economy

[micaddict]

Indeed, always striving to be better than others, or the best for that matter,  doesn't necessarily make you, or others, happier.

 

[dmp]

To veer back to economics, I read a disturbing statistic about the lack of financial understanding for the american public. This is especially unsettling for the number of millennials saddled with significant student loan debt and little understanding of compound interest that as a borrower is working against them.  Like much of life they are given the test first and then the lesson later, but this difficult lesson means a huge pile of debt that has to be managed from a too early age. 

Does the American public understand statistics?    ;D
There's been talk of including a finance class as a requirement in high school. Pretty important.
Currently, most millenials have had to sign up for a big loan to get the education to then learn what a bad idea the big loan was in the first place.  The fact that Congress has been charging 5-7% for student loan interest just because they didn't tie it to prime twenty years ago is a travesty. We have a decade of ZIRP and the country is hobbling the next generation with high interest rate student loans.

 

[JohnRoberts]

Does the American public understand statistics?    ;D

Hell no...  I got into a mild discussion on social media with some salesman pimping mutual funds based on past performance (that they usually cherry pick), about his ability to statistically prove that the investment choices  were the single reason the fund went up, vs simple chance and external market trends.  Which makes a big difference wrt future fund performance. 

There's been talk of including a finance class as a requirement in high school. Pretty important.

very important, add that to the civics class that is also needed.

Currently, most millenials have had to sign up for a big loan to get the education to then learn what a bad idea the big loan was in the first place.  The fact that Congress has been charging 5-7% for student loan interest just because they didn't tie it to prime twenty years ago is a travesty. We have a decade of ZIRP and the country is hobbling the next generation with high interest rate student loans.

The real travesty IMO is that the government took over the private student loan industry and pushed it broadly with too easy credit terms... (just like the housing bubble). In simple supply/demand terms, the too easy credit caused too much money supply to pursue a fixed number of college seats, driving the prices up. Colleges expanded as fast as they could, while lowering admissions standards and dumbing down the curriculum to accommodate these newly minted college students.  It is not surprising that these new students who didn't major in merchantable fields are now saddled with huge debt and poor employment chances. 

For another related example of insidious government "helping" they also made it too easy to "not" pay these loans without effectively educating the students about what would happen.  I have written about this here before, the loan principal balance continues to incur interest, but since the student isn't paying that interest off, it gets "capitalized" or rolled into the loan principal. This is compound interest at it's worst, working against the individual... After several years of skating on student loan payments the loan balance can grow substantially.

This is a classic case of politicians confusing correlation with causation, just like they did with home ownership. Seeing that college educated adults generally fared better, they waved their legislative wand and "presto" made more people college students. Just like the housing crisis which we are still recovering from we will have to deal with a student loan crisis too. The problem is not the interest rate, it is the fact that these loans were too easy to get, and that students (parents?) had zero clue about what they were getting themselves into.

Borrowing money to get an education that guarantees a good future may be sensible (computer science, medicine,etc), but borrowing and paying too much money for just any questionable major, is just a very bad idea.  I have also shared about a recent trend in high intensity software programming training courses, that only take a few months and cost around $10-$15k that have very high and well paid employment success. 

This should be obvious but whenever borrowing money, one needs to understand how they will pay it back, or don't borrow it.

JR

 

[dmp]

This is a classic case of politicians confusing correlation with causation, just like they did with home ownership.

Or they were trying to provide opportunity for everyone, instead of just opportunity for the wealthy.
Most kids of rich people go to expensive colleges and it doesn't seem to be a big problem... Even if they are the least qualified. GWB and DT come to mind. 
Someone does need to figure out how to make financial assistance available without stimulating inflation. Housing, education, health care, etc... all come to mind. Even equities with the Fed zero interest rate policies.  It's ironic that this all might collapse with a President that talks about how much he loves debt.
I just hope it happens soon enough that the baby boomers don't get off scott free, since they made this mess.

broadly with too easy credit terms... (just like the housing bubble).

This myth about the housing bubble has been widely debunked.  The financial industries shenanigans caused it - not the relatively small percent of loans the Gov enabled to lower income people.
I remember going to see a lender in 2006 and being pre-approved for a loan about 2x what I could afford. The mortgage payment was slightly over my take home. A great movie about the start of the collapse of MBS is "Margin Call". Just watched it again recently.

The real problem with housing today is the extraction of wealth from the lower 80% of people by the very wealthy. Home ownership rates are declining  as wealthy people have turned to buying houses and turning them into rentals. The oppression and inequality continues.
https://www.bloomberg.com/news/articles/2017-03-23/renters-now-rule-half-of-u-s-cities

And about debt, just reading that 73% of people who died last year had debt, averaging $62k. Without mortgage debt, the balance was $12k
http://www.foxbusiness.com/features/2017/03/21/americans-are-dying-with-average-62k-debt.html

 

[JohnRoberts]

Or they were trying to provide opportunity for everyone, instead of just opportunity for the wealthy.

Everybody in my family except me graduated from college and I have one brother still alive with a phd. We were not wealthy. My single mother after my father died  got a job and put us through college. I was the black sheep and dropped out of school because i didn't want to waste my mother's hard earned money on something I didn't appreciate (I was never a good student). 

Most kids of rich people go to expensive colleges and it doesn't seem to be a big problem... Even if they are the least qualified. GWB and DT come to mind. 

Some rich kids go to expensive colleges to network with other rich kids. Other rich, and not so rich, kids go to college to party and meet girls.  Some poor kids are denied the opportunity to drink themselves to death like this one http://wkrg.com/2016/03/15/21-year-old-dies-from-alcohol-poisoning-at-spring-break-in-orange-beach/

Someone does need to figure out how to make financial assistance available without stimulating inflation.

No IMO financial assistance is what causes the economic distortions.

How about making education more cost effective and more efficient. There are already large efforts to get web based education programs working. Good lectures can be recorded and watched when convenient. A serious web based education program could be dirt cheap and available to anyone with an internet connection.

No need to pay for the full college ride.

Many businesses will support and invest in training workers to fill open positions.

Housing, education, health care, etc... all come to mind. Even equities with the Fed zero interest rate policies.  It's ironic that this all might collapse with a President that talks about how much he loves debt.

I thought Ben Bernanke should have been chained to his desk, until this grand experiment gets unwound...

I just hope it happens soon enough that the baby boomers don't get off scott free, since they made this mess.

that's a new one.... I guess I am a boomer (born in 1948) so you think I made this mess?

This myth about the housing bubble has been widely debunked.  The financial industries shenanigans caused it - not the relatively small percent of loans the Gov enabled to lower income people.

debunked by who? Bubbles are pretty simple to understand (after they burst). There have been many bubble over the centuries. The cause is either an unusually desirable scarce commodity or too much money chasing a finite commodity that causes a rising price trend that people think will continue going up to sky. Prices never go up to the sky, so bubbles always burst.

While Barney Frank will proclaim his innocence, and a liberal press gladly gives him a pass... The government still hasn't reeled in fannie and freddie, the GSEs who create the secondary market for home mortgages. While they do not enjoy an explicit guarantee of government backing, the market expects them to be bailed out again like the last time should another housing crisis occur.

While technically the housing bubble was fueled by poorly understood/regulated tranches of bundled mortgages, that were packaged and resold for profit as fast as they could bundle them, the legislators and bank regulators happily looked the other way while the music kept playing.  Everybody in the housing/mortgage business was getting fat and happy so nobody wanted to upset the apple cart, In fact the entire economy was helped by this bubble, until it wasn't. 

It seemed apparent to me from all the crazy house flipping that this would end badly. I begged a young friend to be more careful. He didn't listen and lost both his house and imaginary paper flipping profits.

Some pukes on wall street  didn't get together and decide to create a housing bubble, but regulators and the legislature were not disciplined or adult.  Even president Bush was guilty of putting the government thumb on the housing scale, before he got religion and tried to push for reform. 

Before affordable housing limits were imposed on the GSE in 1992 they were mandated to only buy institutional quality (prime ) mortgages. The affordable housing act mandated government quotas.  At first it was only 30% of loans had to be made to people at or below the median income. Hud was given authority to administer these quotas and under Clinton they were raised to 50% and Bush even raised them higher to 55%. Even I can figure in my head that more than half were below median income borrowers (sub-prime).  :

I don't like to cut and paste but this web page from the Bush whitehouse is full of historical data.

Over the past six years, the President and his Administration have not only warned of the systemic consequences of failure to reform GSEs but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties.  In fact, it was Congress that flatly rejected President Bush's call more than five years ago to reform the GSEs.  Over the years, the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems with the GSEs.

2001

April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity."  (2002 Budget Analytic Perspectives, pg. 142)
2002

May: The Office of Management and Budget (OMB) calls for the disclosure and corporate governance principles contained in the President's 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac.  (OMB Prompt Letter to OFHEO, 5/29/02)
2003

February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market.


September: Then-Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.


September: Then-House Financial Services Committee Ranking Member Barney Frank (D-MA) strongly disagrees with the Administration's assessment, saying "these two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis … The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."  (Stephen Labaton, "New Agency Proposed To Oversee Freddie Mac And Fannie Mae," The New York Times, 9/11/03) 


October: Senator Thomas Carper (D-DE) refuses to acknowledge any necessity for GSE reforms, saying "if it ain't broke, don't fix it."  (Sen. Carper, Hearing of Senate Committee on Banking, Housing, and Urban Affairs, 10/16/03)


November: Then-Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk."  To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE."  (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)
2004

February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital and calls for creation of a new, world-class regulator:  "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore … should be replaced with a new strengthened regulator."  (2005 Budget Analytic Perspectives, pg. 83)


February: Then-CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted."  Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator."  (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)


April: Rep. Frank ignores the warnings, accusing the Administration of creating an "artificial issue."  At a speech to the Mortgage Bankers Association conference, Rep. Frank said "people tend to pay their mortgages.  I don't think we are in any remote danger here.  This focus on receivership, I think, is intended to create fears that aren't there."  ("Frank: GSE Failure A Phony Issue," American Banker, 4/21/04)


June: Then-Treasury Deputy Secretary Samuel Bodman spotlights the risk posed by the GSEs and calls for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system.  Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs:  Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System."  (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)
2005

April: Then-Secretary Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America … Half-measures will only exacerbate the risks to our financial system."  (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)


July: Then-Minority Leader Harry Reid rejects legislation reforming GSEs, "while I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process." ("Dems Rip New Fannie Mae Regulatory Measure," United Press International, 7/28/05)
2007

August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions.  Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options."  (President George W. Bush, Press Conference, the White House, 8/9/07)


August: Senate Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd ignores the President's warnings and calls on him to "immediately reconsider his ill-advised" position.  (Eric Dash, "Fannie Mae's Offer To Help Ease Credit Squeeze Is Rejected, As Critics Complain Of Opportunism," The New York Times, 8/11/07)


December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly.  So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission.  The GSE reform bill passed by the House earlier this year is a good start.  But the Senate has not acted.  And the United States Senate needs to pass this legislation soon."  (President George W. Bush, Discusses Housing, the White House, 12/6/07)
2008

February: Assistant Treasury Secretary David Nason reiterates the urgency of reforms, saying "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully."  (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)


March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac.  They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages."  (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)


April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac.  [There are] constructive things Congress can do that will encourage the housing market to correct quickly by … helping people stay in their homes."  (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)


May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.

"Americans are concerned about making their mortgage payments and keeping their homes.  Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow state housing agencies to issue tax-free bonds to refinance sub-prime loans."  (President George W. Bush, Radio Address, 5/3/08)


"[T]he government ought to be helping creditworthy people stay in their homes.  And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac.  That reform will come with a strong, independent regulator."  (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)


"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans."  (President George W. Bush, Radio Address, 5/31/08)

June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac."  (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)


July: Congress heeds the President's call for action and passes reform legislation for Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.


September: Democrats in Congress forget their previous objections to GSE reforms, as Senator Dodd questions "why weren't we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem? … I have a lot of questions about where was the administration over the last eight years."  (Dawn Kopecki, "Fannie Mae, Freddie 'House Of Cards' Prompts Takeover," Bloomberg, 9/9/08)

Need i repeat they still haven't reformed the GSEs, just whistling past the graveyard still.

I remember going to see a lender in 2006 and being pre-approved for a loan about 2x what I could afford. The mortgage payment was slightly over my take home. A great movie about the start of the collapse of MBS is "Margin Call". Just watched it again recently.

Back in the early '80s I tried to get a mortgage to buy the house I was renting in CT. I was an army veteran who owned my own successful(?)  business. As i recall I looked into FHA and government assistance, but i was not worthy. Never got the mortgage.

The real problem with housing today is the extraction of wealth from the lower 80% of people by the very wealthy.

that seems to be a common rant.

Home ownership rates are declining  as wealthy people have turned to buying houses and turning them into rentals. The oppression and inequality continues.
https://www.bloomberg.com/news/articles/2017-03-23/renters-now-rule-half-of-u-s-cities

I have been watching this among other trends. The pendulum was swung way too far out over the water promoting home ownership, and is likely to overshoot in the other direction toward renting (but how do you buy a house with a huge student loan balance hanging over your head?).

Those damn rich people, also known as investors, started out buying distressed houses when people couldn't keep up with their mortgages. But this is too messy to do with individual houses one at a time, so hedge funds put together programs to raise investments to buy these cheap houses (classic buy low to sell high later).  I always ASSumed these hedge funds were making a short term trade planning to flip the houses back into a strong market for a nice profit.  BUT I was wrong as I often am about predicting the future and we still haven't had a proper housing recovery. New household formation is weak (kids still living in parents basement), and the student debt overhang makes rental look like a more persistent or chronic trend.

The hedge funds stopped raising chump change and recently did an IPO to sell stock to the public and raise some serious capital to buy houses and rent them out (Invitation Homes raised $1.5B in jan). So investors are betting the renting trend will be with us for some time. Damn those rich people buying stocks. For the record I do not consider this a good thing, but just another unintended consequence of misguided government helping.

And about debt, just reading that 73% of people who died last year had debt, averaging $62k. Without mortgage debt, the balance was $12k
http://www.foxbusiness.com/features/2017/03/21/americans-are-dying-with-average-62k-debt.html

I recall reading a book years ago called "Die Broke"... it made a lot of sense (it favored accumulating income streams over just accumulating capital or wealth, there is a difference). Only thing better than dying flat broke is owing money. 

Tag you're it.  8)

JR .

 

[JohnRoberts]

I have been warning about this for some time... The Fed has just floated a trial balloon about starting to sell off their $4.5T portfolio of sovereign debt...  They have been buying our own debt in the margin to keep interest rates low. It is arguably a good sign that they are starting to unwind this distortion to free market debt pricing. Predictions are that portfolio reduction may start before the end of this year. They can just let these debt instruments expire at maturity and stop rolling them over (replacing with new debt purchases).

Good luck to us all.... Higher interest rates will help normalize the unhealthy too-low for too-long interest rate environment... BUT higher interest rates will slow the economy so expect bumps ahead.

We need higher GDP growth, but without distortion from the fed's thumb on the scale. This is economic history being written before our eyes. Interesting times.

JR

 

[JohnRoberts]

For another perhaps interesting unintended economic consequence, modern collision avoidance technology is actually causing insurance rates to go up due to vastly more expensive repair costs... A side mirror with anti-collision works inside could be $850 to replace. Almost 3x the standard mirror.

Car companies claim that once there is a critical mass of cars equipped with anti-collision technology, there will be less collisions and costs will go down. Accidents and insurance rates have already been rising due to texting  related mishaps.

be safe..

JR

 

[JohnRoberts]

Not sure whether to blame this one on excesses of capitalism or unchecked growth of government, but a well intentioned government supported loan program, to finance energy saving home improvements. The program has grown in just a few years to $3.7B... These often high interest rates loans for solar panels and the like .

In a shocking turn the Republicans  ;D are calling for regulatory oversight of these loans similar to mortgage lending.  (PACE act 2017 amends Truth in lending Act).

Typically lenders for this market depend on plumbers and local contractors to broker the loans...  Often leaving consumers with less than complete understanding of their loan terms.  Reminiscent of the housing crisis investors have bought tens of millions of dollars of bond deals backed by these loans in bundles...

So far these numbers, millions and billions of dollars are modest and not a threat to the wider economy but some consumers are getting loans they don't understand and with plumbers as loan brokers the quality of bundled loan instruments may be hard to determine.

Good to be proactive and prevent this from becoming another economic problem.  Some regulation can be good...

JR

 

[JohnRoberts]

Credit card debt just passed $1T so we now have $1T student loan debt, $1T car loan debt, and $1T credit card debt..  Stock market margin debt is just $500B.

What could possibly go wrong.  : :

JR

Note: Home mortgage debt is many times larger than that... ($9T ??)  A bill pending in congress to make the tax liability forgiveness permanent, when home mortgage loans get forgiven. Technically when a debt gets forgiven that is income to the former debt holder and taxable.  Trying to tax distressed borrowers seems like a low success strategy, but we don't want to inadvertently encourage bad behavior.

 

[benb]

For another perhaps interesting unintended economic consequence, modern collision avoidance technology is actually causing insurance rates to go up due to vastly more expensive repair costs... A side mirror with anti-collision works inside could be $850 to replace. Almost 3x the standard mirror.

Car companies claim that once there is a critical mass of cars equipped with anti-collision technology, there will be less collisions and costs will go down. Accidents and insurance rates have already been rising due to texting  related mishaps.

be safe..

JR

I'm reminded of the US car bumper regulations in the 1970s. I don't recall if this was insurance-related, but in retrospect it surely was. Congress was lectured on the high repair costs of bumpers at very low speed accidents (2.5 to 5mph or so - I recall video of a 3-year-old child running to demonstrate the speed), so they passed regulations requiring bumpers that wouldn't be damaged in such low speed accidents.  Of course, those new bumpers were more complicated and expensive to prevent the low-speed damage, so the costs of higher speed damage ended up being much MORE than with the previous bumpers.

Wikipedia tells some of the story:
https://en.wikipedia.org/wiki/Bumper_(car)

 

[JohnRoberts]

I'm reminded of the US car bumper regulations in the 1970s. I don't recall if this was insurance-related, but in retrospect it surely was. Congress was lectured on the high repair costs of bumpers at very low speed accidents (2.5 to 5mph or so - I recall video of a 3-year-old child running to demonstrate the speed), so they passed regulations requiring bumpers that wouldn't be damaged in such low speed accidents.  Of course, those new bumpers were more complicated and expensive to prevent the low-speed damage, so the costs of higher speed damage ended up being much MORE than with the previous bumpers.

Wikipedia tells some of the story:
https://en.wikipedia.org/wiki/Bumper_(car)

Classic unintended consequences of government helping.  Since all they can do is pass legislation they feel compelled to pass laws (or write regulations) about anything and everything that gets national attention.

JR 

 

[Phrazemaster]

Indeed, always striving to be better than others, or the best for that matter,  doesn't necessarily make you, or others, happier.

The problem is we use unhappiness as a motivator. We threaten ourselves and others to excel "so you can finally succeed" (be happy). But there's no endpoint to happiness - and when we finally do achieve one goal we don't stop and let ourselves be happy - we make another goal, and make ourselves miserable again to achieve it. It's the carrot and the stick, but the carrot ends up being an illusion and the stick a far-too real bruise.

And this relates to the economy because we are fed thousands of ads whose goal is to make us want something (be unhappy) until we buy a product to satisfy the want (be happy).

The world would be very different if we just let ourselves be happy and not use happiness as a motivator.

All unhappiness is ultimately in service to happiness. Ironically.

 

[JohnRoberts]

I don't know how significant this is, but Ben Bernanke was recently interviewed and commented that the neutral interest rate (rate where it neither stimulates or suppresses growth) is probably lower than most assume. Meaning we do not need to return to historical interbank rates.  He also suggested the Fed may hold onto some of their elevated balance sheet longer than expected.

I am pleasantly surprised that the economy hasn't blown up yet after this massive experiment. Low for long interest rates definitely hurts savers (like retirees).  This looks and feels like a soft landing, but the thing about black swans is you never see them coming.

Good luck to us all...

JR 

 

[Script]

I am pleasantly surprised that the economy hasn't blown up yet after this massive experiment. Low for long interest rates definitely hurts savers (like retirees).  This looks and feels like a soft landing, but the thing about black swans is you never see them coming.

It blew up in 2008/09 after massive pre-millenium deregulation.

Soft landing indeed, since central banks after Lehman switched to doing the opposite of what they used to do to push or dampen  market developments. A shift in paradigm. 

Yes, low interest rates hurts 'conventional' savers, but there are alternatives to savings accounts.

Just read that interest rates on Amercican government held bonds are actually falling despite FED having slightly raised interest rates. Not only good news, but it also seems the 'experiment' isn't over yet.

Not sure what to think of Trump intending to massively deregulate banks again. A bit premature? Not being able to give out loans is a problem, not only in the US. Still, not sure Trump is fully informed on this (yet?).

 

[tands]

Keen’s “Minsky” model traces this to what he has called “endogenous money creation,” that is, bank credit mainly to buyers of real estate, companies and other assets. He recently suggested a more catchy moniker: “Bank Originated Money and Debt” (BOMD). That seems easier to remember.
The concept is more accessible than the dry academic terminology usually coined. It is simple enough to show that the mathematics of compound interest lead the volume of debt to exceed the rate of GDP growth, thereby diverting more and more income to the financial sector as debt service. Keen traces this view back to Irving Fisher’s famous 1933 article on debt deflation – the residue from unpaid debt. Such payments to creditors leave less available to spend on goods and services.

In explaining the mathematical dynamics underlying his “Minsky” model, Keen links financial dynamics to employment. If private debt grows faster than GDP, the debt/GDP ratio will rise. This stifles markets, and hence employment. Wages fall as a share of GDP.

This is precisely what is happening. But mainstream models ignore the overgrowth of debt, as if the economy operates on a barter basis. Keen calls this “the barter illusion,” and reviews his wonderful exchange with Paul Krugman (who plays the role of an intellectual Bambi to Keen’s Godzilla), who insists that banks do not create credit but merely recycle savings – as if they are savings banks, not commercial banks. It is the old logic that debt doesn’t matter because “we” owe the debt to “ourselves.”

The “We” are the 99%, the “ourselves” are the 1%. Krugman calls them “patient” savers vs “impatient” borrowers, blaming the malstructured economy on personal psychology of indebted victims having to work for a living and spend their working lives paying off the debt needed to obtain debt-leveraged homes of their own, debt-leveraged education and other basic living costs.

By being so compact, this book is able to concentrate attention on the easy-to-understand mathematical principles that underlie the “junk economics” mainstream. Keen explains why, mathematically, the Great Moderation leading up to the 2008 crash was not an anomaly, but is inherent in a basic principle: Economies can prolong the debt-financed boom and delay a crash simply by providing more and more credit, Australia-style. The effect is to make the ensuing crash worse, more long-lasting and more difficult to extricate. For this, he blames mainly Margaret Thatcher and Alan Greenspan as, in effect, bank lobbyists. But behind them is the whole edifice of neoliberal economic brainwashing.

Keen attacks this “neoclassical” methodology by pointing that the logical fallacy of trying to explain society by looking only at “the individual.” That approach and its related “series of plausible but false propositions” blinds economics graduates from seeing the obvious. Their discipline is the product of ideological desire not to blame banks or creditors, wrapped in a libertarian antagonism toward government’s role as economic regulator, money creator, and financer of basic infrastructure.

Keen’s exposition undercuts the most basic and fundamental assumptions of neoclassical (that is, anti-government, anti-socialist) economics by showing that instead of personifying economic classes as “individuals” (Krugman’s “prudent” individuals with their inherited fortunes and insider dealings vs. spendthrift individuals too economically squeezed to afford to buy houses free of mortgage debt) it is easier to start with basic economic categories – creditors, wage earners, employers, governments running deficits (to provide the economy with money) or surpluses (to suck out money and force reliance on commercial banks).

His Figure 16 shows how stable UK private debt/GDP was for a century, until Margaret Thatcher deranged the economy. Debt soared, and mainstream economists applauded the boom. (He suggests calling this new wave of neoliberal policy “deform,” in contrast to “reform.” We certainly need a new vocabulary to counter the soporific euphemisms used by the fake economic news media.) Privatization of Council Housing and basic infrastructure forced the population deeply into debt to afford their basic needs. The financial City of London ended up the big winners, while industry or labor have suffered a debt squeeze.

Keen’s model shows that a long debt buildup can give the appearance of prosperity, until the crash comes. But when it comes, voters blame the party in power, not the earlier promoters of nationwide debt peonage. Along with Thatcher, Keen places the blame the pied piper of Wall Street deregulation Alan Greenspan, whom he calls “a maestro of delusion, not of insight.” He also cites Larry Summers as an example of the learned ignorance beclouding economic discussion – which of course is just why the Clintons and Obama were told by their Donor Class to anoint him.

This book enables the non-mathematician to pierce the shell of mathiness in which today’s economic mainstream wraps its lobbying effort for the big banks and their product, debt. The needed escape from the debt deflation they have caused is a debt writedown.

The problem is that the public is brainwashed to imagine that it is the banks that need saving, not the indebted economy. Keen proposes a “Modern Debt Jubilee” that is essentially a swap of equity for debt. The intellectual pedigree for this policy to keep debt within the ability to pay was laid two centuries ago by Saint-Simon in France. His solution was for banks to take an equity position in their clients, so that payments to backers could rise or fall in keeping with the fortunes of the enterprise. Keen urges that this become the basis for future banking.

As a transition from todays debt stagnation, he suggests that the central banks create a lump sum to put into everyone’s account. Debtors would be required to use their gift to pay down the debt. Non-debtors would keep the transfer payment – so as not to let demagogic political opponents accuse this plan of rewarding the profligate.

If this solution is not taken, debtors will continue to lumber on under debt and tax conditions where only about a third of their nominal wages are available to spend on the goods and services that labor produces. The circular flow between producers and consumers will shrink – being siphoned off by debt service and government taxes to bail out bankers instead of their victims.

This should be what today’s politics is all about. It should be the politics of the future. But that requires an Economics of the Future – that is, Reality Economics.

Toward this end, Keen’s pamphlet should be basic reading for placing debt at the center of today’s political debate and replacing mainstream “barter” economics with a more reality-based discipline.

http://www.nakedcapitalism.com/2017/05/michael-hudson-review-steve-keens-can-void-another-financial-crisis.html

 

[Script]

Chinese HNA Group is now biggest* stakeholder (9.92%) in Deutsch Bank.

Not that I care much about banks, but that's not enough influence yet to press the pOtUs toward paying his debts to DB
__
* Second ranks Katar sheikh family. Third comes BlackRock.

 

[JohnRoberts]

It blew up in 2008/09 after massive pre-millenium deregulation.

Soft landing indeed, since central banks after Lehman switched to doing the opposite of what they used to do to push or dampen  market developments. A shift in paradigm. 

It has been well inspected and blaming it on deregulation is a little too easy IMO. In the crystal clarity of hindsight we can see ways that regulators "could" have moderated the rapid expansion of consumer credit that no only drove the housing bubble, but rippled through raising the entire economy with strong growth. Many consumers tapped into their rising home wealth using second mortgages to buy boats and make home improvements.

Politicians didn't have the stomach to stop that music playing (they still haven't dealt with Fannie and Freddie that were targeted for reform by the Bush administration, unfortunately after he lost the congress).  The fix for "too big to fail" was to merge huge banks with other huge banks making them even bigger.  :

Yes, low interest rates hurts 'conventional' savers, but there are alternatives to savings accounts.

I am open to suggestions...?  Bank CDs, savings bonds and the like are paying historically low rates. Alternate investments paying higher rates generally come with significantly higher risk.  Investment vehicles have been developed as plays on real estate, with new vehicles to buy up undervalued housing to rent them out. I thought this was just a short term trade by hedge funds, but these seem like longer term business plans.  If I was younger I would have bought a larger house when they were on sale so cheap.

Just read that interest rates on American government held bonds are actually falling despite FED having slightly raised interest rates. Not only good news, but it also seems the 'experiment' isn't over yet.

The government is talking about perhaps issuing longer duration bonds (even longer than 30 years). The FEDs balance sheet has a lot of  short term paper used to influence bond pricing auctions. I thought Bernanke's observations were perhaps important suggesting we may get less interest rate increases than expected(?). Bernanke seems to be in the camp of persistent low GDP growth rates. I do not expect a return to historic growth rates, but we can do a lot better than we have recently. Locking in current low interest rates for as long as we possibly can, for sovereign debt seems prudent. The debt service on $19T could grow exponentially if returned to elevated historic interest rates. 

Not sure what to think of Trump intending to massively deregulate banks again. A bit premature? Not being able to give out loans is a problem, not only in the US. Still, not sure Trump is fully informed on this (yet?).

I would not advise listening to Trump's tweets for firm specific policy advice. He may be throwing out ideas to test the water, or just to stirring the pot to keep people off balance. He also mentioned a 21st century Glass-Stegall regulation during his campaign.  He has more pressing issues on his plate right now, but it is not his nature to negotiate details in the media (I think, maybe just broad strokes)... Out of the media spotlight his administration is still working on healthcare reform and tax reform. While publicly doing hand to hand combat with an aggressive (opposition?) media. 

I thought it was perhaps instructive that Pres trump said getting China's assistance at managing N. Korea may out weigh getting the best possible trade deal with them. But this may just be signaling for N. Korea's benefit. 

JR

PS: I have been watching the car market for bargains (my daily driver is 20 YO). We appear to be at peak autos with Detroit paying record high cash incentives to move cars out of dealerships. There are a large number of cars coming off lease this year and next that will suppress used car market prices.  Another interesting trend is web transactions so less car buyers are literally kicking the tires at physical car lots, so dealers are selling off prime real estate and parking new cars off site.

 

[Script]

I am open to suggestions...?

I am pretty sure that you don't need my suggestions.

It has been well inspected and blaming it on deregulation is a little too easy IMO.

Agreed. Too easy, but an important aspect. Add the hedging game, fast trading possibilities through computers, computer-based automatic trading and, also highly important, the massive surge in derivatives since the turn of the millenium.

Bank CDs, savings bonds and the like are paying historically low rates. Alternate investments paying higher rates generally come with significantly higher risk. 

Well, no free lunch then any more. About higher risks, I am not so sure. Strangely enough, stocks are widely thought of and promoted as involving a significantly high risk. Anyone who believes this has fallen victim to a grand lie. Personally, I think the opposite is true, depending on what stocks you pick of course.

To my understanding, a fond is riskier because of anonymous management staff, running costs and generally lower ROI -- basically subsidizing your bank with skimmed off (read: free) constant revenue. Trackers are also risky (issuer risk) and they don't count as property but are basically like lending out cash (private persons have significantly low priority in the case of issuer bankruptcy). Bitcoins are what I'd call very risky (actually the turbo capitalist's wet dream), while taking a second mortgage on the house just because its value is rising is what I'd almost call taking a stupid risk (paying off the morgage as quickly as possible is what I'd call smart).

BTW, have you ever tried trading options, futures, puts, calls, well, any leverage product of any kind? Now that is indeed pretty much like betting on horses and it involves significantly (read: extremely) high risk. It's fast-paced, there's a knock-out (total loss) and the spread is always working against you.

Derivates are responsible for much if not most market movements these days. So -- and this is just an idea off the top of my head -- why not change the rules and decide that you can only hedge a position that you actually own. Read: you can trade up to 100 leverage units of a product based on a given stock if you can proove that you actually hold 100 stocks by said company. If you don't have those stocks, you can't buy the derivative. I am well aware that this would be the death blow to 90% or more of so-called investment companies. But then again, it's just a quick shot. 

The government is talking about perhaps issuing longer duration bonds (even longer than 30 years).

There you go. Lock in the rates while they are still low. Then fuel inflation by allowing banks to give out more money again, floddding the markets with the very same money that the banks have been flooded with. Said differently, have inflation mimick growth (the Japanese approach), hoping that more money circulating will unleash whatever they wishfully think there is.

#

I would not advise listening to Trump's tweets for firm specific policy advice.

Never did. I think it's a total waste of valuable time  8)

 

[Matador]

I would not advise listening to Trump's tweets. for firm specific policy advice.

Let me fix that for you.

 

[mattiasNYC]

Let me fix that for you.

"I would not advise listening to Trump"

Howsabootthat?

He's a perpetual liar. Why listen?