Posts Tagged ‘Great Depression’

HUD Head Says Housing Bottoms Off

Wednesday, July 20th, 2011

American home prices may start rising as soon as the 3rd quarter as a foreclosure decline makes more homes available for sale, according to Housing and Urban Development Secretary Shaun Donovan.  “It’s very unlikely that we will see a significant further decline,” Donovan said.  “The real question is when will we start to see sustainable increases.  Some think it will be as early as the end of this summer or this fall.”  Home sales have increased in six of the past nine months; the number of homeowners in default is declining, Donovan said on CNN’s “State of the Union” program.

“In the long run, it’s a good time to buy,” Donovan said.  “It’s so affordable today compared to where it’s been for generations.”  Contracts to purchase previously owned homes rose 8.2 percent in May, following a revised 11 percent drop in April, according to the National Association of Realtors (NAR).  Another NAR report showed sales of existing houses, which make up about 96 percent of the market, fell in May to a six-month low.  Home prices fell four percent in April over 2010, the biggest decline in 17 months according to the S&P/Case-Shiller index of values in 20 cities.  An estimated 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market in April, representing an 18 percent decline from the peak, as fewer loans entered delinquency and more distressed homes were sold, CoreLogic Inc. said.

Additionally, Donovan said that foreclosures are down approximately 40 percent when compared with last year.  Although 1.3 million homes are still in the foreclosure process, Donovan said that housing prices are stabilizing in the aftermath of the worst financial crisis since the Great Depression.  According to Donovan, “So, we are making progress, but rightly, the American people recognize we’re not where we need to be.  We still have a ways to go.”

On the subject of requiring 20 percent downpayments to buy homes, Donovan said there should be a way for qualified people to buy a home with less money upfront.  “We can’t go so far in the other direction that we cut off home ownership for people who really can be successful homeowners.  We can get back to the place where it’s a good investment and we will be able to make money over time,” Donovan said, noting that Americans should no longer view their homes as ATMs.

Financial analyst A. Gary Shilling, writing in The Christian Science Monitor, isn’t as optimistic.  In fact, he thinks that housing prices are likely to fall another 20 percent before bottoming out.  According to Shilling, “Many housing optimists a year ago believed not only that the housing collapse was over, but also that a robust rebound was under way.  Low mortgage rates and collapsed housing prices, not to mention the $8,000 federal tax credit for new home buyers and other initiatives, seemingly were going to kick-start housing activity nationwide.  Then a funny thing happened on the way to the housing recovery.  The tax credits expired, home sales dried up, and prices resumed their declines from their 2006 peak.  Excess inventories piled up due to overbuilding and mounting foreclosures.  In the meantime, buying those lower-priced houses became more difficult as lenders, burned by the housing crash, tightened lending standards and increased downpayment requirements.  As a result, the housing sector not only has failed to bolster the weak economic recovery but is also likely to continue to struggle for years.  And that’s bad news for the economy, which has softened in recent months.  Excess inventories are the mortal enemy of housing prices.  Lower prices are needed to unload surplus inventory, but in turn, lower prices bring forth more inventory from anxious sellers.  The anxiety of house sellers and the reluctance of buyers are enhanced by the realization that house prices can fall – and are falling for the first time in 70 years.”

The idea of owning a home is becoming less attractive as many people realize that it may be many years before prices stop falling and stabilize, let alone revive.  As proof, the national homeownership rate has fallen from its late 2009 peak of 69.2 percent to 66.4 percent in the 1st quarter of 2011 – the exact same level as in late 1998.  As homeownership loses its luster, rental apartments are gaining.  The homeownership rate is likely to continue to decline to its earlier long-term trend of around 64 percent as people continue to separate their abodes from their investments and as the baby boomers age, retire, and downsize.  That means approximately 4.5 million new renters in coming years.  Apartment construction, which normally totals 300,000 units annually, will be vigorous once surplus vacancies disappear.

Bernanke Talks Tough on Bank Regulation

Wednesday, May 18th, 2011

The Federal Reserve is identifying risks in the financial system that could someday erupt into a new financial crisis, but regulators must be careful not to unintentionally hamper lending as they set up new oversight, according to Chairman Ben Bernanke.   “We want the system to be as strong and resilient as possible,” and more intense oversight and changes such as requiring banks to hold more capital will help, said Bernanke at the Federal Reserve Bank of Chicago’s Bank Structure & Competition conference.  “If we can’t arrest risks, we want to make sure the financial system is defending itself,” he said.  The Dodd Frank Act establishes governmental structures to analyze risk aimed at preventing another financial failure as harsh as the one that almost brought down the world’s economy in the fall of 2008.

Through the Financial Stability Oversight Council and within the Fed, regulators are still analyzing what can cause “systemic risk,” – identified as risk that can cause widespread financial failure, Bernanke said.  Similar actions are underway in other nations; Bernanke said that regulators worldwide are communicating with each other while implementing their own systems.  If the new structures had been in place previously, Bernanke said, the 2008 financial crisis likely would not have happened. The old system of regulation spread authority across too many entities, was poorly coordinated, and problems “fell through the cracks.”  As the Federal Reserve develops a structure for analyzing risk, Bernanke said the focus must go beyond “fighting the last war.”  Future financial threats may differ from those of the past, which is why the banking industry currently is facing new oversight.  When some banks announced plans to pay shareholders dividends, regulators applied “stress tests” to their finances to determine if the institutions would be sound even if the economy weakened.  According to Bernanke, the government’s new stress testing system has provided accurate assessments of bank finances.

Even so, the regulations – the first new ones in 70 years — will be written to encourage bank compliance.  “No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said.  “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”

Bernanke and Fed officials are trying to balance the need to diminish the risk of another financial crisis with the aim of stimulating the economy after the worst recession since the Great Depression. The Dodd-Frank Act gives the Fed the job of overseeing the biggest financial companies.  “While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macro-prudential risks,” Bernanke said.

Lawmakers who solidly opposed the financial overhaul legislation, say Dodd-Frank goes too far and might make it more difficult for American banks to compete globally.  Some are working to cut funding for agencies established by the law and limit the scope of new rules.  According to the General Accounting Office, the law will cost nearly $1 billion to implement in 2011.

Additionally, Bernanke cited the sovereign-debt concerns in Europe as an example where the analysis led to the May 2010 decision by the Federal Open Market Committee to authorize “dollar liquidity swap lines with other central banks in a pre-emptive move to avert a further deterioration in liquidity conditions.”

To listen to our podcast on financial reform with Anthony Downs of The Brookings Institution, click here.

Federal Reserve Comes Clean on Who Received Bailout Money

Thursday, January 27th, 2011

Federal Reserve Comes Clean on Who Received Bailout MoneyAt the instruction of Congress, the Federal Reserve has released the names of the approximately 21,000 recipients of $3.3 trillion in aid provided during the financial meltdown –without doubt the nation’s worst economic crisis since the Great Depression.  Not surprisingly, two of the top beneficiaries were Bank of America and Wells Fargo, who received approximately $45 billion each from the Term Auction Facility.  American units of the Swiss bank UBS, the French bank Societe Generale and German bank Dresdner Bank AG also received financial assistance.  The Fed posted the information on its website in compliance with a provision of the Dodd-Frank bill that imposed strict new financial regulations on Wall Street.

One of the biggest surprises on the list is the fact that General Electric accessed a Fed program no fewer than 12 times for a total of $16 billion.  Although the Fed originally objected, Congress demanded accountability because there was evidence that the central bank had gone beyond their usual role of supporting banks.  In addition, the Fed purchased short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in housing debt.

Reactions to the revelations are both positive and negative.  On the positive side, Richmond Fed President Jeffrey Lacker said “We owe an accounting to the American people of who we have lent money to.  It is a good step toward broader transparency.”  Sarah Binder, a senior fellow with the Brookings Institution, disagrees, noting that “These disclosures come at a politically opportune time for the Fed.  Just when Chairman Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”

Senator Bernard Sanders (I-VT) said “We see this (list) not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government.  Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them.”

Baby Boom Has Gone Bust

Thursday, September 23rd, 2010

Illinois' birth rate is at its lowest level since the Great Depression.One unexpected side effect of economic hard times is a sharp decline in birth rates.  In Illinois, for example, the birth rate has fallen to its lowest level since 1933 – and that was during the darkest days of the Great Depression.  “Many couples are strained and don’t want to take on additional responsibilities,” said Dr. Kishore Lakhani, an obstetrics and gynecology specialist.  Dr. Vijay Arekapudi, chairwoman of the OB/GYN department at the Division Street campus of Sts. Mary and Elizabeth Medical Center is in agreement, noting that “Especially for people who are working, if they already have a child, they are deciding to continue taking birth control.”

At present, Illinois’ birth rate is approximately 13.3 for every 1,000 people.  That is a significant reduction from the high of 17.1 per 1,000 residents in 1990, according to Census Bureau statistics.  By contrast, the 1933 rate was 13.9.  According to the Illinois Department of Public Health and the National Center for Health Statistics, approximately 171,200 babies were born in Illinois in the year ending last November.  Births are down five percent from 180,503 births in 2007, before the recession began, according to Census Bureau statistics.

“It’s not just the recession; it’s the way the recession is intersecting with these other trends” that has slashed the birth rate, said Arden Handler, a professor at the University of Illinois at Chicago School of Public Health.  Illinois is not the only state impacted by falling birth rates, according to the Pew Research Center.  The nonpartisan organization studied data from 25 states (Illinois was not one of them) and found that birth rates started shrinking in 2008 after reaching their highest level in 20 years.  Gretchen Livingston, a Pew Center senior researcher, summed up the trend as “When things are tough economically, fertility goes down.

Congress Will Examine the Fed’s Actions During the Financial Crisis

Tuesday, May 25th, 2010

A bipartisan Senate votes to investigate the Fed’s actions before and during the financial crisis.  In a rare moment of bipartisanship, the Senate voted 96 – 0 to attach a modified version of an amendment proposed by Sen. Bernard Sanders (I-VT) to the financial regulatory bill to investigate transparency in emergency lending practices by the Federal Reserve during the financial crisis.  “This amendment begins the process of lifting the veil of secrecy of perhaps the most powerful federal agency,” Sanders said.  The vote also is a nod to public frustration with the government’s Wall Street bailout.

President Barack Obama has asked Congress to enact reform legislation that will make capital markets less susceptible to crises.  The Senate’s vote will clarify the Fed’s emergency lending practices during the crisis when it put hundreds of billions of dollars into the financial markets to stabilize the economy.  The proposal marks the first time the Fed has been investigated this thoroughly by Congress.

The Senate wants to scrutinize the Fed’s role in the time leading up to and during the financial crisis to determine if there were any regulatory gaffes.  Passage of the amendment allows a one-time audit of the Fed’s emergency lending since December 2007.  Additionally, the Fed will have to publicly disclose detailed data about which financial institutions it has lent money to by December 1.  Although the Fed initially was uneasy about the audit, its comfort level has now improved.  According to Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, “I’m comfortable with the modified Sanders amendment.”

Fed Retirement Gives President Obama the Go-Ahead to Chart a New Fiscal Course

Thursday, March 11th, 2010

Donald Kohn’s retirement gives President Obama the opportunity to reshape the Federal Reserve.  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.”

Hedge Fund Honcho’s Bet Pays Off Big

Monday, February 1st, 2010

David Tepper’s shopping trip for cheap Bank of America and Citigroup stocks a $7 billion windfall.  David Tepper’s shrewd bet that the nation would avoid a second Great Depression inspired him to buy bank shares at rock-bottom rates, a move that has earned his Appaloosa Management hedge fund an estimated $7 billion worth of profit during 2009.  Last winter, Tepper invested heavily in Bank of America stocks selling for $3 a share, as well as Citigroup, Inc. preferred stock, then priced at a bargain-basement $1 per share.

Tepper, a philanthropist who funded the Tepper School of Business at Carnegie Mellon University, made a gamble that is paying off in a big way – surprising skeptics who insisted that he was making a costly error.  “I felt like I was alone,” Tepper said.  There were days when “no one was even bidding.”  An improving market has seen Appaloosa Management earn a 120 percent return.  As a result of those gains, Tepper now manages approximately $12 billion, making his company one of the world’s largest hedge funds.

In general, hedge funds had a bad year in 2008, when they experienced a 19 percent decline.  Approximately 1,500 funds – 16 percent of the total – went out of business in 2008.  The funds had a far better year in 2009.  According to Hedge Fund Research, Inc., they are seeing a 19 percent return, the best annual gains in 10 years.

Alan Shealy, a long-time Tepper client, says “Investing with David is like flying, with hours of boredom followed by bouts of sheer terror.  He’s the quintessential opportunist, investing in any asset class, but you have to have a cast-iron stomach.”

Ben Bernanke: Person of the Year

Monday, December 28th, 2009

Ben Bernanke is an excellent choice as Time’s “Person of the Year.”  Time magazine has settled the much-anticipated question of its choice for “Person of the Year” for 2009.  It’s Ben Bernanke,  the scholarly chairman of the Federal Reserve, and “the most important and least understood force shaping the American – and global – economy.”  A former Princeton professor well versed in the causes and cures of the Great Depression, the 56-year-old Bernanke reinvented the Federal Reserve once global markets imploded in the fall of 2008.  Bernanke also has a compelling personal history, having been raised Jewish in small-town South Carolina during the Civil Rights era.

Time, commenting on Bernanke’s achievements over the last year, notes that “He knew how the passive Fed of the 1930s helped create the calamity – through its stubborn refusal to expand the money supply and its tragic lack of imagination and experimentation.  Chairman Bernanke of Washington was determined not to be the Fed chairman who presided over Depression 2.0.  So when turbulence in U.S. housing markets metastasized into the worst global financial crisis in more than 75 years, he conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies; ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed’s balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation.  He didn’t just reshape U.S. monetary policy; he led an effort to save the world economy.”

What’s remarkable is that Bernanke has achieved all of this in slightly more than one year.

Throughout 2009, Bernanke deposited unprecedented amounts of money into the banking system in entirely new ways, while charting a framework for the Fed’s ultimate return to normality.  He oversaw the financial stress tests that calmed the markets, and launched a ground-breaking public relations campaign to make the Fed more comprehensible to ordinary people.  According to Time, Bernanke’s “creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivaled power over our money, our jobs, our savings and our national future.  The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world.”

Central Banks Tighten the Purse Strings A Little

Thursday, December 17th, 2009

The world’s central banks are easing up slightly on the generosity they have shown over the past year when the financial crisis threatened to destroy the global economy. After European Central Bank president Jean-Claude Trichet said his bank would withdraw some liquidity operations, the euro rose.  Similarly the pound went up after the Bank of England started purchasing bonds at a slower rate.  The Federal Reserve detailed the conditions in which it would raise interest rates – though it hasn’t acted on that yet.Central banks take initial steps to see if global economies can thrive without being propped up.

Juergen Michels, chief European economist at Citigroup, Inc., in London, says that “As soon as the first exit measures are put in place, there’s the risk that the market overreacts.  We’ll probably see a tightening of financing conditions, and hard-fought-for improvements will be in jeopardy.”

These actions mean that investors will have to operate without the liquidity that has been propping up the world’s economies, even as new concerns about additional asset bubbles grow.  Mistiming the withdrawal of support could spoil the fragile recovery.  Central banks are changing course at a time when factories are restocking inventories, and the price of commodities like gold and sugar are climbing.  The MSCI All-Countries World Index has soared 66 percent since March and sugar has increased 90 percent this year.

“There are all kinds of risks,” said Jim O’Neill, chief global economist at Goldman Sachs Group, Inc., in London.  “We don’t know how much of the improvement in markets is due to the central banks’ largesse, and neither do they.  They’re pretty nervous, but they’ve got to get out of it at some stage.”

Buddy, Can You Spare a Job?

Monday, December 14th, 2009

With the national unemployment rate at 10.2 percent, President Barack Obama is focusing on job creation – the American public’s number one concern.  The administration’s “White House to Main Street” summit and tour is gathering advice from a variety of stakeholders, including business executives, small-business owners, economists, union officials and Ed Pawlowski, the mayor of hard-hit Allentown, PA.

The stakes are high because the Obama administration finds itself in the difficult position of wanting to create millions of new jobs without adding to the national debt.  “There’s one group that says we need to do more about the economy, more to create jobs,” according to political analyst Charlie Cook.  “And then there’s the other side that’s saying we’re blowing the heck out of the budget deficits.  And so they’re getting squeezed.”

“If we keep on adding to the debt, even in the midst of this recovery, at some point people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” the President said in an interview with Fox News.

In the meantime, Congress is considering job stimulus legislation that could combine extensions of COBRA, unemployment compensation and food stamps. Because the Democrats have very little money to spend right now, they know that a successful second stimulus will have to pack a powerful punch.  Senator Mark Warner (D-VA) wants to use $50 billion in leftover TARP funds to provide loans to small businesses.  Yet another proposal from Senator Jack Reed (D-RI) would use $600 million to subsidize employees who volunteer to have their hours cut to help companies avoid layoffs.  This approach has worked spectacularly well in Germany, which has not seen an uptick in unemployment this recession.