scrap yards might try to play fast and loose. And certainly it will pump some much needed cash into our stagnant economy by convincing some of us to dip into our dusty coffers and spend money on a new car.

There’s another interesting aspect to this program: We have now seen what our government is capable of in terms of competence and speed. They have quickly worked out a comprehensive plan here, from destroying engines and scrapping cars to finding those of us who qualify for the program (like me and my Bronco). The fact that our government can pull this all off has me thinking about the health care reform bill.

We often hear that something like 46 million Americans are without health insurance, right? If the government could create a database to find those of us who owned cars with fuel efficiency ratings below 19 MPG, could they not also ascertain who among us chooses not to carry health insurance despite the fact that they can afford it? How many millions of us are in our twenties or early thirties and have good jobs but don’t even think about health insurance because, frankly, we have yet to experience any serious medical problems? What about those people who would rather buy a fancy car or a house they couldn’t otherwise afford and forego necessities like health insurance in order to keep up with the Joneses? Wouldn’t it be more palatable to us all if we knew that any health care reform was covering only those us of us who actually needed it? I believe we Americans would happily supply a safety net for needy single moms, for instance, but many of us fear we’ll also be underwriting BMWs for status-conscious twentysomethings. If that fear could be removed, health care reform would be a piece of cake.

All I am really saying is that with this Cash For Clunkers program, the government has raised the bar. The government has proven it can find people who qualify for a very specific set of criteria. It has shown it can create a well-thought-out plan and implement it. Let’s keep that going. What do you say?

8/19/2009

Why Is This Country Stuck in Partisan Limbo?

By Duff McKagan

So much is happening—and so quickly—that a weekly column barely stands a chance of staying up to speed. I thought that maybe I could try to recap what is going on and see if any of you has a comment or feels a need to sound off.

GM announced plans for the release of the Chevrolet Volt, a new form of electric/gas hybrid that gets a purported 230 mpg and can be plugged into ordinary household electric outlets. Right now it will only go 40 miles on battery power alone, but the onboard gasoline engine recharges the batteries on the fly and allows the Volt to go more than 600 miles per tank of gas. GM also announced a partnership with eBay to start selling cars direct to consumers via the internet. Is this stuff sexy enough to turn the tide for GM? Is it strictly symbolic, or does it demonstrate that GM is finally going to catch up to the times and also listen to consumers and make a product we want?

On the other side of the coin, have we as a nation learned to be more prudent and economic shoppers? Some experts say that consumer confidence is showing a slight rise. Last September, when Lehman Brothers were making their first job cuts—indicating to the rest of the world that something was seriously wrong in the financial sector—it was the beginning of what became a pandemic consumer panic in the West. We all just turned off the spigot as far as our spending. Any tax bonus that we saw in the stimulus bill was instantly squirreled away as opposed to being spent. We were too scared to stimulate anything, and that was probably not accounted for sufficiently.

Recent talk about whether the bank bailout is working has me confused. It’s like the banks had a hostage and we paid the ransom—except they still have the damn hostage. I’m not a banking expert, but this whole thing never smelled right to me. Still, I do feel a tangible change in the air as far as people parting with their hard-earned dough. The news that we are losing our jobs at a slower rate helped. I guess the situation is still pretty dire, though, if news like that boosts confidence on Wall Street and Main Street alike.

These recent town hall meetings regarding the health care reform bill have given rise to a disturbing realization that we must face here in America: 38 percent of our population didn’t vote for our current president, and that minority seems to hail from a place where yelling about false realities is not only condoned but reckoned to be intelligent. I know the euthanasia provision is a really bad part of the bill and we should all rally to get that shit taken out of it right away—how dare that Obama put anything about my Grandpa anywhere near any sort of national health legislation, how dare he!

Um, actually, no, hang on a minute. Note to America: Read and understand things before you start an uproar over something you heard. I downloaded the entire 1036-page proposed health care bill and found not one reference to euthanasia. We are all collectively and singularly smarter than this—or should be.

9/2/2009

Why Glenn Beck Is a Symptom of What Is Wrong with America

By Duff McKagan

News broke last week that many major sponsors advertising on Fox host Glenn Beck’s nightly show will be pulling out. If any of you saw his “Obama is a racist” segment, you would probably agree that having your corporate name associated with this loose cannon is most likely a terrible idea.

The thing that gets me about Glenn Beck is that I used to think he was pretty cool. His CNN show a couple years back was a show that I’d sit and watch. Back then, Beck seemed to have a cat-bird seat somewhere in the political middle, where he’d toy with guests and challenge the viewer. Now, however, he has apparently bought into some weird angle that I am sure he hoped would keep a certain type of advertiser supporting of his gig for life. I am glad to see this scheme has backfired. What a moron.

I have previously addressed the problem I have with certain factions of the left or right trying to spin the other side into the worst possible light. At what point do we just drop the politics and try to do what is best for our country? Aren’t two wars and the biggest economic recession in 80 years enough to get us to unite for the purpose of making a safer and stronger country? Let’s all get with the damn program.

This polarization has got to stop. I can’t in good conscience just point my righteous finger at the conservatives. Liberal media, too, skews the news to fit their political motives, albeit with less bluster and shouting.

This brings me to an idea that just might work: Let’s run the U.S. like a corporation. That’s right, let’s stop trying to get Presidents ousted as soon as they take office and instead do the opposite—make terms an eight-year commitment. Would Lee Iacocca have been able to realize all of his reforms if he had to worry about a re-election two years into his reign at Chrysler? Or take Bill Gates. This man is a visionary and is constantly unveiling new ventures that you realize are the result of a well-thought-out, long-term plan.

Corporate security at a company like Microsoft is taken very seriously. Do you think Bill Gates would commit his firm to some ill-thought-out war in Iraq on a rumor? Hell no. But that’s not my point really.

A guy like Reagan got the country close to the way he thought it should be run, and Clinton pretty much spent his time tearing that apart and remolding it according to his vision. George W. Bush in turn tore apart Clinton’s efforts and now Obama is reversing a lot of Bush’s work. It’s kind of like a damn rollercoaster if you really think about it, right?

Has there ever been a sort of “happy medium” in the history of this country—a time when a workable balance between social programs and business incentives was struck? A balance where Democrats and Republicans were both happy with the direction of this country? It seems that we could indeed come up with one and this could possibly turn back the current tide of anger if not alleviate this antiquated (in my mind at least) two-party obnoxiousness.

That’s right, run this country like a great corporation—with pensions and health insurance, security and growth potential, research and development. We would act as the shareholders, with the power to axe the acting boss, or at least put a chief on notice. Does this sound too much like a utopian dream? You may argue that we need the checks and balances the legislature and courts were originally set up to provide. I guess I am just getting real sick of politics and wonder whether TV and its bellicose talking heads will ever again let an acting President just do his or her job.

10/28/2009

The Banker Bonus Debacle

By Duff McKagan

Last week, as I traveled back to the States from 20 days in the U.K., it seemed the front pages of every newspaper were splashed with outraged headlines about baker bonuses. Goldman-Sachs is considering a worldwide bonus package of $35 billion, an average of $600,000 to each of its 5,500 London workers alone. Why would banks consider any sort of bonus at all with the U.K. and U.S. taxpayer carrying most of the burden of making these banks "whole" again through the massive bailout packages put forth in the last year?

It's interesting to note that the word "bonus" stems from the Latin meaning of good, as in beyond the call of duty. So how and why are bankers considering any compensation above and beyond their base salaries? In this whole economic crisis, had not the banking industry been to blame from the start? Was not greed in our financial industry the genesis of this credit crunch? (See my previous column on greed.)
When bonuses started in the banking industry some two decades ago, it was at a time when banking executives were making a relatively low yearly salary (say $100,000), but they were generating large amounts of capital. When we all started to "win" in the stock and real-estate markets a few years back, no one really blinked an eye when hearing stories of hedge-fund managers getting $20 million as a bonus. No, we all thought they were financial "rock stars."

Getting back to the Latin root for bonus: wouldn’t it make more sense to re-phrase this as "commission"? Personally, I have no problem at all with an investment guy making money off of me when he makes me more money. That's the way it works in most businesses. The more my band manager makes for the band, the better his commission is, but he doesn’t get a bonus and would never expect one—he's just doing his job. Conversely, if my band manager makes us nothing—or worse, puts us in the hole—he makes nothing, and would be rather apologetic. His reputation in the music industry would probably suffer, too. Who would want to be with artist management that makes no money for the artist? The word and underlying precedent of ‘commission’ would work, look, and sound much better for bankers.

The fear in the banking industry right now is, if they don’t pay out bonuses, large institutional investors will fear they may be coming up short somewhere in their balance sheets and are perhaps a risky bet. So banks here and abroad now want the government to tell them to stop paying bonuses or at least establish a cap. If good bankers want to rid the industry of all its fallen credibilty as fat and greedy heathens, a commission-based system would be a step in the right direction and help President Obama realize his vision of transparency in our banking system.

11/18/2009

Why China Owns Us—In More Ways Than One

By Duff McKagan

Understanding the U.S. and China Debt Situation: 101Treasury bills, notes and bonds have long been considered some of the world’s safest investment vehicles. When you buy a Treasury security, you are simply loaning money to the United States government; in return, you receive a guaranteed interest payment. In other words, Treasuries put our government in debt.

In the last year, China has become the biggest holder of U.S. debt, surpassing Japan. China now holds roughly $800 billion in U.S. debt of which we must pay about $50 billion in interest every year. This debt has been sold off by our Treasury Department to pay for Obama’s stimulus package. Trading debt in a global economy is a usual part of business and should cause no alarm. The debt trade plays heavily in how different currencies are valued on a day-to-day basis…but that is a subject for another column. This administration does hope to buy back this debt at some point, but for now, China holds the cards.

However, those cards also dictate another area when it comes to economic issues: the trade of goods between China and the U.S. Follow me here for a second. First off:

—China has recently attached their yuan currency unit to the worth of the U.S. dollar. That is, whatever the dollar is worth in world markets from day to day, the yuan is worth the same amount. Most other currencies, such as the pound or euro, have a floating value of their own, independent of the dollar. Attaching the yuan to the worth of the dollar makes inexpensive goods produced in China appear even cheaper.

Secondly:

—The U.S. will buy goods made in China because they are cheaper, and tariffs on these goods would only worsen the relationship between China and the U.S., thus complicating the debt situation and shutting down our already limited exports to that country.

Last year, "Buy American" clauses were being discussed during the presidential campaign. If we were to simply buy only American goods in the U.S., the backlash from other countries buying goods made in the U.S. would be truly horrific to our economy. (For instance, John Deere sells 80 percent of their product overseas. A "Buy American" clause would arguably shut down that commerce.)

The term trade means what it seems to mean: You give me something in exchange for something of equal value. The world trade stage is indeed a tenuous balance of give and take. President Obama has his work cut out for him when it comes to commerce with China and all of its machinations (human rights being the biggest collateral issue). For now though, trade between China and the U.S. appears to be a lopsided affair.