Posts Tagged ‘Alan Greenspan’

Fitch Ratings Reaffirms U.S. Creditworthiness as AAA

Thursday, September 1st, 2011

Former Federal Reserve chairman Alan Greenspan says that Italy is the root of most of Europe’s economic problems, as well as our own.  In a recent appearance on “Meet the Press”, “It depends on Europe, not the United States,” Greenspan said. “The United States was actually doing relatively well, sluggish but going forward until Italy ran into trouble.”  According to Greenspan, 50 percent of American corporations have offices in Europe, and the continent “has been a very important driving force in the overall earnings of U.S. corporations.”  Greenspan also noted that S&P’s downgrade “hit a nerve”.  The ratings agency said it was reducing the AAA rating to AA+ not only because of the country’s debt load, but because it doesn’t believe that Congress can resolve the country’s debt problems.  Mark Zandi, chief economist at Moody’s Analytics, agrees, noting that “There’s a lot of fear and misunderstanding and confusion, and that all could come out in the stock and bond markets.  I don’t think it takes much to unnerve investors given the current environment.  I think anything could drive investors to sell given how fragile sentiment is.”

At the same time, Greenspan downplayed the risk of a double-dip recession in the United States, noting that the economy is in better shape than its European peers.  With all of this bickering going on, the economy is slowing down,” Greenspan said.  “You can see it in all the data.  I don’t see a double-dip, but I do see it slowing down.”  Europe, which purchases 25 percent of American exports and is home to the operations of many American companies, could determine the course of the U.S. economy’s recovery, according to Greenspan.  European leaders are working to control a sovereign-debt crisis, which has spread to Italy, the euro zone’s third-largest economy, and is causing chaos in global financial markets.

“When Italy first showed signs of weakness and started selling its bonds — the yield is now over six percent, which is an unsustainable level — it created a massive problem in Europe because Italy is a very large country, cannot be easily bailed out and indeed cannot be bailed out.  This is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that.  There is zero probability of default,” Greenspan said.

In the meantime, Fitch Ratings delivered some good news to the U.S. economy when it reaffirmed its AAA credit rating and said it did not anticipate downgrading the nation’s debt in the near future.  The firm said the outlook for the rating is stable because the recent deal to raise the debt ceiling and cut the budget deficit proved that the nation’s political leaders are willing to do what’s necessary to cut the nation’s growing debt.  The debt-ceiling deal “was a significant positive development that provided a substantive and necessary increase in the federal debt ceiling.  It also signaled that there is the political commitment to place U.S. public finances on a sustainable path consistent with the U.S. sovereign rating remaining ‘AAA’,” Fitch said.  Fitch’s outlook is the most positive on the U.S. of the primary credit rating agencies.  Standard & Poor’s downgraded long-term debt to AA+ after concluding that the planned $2.1 trillion to $2.4 trillion budget cuts over the next 10 years are not large enough to stabilize the nation’s rising debt.  Moody’s Investor Services also retained the nation’s AAA rating, but changed its outlook to negative.  This means that there’s a possibility of a downgrade.

“The key pillars of the U.S.’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base.  Monetary and exchange-rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks,’ Fitch said.

“I think they’re looking at a broader perspective than S&P in the global aspects,” Steve Goldman, Weeden & Company market strategist said of Fitch’s decision. “It’s giving a sigh of relief to investors here.”

Equity Loans Putting Homeowners Under Water

Thursday, June 23rd, 2011

Homeowners who took out second mortgages, or borrowed against their homes to use the money as a cash advance,  may regret their decisions.  Close to 40 percent are now underwater on their loans — owing more than their home is worth, according to CoreLogic Data.  The data show 38 percent of borrowers who took second mortgages are now under water, compared with 18 percent of mortgage holders who haven’t taken out home equity loans.  The study did not examine how the cash was used.  This type of negative equity can result from increased mortgage debt, a decline in home value — or both.  Additionally, the report found that during the 1st quarter of 2011 the number of underwater homeowners fell to 22.7 percent from 23.1 percent in the 4th quarter of 2010.   Although this decrease may seem like good news, it is due to the fact that completed foreclosures lessened the total number of homeowners in the market.

The study illustrates the consequences of easy borrowing amid the housing boom’s inflated prices.  Home-equity loans, which total approximately 10 percent of the mortgage market, have been a problem for both homeowners and lenders.  Second mortgages are any loan taken out on a property that is in addition to the first mortgage; they include home-equity loans and lines of credit.  Second mortgages are taking a toll on a fitful recovery, in which housing has been the weakest spot.  The S&P/Case-Shiller National Index recently showed that home prices fell another 4.2 percent nationally in the 1st quarter, its third straight quarter of price declines after a modest recovery in early 2010.  Across the country, prices have fallen 34 percent since peaking in 2006.  The inventory of unsold homes will take more than nine months to sell, according to the National Association of Realtors.  This is approximately 50 percent longer than is considered a healthy market.  “When a homeowner’s house is under water, “it’s harder to get a credit card or a car loan, you can’t put your home up for a small business loan,” said Mark Zandi, chief economist at Moody’s Analytics.  “There are all sorts of little, pernicious effects that you don’t necessarily think about.”

Writing on the Mortgage Rates &Trends:  Mortgage Blog, Michael Kraus says “Unsurprisingly, there is a strong correlation between negative equity and home equity loans.  Thirty-eight percent of borrowers with home equity loans are under water.  Those with negative equity and HELOCs (home equity lines of credit) are down $98,000 on average, compared to $52,000 for those without HELOCs.  Intuitively, this makes a ton of sense and serves to illustrate the danger of using your home equity as an ATM.  Hindsight being 20/20, of course.  The negative equity problem remains the most acute in all the same places.  Nevada leads the nation in negative equity, with an incredible 63 percent of Nevada homeowners with mortgages under water.  Fifty percent of mortgaged Arizona homes are upside down, followed by Florida (46 percent), Michigan (36 percent), and California (31 percent).  These figures have changed relatively little since the last report on home equity, and negative equity will likely remain a massive problem in these markets for years to come.  Also of interest is the amount that the average borrower with negative equity is underwater.  Across the country, the average person who has negative equity is $65,000 underwater.  The highest average negative equity is in New York ($129,000), followed by Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000), and California ($93,000).  These areas typically have the highest home prices, so the high amounts of negative equity make sense.”

Treating your home as an ATM by taking out a second loan puts owners in the position of being more than twice as likely as single-mortgage homeowners to owe more than it’s worth.  This scenario isn’t what economic leaders had pictured.  During the housing market’s boom years, Federal Reserve chairman Alan Greenspan promoted second mortgages and home-equity loans as a way to tap homeowners’ most valuable asset to pay bills or buy a car.  Then the bubble burst.  Because home values are still falling, those loans have now become just another burdensome payment.

The Fed Responds to Stimulus Criticism

Wednesday, November 24th, 2010

Fed officials defend new stimulus actions against criticism.  The Federal Reserve – in a highly unusual action – is defending its recent purchase of Treasury bonds in an effort to get the U.S. economy moving. Critics of the decision to purchase additional assets, led by former Fed chairman Alan Greenspan, conservative economists and writers, representatives of foreign governments – not to mention Sarah Palin — say that the Fed is deliberately weakening the dollar to make American exports more competitive.  Other arguments are that the Treasury bond purchases could eventually cause inflation and that the action won’t stimulate economic growth.

William Dudley, President of the Federal Reserve Bank of New York, countered that the objective is not to weaken the dollar or cause inflation.  In fact, he believes that the Fed’s moves are already having a positive impact.  “You’ve seen a significant easing of financial conditions,” according to Dudley.  “I have to believe that the expectation of a second large-scale asset purchase program was the primary driver of those changes.”  Fed Vice Chairman, Janet Yellen, agrees, telling the Wall Street Journal that action was necessary to spur the economy.  If there is no monetary stimulus, Yellen says “I’m having a hard time seeing where really robust growth can come from.”

Dudley’s and Yellen’s comments seem to confirm that the Fed is no longer staying out of public debate over its policies.  Although the Fed has typically remained above the fray to maintain its appearance of political independence, that stance has proved untenable in the face of the turmoil that resulted from the financial crisis.  As a result, the Fed is now open to criticism from small-government conservatives and liberals who don’t trust Wall Street.  Unfortunately for the Fed, Congressman Ron Paul (R-TX) — who based his 2008 presidential bid on his opposition to monetary policy – will soon chair the committee that oversees the Fed and plans to use the post as a “mini bully pulpit,” he said.

Anthony Downs On Financial Reform

Tuesday, August 31st, 2010

Anthony Downs discusses the ins and outs of financial reform.  The nation’s financial system needs significantly more regulation than exists now.  The lack of tough regulatory powers strongly impacted the recent financial crash and the Great Recession that ensued.  The good news is that the Obama administration is moving firmly in this direction with financial reform legislation a critical item on its agenda.  This is the opinion of Anthony Downs,  a senior fellow with the Brookings Institution and former President of the Real Estate Research Corporation.  In a recent interview for the Alter NOW Podcasts, Downs said that between 1980 and 2007, the value of international capital markets – including bank deposits, assets, equities, public and private debt – quadrupled relative to the world’s GDP, lifting millions of people out of poverty.  Although unprecedented, this growth relied heavily on borrowed money to finance higher living standards and highly leveraged loans with limited reserves backing them.  In the end, the growth was unable to be sustained.

The financial reform legislation currently undergoing reconciliation by a Senate-House conference committee is not a reinstatement of the 1933 Glass-Steagall Act – which separated investment and commercial banking — because banks will still be allowed to deal with securities.  Under the new law, banks will have to register derivatives with some type of formal exchange and maintain records on who is borrowing money and under what terms.  This marks a significant change from before the Great Recession, when derivatives were traded with virtually no oversight.

Downs believes that former Federal Reserve Chairman Alan Greenspan contributed to the financial crisis in two ways.  In 2001, when Greenspan was informed that there was fraud in the subprime housing market and that he should do something about it, he refused to take action because he didn’t believe in regulation.  According to Downs, “that was a terrible mistake and meant that all the horrible loans made in the subprime market could continue unchecked.”  Greenspan’s second error was to maintain low interest rates for as long as he did at a time when an enormous amount of capital was coming into the United States economy from overseas.  Because investors were avoiding the stock market, they put their money into real estate.  That drove the price of properties sky high and destroyed the concept of intelligent underwriting and evaluating the risk before approving the loan.

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Are Banks Really Too Big To Fail?

Wednesday, April 21st, 2010

Former IMF chief economist opines on whether banks are too big to fail and possible solutions.  Simon Johnson, a professor at M.I.T.’s Sloan School of Management and former chief economist at the International Monetary Fund, raises the question of “As we move closer to a Senate – and presumably national – debate on financial reform, the central technical and political question is:  What would prevent any bank or similar institute from being regarded – ultimately by the government – as so big that it would not be allowed to fail?

Writing in the New York Times, Johnson believes that there is sharp disagreement on what would be needed to end “too big to fail” – or, as he terms it, “T.B.T.F.”  From the viewpoint of Senator Christopher Dodd (D-CT), “creating a ‘resolution authority’ would, at a stroke, effectively remove the perception and the reality that some banks are too big to fail.  The basic idea here, as elaborated by Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC) would expand the powers it currently has to ‘resolve’ – i.e., take over and liquidate in an orderly manner – banks with federally insured deposits; it could do this for any financial institution.”

The Republicans, on the other hand, believe that this approach would formalize the existence of T.B.T.F. banks.  They believe that the FDIC lacks the skill to wind down complex financial institutions as this job differs from closing small- and medium-sized banks to protect depositors.  The “counterproposal, which seems to also have the support or Senate Richard Shelby (R-AL), is that we should just allow big financial firms to fail outright, i.e., to run through the usual bankruptcy procedures.  At a rhetorical level, ‘let ’em fail’ has some appeal.  But as a practical matter, it is a complete non-starter,” according to Johnson.

The third suggestion, proposed by Senator Ted Kaufman (D-DE), is quite simple.  “Break up these megabanks.  As even Alan Greenspan said in October 2009,” Johnson says, “‘If they’re too big to fail, they’re too big’.  There is no evidence for economies of scale or scope – or other social benefits – from banks with assets above $100 billion.  Yet our largest banks have balance sheets around $2 trillion.”

Johnson concludes:  “Making our largest banks smaller is not sufficient to ensure financial stability.  There are many other complementary measures that make sense – including higher capital requirements, more transparency for derivatives and generally more effective regulation.  But reducing the size of our largest banks is absolutely necessary if we are to reduce the odds of another major financial catastrophe.”

Container Shipping Riding Choppy Seas

Monday, August 24th, 2009

Container trade is entering rough waters, despite the strength of global supply chains and China’s status as the world’s factory.  According to AXS Alphaliner, a container shipping information service, 15 percent of shipping capacity will be idle by October — thanks primarily to the recession.

Shipping companies that link Asian workshops with American retailers are forecast to lose about $20 billion this year after earning $5 billion in profits last year.  Drewry Shipping Consultants huge-container-shipreports that the reason is a $55 billion shortfall in expected revenues, only partly balanced by savings from lay-ups, slow-steaming to conserve fuel and opting for the longer but less expensive trip around the Cape of Good Hope to avoid using the costly Suez Canal.  The canal is facing a 14 percent decline in revenues this year.

Container rates have fallen from last summer when it cost $1,400 to move a container from China to Europe.  Today, shipping that same container costs just $400.  Chang Yung Fa, head of Taiwan-based Evergreen, the world’s fourth largest container company, says there is over capacity.  In addition to dropping plans to order new ships, he is getting rid of some of his 176-ship fleet.

Container shipping’s grim outlook reflects a deeper concern than the recession.  Containerization encouraged globalization by cutting the cost of shipping goods so deeply that manufacturers could find the lowest-cost factories possible – no matter the location.  In response, the amount of sea transport soared.  The concern with over capacity is overstated, I believe.  Recent economic news, heralded by Alan Greenspan, show that inventory levels have been eroded because of the cut in production.  While the recovery will be slow, the rebound in the equity markets will boost consumer spending which will affect trade.  While we are sure to see more efficient supply chains, distribution is poised for a comeback.

“The Giant Pool of Money”

Thursday, May 21st, 2009

$70 trillion dollars.  That’s all the money in the world, or to get technical, the subset of global dollarsavings known as fixed-income securities.  And it almost doubled from $36 trillion in just six years.  How did this happen?

The Federal Reserve presided over the creation of what we have learned (the hard way) is a monster of unregulated investment vehicles run amok, resulting in the global credit crisis.

In the words of National Public Radio’s international business reporter Adam Davidson, “What he (former Federal Reserve Chairman Alan Greenspan) is saying is he’s going to keep the Fed Funds rate at the absurdly low level of one percent.  It tells every investor in the world:  you are not going to make any money at all on U.S. treasury bonds for a very long time.  Go somewhere else.  We can’t help you.  And so the global pool of money looked around for some low-risk, high-return investment.  And among the many things they put their money into, there was one thing they fell in love with.”

Investment companies fell in love with securitizing mortgages, bundling them into enormous pools – in some cases, pools of as many as 16 million loans — and selling them in shares to investors.  To make the pool of mortgages even larger, they created vehicles like adjustable-rate mortgages (ARMs), subprime mortgages and no-income, no-asset loans that allowed people to buy homes or take out home equity loans that they simply could not afford.  Last 02192006_iraglassSeptember, this house of cards came crashing down, setting off the global credit crisis and making an ongoing recession the worst in a generation.

Click here  to listen to the full “The Giant Pool of Money” podcast from “This American Life” to learn exactly what happened and why.  I know of no better description of how the recession happened.