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Restoring Trust in Mortgage-Backed Securities
The mortgage finance market has leaned heavily on government support over the past few years. More than 90 percent of mortgages originated in 2011 were securitized by government entities using taxpayer funds to guarantee investors against default risk. And over $5.8 trillion in home mortgage debt in the United States is now either owned or guaranteed by a federal entity – be it the Federal Housing Administration (FHA), Ginnie Mae, the Veterans Housing Administration, or one of the two government-sponsored enterprises (GSEs) under "conservatorship" since 2008. This support cannot continue forever. Read more...
Today’s Student Loan Recipients are Tomorrow’s Economic Elite
President Obama recently took to college universities and late night talk shows to tout his plan to keep student loan interest rates fixed at 3.4%. Since 2008 the Federal Government has effectively socialized the student loan market by enacting laws to eliminate private lender participation in administering Federal loans. As a consequence, student loans owned by the Federal Government have grown from $111 billion at the end of 2008 to $425 billion as of December 31, 2011. With a 9% default rate among borrowers and no collateral to cushion default severities, the program’s interest rate would be insufficient to cover expected credit losses at today’s default rates. Yet there is no appetite among elected officials for scaling back government involvement. Read more...
The Perils of Treasury's New Talking Points on TARP
The policy debate regarding the merits of TARP has taken an interesting turn in recent weeks with the Treasury Department’s claim that the program will likely turn a profit. The bank rescue portion of TARP has already returned a gross profit. Treasury also points out that when counting Fed seigniorage from printing money to buy interest-bearing assets, the government may even come out ahead when including the cost of the $150+ billion bailout of Fannie Mae and Freddie Mac. The message is that TARP and the associated rescue programs not only saved the economy from collapse, but were also a shrewd investment undertaken on behalf of taxpayers. Read more...
Milken 2012 Tackles Growth and Fiscal Health
The recent “2012 Milken Institute’s Global Conference” had some very interesting panel discussions. Here are links to our favorite three panels: Read more...
Ex-Im Bank Reauthorization Should Include Fair Value
House lawmakers may reach a bipartisan deal this week to reauthorize the Export-Import Bank of the United States. Any reauthorization deal should require that official cost estimates for the bank’s lending activities reflect fair value. Read more...
FOMC Projections Improve, Dovish Rate Forecasts Slowly Losing Wings
The most recent FOMC meeting kept interest rates at near-zero levels for the fortieth straight month. Despite holding rates steady, members did show a changing outlook regarding the US economy in the second installment of the Fed’s publicly released forecasts. Forecasts for unemployment improved slightly as the Fed now expects the overall rate to drop to 8.0% by year-end. Inflation pressures have increased with the rise in gasoline prices. Read more...
TARP’s Illusory Profits
The Troubled Asset Relief Program (TARP) was recently claimed by the Treasury department to be likely to recoup the money it spent trying to prop up the economy. While that would be wonderful news, judging the impact of a huge financial program like TARP on the federal budget is much more complex that simply totaling dollars in and dollars out.Daniel Indiviglio of Reuters applied some basic financial accounting techniques to determine that TARP is actually likely to cost the taxpayers hundreds of billions of dollars. Read more...
The Big Picture
CBO Update on TARP Disbursements and Costs
The Congressional Budget Office’s Report on the Troubled Asset Relief Program—March 2012 provides updated analysis of the program started in October 2008. The report concludes that as of February 2012, $431 billion of the possible $700 billion has been disbursed. More than half of that has already been repaid and AIG’s $50 billion represents nearly 40% of payments still outstanding. Read more...
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Wednesday, May 16, 2012Ex-Im Bank Deal Clears Congress (Politico)
Boehner Insists That Debt Limit Increase Must Be Offset by Spending Cuts (CQ)
GOP Expects Budget Votes This Week (National Journal)
Senate Democrats to Bring Fed Nominees to Floor for Votes (The Wall Street Journal)
Taxmageddon Sparks Rising Anxiety (The Washington Post)
The Housing Market and the Case for Higher Inflation Targets in the US and the Eurozone (VoxEU)
JPMorgan Loss Exposes Derivatives Dangers (Financial Times)
Yields Show U.S. Is Facing Lost Decade, Krugman Says (Bloomberg)
It’s Time to Break Up the Big Banks (Katrina vanden Heuvel in The Washington Post)
U.S. Doesn't Need Industrial Policy (Dan Ikenson in USA Today)
The Big Danger With Big Banks (Tom Frost in The Wall Street Journal) -
Tuesday, May 15, 2012e21 Commentary: Restoring Trust In Mortgage-Backed Securities (Anthony Randazzo & Marc Joffe)
e21 Event: Medicare Numbers Examined: Blahous and Bernstein Discuss the Fiscal Consequences of the Health Care Law
Deal Could Clear Way For Export Bank Bill (Politico)
Senate Democrats Planning to Push Tax Cut Do-Over to Promote Hiring (CQ)
President Obama's Wall Street Problem (Politico)
Dimon on New York Fed Board Renews Concern About Conflict (Bloomberg)
Economists Forecast Subdued Growth in 2012 (The Wall Street Journal)
Obama Says JPMorgan Loss Shows Need for Tighter Rules (Bloomberg)
Saying No to State Bailouts (Kevin Brady & Jim DeMint in The Wall Street Journal)
End of the Affair? (The New York Times Editorial)
Is The ‘Fiscal Cliff’ Just A Myth? (Charles Lane in The Washington Post) -
Monday, May 14, 2012NY Fed Releases Latest View on Economy (The Wall Street Journal)
Ryan Budget Still An Issue in Congressional Races (The Washington Post)
Senators Seek Tougher Bank Rules (CQ)
Republican State Officials Stall on Setting Up Health Insurance Marketplaces (The Washington Post)
Labor force nonparticipants: So what are they doing? (Atlanta Fed)
Unemployment Insurance is Vanishing, Even As Jobs Are Scarce (The Washington Post)
Lawler: Fannie SF REO Inventory: Total vs. “Listed/Available for Sale” (Calculated Risk Blog)
More Evidence on What Is Holding the Economy Back (John Taylor in Economics One Blog)
JP Morgan and Systemic Risk (James Hamilton in Econbrowser Blog)
'Taxmaggedon' Is a Real Threat (John Snow in The Wall Street Journal)
Monetary Policy and Economic Performance
The Federal Reserve is in an uncomfortable predicament. It has reduced interest rates to zero, pumped trillions of dollars into the financial system, and is now engaging in “operation twist”. Bond yields are low, yet the economy is not responding. Congress, financial markets and the media always turn to the central bank in times of trouble, and the Fed feels pressure to comply and ease monetary policy further. The Fed has not come to grips with the limitations of monetary policy. Complying with the pressure to ease further—to do something—may involve high risks, even if inflation remains low in the near term.
Nominal GDP Targeting
Recent months have witnessed an upsurge of interest in the idea that, to quote The Economist, “… rather than directing monetary policy to hit inflation targets (as they have done for the past 20 years) central banks should take aim at nominal GDP (or NGDP).” That is, the idea is that central banks should conduct monetary policy so as to keep the growth rate of aggregate nominal spending at a specified numerical value. This value would equal the sum of the central bank’s target inflation rate (say, 1.5% per annum) and the economy’s long-run average rate of output (real GDP) growth (say, 3.0%). The belief of supporters of the suggestion is that successful achievement of this objective would yield the same long-run average inflation rate as would achievement of an inflation target of 1.5%, and also the same long-run growth of output, but would do so with a reduced volatility of output fluctuations.
Fiscal Dimensions of Inflationist Monetary Policy
The broad-based support for price stability is at risk today in the United States and in Europe. Prominent voices in academia, the media, the International Monetary Fund, and inside the Federal Reserve have proposed that the commitment to price stability should be relaxed in one way or another to concentrate on achieving more pressing objectives. The inflationist policy proposals are varied with respect to their objectives and operating guides. For instance, the objectives range from reducing unemployment, to depreciating the real public debt, to facilitating international adjustment within the Euro area. In the paper, I compare and contrast various inflationist proposals and consider their overall advisability in light of lessons from the Great Inflation.
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