Federal Reserve Chairman Ben Bernanke may get all the headlines, but the retirement of Vice Chairman Donald L. Kohn is giving President Barack Obama the historic opportunity to reshape the nation’s central bank.

The change comes at a time of historic transformation and intense examination of the Fed and its mission.  Over the past 18 months, the Fed has taken extraordinary steps to recue the nation from the worst financial crisis since the Great Depression and stabilize the economy.  The Fed has now reached the point where it must decide how and when to relax some of its emergency actions.  The Fed’s governors also must transform their regulatory approach to prevent future financial crises.  They also must avert attempts by Congress to enact greater monetary policy oversight and take away the Fed’s ability to supervise banks.

Potential candidates for the job include Christina Romer, Council of Economics Advisers Chairman, and Janet Yellen, President of the Federal Reserve of San Francisco.  Kohn, who has been with the Fed for 40 years, will take with him much of the central bank’s institutional memory.  Additionally, Kohn received high praise from his boss.  According to Bernanke, “The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service.”

“It’s a pivotal point in the history of the Fed,” says Diane Swonk, chief economist at Mesirow Financial.  “You need somebody who has credibility and can defend the Fed’s independence in a way that doesn’t offend Congress.  They need finesse on regulatory policy.  There will be a lot on their plate.”

The rate of mortgage delinquencies - borrowers who are one payment late - fell slightly between the 3^rd and 4^th

Jay Brinkmann, the MBA’s chief economist, offered this upbeat perspective.  “We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007.  With fewer new loans going bad, the pool of seriously delinquent loans and foreclosures will eventually begin to shrink once the rate at which these problems are resolved exceeds the rate at which new problems come in.”

Despite the good news, delinquencies nationwide are still significantly higher than in the 4^th quarter of 2008, when the rate was reported at 7.88 percent.  The pain is concentrated in two states.  In Florida, 26 percent of homeowners are one or more months late in making their payments; 24.7 percent of Nevadans are having trouble paying their mortgages.

The 8.8 magnitude Chilean earthquake was so strong that it literally knocked the earth off its axis - permanently.

By contrast, the 9.1 magnitude 2004 Sumatran earthquake shifted the earth’s axis by 2.76 inches and made the day shorter by 6.8 microseconds.  The larger shift in the earth’s axis as the result of a slightly smaller earthquake is because the Chilean trembler occurred in the earth’s mid-latitudes.  The fault responsible for Chile’s quake also cuts more deeply into the earth and at a steeper angle than in Sumatra.  Haiti’s 7.0 January earthquake, which occurred close to the surface, had no impact on the earth’s rotation.

In a recent interview for the Alter NOW Podcasts, Mattoon warned that most people probably don’t feel like the nation is coming out of a recession because there are few signs of job creation or easier access to credit.  One of the major concerns economists have is that this will be a double-dip “W-shaped” recession because once the bump from the $787 billion stimulus ends, there will be scant pent-up consumer demand for products and services to take the place of government spending.

One positive sign is an uptick in hiring by temporary employment agencies, which usually is considered to be a good harbinger of what future demand will be.  Another interesting theory about this particular recession in terms of jobs is the idea that companies adjusted their employee levels much more aggressively at the beginning of this cycle.  As a result, they are operating at extremely lean levels and so may hire earlier rather than later.

One problem is that there is a skills mismatch in the economy.  Many people who have lost their jobs don’t possess the right skills to find employment in growth industries such as clean energy or healthcare.  The challenge is training these individuals to bring their skills up to par.

The last 30 years have seen a boom for skyscraper construction because the cost of borrowing money had declined significantly.

The central bank critics argue that the desire to end the credit crunch may be causing authorities to make the same mistake by maintaining short-term interest rates at less than one percent in a majority of the developed world.  Developing markets, thanks to their tendency to emulate richer nations, have the same cheap-money policies.  The irony is that many of these economies are growing faster than those in the developed world.

For the commercial real estate industry, the bubble means that it is unlikely that we will see more high-profile skyscrapers like the Burj Dubai or Petronas Towers under construction very soon.  All three projects were started during financial booms and delivered in hard economic times.

Listen to our interview with Rick Mattoon, a senior economist and economic advisor in the economic research department of the Federal Reserve Bank of Chicago, on the dangers of asset price inflation.  Click here for the podcast.

Rebates are allocated by the states.  New York, for example, is offering rebates that range from $75 to $105 on refrigerators, freezers and washing machines.  If all three appliances are purchased together, the rebate can be as much as $555.  “This program will provide a tremendous incentive for consumers all across New York to reduce their energy consumption while providing an important stimulus to our economy,” according to a statement by New York Governor David Paterson.

Retailers are pleased with the program, but think it will not be easy to predict how the program will affect sales.  Home Depot spokeswoman Jean Neimi notes that “It’s tough to say, from a sales perspective, because each state has such a different program.  But we’re excited the program is in place.  Any opportunity to educate our customers on the benefits of energy efficiency is welcome.”

Eleven American banks that received money from the Troubled Asset Relief Program (TARP) originated 13 percent more loans in December than they had the previous month.

According to the Treasury Department, total loan balances fell one percent during the same timeframe.  This report does not include statistics from banks that repaid their TARP funds in June of 2009; future reports will not include data from banks that are exiting the TARP program.

A total of $178.1 billion in new loans was made during December, according to the Treasury.  Bank of America led the pack in originating loans, with $64.6 billion, an 11 percent increase over November.  Wells Fargo & Company occupied second place with a six percent increase, reporting $58.3 billion in new loans.  Citigroup lent $16.3 billion, an 11 percent increase.

Texas led the nation, with 62,827 new households; the largest number of families moved there from California and overseas.  Georgia ranked second, with 37,559 new households, many of whom moved there primarily from Florida and New York.  Arizona reported a net gain of 20,300 new households, with the majority relocating there from California and Michigan.

The IRS statistics indicate that Americans are not moving much at present, with the annual migration rate at 11.9 percent - the lowest number in decades.  United States Census Bureau estimates released at the end of 2009 confirm the IRS numbers.  According to the AP analysis, counties with better-educated taxpayers typically see the highest county-to-county migration gains.

“People who move tend to be younger and have lower incomes,” according to William Frey, a demographer with the Brookings Institution.  “Normally, if there is a big influx of young people, that could pull down the income of an area; and if there is a big outflux of young people, that can raise income in an area.”

The federal government has promised to revive the $700 billion CMBS market, even as property values fall and securing loans is difficult.  In 2007, a record $237 billion of debt was sold.  That fell precipitously in 2008 to just $12 billion and even further to $1.4 billion in 2009.  Activity isn’t expected to increase until the second half of 2010.

“The banks would like to lend,” Todd noted.  “There are fewer properties to lend against.”  He pointed out that many owners went heavily into debt during the boom and now cannot locate properties not currently encumbered to lend against.  The dearth of new loans cuts off funding to borrowers whose debt is maturing.  Approximately two thirds of loans bundled and sold as securities - totaling $410 billion — may require additional cash as property values fall and underwriting standards get tougher, according to Deutsche Bank AG research.

Moody’s Investor Services reports that commercial real estate prices in the United States are 42.9 percent lower than their 2007 peak.

Commercial real estate will begin its long-awaited recovery

According to the Korpacz survey, “Rental rates will continue to decline until strong, consistent job growth resumes.  With $1.4 trillion of commercial real estate debt maturing by the end of 2012, some property owners will not be able to survive the downturn.  Problems related to refinancing that debt could further delay a recovery in the sector.”

Government and regulatory policy will have greater impact on pricing than occupancy levels or rents, according to Real Capital Analytics, Inc.  “Policymakers control what happens to commercial mortgages in default,” Robert White, the president of Real Capital Analytics, wrote in a report.  They “have encouraged loan modifications and extensions even in cases where loans are above a property’s current value.  Tax policy, meanwhile, has made it easier for special servicers to negotiate with borrowers, a move meant to prevent a wave of maturity defaults and property fire sales.  Keep rates low and easing restrictions on foreign capital will also influence industry prospects.”  Real Capital Analytics notes that commercial mortgage-backed securities (CMBS) hold 42 percent of distressed loans; American banks 31 percent; and foreign banks 13 percent.