MacroScope

Surge in foreclosures strains social services in Philadelphia: Philly Fed report

In the wake of a historic housing crisis that has just recently begun showing signs of a turnaround, foreclosure counseling services are coming under strain. The foreclosure mess may be over for big banks, which recently settled with regulators for $8.5 billion.

Not so for homeowners, who continue to face a bureaucratic morass in dealing with lenders and servicers. According to a new report from the Philadelphia Fed, the city of Philadelphia’s already weak infrastructure for dealing with the fallout from the foreclosure crisis is fraying at the edges.

The report’s conclusion:

Foreclosure counseling in Philadelphia is in high demand, but the city’s housing counseling agencies have limited resources with which to meet that need. There is a high degree of reliance on public funding for operations, which is particularly problematic in the current environment of increased concern over budget deficits and public debt. Counselors are being asked to provide services to numerous clients, and agencies have to meet multiple sets of requirements to access and to maintain funding from the primary funding sources. In recent years, these pressures have led to a reduction in the number of agencies offering such counseling in Philadelphia and may continue that trend without new sources of funding to bolster service provision.

SEC has power to ban high-frequency trading, congressman says

Not everyone agrees that using high-speed machines to trade stocks in less time than it takes the average person to blink is a bad thing, but the people who do might be heartened by the letter a congressman sent the U.S. Securities and Exchange Commission on Friday.

Rep. Edward Markey, a Massachusetts Democrat who has waged a decades-long struggle against computerized trading sent the SEC a hint: The power to curb high-frequency trading has been within its grasp all along.

In his letter, Markey described a law he co-sponsored in 1989 to increase the agency’s power to regulate computerized trading, a precursor to HFT that employed computer programs to make trading decisions without the participation of conscious humans. The law lets the SEC “limit practices which result in extraordinary levels of volatility,” according to Markey’s citation.

Interview with IMF Managing Director Christine Lagarde

IMF Managing Director Christine Lagarde sat down for an interview with Thomson Reuters Editor of Consumer News Chrystia Freeland to discuss the European debt crisis and U.S. fiscal problems.

Lagarde also outlined the Fund’s agenda for 2013 at a news conference following the release of a $4.3 billion tranche of aid to Greece, which she said is moving in the right direction with reforms.

Bank safety is in the eye of the beholder

Too-big-to-fail banks are bigger than ever before. But top regulators tell us not to worry. They say the problem has been diminished by financial reforms that give the authorities enhanced powers to wind down large financial institutions. Moreover, supervisors say, the new rules discourage firms from getting too large in the first place by forcing them to raise more equity than they had prior to the financial meltdown of 2007-2008.

New York Fed President and former Goldman Sachs partner William Dudley said in a recent speech:

There has already been considerable progress in forcing firms to bolster their capital and liquidity resources. On the capital side, consistent with the Dodd-Frank Act, Basel III significantly raises the quantity and quality of capital required of internationally active bank holding companies. This ensures that the firm’s shareholders will bear all the firm’s losses across a much wider range of scenarios than before. This should strengthen market discipline. Meanwhile, to the extent that some of the specific activities that generate significant externalities are now subject to higher capital charges, this should cause banks to alter their business activities in ways that reduce both the likelihood and social cost of their failure.

NY Fed’s Dudley: “Blunter approach may yet prove necessary” for too-big-to-fail banks

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It was kind of a big deal coming from the Federal Reserve Bank of New York’s influential president William Dudley. The former Goldman Sachs partner and chief economist has offered a fig leaf to those who say the problem of banks considered too-big-to-fail must be dealt with more aggressively. Some regional Fed presidents have advocated breaking up these institutions. But Dudley and other powerful figures at the central bank have maintained recent financial reforms have already laid the groundwork for resolving the issue.

At a gathering of financial executives in New York last week, Dudley said he prefers the existing approach of making it costlier for firms to become big in the first place. Still, he left open the possibility of tackling the mega-bank problem more directly:

Should society tolerate a financial system in which certain financial institutions are deemed to be too big to fail? And, if not, then what should we do about it?

A picture is worth a thousand pages of financial reform

Here’s a snapshot of FDR & Co. in 1933 as they signed Glass-Steagall, which separated the financial sector into safer, deposit-taking commercial banks and risk-taking investment banks – Wall Street.

And here’s a photo of Bill Clinton & Co. repealing Glass-Steagall in 1999, with the passage of the Graham-Leach-Bliley act known as the Financial Services Modernization Act. 

Fed call for cap on bank size sparks fresh debate on too big to fail

Federal Reserve Board Governor Daniel Tarullo’s call for limiting bank size is sparking debate in unexpected places. Keith Hennessey, who ran the National Economic Council under President Bush, was in Chicago late last week for a discussion with Democratic lawmaker Barney Frank. The topic of the panel, sponsored by CME Group Inc., was the housing crisis.

But the most spirited exchange took place after Hennessey said that banks are simply too big to regulate adequately. “I think Tarullo has got a good point,” he said, referring to Tarullo’s argument for the need to cap bank size. Hennessey, as Bush’s economic policy assistant in 2008, was among administration officials that worked to win Congressional approval for the bailout of insurance major AIG, as its failure threatened to plunge the nation’s financial markets, already reeling from the failure of Lehman Brothers, even deeper into crisis.

Lawmakers eventually relented. On Friday, Frank, who co-authored Wall Street reform legislation designed to prevent another bailout of a too-big-to-fail financial institutions, was not about to cede ground this time to Hennessey. “I didn’t ask what Tarullo thinks – are you for breaking up the banks, and if so, to what size, and by what method?”  “Right now I don’t see any better solution than what Tarullo has suggested – yes, a size cap on banks… The alternative is a repeat of the 2008 crisis.” After the panel, Frank said he took issue with the idea, both from a technical perspective – “How do you do it? Do you sell it? Who’s going to buy it? The other banks by definition can’t.” – and because of concern that trimming bank size will hurt the ability of U.S. financial institutions to compete internationally.

Banks keeping most of QE3 benefits for themselves

Federal Reserve officials have been worried that their policy of ultra-low interest rates may be having less of an effect than usual because of a “broken transmission channel.” In plain English, this means the money hasn’t really been flowing smoothly from liquidity-flooded banks to would-be borrowers.

Economists at TD Securities argue banks have passed on less than half of their lower funding rates as reflected in yields on mortgage-backed securities onto consumers.

During the current iteration of monetary policy easing, pass-though peaked at 66% during the third week following the QE3 announcement, when MBS yields rebounded from their post-QE3 lows and 30-year mortgage rates fell to a record-low 3.36%. However, since the QE3 announcement, our calculations suggest that banks have passed through an average of just 40% of their lower funding rates (i.e. lower MBS yields) in the form of lower mortgage rates.

Too big to exist? Fed’s regulation czar backs limits on bank size

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Regional Federal Reserve Bank presidents who oppose quantitative easing have made little way in convincing the central bank’s dovish core. Apparently, not so on the cause célèbre of policymakers like Richard Fisher at the Dallas Fed, who have called for too big to fail banks to be broken up.

In a speech this week, Fed board governor and regulation czar Daniel Tarullo stopped short of calling for outright break-ups. But he did take the unprecedented step of backing size limitations on banks that would be linked to overall U.S. economic output.

In his own words:

In these circumstances, however, with the potentially important consequences of such an upper bound and of the need to balance different interests and social goals, it would be most appropriate for Congress to legislate on the subject. If it chooses to do so, there would be merit in its adopting a simpler policy instrument, rather than relying on indirect, incomplete policy measures such as administrative calculation of potentially complex financial stability footprints.

Goldman thinks market’s disappointment with ECB is premature

Financial markets on Thursday were starkly disappointed with the European Central Bank and its president, Mario Draghi. He had promised recently to do everything in his power to save the euro and yet announced no new bond-buying at the central bank’s latest meeting. Riskier assets sold off and safe-haven securities benefitted.

But Francesco Garzarelli of Goldman Sachs, Draghi’s former employer, has a different take on the matter:

We see a material change in the central bank’s approach to the crisis, and a coherent interplay between fiscal and monetary policy. The underwhelming part of today’s announcements lies in the lack of details on the asset purchases and other measures to support the private sector. But it appears that these will have more structure around them than the SMP (Securities Markets Program).