Archive for the ‘Economics’ Category
Thursday, March 11th, 2010
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. Kohn is one of seven Fed governors who set U.S. monetary policy and regulate the financial system.
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.”
Tags: Ben Bernanke, central bank, Christina Romer, congress, Diane Swonk, Donald Kohn, Federal Reserve, Great Depression, Janet Yellen, Mesirow Financial, President Barack Obama
Posted in Economics | No Comments »
Wednesday, March 10th, 2010
The rate of mortgage delinquencies - borrowers who are one payment late - fell slightly between the 3rd and 4th quarters of 2009 from 9.64 percent to 9.47 percent. According to the Mortgage Bankers Association (MBA), a fourth quarter decline is unusual — even when there is no recession — because winter and the holidays typically mean that homeowners have extra expenses.
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 4th 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.
Tags: Department of Labor, Jay Brinkmann, mortgage delinquency, Pricewaterhousecoopers
Posted in Economics, Residential | No Comments »
Monday, March 8th, 2010
Economic indicators show that the recession is over. This is the opinion of Rick Mattoon, a senior economist and advisor in the economic research department of the Federal Reserve Bank of Chicago and a lecturer at the Kellogg School of Management at Northwestern University. Rick’s primary research focuses on issues facing the Midwest regional economy.
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.
Rick Mattoon: Is the Recession Over? :
Play Now |
Play in Popup |
Download
Tags: American Recovery and Reinvestment Act, Chicago, deficit, Federal Reserve Bank, GDP, Great Recession, inflation, Rick Mattoon, stimulus bill, treasury bills, wage growth
Posted in Economics, Financing, General, Green, Healthcare, Office, Residential | No Comments »
Thursday, March 4th, 2010
The last 30 years have seen a boom for skyscraper construction because the cost of borrowing money had declined significantly. When investors borrow money to purchase assets, they send prices higher. The problem is that this borrowing makes the markets susceptible to busts when investors sell assets to pay their debts. The recent financial crisis was one result of this process, with the debts larger and the price swings broader than has been seen in the past three decades. According to central bank critics, focusing on consumers - and not on the dangers of asset-price inflation - have encouraged bubbles by keeping interest rates artificially low.
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.
Tags: Asset-price inflation, Ben Bernanke, Burj Dubai, central banks, Federal Reserve, financial markets, interest rates, investors, MSCI index, Petronas Towers, Skyscraper construction, Wall Street crash
Posted in Development, Economics, Financing, Office | No Comments »
Tuesday, March 2nd, 2010
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. The Department of the Treasury released this information in its monthly survey of loans made by recipients of the $700 billion government bailout money.
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.
Tags: bailout money, Bank of America, banks, Citigroup, department of treasury, loans, TARP, Wells Fargo
Posted in Economics | No Comments »
Thursday, February 25th, 2010
Commercial mortgage-backed securities (CMBS) are expected to remain below $15 billion in 2010 as borrowers cope with falling property values. According to Alan Todd, a JPMorgan analyst, debt sales backed by CBD office, hotel and shopping center loans could be as low as $10 billion this year. Aaron Bryson of Barclays Capital is more optimistic, predicting transactions totaling approximately $15 billion for the year.
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.
Tags: Barclays Capital, Bloomberg, CMBS, Deutsche Bank AG, JP Morgan Chase, Moody's Investor Services, treasury notes
Posted in Economics, Financing | No Comments »
Monday, February 22nd, 2010
An independent audit released by the bipartisan Congressional Oversight Panel (COP) has found the $700 billion Troubled Asset Relief Program (TARP) to be effective, so much so that the Department of the Treasury has extended it to October 3, 2010. Treasury Secretary Timothy Geithner plans to use the remaining funds to assist families facing foreclosure and give loans to small businesses.
The COP was unable to fully gauge TARP’s impact because of other forces such as the $787 billion American Recovery and Reinvestment Act, tax cuts and actions by the Federal Reserve and Federal Deposit Insurance Company. “Even so, there is broad consensus that the TARP was an important part of a broader government strategy that stabilized the U.S. financial system by renewing the flow of credit and averting a more acute crisis,” according to the report. “Although the government’s response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence.”
That said, after 14 months of TARP, the panel admits that problems remain. Banks are still skittish about making loans, toxic mortgage-related assets are still sullying banks’ balance sheets and smaller banks are susceptible to difficulties in the commercial real estate sector. And, with 13 million additional home foreclosures expected over the next five years, “TARP’s foreclosure mitigation programs have not yet achieved the scope, scale and permanence necessary to address the crisis.”
Repayments from banks that received TARP dollars are expected to total $116 billion, including $45 billion that is being returned by Bank of America. The government is likely to receive as much as $175 billion in repayments from companies it rescued by the end of 2010.
Tags: AFL-CIO pension fund, American Recovery, bailouts, Bank of America, Congressional Oversight Panel, department of treasury, Federal Deposit Insurance Company, Federal Reserve, Harvard Law School, Main Street, President Obama, Securities and Exchange Commission, TARP, Timothy Geithner, Wall Street
Posted in Economics, Financing | No Comments »
Thursday, February 18th, 2010
Greece, Spain, Ukraine, Austria, Latvia and Mexico are among the nations in danger of sovereign debt default, putting the global economic recovery from the recession at risk. Sovereign debt is the debt of nations. For example, U.S. Treasuries are backed by the “full faith and credit” of the government; similarly, other countries sell bonds to raise money to pay for programs such as armies and public healthcare. When a nation defaults on its sovereign debt, it means they are unable to pay their creditors. Dubai escaped default when its oil-rich neighbor, Abu Dhabi, bailed out the emirate to the tune of $10 billion. Also in trouble - though to lesser degrees — are Ecuador, Argentina, Grenada, Lebanon, Pakistan and Bolivia.
A default on sovereign debt is potentially even more disastrous than last year’s subprime meltdown because it has the potential to lead to geopolitical volatility, social unrest and even war. Investors who have purchased sovereign debt - which typically is perceived as safer than corporate debt because countries can raise taxes and increase tariffs to raise cash to pay their debts - could see some extremely poor returns.
In a book entitled This Time Is Different: Eight Centuries of Financial Folly, authors and economists Ken Rogoff of Harvard and Carmen Reinhart of the University of Maryland state that “Since 1970, nearly half of sovereign defaults have occurred in nations with debt-to-GNP ratios of 60 percent or more. This makes sense: As a country’s debt starts to approach the size of its total economy (or GNP), it gets harder to make their payments, just like an individual whose debts start to eat up all (or most) of their salary.”
Tags: credit card delinquencies, default, Fitch Ratings, GNP, Moody's Investor Services, mortgage defaults, recessino, sovereign wealth, Standards & Poors, Triple A ratings, US Treasuries, Wall Street
Posted in Economics | No Comments »
Wednesday, February 17th, 2010
Federal Reserve Chairman Ben Bernanke is starting to look at ways to back off from the central bank’s heroic efforts to keep the nation’s economy afloat through the financial crisis of the past 18 months. The trick to raising short-term interest rates, which have been at historic lows for more than a year, is to time them with extraordinary precision to avoid new damage to the still-fragile economy.
At present, the Fed has $2.29 trillion on its balance sheets, an increase from the $934 billion reported in September, 2008, when the financial crisis was at its worst. Bernanke plans to sell some of the Fed’s mortgages, Treasuries and debt by offering reverse repurchasing agreements. Under these arrangements, the Fed sells its securities to a third party while agreeing to re-buy them at some point in the future.
The Fed’s next step is to sell banks and financial firms the equivalent of certificates of deposit. In these cases, the Fed gets a portion of the bank’s reserves in exchange for paying interest at a fixed rate. Called a “term deposit facility,” these deposits would be auctioned off and banks couldn’t count their investment in the Fed as cash or reserves.
“These programs, which imposed no cost on the taxpayer, were a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit,” Bernanke said in testimony at a Capitol Hill hearing. “As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.”
Tags: American Enterprise Institute, American International Group, Bear Stearns, Ben Bernanke, central bank, congress, department of treasury, exit strategy, Fannie Mae, Federal Reserve, financial crisis, Freddie Mac, Ginnie Mae, interest rates, JP Morgan Chase, University of Chicago
Posted in Economics, Financing | No Comments »
Tuesday, February 16th, 2010
Congressman Barney Frank (D-MA) wants to scrap Fannie Mae and Freddie Mac in favor of an entirely new mortgage-financing system. According to Frank, Chairman of the House Financial Services Committee and who previously supported the programs, “The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current forms and coming up with a whole new system of housing finance.”
Fannie Mae and Freddie Mac, which back a majority of the nation’s home loans, buy mortgages from lenders, insure them against default and supply new money to create new loans. Thanks to growing losses on these loans that threatened the health of Fannie Mae and Freddie Mac, the federal government took control of the programs in September 2008. Since their seizure, Fannie and Freddie have been run by regulators and kept alive by $110.6 billion in taxpayer money. Frank says that Congress needs to decide what to do with Fannie’s and Freddie’s remaining shareholders, as well as investors in the companies’ $5.4 trillion in mortgage bonds and $1.7 trillion in unsecured corporate debt.
Fannie Mae and Freddie Mac profit by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders. They currently own or guarantee more than $5 trillion in U.S. residential debt, and were responsible for as much as 75 percent of the new mortgages made in 2009.
“We’re going to look at the whole question of housing finance,” Frank said. “Sorting out the function of promoting liquidity in the market, and also the secondary market in general but then also doing some kind of subsidy for affordability.”
Fannie/Freddie were caught in the eye of the subprime meltdown. In February of 2007, the residential mortgage-backed securities market crashed with sales plummeting 90 percent. While reform is needed, Fannie and Freddie operate like a public option - by making home ownership more affordable and creating competition to commercial banks. A positive step is the Deed for Lease program. After foreclosure - at 57,000 homes in the first half of 2009 - the new program allows owners to lease their homes and avoid foreclosure.
Artificially creating/guaranteeing a market for home loans has lost billions. Hopefully, whatever entity replaces Fannie and Freddie will be prohibited from contributing to congressional campaigns and PAC’s.
Tags: Barney Frank, congress, Deed for Lease program, Fannie Mae, Freddie Mac, House Financial Services Committee, house of representatives, Massachusetts, mortgages, PBS News Hour, Timothy Geithner
Posted in Development, Economics, Financing, Residential | No Comments »