Time to stand up to the banking lobby
– Christopher Swann is a Reuters columnist. The views expressed are his own —
The crusading spirit that at one stage threatened to lead to the nationalization of U.S. banks and the downfall of their top executives now seems like ancient history.
Banks are again flexing their muscles and have turned the tables on America’s politicians. Remarkably, policy makers now seem to be struggling to secure even a modicum of needed change in the regulatory system.
The winter’s paroxysm of public anger has dissipated with astonishing speed. This is in spite of the fact that economic recovery still seems a distant goal and the woes of CIT Group suggest that even the financial system is not out of the woods. As a result there is now a real danger that the administration and Congress will fail to live up to Rahm Emanuel’s famous injunction never to let a crisis go to waste.
The ability of the financial lobby to hold onto its political power has been one of the great mysteries of the crisis. Few special interest groups have shown such flexibility in their logic.
As profits soared in the 1990s, their strength was taken as proof of their genius and politicians bowed to their every whim. After their crisis their weakness became a trump card. Hurt the banks, they argued, and the economy would go down with them. Now the banks are taking credit for a revival in profits that is almost entirely due to the extraordinary contortions of public policy.
The administration and Congress should not be taken in again. We are entering a crucial phase in the revamping of regulation and there is still little sign that the White House is putting enough political muscle into the process.
Stress test the consumer
– Christopher Swann is a Reuters columnist. The views expressed are his own –
People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.
A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.
Debt is at high levels — 130 percent of disposable income, or more than twice its peak in the late 1980s. A slide in net wealth has reduced the collateral Americans can draw upon for emergency loans. Finally, it is now harder to borrow money for new consumption or to roll over existing debt.
Like a compromised immune system, this weakness makes consumers extremely susceptible to further shocks. Traumatic as the recent bout of retail restraint may have felt, worse may be in store. After all, consumption rose by 18.5 percent in the seven years to 2008. So far it has only fallen back by less than 2 percent.
There are several potential mishaps that could swiftly undermine consumer spending and set the recovery back to square one.
Among the most likely problems would be a continued slide in house prices. Even on the conservative measures used by the Federal Reserve, the value of residential real estate has fallen 18 percent since 2006.
Unfortunately, today we face the effects. Jobs are being lost. What was once a two income household is now a one or no income household? Granted many of us have borrowed against future income and now it is difficult or impossible to repay that loan. Many will make mortgage and car payment while buying food and what clothing is necessary and the rest will go by the wayside. The rest will just hope they don’t take home and car to soon. It is sad.
Now for anyone to state that Gas prices didn’t contribute to the collapse get off you bicycle and try driving to work. I would love to get off of gas and onto a better more economical and efficient mode of transportation but the auto industry has done nothing since the last oil crisis in the 70s to bring the internal combustion engine to its fullest potential or put out a viable alternative to the gas guzzlers. What do they give us but toy cars like the Volt and crap like the hybrid? No we should not have bailed out the auto industry. They have brought this debacle unto themselves. I would have loved to see new blood come out and take over our auto industry.
The consumer is always the ultimate payer. We pay while our voice is silent in Congress. We pay while CEOs are paid 100 times their worth. We pay as our retirement funds are slashed in half and our government does absolutely nothing to bail us out. You could run a consumer stress test but, we would fail.
Learning to love falling house prices
– Christopher Swann is a Reuters columnist. The views expressed are his own –
Optimism has been all but extinguished from the U.S. housing market.
The number of Americans lining up for new home loans is shrinking again, according to Wednesday’s release from the Mortgage Bankers Association, and the best that can be said of homebuilding is that it has stabilized at almost 80 percent below its peak.
With no end in sight to falling prices, perhaps we should look on the bright side. Indeed, there are three good reasons why sliding prices are not such a bad thing.
Falling house prices are usually seen as wealth destruction. But they can also be seen as wealth transfer. The next generation of homebuyers will benefit from our loss. Those young homebuyers who have been able to cling onto their jobs are already reaping the advantage. The American dream of home ownership can now be achieved at bargain basement prices.
Take San Francisco. If you earned the median wage in San Francisco at the peak of the housing market in 2006, you would have needed to devote 75 percent of your income to meet mortgage payments on the average home. Now people will pay just 35 percent of their income, according to Ian Morris, chief U.S. economist at HSBC.
It would no longer be any surprise if prices remained stagnant for a decade – spreading the benefit of cheap housing for at least 13 million new households.
Why does everyone seem to think home prices are such a great deal now? Housing costs are only returning to normal values after a speculative bubble.
When they reach 2002 prices, plus some normal appreciation, they will be at the levels they would have been, if the bubble did not happen.
The Fed needs to get its wallet out
– Christopher Swann is a Reuters columnist. The views expressed are his own –
The Federal Reserve is putting on a brave face about the rise in Treasury yields.
At the moment, the Fed can afford to put off bringing out the big cannons for a little while. If market optimism is overdone, a few weak economic releases would soon send interest rates plunging again. If the market is right, then higher rates are justified and the economy will cope.
But Fed policymakers, who next meet in two weeks, should be getting the artillery ready. They have already promised to buy as much as $300 billion of Treasuries before September.
Unless rates come down swiftly, this limit should be increased substantially.
So far, the Fed has managed to confound the skeptics of their unconventional monetary policy.
Fed intervention breathed life back into the commercial paper market and the program appears to be winding down. The purchase of mortgage securities has driven the spread between 30-year mortgages and Treasury yields down to pre-Lehman levels. The result was a spurt of mortgage refinancing.
The Federal Reserve is already monetizing debt. Anybody who claims otherwise is being disengenuous.
The Fed’s buying about a third of the Treasuries being issued during the period and as much as 150% of the agency mortgage debt being issued during the last year.
Blunting Obama’s tax cuts
– Christopher Swann is a Reuters columnist. The views expressed are his own –
Obama’s tax cuts were meant to be the first strike force of the stimulus package. The main selling point — other than political popularity — was speed.
Higher take-home pay in April and May would be the first evidence many Americans would see of their government’s broad effort to rescue the economy. The hope was that this would prop up spending long before lumbering public work projects could get under way.
Yet the financial impact already looks set to be swept away. The recent run-up in gasoline prices and a surge in personal savings have provided an uncomfortable reminder of the diminutive size of the tax cuts.
The cuts are just part of a broad government campaign to revive the U.S. economy — along with fresh infrastructure projects, help to the states and bank bailouts.
Even so, boosting take home pay has been an important part of the White House strategy to prop up spending.
But the “Making Work Pay” deduction in withholding tax will amount to an estimated $116 billion spread over two years.
The government should have continued with residential stimulus instead of giving money to the banks. Businesses are the markets to make money. If they can’t sustain their operations then they shouldn’t be in business.
But instead of returning the tax money back to the consumer. Government bails business out and leaves the American family to fend for itself. Broke banks want you to pay them. Government wants you to pay them by taking your tax money.
If the consumer had been bailed out, mortgage payments would have been caught up with. Money would have been put back in savings. And banks would have had a much healthier consumer based to which to lend. But business searching for government welfare asked for and received money that should have gone to public social safety nets so that those at the top wouldn’t have to take any money from their own private reserves to fix their businesses.
The government needs to do it’s real job and invest in the American family. Bail them out. No bank is too big to fail. But even one family is too important to fail.
Double-edged sword in pay cuts
– Christopher Swann is a Reuters columnist. The views expressed are his own –
This recession is introducing many Americans to a novel experience — the pay cut.
Fifteen percent of employers surveyed by the Society of Human Resource Management reduced pay in the past six months — a threefold increase from earlier this year. Companies like Hewlett-Packard, Caterpillar and the New York Times have taken the pruning shears to wages.
Real pay cuts — when wages fail to keep pace with inflation — are commonplace in recessions, but you would have to look back to the 1930s for the last example of widespread cuts in nominal wages in the United States.
Since Keynes, many economists have treated nominal wage cuts as a virtual impossibility. In 1999, Yale economist Truman Bewley wrote the optimistically titled “Why Wages Don’t Fall During a Recession.”
Wage cuts cause huge resentment, damage moral and raise the risk of losing star employees. Bewley found American firms prefer to lay people off to “get the misery out the door”.
The notion that pay is rigid on the downside has been a cornerstone of much post-war economics. This assumption is now proving about as true for wages as it was for houses.
I have nutted out the problem we have here.
-You ask for criticism.
-I provide it. Based on economic theory.
-You reject the criticism. Because you don’t understand economic theory.
-You ask for proof the theory is correct.
-I tell you that proof is in the economy.
-You reject that proof. Because you don’t understand economic theory.
-You ask for criticism.
And so on, and so on.
You are not in a capacity to understand the criticism being made of your position. So regretfully, I can not see any way to engage in any meaningful debate with you.
If you want your questions answered, then do the research yourself.
To start yourself off, type in “Money is not a factor of production” in Google and work from there.
Obama’s disappearing stimulus
– Christopher Swann is a Reuters columnist. The views expressed are his own –
It’s not just California that threatens to sabotage the Obama stimulus. State and local governments across the nation are gradually unravelling federal efforts to revive growth.
The states have been inveterate stimulus eaters in the past. For most of the 1930s the expansionary policies of the federal government were just sufficient to offset the shrinking of state and local governments. Click here for PDF.
States also raised taxes in the recession of the early 1990s and in 2001. It was a problem that Obama — his team stocked up with renowned scholars of the Great Depression — was determined to avoid.
Sadly, the financial woes of the states and cities — many of them self inflicted — are overwhelming these good intentions. The maths now looks distinctly unpromising.
The Obama administration has pledged around $140 billion in fiscal assistance to the states with the express goal of saving them from tax increases, layoffs and painful cuts in services. But as state tax revenues have tanked, they now appear to be heading for a $370 billion shortfall over the next few years. Federal largesse will cover just 40 percent of the gap.
Nor is the roughly $200 billion fiscal drag from the states Obama’s only problem. America’s towns present a fiscal headwind as well, with an expected funding gap of nearly $100 billion, according to the National League of Cities. Taken together these could cancel out up to 40 percent of the federal stimulus.
On the other hand, the difference between insanity and genius is measured by degrees of success.
Financial heaven and hell
– Christopher Swann is a Reuters columnist. The views expressed are his own –
There is nothing like a home-grown financial crisis to undermine a superpower’s sense of superiority. The United States is finding it has something to learn from some of the world’s lowest profile countries.
Among those that are now being held up as role models are Denmark, Canada and Sweden.
This brings to mind the old joke about the European heaven and hell. In a financial heaven you would have Danish mortgages, Canadian regulators and bank rescues would be orchestrated by the Swedes. In a financial hell the mortgages would be Hungarian, the bank regulators would be from Iceland and the Americans would manage bank rescues.
Imitation is the sincerest form of flattery, yet there has been precious little of this. This is probably a result of the continued political influence of the financial oligopoly.
The common thread linking Danish mortgages, Canadian bank regulation and Swedish bank rescues is that they are all less favourable to the financial services sector.
The Danish mortgage system has huge appeal to everybody but entrenched interests. Emulating it in the United states would involve finally putting Fannie Mae and Freddie Mac out of their misery. It would also force mortgage originators to retain the full credit risk of loans, allowing them to palm off only interest rate risk.
The massive failure by the regulators reflects serious structural problems in the regulatory environment. I am a former senior bank regulator and I spent many years in the investment banking world involved in risk management, risk reporting and risk technology. There has been a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. Let me offer the following comments:
1. The bank regulators had the authority to examine any aspect of a bank¹s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper or hiring additional analysts or creating new “early warning statistics” will mean nothing if the regulators cannot or will not do their jobs.
2. Sending a regulator who makes $60,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did for over 4 years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There are dim bulbs and deadwood at the top of the agencies and all of it needs to be cleaned out. A Herculean task if there ever was one.
3. We recently saw the regulators “stress-test” the major banks and compute the additional capital that the banks required to weather the economic turmoil. Then some of the largest banks complained vociferously about the additional capital requirements and the regulators backed off. So much for firm regulation.
It’s a wonder that any banking regulatory legislation will be suggested by the White House considering that the Goldman Sachs crowd is so entrenched in the Treasury Department and in other advisory roles to the President.