Tag Archives: government

(Revised) What The Jobs’ Report Means in the Short Run

After a rapid three months to start off 2014, we can finally look back to analyze where we might be headed for the rest of the year. According to The New York Times, there was an “addition of 192,000 jobs last month, all from private employers.” The weather did not seem to slow down the rise in jobs. However, it is also true that the level is still far below what is needed to fully accommodate the millions of people who have joined the work force since the recession and those who still have been jobless as well. Will the number of jobs added in April slow down? I believe our government can play a key role in aiding our economy and its’ job growth. However, they are currently doing very little in attacking fiscal policy changes to keep a steady pace for the coming months.

Although individuals like chief economist Jed Kolko at Trulia, mentions in The Wall Street Journal that there were improvements in jobs like construction and that young-adult employment is slowly making its way back to ‘normal’ levels, many others are convinced that the areas like the housing market may be cooling down  and that we aren’t being led in the right direction.

Throughout the beginning of 2014, we have been continuing to approach the employment level the economy was at when the down turn of jobs started to fall in 2008. However, our government cannot slow down its work and needs to “step on the accelerator” to continue to keep moving the economy. With this in mind, the market it still sensitive to the economy and our government needs to increase their activity and work together. Our government seems to be sitting back on work that’s already been completed.

Dallas Federal Reserve Bank President Richard Fisher accused U.S. politicians on Friday about their inability to cooperate and “accused them of impeding jobs growth.” Fisher added, “If the U.S. had the right fiscal policy, the country would have an ‘incredibly fast-moving economy.’”

Has U.S. stepped on the brakes and let the economy play out?

Fisher backed himself up adding that “the U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions.”

I believe that we, in fact, should be worried that predictable commitments are unsound policy. This in turn would lead to false complacency and market instability. Our economy cannot afford to take this extra weight.

Some, like Fed Chair Janet Yellen, found the market’s sensitivity to be true when proclaiming an interest rate hike could follow around six months after the central bank ends its bond-buying stimulus. This time period was earlier than investors had expected causing stock, bond, and currency markets to take a hit from this very instance. I believe we are witnessing a pause on our economy from here on out. With our government lacking the ability to be able to work together, we may find ourselves at a standstill throughout the summer months. Our government cannot implement a plan and expect it will work everything out for the next couple years. They must continue activity and working to build the economy even as we still grow today. Otherwise volatility might be the theme for the coming months in the markets and I don’t believe last year’s rally will occur again this year.

Is Our Economy Really Moving Foward?

After a rapid three months to start off 2014, we can finally look back to analyze where we might be headed for the rest of the year. According to The New York Times, there was an “addition of 192,000 jobs last month, all from private employers.” The weather did not seem to slow down the rise in jobs. However, it is also true that the level is still far below what is needed to fully accommodate the millions of people who have joined the work force since the recession. Those who still have been jobless must be accounted for as well. Does this mean that there is still room for a lot of improvement? Or will the number of jobs added in April slow down?

Jed Kolko, chief economist at Trulia, mentions in The Wall Street Journal that there were improvements in construction jobs and that young-adult employment is slowly making its way back to ‘normal’ levels.

That’s it? All I have heard is that there is little doubt the housing market has cooled yet, but I am not very convinced that we are being led in the right direction.

Although we are reaching the point we were at when the down turn of jobs began during the Great Recession, our government needs to step on the accelerator and move the economy forward. Dallas Federal Reserve Bank President Richard Fisher accused U.S. politicians on Friday about their inability to cooperate and “accused them of impeding jobs growth.”

“If the U.S. had the right fiscal policy,” Fisher added, “the country would have an ‘incredibly fast-moving economy.’”

Has U.S. stepped on the brakes and let the economy play out?

Fisher backed himself up adding that “the U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions.”

I believe that we, in fact, should be worried that predictable commitments are unsound policy, which can lead to false complacency and market instability.

We even found the market’s sensitivity to be true when Fed Chair Janet Yellen commented that an interest rate hike could follow six months after the central bank ends its bond-buying stimulus. Stock, bond, and currency markets took a hit from this very instance. I believe we are witnessing a pause on our economy from here on out. We cannot afford any time wasted moving forward, but with our government lacking the ability to be able to work together, we may find ourselves at a standstill throughout the summer months. Our government cannot implement one plan and think it will work everything out for the next couple years. They have to work with the present times and implement plans while the economy improves as well.

 

Ads Give False Portrayal Towards Government

I always thought we would just see political advertisements on TV that would hash at other side. Some ads would depict the faults of the other party and some show no mercy at times. Today we find ourselves viewing another type of commercial that is anti-Obamacare. It is said that Republicans believe the Democratic strategy of tying GOP Senate candidates to the Koch brothers is straight desperation and certain to fail. “The substance of the debate over the Koch-backed Americans for Prosperity’s (AFP) millions in anti-Obamacare ads matters, since they could help decide Senate control.”

In the past, AFP’s main goal has been aimed towards repealing Obamacare. But now we are witnessing that these ads are turning people against government as a positive agent of change for ordinary Americans. Would these effects continue to create a bad outcome for our government? Does our government have the right to do anything about organizations like AFP who is trying to diminish the “positive” image of our government?

“Officials of the organization say their effort is not confined to hammering away at President Obama’s Affordable Care Act. They are also trying to present the law as a case study in government ineptitude to change the way voters think about the role of government for years to come.”

Are these truly the motives of AFP? Or is there a larger story at stake? They have been able to hype, distort, and even manufacture the ad’s tales to be misleading, incomplete or played by actors. In the end, these ads are all about making the key Senate races all about Obama.

“The goal is to channel people’s economic anxieties into votes to oust incumbent Democrats. The tales featuring emotional Obamacare victims are designed to focus generalized anguish over the sputtering economy on #Obummer Big Gubmint. The only way to get relief is to sweep out Democrats who continue to enable the hated president’s agenda.”

Are we reaching a limit on how these ads should be approached? Although ads like the ones AFP has put out are able to reach the American people, this should not be permitted. We could get to a point where all big name organizations and companies promote similar ads one day just because they don’t like the way our government is being run.

“If the Times report is right, the Democratic argument—that the hyping of all these alleged Obamacare victims is about furthering an anti-government, anti-tax, anti-regulatory agenda designed to protect the bottom line of the very wealthy—is entirely accurate.”

I believe we are in a major transition stage as a country in many aspects that most don’t realize yet, and this type of behavior is one of them.

U.S. Banking Instability

In early February, Jeffery M. Lacker of the Federal Reserve Bank of Richmond gave a speech at Stanford about the systemic instability.  The full speech is here, and most of it is easy to understand.  I will spend this blog post summarizing and commenting on the speech and the points that he made about the fundamental problem with our banking system and then the ways he believes we can fix those problems.

Lacker states that the recent financial crisis didn’t really fix the problem of banks that are “too big to fail”, which played a major role in initiating the crisis itself.  He states

“In my view it is best described as two mutually reinforcing conditions that seriously distort the incentives of financial market participants to monitor and control risk. First, creditors of some financial institutions feel protected by an implicit government commitment of support should the institution become financially troubled. Second, policymakers often feel compelled to provide support to certain financial institutions to insulate creditors from losses. “

Let us take a look at these two conditions:

Implicit Government Support: Not only does the federal government insure bank deposits up to $250,000, but during the most recent financial crisis, the government help facilitate the bail out of Bear Stearns and other financial institutions.  Deposit insurance was originally created during the Great Depression to try and prevent bank runs from happening, and thus in the early 20th century, deposit insurance did produce stability in the banking industry.  However, banking networks today look far different that they did eighty years ago; during the Great Depression banks were usually single branches, and thus had no way of transferring money quickly to stop a bank run, whereas today banks could transfer money easily to a branch that needs it.  Now, instead of providing financial stability, deposit insurance provides a government safety net that encourages risk taking, and thus decreases financial stability.  The government bailout of Bear Stearns reinforced the message that the government wouldn’t let a major institution fail, and this implicitly encourages banks to take more risk.

Thus, after the most recent financial crisis, the Dodd-Frank Act was passed that included hundreds of provisions intended to decrease systemic risk taking.  Thus, incentives are increased to find ways around regulated markets, which has lead to the growing “shadow banking” sector.

Compelled Policymaker Support: This condition is best seen in the moral hazard problem that the government faces with regards to the banking industry.  I believe that the federal government didn’t necessary want to help bail out Bear Stearns and other banks, but they were afraid of the chain reaction and uncertainty that would result from the failure of a banking institution.  When the Treasury didn’t react immediately to the banking crisis, the stock market dropped somewhere around 20% in a single week.  Therefore, the government has been compelled to support the bailout of banks to protect the assets of Americans.

Lacker goes on to point out that instead of fixing the problem of banks being “too big to fail”, the strategy of the Dodd-Frank Act is to stop banks from failing in the first place.  Unfortunately, the Dodd-Frank Act didn’t break the mutually reinforcing conditions laid out earlier.  In fact according to research by the Richmond Fed, the government safety net for financial sector liabilities was the same in 2009, before Dodd-Frank was passed, and in 2011, after it was passed.  This data indicates a failure of the government to properly incentivize the banking industry to mitigate the risks that they are taking.  Banks understand that since the government safety net is still in place, despite all the new regulations, they can still take large risks, and even if the bets go bad, they don’t have to fully pay the consequences of their actions.

The difficult with this problem is that breaking the cycle is politically difficult and could potentially be painful economically.  In order for banks to believe that the government won’t bail them out, the government almost needs to let a major institution fail.  Although the banking system is somewhat less connected than it was during the 2008 crisis, a major failure could still cause strain on the whole sector.  Hypothetically, if a bank manages to fail despite the new regulations, the government has a difficult decision between letting them fail and potentially helping the system in the long run by giving banks the correct incentives to reduce risk, or bailing them out and perpetuating the broken system. Hopefully we won’t have to figure this out for a long time (because we have no crises), but I curiously await the government’s decision.

 

Fannie Mae and Freddie Mac

The forecast released today by the Congressional Budget Office has made the future of the mortgage giants Fannie Mae and Freddie Mac even foggier. Today’s forecast predicted that in accordance to the current dividend structure, the US Treasury could pull in an additional $163.8 Billion through 2024 (WSJ – OMB Projects Bigger Return on Freddie and Fannie). To better understand the situation surrounding Fannie and Freddie it is essential to take a look at the background.

In 2008, following the bankruptcy of Lehman Brothers and the bailout of AIG, Fannie Mae and Freddie Mac were taken under conservatorship by the United States Treasury. In exchange for bailing out the two firms, the Treasury controlled approximately 80% of the company’s common shares and required a fixed 10% dividend to help the Treasury recoup the $187.5 billion in federal support. As the Obama Administration and Congress pressed for the unwinding of Freddie and Fannie, the outlook on the firms became dim and the stock prices were delisted from the NYSE and were sold for a fraction of its pre-bailout price. In 2012, the Treasury changed its dividend structure with Fannie and Freddie to receive 100% of the firm’s profits in the form of dividend payments, as opposed to the fixed 10%. At this point, the CBO projected Fannie and Freddie to lose over $20 billion by 2022.

Late 2012, the housing market began to take a turn and Fannie and Freddie began to recoup profits as a result of the rising housing rates and increased mortgage-guarantee fees. These profits resulted in a full repayment of the original $187.5 billion of federal support in 2013, and an estimated profit of $15.4 billion by the end of this month. These profits led to many hedge funds and institutional investors placing bets on Freddie and Fannie Mae one day returning dividends back to the investors. The profits have also precluded members of Congress from introducing any bills that would wind down the firms. As a result, over 20 activist investors, led by fund manager Bruce Berkowitz, have sued the United States Treasury on the grounds of unconstitutional control over the dividends of Fannie Mae and Freddie Mac. (WSJ- Berkowitz: Treasury’s Rationale for Fannie Bailout Fix is “Nonsense”)

Currently the private shares of Fannie Mae and Freddie Mac remain in some sort of bureaucratic limbo. With the government seizing all dividends, investors are arguing that it is only fair if they start to see some of the dividends too. Many of these investors believe that the 2012 agreement was some sort of shady inner deal for the Treasury to secure all the profits from the mortgage firms. This is likely an exaggerated view due to the multitude of independent forecasts during 2012 that also predicted loses from Fannie and Freddie, but one can still see the frustration from investors. When the deal was made in 2012 it was created so that Fannie and Freddie wouldn’t drain the $187.5 billion Treasury investment in order to pay back the 10% dividend. Essentially it was drafted as a concession so that the firms wouldn’t be strangled by the Treasury’s fixed dividend and could stay afloat. Now that the firms have showed that these forecasts of losses were gravely wrong, another deal needs to be made between the Treasury and Fannie and Freddie to distribute dividends evenly between all investors. Ultimately, the Treasury should be compensated with a fair return for the investment and the risk that they undertook for saving Fannie and Freddie, but the government is not a hedge fund and shouldn’t benefit at the expense of investors. So for this reason I believe that it is the government’s obligation to readjust a deal that is fair for investors and government alike.

The forecast released today by the Congressional Budget Office has made the future of the mortgage giants Fannie Mae and Freddie Mac even foggier. Today’s forecast predicted that in accordance to the current dividend structure, the US Treasury could pull in an additional $163.8 Billion through 2024 (WSJ – OMB Projects Bigger Return on Freddie and Fannie). To better understand the situation surrounding Fannie and Freddie it is essential to take a look at the background.

In 2008, following the bankruptcy of Lehman Brothers and the bailout of AIG, Fannie Mae and Freddie Mac were taken under conservatorship by the United States Treasury. In exchange for bailing out the two firms, the Treasury controlled approximately 80% of the company’s common shares and required a fixed 10% dividend to help the Treasury recoup the $187.5 billion in federal support. As the Obama Administration and Congress pressed for the unwinding of Freddie and Fannie, the outlook on the firms became dim and the stock prices were delisted from the NYSE and were sold for a fraction of its pre-bailout price. In 2012, the Treasury changed its dividend structure with Fannie and Freddie to receive 100% of the firm’s profits in the form of dividend payments, as opposed to the fixed 10%. At this point, the CBO projected Fannie and Freddie to lose over $20 billion by 2022.

Late 2012, the housing market began to take a turn and Fannie and Freddie began to recoup profits as a result of the rising housing rates and increased mortgage-guarantee fees. These profits resulted in a full repayment of the original $187.5 billion of federal support in 2013, and an estimated profit of $15.4 billion by the end of this month. These profits led to many hedge funds and institutional investors placing bets on Freddie and Fannie Mae one day returning dividends back to the investors. The profits have also precluded members of Congress from introducing any bills that would wind down the firms. As a result, over 20 activist investors, led by fund manager Bruce Berkowitz, have sued the United States Treasury on the grounds of unconstitutional control over the dividends of Fannie Mae and Freddie Mac. (WSJ- Berkowitz: Treasury’s Rationale for Fannie Bailout Fix is “Nonsense”)

Currently the private shares of Fannie Mae and Freddie Mac remain in some sort of bureaucratic limbo. With the government seizing all dividends, investors are arguing that it is only fair if they start to see some of the dividends too. Many of these investors believe that the 2012 agreement was some sort of shady inner deal for the Treasury to secure all the profits from the mortgage firms. This is likely an exaggerated view due to the multitude of independent forecasts during 2012 that also predicted loses from Fannie and Freddie, but one can still see the frustration from investors. When the deal was made in 2012 it was created so that Fannie and Freddie wouldn’t drain the $187.5 billion Treasury investment in order to pay back the 10% dividend. Essentially it was drafted as a concession so that the firms wouldn’t be strangled by the Treasury’s fixed dividend and could stay afloat. Now that the firms have showed that these forecasts of losses were gravely wrong, another deal needs to be made between the Treasury and Fannie and Freddie to distribute dividends evenly between all investors. Ultimately, the Treasury should be compensated with a fair return for the investment and the risk that they undertook for saving Fannie and Freddie, but the government is not a hedge fund and shouldn’t benefit at the expense of investors. So for this reason I believe that it is the government’s obligation to readjust a deal that is fair for investors and government alike.

Bank Regulations Backfiring?

Recently, the Office of the Comptroller of the Currency and the Federal Reserve began warning banks against financing corporate takeovers, especially those with a large amount of debt involved (relative to earnings).  These governmental agencies fear banks taking on too much risk as they did in 2007 before the financial collapse.  If banks consistently spur these warnings, they could face fines or other sanctions.  The imaginary line at which the government has declared an acquisition too risky is when debt is at six times earnings before interest, taxes, depreciation, and amortization.

However, such mergers are now simply either being handled less often by a wider array of banks, being handled by non-banking institutions that are subject to the guidelines of the the OCC and the Fed, or not happening at all.  However, even in light of the new “guidance” handed down by regulators, some banks have funded large acquisitions because of “different interpretations of the guidance”, according to the Wall Street Journal.  This seems to indicate that no matter what sort of regulations regulators put into practice, banks will find some way around them hunting for a profit.

Furthermore, according the the WSJ piece, “Buyouts aren’t seen as a big contributor to the financial crisis, and few banks suffered outsize losses from them.”  Therefore, the enforcement of these new regulations might not even be fixing a problem, because it wasn’t even a problem in the first place.  Instead, such regulation may merely be a mirage to appease the bureaucrats in Washington demanding that the banks are regulated more tightly.  Especially in this case, when such new regulations are fixing a pipe that isn’t leaking, it seems that all regulations aren’t necessarily good regulations.

So, what are the consequences of such regulations?  By essentially threatening large banks into complying with “guidance” (i.e. something that is not a law), there is no good will being fostered between the largest banks and the government.  Now perhaps such strong-arming is the result of the steadfast refusal of large banking institutions to bend to the governments requests, but more cooperation between the two entities would be nice. Beyond the the relationship between banks and the government, some corporate takeovers and acquisitions simply might not happen and more companies will just be allowed to fail because no bank will finance the acquisition.

To be fair, there are benefits to such regulations: by preventing banks from financing too many risky deals, regulators are at the very least spreading the risk among more firms, and thus eliminating institutional risk.  Also, allowing failing firms to just fail might make more sense that trying to drag them back to profitability.

Regardless of the benefits and drawbacks of this new federal “guidance”, it would be nice to see large banks and the government work together better.