The following appeared on page 1A of the Tuesday May 13, 2008 issue of the St. Paul Pioneer Press.
Late on a car payment? Beware. Delinquencies are rising, and impatient lenders aren't waiting long to call out the tow trucks.
By Jennifer Bjorhus and Nicole Garrison-Sprenger
Pioneer Press
It's 3 a.m. - do you know where your car is? If you're late on payments, your local towing company probably does.
High and rising auto-loan delinquencies, now above 2001 recession levels by one measure, are speeding u action in the repossession lane. Some Twin Cities car and truck towing companies are reporting a significant uptick in orders from lenders, which they attribute to mounting economic ressures on stretched borrowers.
But accelerating debt collection by lenders appears to be another factor in the rise of repossessions. The country's top auto lender, for instance, said it is cracking down on delinquencies and "moving up the timeline" on recovering unpaid debt.
It's not just the auto industry that's getting more aggressive. Some department stores and retailers are accelerating action on delinquent accounts, according to a Twin Cities debt collectors association, because they too need the cash to pay bills.
All Corey Albertson knows is business is hot after a slow winter.
"Probably in the last four weeks our fax machine started kind of getting bombarded with more repossessions," said Albertson, president of American Towing and Recovery in Hastings.
Auto lenders pay Albertson $300 to $500 to tow away cars and trucks, typically after borrowers are 90 days late on payments. Like other companies, his crew usually works from 2 a.m. to 5 a.m.
"That way, most people are in bed and don't see us coming," Albertson said.
Many of the car owners Albertson deals with are families with two or more vehicles who are prioritizing bills and let the extra car slide, although he recently repo'd the cars of a husband/wife Realtor team in Shakopee who lost their Cadillac and Jaguar. Albertson said he's repossessing more SUVs and trucks than before, which he attributes to the escalating cost of filling up the tanks.
Across the board, nearly all the auto lenders Albertson works with have boosted orders recently, he said. But he's seen particular growth with First 1 Financial Corp., a subprime auto financer out of Massachusetts. First 1 Financial didn't return phone calls.
Missy McMurray, owner of an American Lenders Service Co. franchise in St. Paul and Hudson, Wis., said her Minnesota vehicle repo accounts nearly doubled in the first quarter from a year ago. There's been a notable increase in semi-truck repos, said McMurray, who also attributes it to rising fuel costs. McMurray declined to name the lenders she works with.
"I just think more people are falling behind," she said.
Some auto lenders have responded accordingly.
Bobbie Britting, senior analyst in consumer lending at Needham, Mass.-based researcher TowerGroup, said auto lenders are "not waiting as long as they used to" on delinquencies. That varies by the type of portfolio, she said, such as whether it's prime or subprime loans to borrowers with poorer credit.
Detroit-based GMAC Financial Services, the nation's largest auto lender, told analysts in a February conference call that it has added 400 collections associates and has accelerated contact with borrowers. Spokesman Mike Stoller said in an interview that most auto finance companies contact consumers with a letter or call after a borrower is 30 to 45 days late on a payment. If payment is still due after 90 days, lenders turn to more aggressive tactics.
"While repossession isn't likely to happen on day 91, that kind of activity comes into play," Stoller said.
Banks are in "clean-up mode," Mike Jackson, chief executive of Fort Lauderdale, Fla.-based AutoNation, told analysts two weeks ago. Lenders are "accelerating repossessions on any vehicle that they see out there that has a question mark over it. They are proactively trying to deal with it now rather than later," said Jackson, whose company is the country's largest auto dealer.
Along with the uptick go disputes. At least one Twin Cities attorney reports more wrongful repo calls coming in. Tom Lyons Jr., president of the Consumer Justice Center, a Vadnais Heights law firm, said he's preparing to file two such cases. In one, a Hugo woman alleges she climbed into her car in her attached garage to go to work early one recent morning, and after she opened the garage door, a repo crew raced in and dragged her out of the car.
"I think the banks are getting more aggressive on their willingness to wait for consumers to catch u," Lyons said.
Not everyone is rolling in new orders. "The business is either chicken one day or feathers the next," said Dale Hedtke, owner of Midwest Recovery Bureau Inc in Maple Grove.
National Asset Recovery Group in Wayzata, which specializes in repo'ing heavy equipment, aircraft, RVs and large boats, said business is up, but the repo trends are different for larger vehicles.
President Dan Paselk said his boat business is up at least 15 percent from last year. He attributes most of the surge, at the moment, not to eager lenders but to the fact boat owners recently hauled their big toys out of storage, where repo crews cannot easily get to them and have them parked on the water.
Lenders are less aggressive about repossessing such large equipment because they're much harder to liquidate in a slow economy than cars and trucks, Paselk said. Some lenders are rewriting loans on these big-ticket items, doing what they can to accommodate strapped borrowers, he said, because they don't want the equipment back.
"if they get back a Caterpillar and they have a $50,000 loan on it, they're better off rewriting the loan than running it through the auction," said Paselk. "These big-ticket items aren't selling."
Consumer lenders are going after rising delinquencies harder. Rozanne Andersen of ACA Internation, an Edina-based debt collectors association, said she sees a growing number of department store and smaller retailers both locally and nationally cracking down on delinquent accounts by starting the collections and recovery process much sooner. Most companies opting to accelerate the start of the debt collection process are cutting down the time they're willing to wait for payment by one-third, Andersen said.
"Businesses are in need of cash," she said. "They have determined they cannot afford to wait as long as they may have in the past before sending a debt to collection."
Albertson, at American Towing, said he feels the pinch of high fuel costs as his trucks rumble about picking up vehicles.
"I used to drive a Lexus SUV, and I sold it, and I went out and bought an older Honda Civic," he said. "It's a huge step down, but you have to."
Saturday, May 17, 2008
Friday, May 16, 2008
Foreclosure filings rise 65% in April
The following appeared on page 2C of the Thursday May 15, 2008 issue of the St. Paul Pioneer Press.
More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday. Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.
Nevada, Arizona, California and Florida were among the hardest hit states, with metropolitan areas in California and Florida accounting for nine of the top 10 areas with the higest rate of foreclosure, the company said. Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions.
One in every 519 U.S. households received a foreclosure filing in April. Foreclosure filings increased from a year earlier in all but eight states.
More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday. Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.
Nevada, Arizona, California and Florida were among the hardest hit states, with metropolitan areas in California and Florida accounting for nine of the top 10 areas with the higest rate of foreclosure, the company said. Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions.
One in every 519 U.S. households received a foreclosure filing in April. Foreclosure filings increased from a year earlier in all but eight states.
Default swaps carry uncertain risks
The following Edward Lotterman "Real World Economics" column was published on page 1C of the Thursday May 15, 2008 issue of the St. Paul Pioneer Press.
It is dangerous when anyone plunges into business deals they don't fully understand. Over the past 25 years, the securities industry has developed myriad new financial instruments intended to better manage risk. But it's becoming clear that not everyone dealing in these securities really knows the risks relative to the rewards.
Most people have never heard of a "credit default swap," but they're making news as the risks posed by such once-obscure financial instruments gain visibility.
A credit default swap is insurance against loss from default on another financial instrument. Suppose you own a corporate bond. It is highly likely the corporation will make all promised principal and interest payments. But you want to be sure, so you make periodic payments to a third party who agrees to make good your loss in the unlikely event that the bond goes bad.
This is little different from insurance on houses. I don't expect my house to burn down or blow away, but I am willing to pay several hundred dollars a year for the right to be reimbursed if that does happen.
At this basic level, a credit default swap is straight-forward and useful. One party wants to reduce their risk and is willing to pay a premium to do so. Someone else is willing to assume risk for a fee. Both can be better off in the long run.
But such swaps do differ from insurance in important ways. Insurance companies won't write policies unless the buyer has an "insurable interest." I can buy a policy on my own house, but I cannot go out and buy a policy on Joe Blow's house three blocks down the street. I can insure my own life, but I cannot buy policies that will pay me if Tom Hanks or Tiger Woods dies.
One can, however, either buy or sell protection against a bond defaulting even when neither you nor your counter-party actually owns the bond.
Moreover, default swaps fail a classic test for separating "investors" or "hedgers" from "speculators." Is a given party always on the same side of the transaction or not? Homeowners always are insurance buyers. Insurance companies always are sellers. Grain elevators contract to sell wheat in the future. Flour millers usually contract to buy.
But a financial institution may sell default protection on a bond one week and buy it for the same bond a week later, depending on its assessment of which side is more profitable.
The number of houses in a country limits the volume of mortgage lending. The borrowing needs of governments and corporations limits the number of bonds issued. The number and size of corporations limits the total value of shares of stock. A country's total stock of buildings puts an upper limit on how much property insurance can be sold.
But there is no limit to the volume of credit default swaps that can exist at any time. And their growth has been enormous.
In 1994, there were some $45 billion in such swaps. By 1998, that had quadrupled to $180 billion. Over the next six years the volume increased 44 times to $8 trillion. It is now estimated at $45 trillion, three times the U.S. Gross Domestic Product.
So what, you may ask. Why should the fact that large financial institutions have made large bets on unlikely events affect the average family?
There need not be any effect if all of the players in the credit default swaps market have correctly estimated the underlying risks, and if the prices paid for swaps fully reflect that risk. As long as everyone involved holds up their end of the bargain, come what may, these swaps need not affect the real economy.
However, the ongoing collateralized mortgage debacle demonstrates that financial institutions can be way off base in pricing new, poorly understood securities. Moreover, it is clear that many of the institutions that have jumped on the credit swap bandwagon, including obscure banks in Africa and Asia, don't have the financial wherewithal to pay up if some insured default actually occurs.
When financial institutions lose trust that other parties in deals are willing and able to carry through on commitments, fear comes to dominate markets and they seize up.
That is what happened to commercial paper last August and September. Fear that Bear Sterns no longer was a reliable counterparty is what brought that firm from apparent strength to near bankruptcy in days in March.
As with many other financial sector innovations, the horse is long out the door. There isn't much government can do right now to reduce the threat default swaps pose for the broader economy. We can hope that participants can unwind their positions smoothly in coming months, allowing firms' exposure to drop, without anyone going broke in the process. But don't count on it.
It is dangerous when anyone plunges into business deals they don't fully understand. Over the past 25 years, the securities industry has developed myriad new financial instruments intended to better manage risk. But it's becoming clear that not everyone dealing in these securities really knows the risks relative to the rewards.
Most people have never heard of a "credit default swap," but they're making news as the risks posed by such once-obscure financial instruments gain visibility.
A credit default swap is insurance against loss from default on another financial instrument. Suppose you own a corporate bond. It is highly likely the corporation will make all promised principal and interest payments. But you want to be sure, so you make periodic payments to a third party who agrees to make good your loss in the unlikely event that the bond goes bad.
This is little different from insurance on houses. I don't expect my house to burn down or blow away, but I am willing to pay several hundred dollars a year for the right to be reimbursed if that does happen.
At this basic level, a credit default swap is straight-forward and useful. One party wants to reduce their risk and is willing to pay a premium to do so. Someone else is willing to assume risk for a fee. Both can be better off in the long run.
But such swaps do differ from insurance in important ways. Insurance companies won't write policies unless the buyer has an "insurable interest." I can buy a policy on my own house, but I cannot go out and buy a policy on Joe Blow's house three blocks down the street. I can insure my own life, but I cannot buy policies that will pay me if Tom Hanks or Tiger Woods dies.
One can, however, either buy or sell protection against a bond defaulting even when neither you nor your counter-party actually owns the bond.
Moreover, default swaps fail a classic test for separating "investors" or "hedgers" from "speculators." Is a given party always on the same side of the transaction or not? Homeowners always are insurance buyers. Insurance companies always are sellers. Grain elevators contract to sell wheat in the future. Flour millers usually contract to buy.
But a financial institution may sell default protection on a bond one week and buy it for the same bond a week later, depending on its assessment of which side is more profitable.
The number of houses in a country limits the volume of mortgage lending. The borrowing needs of governments and corporations limits the number of bonds issued. The number and size of corporations limits the total value of shares of stock. A country's total stock of buildings puts an upper limit on how much property insurance can be sold.
But there is no limit to the volume of credit default swaps that can exist at any time. And their growth has been enormous.
In 1994, there were some $45 billion in such swaps. By 1998, that had quadrupled to $180 billion. Over the next six years the volume increased 44 times to $8 trillion. It is now estimated at $45 trillion, three times the U.S. Gross Domestic Product.
So what, you may ask. Why should the fact that large financial institutions have made large bets on unlikely events affect the average family?
There need not be any effect if all of the players in the credit default swaps market have correctly estimated the underlying risks, and if the prices paid for swaps fully reflect that risk. As long as everyone involved holds up their end of the bargain, come what may, these swaps need not affect the real economy.
However, the ongoing collateralized mortgage debacle demonstrates that financial institutions can be way off base in pricing new, poorly understood securities. Moreover, it is clear that many of the institutions that have jumped on the credit swap bandwagon, including obscure banks in Africa and Asia, don't have the financial wherewithal to pay up if some insured default actually occurs.
When financial institutions lose trust that other parties in deals are willing and able to carry through on commitments, fear comes to dominate markets and they seize up.
That is what happened to commercial paper last August and September. Fear that Bear Sterns no longer was a reliable counterparty is what brought that firm from apparent strength to near bankruptcy in days in March.
As with many other financial sector innovations, the horse is long out the door. There isn't much government can do right now to reduce the threat default swaps pose for the broader economy. We can hope that participants can unwind their positions smoothly in coming months, allowing firms' exposure to drop, without anyone going broke in the process. But don't count on it.
Saturday, May 10, 2008
AP: Trade deficit narrows more than expected
The following appeared in the Saturday May 10, 2008 issue of the St. Paul Pioneer Press, Page 2C.
The U.S. trade deficit narrowed sharply in March as demand for imports ell by the largest amount since the last recession was ending. Analysts forecast that trade would continue to be one of the economy's few bright spots this year.
The March deficit totaled $58.2 billion, down 5.7 percent from February, the Commerce Department reported Friday. It was a much larger improvement than had been expected.
Imports totaled $206.7 billion in March, down $6.1 billion from the February level, a drop led by a 5.9 percent decrease in America's foreign oil bill.
Exports, which have been one of the few strong points in this period of weakness, dipped 1.7 percent in March to $148.5 billion, but that was still the second-highest level on record. For the first three months of this year, exports were up 17.6 percent over the same period a year ago.
The U.S. trade deficit narrowed sharply in March as demand for imports ell by the largest amount since the last recession was ending. Analysts forecast that trade would continue to be one of the economy's few bright spots this year.
The March deficit totaled $58.2 billion, down 5.7 percent from February, the Commerce Department reported Friday. It was a much larger improvement than had been expected.
Imports totaled $206.7 billion in March, down $6.1 billion from the February level, a drop led by a 5.9 percent decrease in America's foreign oil bill.
Exports, which have been one of the few strong points in this period of weakness, dipped 1.7 percent in March to $148.5 billion, but that was still the second-highest level on record. For the first three months of this year, exports were up 17.6 percent over the same period a year ago.
Friday, May 9, 2008
Newest National Debt Statistics posted
The National Debt as of May 8, 2008
Held by Public: $5,227,965,998,741.94
Intragovernmental Holdings: $4,136,827,077,212.01
Total (May 8, 2008): $9,364,793,075,953.95
Interest Payments
April 2008 - $22,362,345,451.78
FY to date - $243,903,652,968.47
Gifts to reduce the public debt
March 2008 - $517,816.28
FY to date - $1,405,285.81
Source: www.treasurydirect.gov
Held by Public: $5,227,965,998,741.94
Intragovernmental Holdings: $4,136,827,077,212.01
Total (May 8, 2008): $9,364,793,075,953.95
Interest Payments
April 2008 - $22,362,345,451.78
FY to date - $243,903,652,968.47
Gifts to reduce the public debt
March 2008 - $517,816.28
FY to date - $1,405,285.81
Source: www.treasurydirect.gov
Wednesday, May 7, 2008
AP: Steel pennies make cents to lawmaker
The following Associated Press story appeared on page 3A of the Wednesday May 7, 2008 issue of the St. Paul Pioneer Press.
WASHINGTON - Further evidence that times are tough: It now costs more than a penny to make a penny. And the cost of a nickel is more than 7-1/2 cents.
Surging prices for copper, zinc and nickel have some in Congress trying to bring back the steel-made pennies of World War II, and maybe using steel for nickels, as well.
"With each penny and nickel we issue, we will be contributing to our national debt by almost as much as the coin is worth," said Rep. Luis Gutierrez, D-Ill., who chairs the House panel that oversees the U.S. Mint.
Copper and Nickel prices have tripled since 2003 and the price of zinc has quadrupled.
A penny, which consists of 97.5 percent zinc and 2.5 percent copper, cost 1.26 cents to make as of Tuesday. And a nickel - 75 percent copper and the rest nickel - costs 7.7 cents, based on current commodity prices, according to the Mint.
That's down from the end of the 2007, when even higher metal prices drove the penny's cost to 1.67 cents. The cost of making a nickel then was nearly a dime.
Gutierrez estimated sriking the two coins at costs well above their face value set the Treasury and taxpayers back about $100 million last year alone. A lousy deal, lawmakers have concluded. On Tuesday, the House debated a bill that directs the Treasury secretary to "prescribe" - suggest - a new, more economical composition of the nickel and the penny. A vote is expected later in the week.
Unsaid in the legislation is the Constitution's delegation of power to Congress "to coin money (and) regulate the vlaue thereof."
The Bush administration, like others before, chafes at that.
Mint Director Edmund Moy told House Financial Services Chairman Barney Frank, D-Mass., that the Treasury Department opposes the bill as "too prescriptive" in part because it does not explicitly delegate the power to decide the new coin composition.
Sen. Wayne Allard, R-Colo., is expected to present the Senate with a version more acceptable to the administration in the next few weeks.
Other coins still cost less than their face value. The dime costs a little over 4 cents to make. The quarter costs almost 10 cents. The dollar coin, meanwhile, costs about 16 cents to make, the Mint said. - Associated Press
WASHINGTON - Further evidence that times are tough: It now costs more than a penny to make a penny. And the cost of a nickel is more than 7-1/2 cents.
Surging prices for copper, zinc and nickel have some in Congress trying to bring back the steel-made pennies of World War II, and maybe using steel for nickels, as well.
"With each penny and nickel we issue, we will be contributing to our national debt by almost as much as the coin is worth," said Rep. Luis Gutierrez, D-Ill., who chairs the House panel that oversees the U.S. Mint.
Copper and Nickel prices have tripled since 2003 and the price of zinc has quadrupled.
A penny, which consists of 97.5 percent zinc and 2.5 percent copper, cost 1.26 cents to make as of Tuesday. And a nickel - 75 percent copper and the rest nickel - costs 7.7 cents, based on current commodity prices, according to the Mint.
That's down from the end of the 2007, when even higher metal prices drove the penny's cost to 1.67 cents. The cost of making a nickel then was nearly a dime.
Gutierrez estimated sriking the two coins at costs well above their face value set the Treasury and taxpayers back about $100 million last year alone. A lousy deal, lawmakers have concluded. On Tuesday, the House debated a bill that directs the Treasury secretary to "prescribe" - suggest - a new, more economical composition of the nickel and the penny. A vote is expected later in the week.
Unsaid in the legislation is the Constitution's delegation of power to Congress "to coin money (and) regulate the vlaue thereof."
The Bush administration, like others before, chafes at that.
Mint Director Edmund Moy told House Financial Services Chairman Barney Frank, D-Mass., that the Treasury Department opposes the bill as "too prescriptive" in part because it does not explicitly delegate the power to decide the new coin composition.
Sen. Wayne Allard, R-Colo., is expected to present the Senate with a version more acceptable to the administration in the next few weeks.
Other coins still cost less than their face value. The dime costs a little over 4 cents to make. The quarter costs almost 10 cents. The dollar coin, meanwhile, costs about 16 cents to make, the Mint said. - Associated Press
Fed auctions another $75B to banks
The following appeared on page 2C of the Wednesday May 7, 2008 issue of the St. Paul Pioneer Press.
Battling to relieve stressed credit markets, the Federal Reserver said Tuesday it has provided a total of $435 billion in short-term loans to squeezed banks since December to help them overcome credit problems. The central bank announced the results of its most recent auction - $75 billion in short-term loans - the 11th such auction since the program started in December.
It's part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August, intensified in December and January and took another turn for the worst in March. The housing, credit and financial crises have weakened the economy and threaten to push it into recession. In the latest auction, commercial banks paid an interest rate of 2.220 percent for the loans.
Battling to relieve stressed credit markets, the Federal Reserver said Tuesday it has provided a total of $435 billion in short-term loans to squeezed banks since December to help them overcome credit problems. The central bank announced the results of its most recent auction - $75 billion in short-term loans - the 11th such auction since the program started in December.
It's part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August, intensified in December and January and took another turn for the worst in March. The housing, credit and financial crises have weakened the economy and threaten to push it into recession. In the latest auction, commercial banks paid an interest rate of 2.220 percent for the loans.
Farmland prices may be bubble waiting to burst, group warns
The following appeared on page 3C of the St. Paul Pioneer Press Wednesday May 7, 2008 edition.
By Tom Webb
twebb@pioneerpress.com
Farmland prices are booming across the Midwest, fueled by higher crop prices and speculative bidding.
Now, a Minnesota policy group warns that farmland fever has entered a bubble phase, and urges lawmakers, growers and rural lenders to confront it now, before the party ends and the fallout destroys a new generation of farmers and rural business.
"Minnesota agriculture is riding high - perhaps too high to be sustainable," Minnesota 2020 said in a report released Tuesday.
Prime Minnesota cropland that once grew gasps at $4,000 an acre is now fetching $5,000, even $6,000 an acre. In North Dakota, one survey found that farmland prices rose 46 percent last year, bid up not only by farmers, but also hunters, retirees and speculators.
Matt Entenza and Roger Moe, two former DFL legislative leaders, both have memories of how a similar boom in the 1970s fueled the disastrous farm crisis of the 1980s. Back then, "a lot of farmers took on a lot of debt because they thought prices wouldn't go down," Entenza said. When prices collapsed, it proved ruinous for rural Minnesota.
Now, the liberal-oriented 2020 policy group worries that history is repeating itself. Entenza urged farmers to understand that "debt is their enemy," and use these good times of high crop prices and land values to pay down debt, not borrow lots more.
"Folks said the Internet boom wouldn't end, folks said the housing boom wouldn't end," Entenza said, later warning, "These (farm) prices will burst, and if they (farmers) end up with a lot of debt, they will go down."
The group is asking state government to fully fund a University of Minnesota debt-management program that was helpful in the 1980s. And it wants policymakers to re-examine old policies and programs that once proved useful at keeping rural businesses alive, farmers on the land and communities thriving.
Meanwhile, corn prices continued to soar, moving sharply higher Tuesday on worries about planting delays.
By Tom Webb
twebb@pioneerpress.com
Farmland prices are booming across the Midwest, fueled by higher crop prices and speculative bidding.
Now, a Minnesota policy group warns that farmland fever has entered a bubble phase, and urges lawmakers, growers and rural lenders to confront it now, before the party ends and the fallout destroys a new generation of farmers and rural business.
"Minnesota agriculture is riding high - perhaps too high to be sustainable," Minnesota 2020 said in a report released Tuesday.
Prime Minnesota cropland that once grew gasps at $4,000 an acre is now fetching $5,000, even $6,000 an acre. In North Dakota, one survey found that farmland prices rose 46 percent last year, bid up not only by farmers, but also hunters, retirees and speculators.
Matt Entenza and Roger Moe, two former DFL legislative leaders, both have memories of how a similar boom in the 1970s fueled the disastrous farm crisis of the 1980s. Back then, "a lot of farmers took on a lot of debt because they thought prices wouldn't go down," Entenza said. When prices collapsed, it proved ruinous for rural Minnesota.
Now, the liberal-oriented 2020 policy group worries that history is repeating itself. Entenza urged farmers to understand that "debt is their enemy," and use these good times of high crop prices and land values to pay down debt, not borrow lots more.
"Folks said the Internet boom wouldn't end, folks said the housing boom wouldn't end," Entenza said, later warning, "These (farm) prices will burst, and if they (farmers) end up with a lot of debt, they will go down."
The group is asking state government to fully fund a University of Minnesota debt-management program that was helpful in the 1980s. And it wants policymakers to re-examine old policies and programs that once proved useful at keeping rural businesses alive, farmers on the land and communities thriving.
Meanwhile, corn prices continued to soar, moving sharply higher Tuesday on worries about planting delays.
Tuesday, May 6, 2008
Fed says banks are tightening credit
The following appeared on page 2C of the Tuesday May 6, 2008 issue of the St. Paul Pioneer Press.
The Federal Reserve reported Monday that more banks are tightening lending standards on home mortgages, other types of consumer loans and business loans in response to a spreading credit crisis. The Fed said the percentage of banks reporting tighter lending standards was near historic highs for nearly all loan categories.
The survey, conducted in April, found that nearly two-thirds of banks surveyed had tightened lending standards on traditional home mortgages with 15 percent saying those standards had been tightened considerably. But the survey found that the tougher lending standards extend far beyond home mortgages to other types of consumer debt such as credit cards and home equity lines of credit.
[My comments: Considering the last post, why doesn't the Fed just open up it's discount window to consumers and help the mortgage industry out. Why does CONGRESS have to do everything. Oh wait, they don't want to take the risk that other banks have. Yes, let the taxpayer bail everyone out so we don't have to seems to be the prevailing wisdom on Wall Street and in Washington. Shame! Shame!]
The Federal Reserve reported Monday that more banks are tightening lending standards on home mortgages, other types of consumer loans and business loans in response to a spreading credit crisis. The Fed said the percentage of banks reporting tighter lending standards was near historic highs for nearly all loan categories.
The survey, conducted in April, found that nearly two-thirds of banks surveyed had tightened lending standards on traditional home mortgages with 15 percent saying those standards had been tightened considerably. But the survey found that the tougher lending standards extend far beyond home mortgages to other types of consumer debt such as credit cards and home equity lines of credit.
[My comments: Considering the last post, why doesn't the Fed just open up it's discount window to consumers and help the mortgage industry out. Why does CONGRESS have to do everything. Oh wait, they don't want to take the risk that other banks have. Yes, let the taxpayer bail everyone out so we don't have to seems to be the prevailing wisdom on Wall Street and in Washington. Shame! Shame!]
Bernanke: Congress must act to end mortgage crisis
The following appeared on page 2C of the Tuesday May 6, 2008 issue of the St. Paul Pioneer Press.
[My comments: Congress intervening in the market is exactly what GOT us into this mess in the first place. Congress mandated that certain demographic groups get loans regardless of their ability to pay. Mortgage lenders, meanwhile, loosened their standards to comply with the law. Now look at us! This Congressional/governmental intrusion into the private market has to stop.]
Bernanke: Congress must act to end mortgage crisis
A rising tide of late mortgage payments and home foreclosures poses considerable dangers to the national economy, Federal Reserve Chairman Ben Bernanke warned anew Monday as he urged Congress to take additional steps to alleviate the problems.
"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy," Bernanke said in a dinner speech to Columbia Business School in New York. "Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest," he said.
Some 1.5 million U.S. homes entered into the foreclosure process last year, up 53 percent from 2006, Bernanke said. The rate of new foreclosures looks likely to be even higher this year, he said.
To provide more relief, Bernanke again called on Congress to give the Federal Housing Administration, which insures mortgages, more flexibility to help distressed borrowers at risk of losing their homes.
[My comments: Congress intervening in the market is exactly what GOT us into this mess in the first place. Congress mandated that certain demographic groups get loans regardless of their ability to pay. Mortgage lenders, meanwhile, loosened their standards to comply with the law. Now look at us! This Congressional/governmental intrusion into the private market has to stop.]
Bernanke: Congress must act to end mortgage crisis
A rising tide of late mortgage payments and home foreclosures poses considerable dangers to the national economy, Federal Reserve Chairman Ben Bernanke warned anew Monday as he urged Congress to take additional steps to alleviate the problems.
"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy," Bernanke said in a dinner speech to Columbia Business School in New York. "Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest," he said.
Some 1.5 million U.S. homes entered into the foreclosure process last year, up 53 percent from 2006, Bernanke said. The rate of new foreclosures looks likely to be even higher this year, he said.
To provide more relief, Bernanke again called on Congress to give the Federal Housing Administration, which insures mortgages, more flexibility to help distressed borrowers at risk of losing their homes.
Sunday, May 4, 2008
Home prices keep sinking
The following article appeared on page 3C in the Wednesday April 30, 2008 St. Paul Pioneer Press.
Home prices keep sinking
Foreclosure filings double, hit record in first quarter
By J.W. Elphinstone
Associated Press
NEW YORK - In a bad omen for sellers and lenders this spring home-selling season, the erosion of house values is accelerating and foreclosure filings are doubling, new data showed Tuesday.
A closely watched index of home prices in 20 cities fell almost 13 percent in February from a year earlier, a record for the seven-year old S&P's/Case-Shiller Home Price index. The report follows news that foreclosure filings between January and March also hit a new high, and comes a day after the government said the number of vacant homes on the market also hit a record.
"Month-to-month, it gets consistently worse," said the index committee at S&P, noting February also marked the sixth-straight month all 20 cities experienced declines. "The slope is one direction. There is no sign of a bottom."
He said 17 of the metro areas the index tracks reported record annual declines, led again by Miami and Las Vegas.
Charlotte, N.C., was the only city to post an annual gain - 1.5 percent - but Blitzer noted Charlotte's positive returns continue to diminish with each month and it was the last city in the index to reach its peak.
Nevada posted the country's worst foreclosure rate in the first quarter, RealtyTrac Inc. said Tuesday, with one in every 54 households receiving a foreclosure-related notice.
Nationwide, one in every 194 households received a foreclosure filing during the quarter, more than double the same period last year.
The most recent quarter marked the seventh consecutive quarter of rising foreclosure activity.
Home prices keep sinking
Foreclosure filings double, hit record in first quarter
By J.W. Elphinstone
Associated Press
NEW YORK - In a bad omen for sellers and lenders this spring home-selling season, the erosion of house values is accelerating and foreclosure filings are doubling, new data showed Tuesday.
A closely watched index of home prices in 20 cities fell almost 13 percent in February from a year earlier, a record for the seven-year old S&P's/Case-Shiller Home Price index. The report follows news that foreclosure filings between January and March also hit a new high, and comes a day after the government said the number of vacant homes on the market also hit a record.
"Month-to-month, it gets consistently worse," said the index committee at S&P, noting February also marked the sixth-straight month all 20 cities experienced declines. "The slope is one direction. There is no sign of a bottom."
He said 17 of the metro areas the index tracks reported record annual declines, led again by Miami and Las Vegas.
Charlotte, N.C., was the only city to post an annual gain - 1.5 percent - but Blitzer noted Charlotte's positive returns continue to diminish with each month and it was the last city in the index to reach its peak.
Nevada posted the country's worst foreclosure rate in the first quarter, RealtyTrac Inc. said Tuesday, with one in every 54 households receiving a foreclosure-related notice.
Nationwide, one in every 194 households received a foreclosure filing during the quarter, more than double the same period last year.
The most recent quarter marked the seventh consecutive quarter of rising foreclosure activity.
Wednesday, April 30, 2008
AP: Fed cuts rates as economy slumps, hoping to stop recession
The following AP story appeared on Yahoo Finance at 7:41 p.m. on Wednesday April 30, 2008
By JEANNINE AVERSA, AP Economics Writer
WASHINGTON - Scrambling to shore up the faltering economy, the Federal Reserve cut interest rates to the lowest point in nearly four years Wednesday as the nation teetered on the edge of recession.
Wall Street rallied at first but then pulled back, concerned that the reduction might be the last for a while.
In fact, the Fed's trim was smaller than those of recent months amid indications the central bank might pause to see if months of powerful rate-cutting medicine and billions of dollars in stimulus checks will be enough to lift the country out of its slump.
Chairman Ben Bernanke led a divided Fed, in an 8-2 vote, in slicing its key rate by one-quarter percentage point to 2 percent.
In turn, the prime lending rate for millions of consumers and businesses fell by a corresponding amount, to 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates are the lowest since late 2004.
The Federal Reserve, which has been dropping rates since last September, turned much more forceful early this year when housing, credit and financial problems worsened. Rate reductions in January and March alone marked the most aggressive intervention in a quarter-century in an effort to re-energize consumers and businesses.
"The substantial easing of monetary policy to date ... should help to promote moderate growth over time and to mitigate risks to economic activity," the Fed said, strongly hinting that more cuts may not be needed.
Enthusiastic Wall Street investors drove the Dow Jones industrial average up more than 178 points — lifting it above 13,000 for the first time since early January — right after the Fed action. Then traders' caution returned, and the index ended the day 11.81 points below where it started.
Although the Fed didn't take another reduction off the table, a growing number of economists believe the central bank is winding down its rate-cutting campaign. Barring another hit to economic growth, they believe rates probably will stay where they are — perhaps through the rest of this year — in part because the Federal Reserve is concerned that further cuts could join with galloping energy and food prices and spread inflation dangerously higher.
By all accounts, the country's economic health is fragile.
The economy crawled ahead at a pace of just 0.6 percent from January through March as housing and credit problems forced people and businesses to hunker down, the Commerce Department reported hours before the Fed's action. Growth had been just as feeble in the prior quarter.
Job losses for the first three months of the year neared the staggering quarter-million mark, and a government report on Friday is expected to show that employers shed jobs again in April. The unemployment rate, now at 5.1 percent, also could creep higher in April and hit 6 percent early next year, analysts say.
"Recent information indicates that economic activity remains weak," the Fed said. "Household and business spending has been subdued, and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."
Two members — Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas — opposed cutting rates Wednesday, a crack in the usually unified front the Fed often shows the public.
Both men have a reputation for being especially vigilant about fighting inflation. At the Fed's previous meeting in March, they opposed cutting rates by a whopping three-quarters point and preferred a smaller reduction.
"The Fed didn't completely shut the door on rate cuts but they closed it part way," said Mark Zandi, chief economist at Moody's Economy.com. "I think the overall message was they've done a lot already to help the economy and think this will be enough. But they stand ready to do more if that is needed."
Bernanke's juggling act is getting harder. Fed policymakers are trying to bolster economic growth, and at the same time they are mindful that they can't let inflation get out of hand. The very rate reductions the Fed depends on to energize the economy can also sow the seeds of inflation down the road.
At the same time, many economists believe the economy already is declining.
Under one rough rule, if the economy contracts for six straight months it is considered to be in recession. However, that didn't happen in the last recession — in 2001. A panel of experts at the National Bureau of Economic Research that determines when U.S. recessions begin and end uses a broader definition, taking into account income, employment and other barometers. The bureau's finding is usually made well after the fact.
The Fed's previous rate reductions, which take months to work their way through the economy, should help lift growth in the second half of this year. The government's $168 billion economic-stimulus package — including tax rebates that started flowing to bank accounts on Monday — also should help energize activity, the Bush administration, Bernanke and private economists have said.
The biggest weight on the economy is the housing crisis, which has pushed foreclosures to record highs and caused financial institutions to rack up billions of dollars in losses.
For mortgage rates, the Fed's latest cut probably won't have much, if any, impact.
Rates on longer-term 30-year and 15-year mortgages, which are linked to the 10-year Treasury notes, actually could see rates rise in the weeks ahead in part because of concerns about higher inflation. Rates on shorter-term mortgages probably won't drop either because investors already had factored in the latest Federal Reserve action.
Still, people with adjustable-rate home loans have been helped by the Fed's series of rate reductions; they would have been socked with much higher rates when their mortgages reset if not for the Federal Reserve cuts, analysts said. "Going forward, if the Fed holds rate steady, resets in the pipeline would benefit in a similar fashion as still-low interest rates would mean very manageable mortgage-rate resets," said Greg McBride, senior financial analyst at Bankrate.com.
By JEANNINE AVERSA, AP Economics Writer
WASHINGTON - Scrambling to shore up the faltering economy, the Federal Reserve cut interest rates to the lowest point in nearly four years Wednesday as the nation teetered on the edge of recession.
Wall Street rallied at first but then pulled back, concerned that the reduction might be the last for a while.
In fact, the Fed's trim was smaller than those of recent months amid indications the central bank might pause to see if months of powerful rate-cutting medicine and billions of dollars in stimulus checks will be enough to lift the country out of its slump.
Chairman Ben Bernanke led a divided Fed, in an 8-2 vote, in slicing its key rate by one-quarter percentage point to 2 percent.
In turn, the prime lending rate for millions of consumers and businesses fell by a corresponding amount, to 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates are the lowest since late 2004.
The Federal Reserve, which has been dropping rates since last September, turned much more forceful early this year when housing, credit and financial problems worsened. Rate reductions in January and March alone marked the most aggressive intervention in a quarter-century in an effort to re-energize consumers and businesses.
"The substantial easing of monetary policy to date ... should help to promote moderate growth over time and to mitigate risks to economic activity," the Fed said, strongly hinting that more cuts may not be needed.
Enthusiastic Wall Street investors drove the Dow Jones industrial average up more than 178 points — lifting it above 13,000 for the first time since early January — right after the Fed action. Then traders' caution returned, and the index ended the day 11.81 points below where it started.
Although the Fed didn't take another reduction off the table, a growing number of economists believe the central bank is winding down its rate-cutting campaign. Barring another hit to economic growth, they believe rates probably will stay where they are — perhaps through the rest of this year — in part because the Federal Reserve is concerned that further cuts could join with galloping energy and food prices and spread inflation dangerously higher.
By all accounts, the country's economic health is fragile.
The economy crawled ahead at a pace of just 0.6 percent from January through March as housing and credit problems forced people and businesses to hunker down, the Commerce Department reported hours before the Fed's action. Growth had been just as feeble in the prior quarter.
Job losses for the first three months of the year neared the staggering quarter-million mark, and a government report on Friday is expected to show that employers shed jobs again in April. The unemployment rate, now at 5.1 percent, also could creep higher in April and hit 6 percent early next year, analysts say.
"Recent information indicates that economic activity remains weak," the Fed said. "Household and business spending has been subdued, and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."
Two members — Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas — opposed cutting rates Wednesday, a crack in the usually unified front the Fed often shows the public.
Both men have a reputation for being especially vigilant about fighting inflation. At the Fed's previous meeting in March, they opposed cutting rates by a whopping three-quarters point and preferred a smaller reduction.
"The Fed didn't completely shut the door on rate cuts but they closed it part way," said Mark Zandi, chief economist at Moody's Economy.com. "I think the overall message was they've done a lot already to help the economy and think this will be enough. But they stand ready to do more if that is needed."
Bernanke's juggling act is getting harder. Fed policymakers are trying to bolster economic growth, and at the same time they are mindful that they can't let inflation get out of hand. The very rate reductions the Fed depends on to energize the economy can also sow the seeds of inflation down the road.
At the same time, many economists believe the economy already is declining.
Under one rough rule, if the economy contracts for six straight months it is considered to be in recession. However, that didn't happen in the last recession — in 2001. A panel of experts at the National Bureau of Economic Research that determines when U.S. recessions begin and end uses a broader definition, taking into account income, employment and other barometers. The bureau's finding is usually made well after the fact.
The Fed's previous rate reductions, which take months to work their way through the economy, should help lift growth in the second half of this year. The government's $168 billion economic-stimulus package — including tax rebates that started flowing to bank accounts on Monday — also should help energize activity, the Bush administration, Bernanke and private economists have said.
The biggest weight on the economy is the housing crisis, which has pushed foreclosures to record highs and caused financial institutions to rack up billions of dollars in losses.
For mortgage rates, the Fed's latest cut probably won't have much, if any, impact.
Rates on longer-term 30-year and 15-year mortgages, which are linked to the 10-year Treasury notes, actually could see rates rise in the weeks ahead in part because of concerns about higher inflation. Rates on shorter-term mortgages probably won't drop either because investors already had factored in the latest Federal Reserve action.
Still, people with adjustable-rate home loans have been helped by the Fed's series of rate reductions; they would have been socked with much higher rates when their mortgages reset if not for the Federal Reserve cuts, analysts said. "Going forward, if the Fed holds rate steady, resets in the pipeline would benefit in a similar fashion as still-low interest rates would mean very manageable mortgage-rate resets," said Greg McBride, senior financial analyst at Bankrate.com.
Monday, April 28, 2008
WSJ: The Fed's Bender
The following appeared on page A18 of the Monday April 28, 2008 issue of the Wall Street Journal.
So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous.
***
Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting - taking the fed funds rate to 2.25% from 5.25% last September - has had little effect on the banking crisis it was supposed to ease.
The recent progress on that front has come principally from the Fed's discount window innovations, especially its lending to investmetn banks in the wake of the Bear Stearns rescue. That is the kind of targeted liquidity that helps the financial system handle fears of bank failure and solvency without risking inflationary side-effects. The shame is that the Fed didn't do more of this earlier, along with tougher regulatory oversight of the likes of Citigroup. The way to save a troubled banking system is to focus on specific problems via dividend cuts, new management, losses in shareholder equity, rights offerings and other new capital, and if need be public money through the Federal Deposit Insurance Corp.
Meanwhile, the Fed's decision to open the general monetary spigots has inspired a global commodity boom unlike any since the 1970s. Oil has climbed to nearly $119 a barrel today from $70 in late August, a 70% increase. Farm and other commodities have seen a similiar surge, with corresponding increases in food prices leading to shortages and riots in Egypt and other places, and to rice hoarding even in Southern California.
The popular media explanation is that this price surge is a result of rising global demand, greedy speculators and human profligacy. All of sudden, without warning, the world is said to be running out of food. After 30 years in intellectual hibernation, Thomas Malthus and the Age of Scarcity are back in style.
No doubt commodity traders are having a field day, but what they are speculating on is the Fed's refusal to stop the free-fall of the dollar. The weak dollar has created another speculative bubble, this time in commodities. Oil prices have been surging despite only the usual geopolitical risks to global supplies and despite a recent International Energy Agency estimate the global oil demand will fall as growth slows.
As for food prices, it's true that government policies supporting biofuels have created new demand for corn and other grains. This and price controls in some countries have contributed to the food panic. But the price surge has been so rapid and so broad across nearly all commodities that it can't merely be a function of supply glitches or new demand for specific grains.
Like oil, world trading in most commodities is deonominated in dollars. When the dollar declines, especially as fast as it has since September, commoditiy prices surge and speculators gamble on even further declines. As the nearby chart shows, since 2003 the dollar price of oil has climbed far more rapidly than has the euro price - 273% in dollars, compared to 146% in euros. Note in particular the oil spike in dollars since the second half of last year. This reflects the European Central Bank's sounder monetary management. And it means that had the dollar merely retained the same purchasing power as the euro, today's price of oil would be below $70 a barrel.
The practical impact has been to send energy and food prices soaring. This is a direct tax on both the world's poor and America's middle class. Just when the U.S. economy needs a resilient consumer given the fall in housing prices, these price increases have eviscerated consumer pocketbooks. In its attempt to help Wall Street and the financial system, Fed policy is punishing average Americans. The public is frustrated and angry with these price increases, and it has a right to be. Inflation is the thief of the thrifty middle class.
The Fed's weak dollar policy ahs also done great harm to overall financial confidence, which is essential to any growth revival. A main source of the credit crisis is a lack of trust. Investors stop taking risks, bankers stop lending, and everyone flees to the safety of Treasurys or cash. But how can the Fed expect people to calm down and begin taking risks when it is clearly debasing the currency? Monetary easing itself also becomes less effective, because without confidence more liquidity is merely "pushing on the string," in the famous phrase.
The Fed's problem has been both political and intellectual. Politically, Mr. Bernanke has been unwilling to say no to Wall Street and the Beltway political class, which reflexively demand easier money in a crisis. This demand has become almost Pavlovian since Wall Street came to believe during the late 1990s in what was known, fairly or not, as the "Greenspan put." It takes character to resist this political pressure, but that is what Fed chairmen are supposed to have.
As for the intellectual problem, the Fed and much of Wall Street convinced themselves that the only inflation measure that matters is "core inflation," which excludes food and energy. The Fed's monks devised that measure to avoid an overreaction to commodity price movements, but instead they have used it to pretend that food and energy prices don't matter. Throughout this decade, they pointed to core infaltion to argue that "inflationary expectations remain well anchored," even as the dollar and commodity price signals were telling us that the opposite was true. Americans don't buy gas and groceries with "core" dollars.
In fairness to the Fed, it has had many allies in dollar-devaluation. The manufacturing lobby promoted it, as ever, to spur exports and profits, while the Bush Administration has acquiesced in the hope that it would reduce the trade deficit. (Oops.) The housing bubble was a societal mania brought on by the Fed's subsidy for credit, and no one wanted it to end. Even many of our supply-side friends dismissed concern about price signals and the falling dollar, focusing too much on the benefits of tax cuts and forgetting the monetary lessons of the 1970s. Some of these sages are finally coming around, but too late to prevent the economic and policy damage.
The ironic and unfortunate cost may be that political blame for rising prices and any recession will fall unfairly on Bush fiscal policy. As we've been writing for several years, the greatest threat to economic growth has been reckless monetary policy. Yet both the Bush Treasury and John McCain's campaign seem oblivious to the monetary roots of our current economic troubles.
***
As the Fed's open-market committee meets this week, what the world wants is a revivial of American monetary leadership. It wants the Bernanke Fed to stop the global run on the dollar, and that means declaring an end of its rate-cutting mistake.
So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous.
***
Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting - taking the fed funds rate to 2.25% from 5.25% last September - has had little effect on the banking crisis it was supposed to ease.
The recent progress on that front has come principally from the Fed's discount window innovations, especially its lending to investmetn banks in the wake of the Bear Stearns rescue. That is the kind of targeted liquidity that helps the financial system handle fears of bank failure and solvency without risking inflationary side-effects. The shame is that the Fed didn't do more of this earlier, along with tougher regulatory oversight of the likes of Citigroup. The way to save a troubled banking system is to focus on specific problems via dividend cuts, new management, losses in shareholder equity, rights offerings and other new capital, and if need be public money through the Federal Deposit Insurance Corp.
Meanwhile, the Fed's decision to open the general monetary spigots has inspired a global commodity boom unlike any since the 1970s. Oil has climbed to nearly $119 a barrel today from $70 in late August, a 70% increase. Farm and other commodities have seen a similiar surge, with corresponding increases in food prices leading to shortages and riots in Egypt and other places, and to rice hoarding even in Southern California.
The popular media explanation is that this price surge is a result of rising global demand, greedy speculators and human profligacy. All of sudden, without warning, the world is said to be running out of food. After 30 years in intellectual hibernation, Thomas Malthus and the Age of Scarcity are back in style.
No doubt commodity traders are having a field day, but what they are speculating on is the Fed's refusal to stop the free-fall of the dollar. The weak dollar has created another speculative bubble, this time in commodities. Oil prices have been surging despite only the usual geopolitical risks to global supplies and despite a recent International Energy Agency estimate the global oil demand will fall as growth slows.
As for food prices, it's true that government policies supporting biofuels have created new demand for corn and other grains. This and price controls in some countries have contributed to the food panic. But the price surge has been so rapid and so broad across nearly all commodities that it can't merely be a function of supply glitches or new demand for specific grains.
Like oil, world trading in most commodities is deonominated in dollars. When the dollar declines, especially as fast as it has since September, commoditiy prices surge and speculators gamble on even further declines. As the nearby chart shows, since 2003 the dollar price of oil has climbed far more rapidly than has the euro price - 273% in dollars, compared to 146% in euros. Note in particular the oil spike in dollars since the second half of last year. This reflects the European Central Bank's sounder monetary management. And it means that had the dollar merely retained the same purchasing power as the euro, today's price of oil would be below $70 a barrel.
The practical impact has been to send energy and food prices soaring. This is a direct tax on both the world's poor and America's middle class. Just when the U.S. economy needs a resilient consumer given the fall in housing prices, these price increases have eviscerated consumer pocketbooks. In its attempt to help Wall Street and the financial system, Fed policy is punishing average Americans. The public is frustrated and angry with these price increases, and it has a right to be. Inflation is the thief of the thrifty middle class.
The Fed's weak dollar policy ahs also done great harm to overall financial confidence, which is essential to any growth revival. A main source of the credit crisis is a lack of trust. Investors stop taking risks, bankers stop lending, and everyone flees to the safety of Treasurys or cash. But how can the Fed expect people to calm down and begin taking risks when it is clearly debasing the currency? Monetary easing itself also becomes less effective, because without confidence more liquidity is merely "pushing on the string," in the famous phrase.
The Fed's problem has been both political and intellectual. Politically, Mr. Bernanke has been unwilling to say no to Wall Street and the Beltway political class, which reflexively demand easier money in a crisis. This demand has become almost Pavlovian since Wall Street came to believe during the late 1990s in what was known, fairly or not, as the "Greenspan put." It takes character to resist this political pressure, but that is what Fed chairmen are supposed to have.
As for the intellectual problem, the Fed and much of Wall Street convinced themselves that the only inflation measure that matters is "core inflation," which excludes food and energy. The Fed's monks devised that measure to avoid an overreaction to commodity price movements, but instead they have used it to pretend that food and energy prices don't matter. Throughout this decade, they pointed to core infaltion to argue that "inflationary expectations remain well anchored," even as the dollar and commodity price signals were telling us that the opposite was true. Americans don't buy gas and groceries with "core" dollars.
In fairness to the Fed, it has had many allies in dollar-devaluation. The manufacturing lobby promoted it, as ever, to spur exports and profits, while the Bush Administration has acquiesced in the hope that it would reduce the trade deficit. (Oops.) The housing bubble was a societal mania brought on by the Fed's subsidy for credit, and no one wanted it to end. Even many of our supply-side friends dismissed concern about price signals and the falling dollar, focusing too much on the benefits of tax cuts and forgetting the monetary lessons of the 1970s. Some of these sages are finally coming around, but too late to prevent the economic and policy damage.
The ironic and unfortunate cost may be that political blame for rising prices and any recession will fall unfairly on Bush fiscal policy. As we've been writing for several years, the greatest threat to economic growth has been reckless monetary policy. Yet both the Bush Treasury and John McCain's campaign seem oblivious to the monetary roots of our current economic troubles.
***
As the Fed's open-market committee meets this week, what the world wants is a revivial of American monetary leadership. It wants the Bernanke Fed to stop the global run on the dollar, and that means declaring an end of its rate-cutting mistake.
Inflation may force Fed to ease up on rate cuts
The following appeared on page 5B of the Monday April 28, 2008 issue of the St. Paul Pioneer Press.
By Kevin G. Hall
McClatchy Newspapers
NEW YORK - A few weeks ago, financial analysts were certain the Federal Reserve would try to spark the economy with another half-point cut in interest rates when its policy-making committee meets this week.
Since then, however, soaring oil prices and food riots across the globe have raised fears that people at home and abroad are becoming convinced the world is entering an era of rising inflation, and they're adjusting their expectations and behavior as a result.
In light of that, if the Fed's rate-setting Open Market Committee does cut its benchmark federal funds rate - the rates that banks charge one another for overnight lending - it's likely to be only a quarter-point, to 2 percent, not the aggressive cut most analysts were projecting weeks ago. But it's also likely to signal it intends to pause a while before cutting rates again because inflation remains stubbornly high - even though the U.S. economy appears to be stalled.
Inflation, the rise of prices across the economy, remains a threat at home and abroad. The biggest part rises from the seeminly unstoppable climb in oil prices. But the prices of everything from grains and dairy products to base metals and raw materials also are surging. That drives up the price of nearly everything we eat, heat, cool, drive or manufacture.
That's bad news for the Fed, whose primary mission is to keep inflation low to preserve the buying power of U.S. consumers.
In recent weeks, there have been food riots in Egypt, Haiti and elsewhere as rising prices for globally traded commodities such as rice and corn have pushed up food prices. Corn prices are up 30 percent, and rice is up more than 50 percent so far this year. The prices of some U.S. staples such as eggs, are up about 30 percent since March 2007.
People in developing nations often spend more than half their incomes on food, and that's why their anger about rising prices is spilling onto the streets.
"This steeply rising price of food, it has developed into a real global crisis," United Nations Secretary-General Ban Ki-Moon said Friday, appealing for greater food aid.
Most Americans spend less than 10 percent of their incomes on food. But coupled with soaring prices for health care and oil, now above $118 a barrel, and with gasoline over $4 a gallon in some places, the middle-class American consumer is taking it on the chin.
"It does represent a change," said Peter Kretzmer, an economist in New York for Bank of America.
It also presents a dilemma for the Fed.
Three months of falling employment, flagging consumer confidence and a persistent housing crisis argue for more rate cuts to spark lending and reignite consumer spending. Traditionally, the Fed keeps cutting rates until unemployment has peaked.
"It would be unusual for the Fed to be on hold while that is happening," said Kretzmer.
The Fed normally has room to maneuver because a slowing economy douses the flames of inflation.
However, global oil and commodity prices keep rising, and they're being passed along to consumers and businesses. U.S. consumer prices were rising at a 4 percent annual rate in March, the latest reading. They're sure to have risen again in April, when oil leapt above $110 a barrel. Food prices rose 4.5 percent over the past 12 months; gasoline rose 26 percent.
Richard Fisher, president of the Federal Reserve Bank of Dallas, is worried people are beginning to expect rising inflation. That's why he's voted against further rate cuts at the last two Fed meetings.
In an interview last week with Fox Business News, he said that "really what we're dealing with are inflationary expectations. And what we're trying to make sure doesn't get out of control are the expectations of consumers and businesses, to begin imputing certain inflationary patterns, because then they'll be exacerbating inflation, and that's something certainly none of us wish to see."
By Kevin G. Hall
McClatchy Newspapers
NEW YORK - A few weeks ago, financial analysts were certain the Federal Reserve would try to spark the economy with another half-point cut in interest rates when its policy-making committee meets this week.
Since then, however, soaring oil prices and food riots across the globe have raised fears that people at home and abroad are becoming convinced the world is entering an era of rising inflation, and they're adjusting their expectations and behavior as a result.
In light of that, if the Fed's rate-setting Open Market Committee does cut its benchmark federal funds rate - the rates that banks charge one another for overnight lending - it's likely to be only a quarter-point, to 2 percent, not the aggressive cut most analysts were projecting weeks ago. But it's also likely to signal it intends to pause a while before cutting rates again because inflation remains stubbornly high - even though the U.S. economy appears to be stalled.
Inflation, the rise of prices across the economy, remains a threat at home and abroad. The biggest part rises from the seeminly unstoppable climb in oil prices. But the prices of everything from grains and dairy products to base metals and raw materials also are surging. That drives up the price of nearly everything we eat, heat, cool, drive or manufacture.
That's bad news for the Fed, whose primary mission is to keep inflation low to preserve the buying power of U.S. consumers.
In recent weeks, there have been food riots in Egypt, Haiti and elsewhere as rising prices for globally traded commodities such as rice and corn have pushed up food prices. Corn prices are up 30 percent, and rice is up more than 50 percent so far this year. The prices of some U.S. staples such as eggs, are up about 30 percent since March 2007.
People in developing nations often spend more than half their incomes on food, and that's why their anger about rising prices is spilling onto the streets.
"This steeply rising price of food, it has developed into a real global crisis," United Nations Secretary-General Ban Ki-Moon said Friday, appealing for greater food aid.
Most Americans spend less than 10 percent of their incomes on food. But coupled with soaring prices for health care and oil, now above $118 a barrel, and with gasoline over $4 a gallon in some places, the middle-class American consumer is taking it on the chin.
"It does represent a change," said Peter Kretzmer, an economist in New York for Bank of America.
It also presents a dilemma for the Fed.
Three months of falling employment, flagging consumer confidence and a persistent housing crisis argue for more rate cuts to spark lending and reignite consumer spending. Traditionally, the Fed keeps cutting rates until unemployment has peaked.
"It would be unusual for the Fed to be on hold while that is happening," said Kretzmer.
The Fed normally has room to maneuver because a slowing economy douses the flames of inflation.
However, global oil and commodity prices keep rising, and they're being passed along to consumers and businesses. U.S. consumer prices were rising at a 4 percent annual rate in March, the latest reading. They're sure to have risen again in April, when oil leapt above $110 a barrel. Food prices rose 4.5 percent over the past 12 months; gasoline rose 26 percent.
Richard Fisher, president of the Federal Reserve Bank of Dallas, is worried people are beginning to expect rising inflation. That's why he's voted against further rate cuts at the last two Fed meetings.
In an interview last week with Fox Business News, he said that "really what we're dealing with are inflationary expectations. And what we're trying to make sure doesn't get out of control are the expectations of consumers and businesses, to begin imputing certain inflationary patterns, because then they'll be exacerbating inflation, and that's something certainly none of us wish to see."
Sunday, April 27, 2008
Surging food, fuel prices cloud inflation picture
The following Ed Lotterman article appeared in the Sunday April 27, 2008 issue of the St. Paul Pioneer Press on page 3D.
Even economists experience sticker shock. I just bought one gallon of skim milk and one of 2 percent at the corner store. I do this regularly, but $9.14 for two gallons of milk still seems like a lot.
I'm not alone. Millions of people perceive that rising fuel and food prices are crimping their families' standard of living. No wonder they get upset when monthly inflation numbers are released and some expert notes that "core inflation" is up only slightly. It contradicts their daily personal experience.
The problem stems from the misapplication of a statistical measure - core inflation - that is useful in some situations but misleading right now.
For 80 years, the U.S. government has tabulated price indices to measure changes in general price levels. The consumer price index is the best known, as it measures goods and services that households buy. Every month, the government checks prices on thousands of items. On the whole, the CPI is an accurate indicator.
But prices of some items jump around more than others. Both food and fuel are important for most households, so they have a lot of influence on the overall index. But their prices tend to fluctuate more in the short term than those of clothing, household goods, shelter or recreation.
The fluctuations, incorporated in something tabulated on a month-to-month basis, can mislead.
Suppose overall prices are increasing at an average annual rate of 3 percent. Items other than food and fuel may increase at a rate of 2.5 percent one month and 3.5 percent the next, but follow this 3 percent trend. Then suppose food and fuel increase at a rate of 6 percent one month and again unchanged the next. Again, the long-run trend is 3 percent.
If you just consider the month that food and fuel rose at a 6 percent rate, it will appear that inflation is hot. The next month it will look like inflation is non-existent. But in the longer run, the trend in food and fuel is about the same as for other goods.
One can avoid this confusion by measuring consumer prices generally, but then making a separate tabulation that excludes volitile items. Weighing the two tabulations together gives us a better picture.
That is why the "core inflation" tabulation was introduced, to allow analysts to factor out short-run volatility that might be misleading.
A problem arises, however, when the longer-term trend for food and fuel is not the same as for other items. Suppose other items increase at rates between 2 percent and 4 percent with a trend of 3 percent. Month after month, food and fuel fluctuate between 6 percent and 10 percent annual rates with an average trend of 8 percent. Just looking at core inflation blinds one to a larger problem.
Taking comfort in a measure designed to dampen short-run fluctuations can mislead one about true prices trends. Over most of the past 25 years, food and fuel pries ahve increased more slowly than everything else. In the last two years, however, they have increased faster, and the discrepancy is widening. Citing restrained core CPI numbers as evidence of constrained inflation assumes that food and fuel will soon be dropping. REalistically, that is not in the cards.
St. Paul economist and writer Edward Lotterman can be reached at elotterman@pioneerpress.com
Even economists experience sticker shock. I just bought one gallon of skim milk and one of 2 percent at the corner store. I do this regularly, but $9.14 for two gallons of milk still seems like a lot.
I'm not alone. Millions of people perceive that rising fuel and food prices are crimping their families' standard of living. No wonder they get upset when monthly inflation numbers are released and some expert notes that "core inflation" is up only slightly. It contradicts their daily personal experience.
The problem stems from the misapplication of a statistical measure - core inflation - that is useful in some situations but misleading right now.
For 80 years, the U.S. government has tabulated price indices to measure changes in general price levels. The consumer price index is the best known, as it measures goods and services that households buy. Every month, the government checks prices on thousands of items. On the whole, the CPI is an accurate indicator.
But prices of some items jump around more than others. Both food and fuel are important for most households, so they have a lot of influence on the overall index. But their prices tend to fluctuate more in the short term than those of clothing, household goods, shelter or recreation.
The fluctuations, incorporated in something tabulated on a month-to-month basis, can mislead.
Suppose overall prices are increasing at an average annual rate of 3 percent. Items other than food and fuel may increase at a rate of 2.5 percent one month and 3.5 percent the next, but follow this 3 percent trend. Then suppose food and fuel increase at a rate of 6 percent one month and again unchanged the next. Again, the long-run trend is 3 percent.
If you just consider the month that food and fuel rose at a 6 percent rate, it will appear that inflation is hot. The next month it will look like inflation is non-existent. But in the longer run, the trend in food and fuel is about the same as for other goods.
One can avoid this confusion by measuring consumer prices generally, but then making a separate tabulation that excludes volitile items. Weighing the two tabulations together gives us a better picture.
That is why the "core inflation" tabulation was introduced, to allow analysts to factor out short-run volatility that might be misleading.
A problem arises, however, when the longer-term trend for food and fuel is not the same as for other items. Suppose other items increase at rates between 2 percent and 4 percent with a trend of 3 percent. Month after month, food and fuel fluctuate between 6 percent and 10 percent annual rates with an average trend of 8 percent. Just looking at core inflation blinds one to a larger problem.
Taking comfort in a measure designed to dampen short-run fluctuations can mislead one about true prices trends. Over most of the past 25 years, food and fuel pries ahve increased more slowly than everything else. In the last two years, however, they have increased faster, and the discrepancy is widening. Citing restrained core CPI numbers as evidence of constrained inflation assumes that food and fuel will soon be dropping. REalistically, that is not in the cards.
St. Paul economist and writer Edward Lotterman can be reached at elotterman@pioneerpress.com
Friday, April 25, 2008
WSJ: Food Inflation, Riots Spark Worries for World Leaders
I've been a little bit behind in my posting. Trying to clear the archive, but this is a story that I think everybody should know about.
With government ethanol subsidies, environmental regulations, failure to add refining capacity, failure to open up ANWAR and the outer-continental shelf for oil drilling, the devaluation of the dollar due to chronic borrowing and the Fed adding "liquidity" the the market, this is more than just about us. The actions of the U.S. government have far and wide implications worldwide. This story shows a bit about how our assinine policies impact the rest of the world.
Food Inflation, Riots Spark Worries for World Leaders
IMF, World Bank Push for Solutions; Turmoil in Haiti
By Bob Davis and Douglas Belkin
Wall Street Journal Monday April 14, 2008 page 1A.
Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plagued the world periodically since before the time of the Pharaohs: food shortages.
Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank – putting huge stress on some of the world’s poorest nations. Even as the ministers met, Haiti’s Prime Minister Jacques Edouard Alexis was resigning after a week in which that tiny country’s capital was racked by rioting over higher prices for staples like rice and beans.
Rioting in response to soaring food prices recently has broken out in Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia. In Pakistan and Thailand, army troops have been deployed to deter food theft from fields and warehouses. World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. Those could include Indonesia, Yemen, Ghana, Uzbekistan and the Philippines. In countries where buying food requires have to three-quarters of a poor person’s income, “there is not margin for survival,” he said.
Many policy makers at the weekend meetings of the International Monetary Fund and World Bank agreed that the problem is severe. Among other targets, they singled out U.S. policies pushing corn-based ethanol and other biofuels as deepening the woes.
“When millions of people are going hungry, it’s a crime against humanity that food should be diverted to biofuels,” said India’s finance minister, Palaniappan Chidambaram, in an interview. Turkey’s finance minister, Mehmet Simsek, said the use of food for biofuels is “appalling.”
James Connaughton, chairman of the White House’s council on environmental quality, said biofuel are only one contributor to rising food prices. Rising prices for energy and electricity also contribute, as does strong demand for food from big developing countries like China.
But beyond taking shots at the U.S., there was little agreement this weekend on what should be done. Mr. Zoellick pushed the ministers to focus on the food issue in a dramatic Thursday news conference at which he held up a 2-kilogram (4.4-pound) bag of rice, which he said would now cost poor families in Bangladesh half their daily income. He kept up the pressure over the weekend. In a Sunday news briefing, he said, “We have to put our money where our mouth is now – so that we can put food into hungry mouths.”
But the weekend’s meeting produced few concrete results. Mr. Zoellick recently urged rich nations to contribute another $500 million to the United Nation’s World Food Program, but he said that the UN has received commitments for only about half the money.
Meanwhile, the IMF’s board of governors – basically, the world’s finance ministers, who run both the IMF and World Bank – urged the IMF to work with the World Bank for “an integrated response through policy advice and financial support.”
On Sunday, the committee that oversees the World Bank noted that “large groups of poor people are severely affected by high food and energy prices across the developing world.” The committee echoed the IMF’s committee’s call for “timely policy and financial support for vulnerable countries” and urged rich countries to be more generous in “immediate support for countries most affected by the high food prices.”
The World Bank plans to nearly double its agricultural lending to Africa next year to $800 million, and is urging members to ramp up relief for hard-pressed nations. The World Bank, IMF and big industrialized nations are also pushing for the completion of the Doha global trade talks, though cutting food subsidies in the U.S. and Europe under a trade deal would boost prices of food for impoverished importing nations.
Last week, British Prime Minister Gordon Brown urged the G7 nations – the U.S., Britain, Canada, France, Germany, Italy and Japan – to develop a comprehensive strategy for the food problem, encompassing trade, agricultural productivity, technology, biofuels and short-term aid for poor countries. In the past, Britain has taken the lead in pushing the G7 to write off the debts of the world’s poorest nations.
The situation in Haiti underscored some of the problems afflicting the world’s poorest countries. Haiti has enough food in the marketplace to feed its populace, but prices have increased beyond the means of many of the urban poor to pay for it, said Michael Hess, an administrator in the U.S. Agency for International Development’s Bureau for Democracy, Conflict and Humanitarian Assistance. “People are making two bucks a day,” he said. “And we’re seeing food prices go up around the world.”
In the Philippines, the world’s biggest importer of rice, a shortage of the grain has become acute. The government is considering a moratorium on converting agricultural land to construction of housing developments and golf courses. The government also is urging fast-food restaurants to offer half-portions of rice to slash the country’s rice bill.
Aggravating the problem, in some countries food inflation ahs prompted a wave of protectionism. Countries usually impose trade barriers to imports to protect local industries and try to boost exports. But food-trade protectionism works the opposite way. Recently at least a dozen of 58 countries surveyed by the World Bank have reduced tariffs to food imports and erected barriers to exports in hopes of restraining food prices domestically and moving toward “self-sufficiency.”
Indian, home to more than half the world’s hungry, is restricting grain exports, including a ban on the export of non-basmati rice. Taxes on edible oils, corn and butter have been decreased or eliminated.
Egypt similarly halted rice exports for six months as of April 1. The price of cereals and bread there has climbed by nearly 50% over the past 12 months. Eleven people have died in the past two months in incidents related to lengthening bread lines. The shortage compelled Presidnet Hosni Mubarak to order the army to bake additional loaves.
The global effect of export barriers, however, is to drive food prices even higher than they would be otherwise. Such policies “distort global prices,” said Mr. Simsek, the Turkish finance minister, in an interview. Rather than erect barriers, he said, Turkey plans to pick up the pace of constructing irrigation canals near dams in Anatolia, in southeastern Turkey.
Arvind Subramanian, a former senior IMF researcher, said that when countries adopt restrictive trade policies regarding food, “it becomes a bizarre kind of beggar-thy-neighbor. You’re not trying to sell more to the other guy; you’re trying to keep more in your own country.”
With the international financial institutions working on a slow track, countries have been cutting their own deals. Ukrainian President Viktor Yushchenko said on Tuesday that he had agreed to let Libya grow wheat on 247,000 acres of land in the Ukraine. In exchange, Libya promised to include the former Soviet republic in construction and gas deals.
Brazil recently invited Egypt’s minister of commerce to discuss a possible trade deal which would have a strong agriculture component. China also cut its first free-trade deal with a rich country, picking New Zealand, a major food exporter, and is talking about a pact with Australia, another big agricultural producer.
Meanwhile, Uganda plans to sell more coffee, milk and bananas to India. “Our problem is too much food and little market,” Uganda President Yoweri Kaguta Museveni told reporters, according to news reports,
About 18 of the countries sampled by the World Bank also are boosting consumer subsidies and instituting price controls. That prompted a warning from U.S. Treasury Secretary Henry Paulson to “resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups.” He said, “They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries.”
Instead, the World Bank’s Mr. Zoellick urged countries to look at better-targeted subsidies – such as providing food in exchange for work, or increasing school-lunch programs for poor families, so that children can take food home to their families.
During informal conversations and interviews, ministers mainly agreed that the U.S. policies on biofuels were especially harmful. U.S. ethanol is made from corn, which, ministers said, could be exported to feed the hungry, and benefited from tariffs that block Brazilian ethanol, which is produced much more efficiently from sugar cane.
The White House’s Mr. Connaughton said the U.S. is working on developing “second generation” biofuels that would use varieties of grass or agricultural wastes – not food – as source material. “That’s where we need to get to go,” he said.
The World Bank also has blamed the boom in biofuels for the rise in global food prices. That has put Mr. Zoellick in a ticklish position. Before taking his job at the World Bank, he was U.S. Trade Representative, and defended U.S. agricultural positions. In his Thursday news briefing, he didn’t mention the U.S. by name, but he praised sugar-based ethanol of the sort made in Brazil and questioned whether tariffs to block the fuel – such as the U.S. uses – make “economic sense.”
-John W. Miller in Brussels and Scott Kilman in Chicago contributed to this article.
With government ethanol subsidies, environmental regulations, failure to add refining capacity, failure to open up ANWAR and the outer-continental shelf for oil drilling, the devaluation of the dollar due to chronic borrowing and the Fed adding "liquidity" the the market, this is more than just about us. The actions of the U.S. government have far and wide implications worldwide. This story shows a bit about how our assinine policies impact the rest of the world.
Food Inflation, Riots Spark Worries for World Leaders
IMF, World Bank Push for Solutions; Turmoil in Haiti
By Bob Davis and Douglas Belkin
Wall Street Journal Monday April 14, 2008 page 1A.
Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plagued the world periodically since before the time of the Pharaohs: food shortages.
Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank – putting huge stress on some of the world’s poorest nations. Even as the ministers met, Haiti’s Prime Minister Jacques Edouard Alexis was resigning after a week in which that tiny country’s capital was racked by rioting over higher prices for staples like rice and beans.
Rioting in response to soaring food prices recently has broken out in Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia. In Pakistan and Thailand, army troops have been deployed to deter food theft from fields and warehouses. World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. Those could include Indonesia, Yemen, Ghana, Uzbekistan and the Philippines. In countries where buying food requires have to three-quarters of a poor person’s income, “there is not margin for survival,” he said.
Many policy makers at the weekend meetings of the International Monetary Fund and World Bank agreed that the problem is severe. Among other targets, they singled out U.S. policies pushing corn-based ethanol and other biofuels as deepening the woes.
“When millions of people are going hungry, it’s a crime against humanity that food should be diverted to biofuels,” said India’s finance minister, Palaniappan Chidambaram, in an interview. Turkey’s finance minister, Mehmet Simsek, said the use of food for biofuels is “appalling.”
James Connaughton, chairman of the White House’s council on environmental quality, said biofuel are only one contributor to rising food prices. Rising prices for energy and electricity also contribute, as does strong demand for food from big developing countries like China.
But beyond taking shots at the U.S., there was little agreement this weekend on what should be done. Mr. Zoellick pushed the ministers to focus on the food issue in a dramatic Thursday news conference at which he held up a 2-kilogram (4.4-pound) bag of rice, which he said would now cost poor families in Bangladesh half their daily income. He kept up the pressure over the weekend. In a Sunday news briefing, he said, “We have to put our money where our mouth is now – so that we can put food into hungry mouths.”
But the weekend’s meeting produced few concrete results. Mr. Zoellick recently urged rich nations to contribute another $500 million to the United Nation’s World Food Program, but he said that the UN has received commitments for only about half the money.
Meanwhile, the IMF’s board of governors – basically, the world’s finance ministers, who run both the IMF and World Bank – urged the IMF to work with the World Bank for “an integrated response through policy advice and financial support.”
On Sunday, the committee that oversees the World Bank noted that “large groups of poor people are severely affected by high food and energy prices across the developing world.” The committee echoed the IMF’s committee’s call for “timely policy and financial support for vulnerable countries” and urged rich countries to be more generous in “immediate support for countries most affected by the high food prices.”
The World Bank plans to nearly double its agricultural lending to Africa next year to $800 million, and is urging members to ramp up relief for hard-pressed nations. The World Bank, IMF and big industrialized nations are also pushing for the completion of the Doha global trade talks, though cutting food subsidies in the U.S. and Europe under a trade deal would boost prices of food for impoverished importing nations.
Last week, British Prime Minister Gordon Brown urged the G7 nations – the U.S., Britain, Canada, France, Germany, Italy and Japan – to develop a comprehensive strategy for the food problem, encompassing trade, agricultural productivity, technology, biofuels and short-term aid for poor countries. In the past, Britain has taken the lead in pushing the G7 to write off the debts of the world’s poorest nations.
The situation in Haiti underscored some of the problems afflicting the world’s poorest countries. Haiti has enough food in the marketplace to feed its populace, but prices have increased beyond the means of many of the urban poor to pay for it, said Michael Hess, an administrator in the U.S. Agency for International Development’s Bureau for Democracy, Conflict and Humanitarian Assistance. “People are making two bucks a day,” he said. “And we’re seeing food prices go up around the world.”
In the Philippines, the world’s biggest importer of rice, a shortage of the grain has become acute. The government is considering a moratorium on converting agricultural land to construction of housing developments and golf courses. The government also is urging fast-food restaurants to offer half-portions of rice to slash the country’s rice bill.
Aggravating the problem, in some countries food inflation ahs prompted a wave of protectionism. Countries usually impose trade barriers to imports to protect local industries and try to boost exports. But food-trade protectionism works the opposite way. Recently at least a dozen of 58 countries surveyed by the World Bank have reduced tariffs to food imports and erected barriers to exports in hopes of restraining food prices domestically and moving toward “self-sufficiency.”
Indian, home to more than half the world’s hungry, is restricting grain exports, including a ban on the export of non-basmati rice. Taxes on edible oils, corn and butter have been decreased or eliminated.
Egypt similarly halted rice exports for six months as of April 1. The price of cereals and bread there has climbed by nearly 50% over the past 12 months. Eleven people have died in the past two months in incidents related to lengthening bread lines. The shortage compelled Presidnet Hosni Mubarak to order the army to bake additional loaves.
The global effect of export barriers, however, is to drive food prices even higher than they would be otherwise. Such policies “distort global prices,” said Mr. Simsek, the Turkish finance minister, in an interview. Rather than erect barriers, he said, Turkey plans to pick up the pace of constructing irrigation canals near dams in Anatolia, in southeastern Turkey.
Arvind Subramanian, a former senior IMF researcher, said that when countries adopt restrictive trade policies regarding food, “it becomes a bizarre kind of beggar-thy-neighbor. You’re not trying to sell more to the other guy; you’re trying to keep more in your own country.”
With the international financial institutions working on a slow track, countries have been cutting their own deals. Ukrainian President Viktor Yushchenko said on Tuesday that he had agreed to let Libya grow wheat on 247,000 acres of land in the Ukraine. In exchange, Libya promised to include the former Soviet republic in construction and gas deals.
Brazil recently invited Egypt’s minister of commerce to discuss a possible trade deal which would have a strong agriculture component. China also cut its first free-trade deal with a rich country, picking New Zealand, a major food exporter, and is talking about a pact with Australia, another big agricultural producer.
Meanwhile, Uganda plans to sell more coffee, milk and bananas to India. “Our problem is too much food and little market,” Uganda President Yoweri Kaguta Museveni told reporters, according to news reports,
About 18 of the countries sampled by the World Bank also are boosting consumer subsidies and instituting price controls. That prompted a warning from U.S. Treasury Secretary Henry Paulson to “resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups.” He said, “They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries.”
Instead, the World Bank’s Mr. Zoellick urged countries to look at better-targeted subsidies – such as providing food in exchange for work, or increasing school-lunch programs for poor families, so that children can take food home to their families.
During informal conversations and interviews, ministers mainly agreed that the U.S. policies on biofuels were especially harmful. U.S. ethanol is made from corn, which, ministers said, could be exported to feed the hungry, and benefited from tariffs that block Brazilian ethanol, which is produced much more efficiently from sugar cane.
The White House’s Mr. Connaughton said the U.S. is working on developing “second generation” biofuels that would use varieties of grass or agricultural wastes – not food – as source material. “That’s where we need to get to go,” he said.
The World Bank also has blamed the boom in biofuels for the rise in global food prices. That has put Mr. Zoellick in a ticklish position. Before taking his job at the World Bank, he was U.S. Trade Representative, and defended U.S. agricultural positions. In his Thursday news briefing, he didn’t mention the U.S. by name, but he praised sugar-based ethanol of the sort made in Brazil and questioned whether tariffs to block the fuel – such as the U.S. uses – make “economic sense.”
-John W. Miller in Brussels and Scott Kilman in Chicago contributed to this article.
Thursday, April 24, 2008
AP: Federal Reserve to auction another $75B in Treasuries
From Page 2C of the Thursday April 24, 2008 issue of the St. Paul Pioneer Press, courtesy of the Associated Press.
The Federal Reserve said Wednesday it will auction an additional $75 billion in super-safe Treasury securities to big investment firms, part of an ongoing effort to help strained credit markets.
The auction - the fifth of its kind - will be held today.
In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities, as collateral.
In the four auctions held so far, the Fed has provided close to $158.95 billion worth of the Treasury securities to investment firms.
The auction program is intended to help financial institutions and the troubled mortgage market.
The goal is to make investment houses more inclined to lend to each other. It is also aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities had driven up mortgage rates, aggravating the housing slump.
The lending program is one of several unconventional steps the Fed has taken to deal with a credit crisis.
The Federal Reserve said Wednesday it will auction an additional $75 billion in super-safe Treasury securities to big investment firms, part of an ongoing effort to help strained credit markets.
The auction - the fifth of its kind - will be held today.
In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities, as collateral.
In the four auctions held so far, the Fed has provided close to $158.95 billion worth of the Treasury securities to investment firms.
The auction program is intended to help financial institutions and the troubled mortgage market.
The goal is to make investment houses more inclined to lend to each other. It is also aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities had driven up mortgage rates, aggravating the housing slump.
The lending program is one of several unconventional steps the Fed has taken to deal with a credit crisis.
Constitutional Amendment may be introduced
The following is being considered as a House Joint Resolution as a constitutional amendment related to Federal Government spending. To my knowledge, it has not been introduced as of yet.
IN THE HOUSE OF REPRESENTATIVES
Mr. CAMPBELL of California introduced the following joint resolution; which
was referred to the Committee on _______________
JOINT RESOLUTION
Proposing an amendment to the Constitution of the United
States to control spending.
1 Resolved by the Senate and House of Representatives
2 of the United States of America in Congress assembled
3 (two-thirds of each House concurring therein), That the fol4
lowing article is proposed as an amendment to the Con5
stitution of the United States, which shall be valid to all
6 intents and purposes as part of the Constitution when
7 ratified by the legislatures of three-fourths of the several
8 States within seven years after the date of its submission
9 for ratification:
1 ‘‘ARTICLE—
2 ‘‘SECTION 1. Total outlays for any fiscal year shall
3 not exceed an amount that would cause total outlays to
4 have increased by a rate that exceeds growth in the United
5 States economy over the period since 2007, unless two6
thirds of the whole number of each House of Congress
7 shall provide by law for a specific increase of outlays above
8 this amount by a roll call vote.
9 ‘‘SECTION 2. Prior to each fiscal year, the President
10 shall transmit to the Congress a proposed budget for the
11 United States Government for that fiscal year, and for all
12 other fiscal years covered by the President’s budget, in
13 which total outlays do not exceed the outlays from the pre14
vious year after taking into account an increase to reflect
15 the average growth in the United States economy over the
16 period since 2007.
17 ‘‘SECTION 3. The Congress may waive the provisions
18 of this article for any fiscal year in which a declaration
19 of war is in effect.
20 ‘‘SECTION 4. The Congress shall enforce and imple21
ment this article by appropriate legislation, which may rely
22 on estimates.
23 ‘‘SECTION 5. Total outlays shall include all outlays
24 of the United States Government, except for those for re25
payment of debt principal.
1 ‘‘SECTION 6. This article shall take effect beginning
2 the second fiscal year after its ratification.’’.
IN THE HOUSE OF REPRESENTATIVES
Mr. CAMPBELL of California introduced the following joint resolution; which
was referred to the Committee on _______________
JOINT RESOLUTION
Proposing an amendment to the Constitution of the United
States to control spending.
1 Resolved by the Senate and House of Representatives
2 of the United States of America in Congress assembled
3 (two-thirds of each House concurring therein), That the fol4
lowing article is proposed as an amendment to the Con5
stitution of the United States, which shall be valid to all
6 intents and purposes as part of the Constitution when
7 ratified by the legislatures of three-fourths of the several
8 States within seven years after the date of its submission
9 for ratification:
1 ‘‘ARTICLE—
2 ‘‘SECTION 1. Total outlays for any fiscal year shall
3 not exceed an amount that would cause total outlays to
4 have increased by a rate that exceeds growth in the United
5 States economy over the period since 2007, unless two6
thirds of the whole number of each House of Congress
7 shall provide by law for a specific increase of outlays above
8 this amount by a roll call vote.
9 ‘‘SECTION 2. Prior to each fiscal year, the President
10 shall transmit to the Congress a proposed budget for the
11 United States Government for that fiscal year, and for all
12 other fiscal years covered by the President’s budget, in
13 which total outlays do not exceed the outlays from the pre14
vious year after taking into account an increase to reflect
15 the average growth in the United States economy over the
16 period since 2007.
17 ‘‘SECTION 3. The Congress may waive the provisions
18 of this article for any fiscal year in which a declaration
19 of war is in effect.
20 ‘‘SECTION 4. The Congress shall enforce and imple21
ment this article by appropriate legislation, which may rely
22 on estimates.
23 ‘‘SECTION 5. Total outlays shall include all outlays
24 of the United States Government, except for those for re25
payment of debt principal.
1 ‘‘SECTION 6. This article shall take effect beginning
2 the second fiscal year after its ratification.’’.
Wednesday, April 23, 2008
AP: Existing home sales, median price fall in March
The following appeared in the Wednesday April 23, 2008 edition of the St. Paul Pioneer Press on Page 2C, courtesy of the Associated Press.
Sales of existing homes fell in March, the seventh drop in the past eight months, as the spring sales season got off to a rocky start.
The median price of a home was down compared with a year ago, and some economists predicted home prices could keep falling for months given all the troubles weighing on housing, from a severe credit crunch to a rising tide of foreclosures.
The National Association of Realtors reported Tuesday that sales of existing single-family homes and condominiums dropped by 2 percent in March to a seasonally adjusted annual rate of 4.93 million units.
The median price of a home sold last month was $200,700, a decline of 7.7 percent from a year ago and the seventh consecutive year-over-year price drop. It also was the second biggest decline following a record 8.4 percent drop in Fedruary. These records go back to 1999.
The median sales price in March was up from a February median of $195,600. Analysts said this was statistically meaningless because the monthly price changes are not adjusted for seasonal variations and prices always rise in March at the start of the spring sales season.
Sales of existing homes fell in March, the seventh drop in the past eight months, as the spring sales season got off to a rocky start.
The median price of a home was down compared with a year ago, and some economists predicted home prices could keep falling for months given all the troubles weighing on housing, from a severe credit crunch to a rising tide of foreclosures.
The National Association of Realtors reported Tuesday that sales of existing single-family homes and condominiums dropped by 2 percent in March to a seasonally adjusted annual rate of 4.93 million units.
The median price of a home sold last month was $200,700, a decline of 7.7 percent from a year ago and the seventh consecutive year-over-year price drop. It also was the second biggest decline following a record 8.4 percent drop in Fedruary. These records go back to 1999.
The median sales price in March was up from a February median of $195,600. Analysts said this was statistically meaningless because the monthly price changes are not adjusted for seasonal variations and prices always rise in March at the start of the spring sales season.
Banks hit up Fed for another $50 billion
The following appeared on page 2C of the St. Paul Pioneer Press Wednesday April 23, 2008 edition.
Battling to relieve stressed credit markets, the Federal Reserve has provided a total of $360 billion in short-term loans to squeezed banks since December to help them overcome credit problems. The central bank on Tuesday announced the results of its most recent auction - the 10th since the program started in December, where commercial banks bid to get a slice of another $50 billion in the short-term loans.
It's part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August, intensified in December and January and took another turn for the worst in March with the sudden crash of Bear Sterns, the nation's fifth-largest investment house.
Battling to relieve stressed credit markets, the Federal Reserve has provided a total of $360 billion in short-term loans to squeezed banks since December to help them overcome credit problems. The central bank on Tuesday announced the results of its most recent auction - the 10th since the program started in December, where commercial banks bid to get a slice of another $50 billion in the short-term loans.
It's part of an ongoing effort by the Fed to help ease the credit crunch, which erupted last August, intensified in December and January and took another turn for the worst in March with the sudden crash of Bear Sterns, the nation's fifth-largest investment house.
Tuesday, April 22, 2008
Piece of the Treasury for $100
The following appeared on page B2 in the April 12-13,2008 weekend edition of the Wall Street Journal.
Piece of the Treasury for $100
Bills, Notes, Bonds Easier to Get, But Do You Want Them?
By Chuck Jaffe
At a time when investors seem obsessed with safety and security, the Treasury Department in the past week instituted a major change in the way people can invest in Treasury bills, notes and bonds.
While many market observers question the value of buying Treasurys now – yields are so low that ordinary bank accounts can be a better value – the changes should cause a stir among small investors looking for safe havens.
On Monday, the Treasury started making all of its marketable securities available to the public in “minimum and multiple amounts of $100.” For roughly the last decade, the threshold has been $1,000.
The change is significant because it means consumers can buy Treasurys for a C-note, making these securities affordable for the masses. It also puts Treasurys on the level of savings bonds and gives consumers new and different low-cost options.
What’s more, it simplifies the process for anyone looking to buy Treasurys. In the past, an investor with $1,200 or $2,700 to put into bills or notes would only be able to invest to the nearest thousand dollars. That made mutual funds or bank deposits more attractive alternatives. Now, that barrier has been eliminated.
“The policy makers are just trying to open it up as widely as possible,” said Stephen Meyerhardt, a Treasury spokesman. “But in opening Treasurys up, I hope that people understand what they are getting and really make sure that they are getting the right investment for their needs.”
Treasury securities can be purchased noncompetitively directly from the Treasury. For this, you need to open an account through the TreasuryDirect program.
The TreasuryDirect program isn’t for traders, and knowing the rules is crucial. For many investors, savings bonds will continue to be the superior choice to Treasurys.
Savings bonds lock up your money for up to 30 years, but an investor can cash out after five years without penalty. Even if you sell after the first year, the penalty amounts to just three months’ worth of interest charges – not much considering that the current payout is fixed at 3%.
With marketable securities such as Treasurys, in contrast, you are locked in to a set term. While you can sell the security through TreasuryDirect before it reached maturity, market forces can rip into the bond’s value, plus you’ll be facing a $45 charge from TreasuryDirect for the privilege. That’s a steep fee on a small-dollar investor who was throwing a few hundred bucks into Tresaurys rather than bank deposits.
One place where the changed Treasury program will help investors is in creating laddered portfolios of securities, where you hold different maturities of bonds and each time one matures, you simply reinvest the proceeds into a new issue that is at the long end of the time spectrum. So an investor might buy one-year, two-year and three-year bonds, for example, and then buy a new three-year note every time one step of the ladder reaches maturity.
Another area where small investors might turn to Treasurys is in place of short-term government bond funds. The little secret that most fund firms don’t say is that most Treasury funds are largely unmanaged. Rather than trying to pick the perfect mix of short-term maturities, the fund manager simply pools the cash, buys a new issue meeting an appropriate time frame and repeats the process whenever there’s cash to invest.
Individual investors can do the same through TreasuryDirect and avoid bond-fund expenses.
Because of their simplicity, Treasurys are something of a commodity, and the changes allow investors to buy in for less money upfront.
“You certainly could replace a bond fund, assuming you have the time and energy to devote to doing it yourself,” said Jeff Tjornehoj, senior research analyst at fund-tracker Lipper Inc.
“You’re not getting a lot of professional management in most short-term bond funds,” he added, “so what you are really paying for is convenience. …But some people probably would feel better having their money with the government – and the full faith and credit of the United States Treasury – than with some fund company, given what we have seen happening in the financial-services business.”
For his part, Mr. Meyerhardt says investors need to be careful not to view Treasurys as a replacement for a bank account. “If what you want is a savings account, and you are below the FDIC insurance limits, you can trust that,” he said, “and not be putting just $100 or $200 into Treasurys.”
Piece of the Treasury for $100
Bills, Notes, Bonds Easier to Get, But Do You Want Them?
By Chuck Jaffe
At a time when investors seem obsessed with safety and security, the Treasury Department in the past week instituted a major change in the way people can invest in Treasury bills, notes and bonds.
While many market observers question the value of buying Treasurys now – yields are so low that ordinary bank accounts can be a better value – the changes should cause a stir among small investors looking for safe havens.
On Monday, the Treasury started making all of its marketable securities available to the public in “minimum and multiple amounts of $100.” For roughly the last decade, the threshold has been $1,000.
The change is significant because it means consumers can buy Treasurys for a C-note, making these securities affordable for the masses. It also puts Treasurys on the level of savings bonds and gives consumers new and different low-cost options.
What’s more, it simplifies the process for anyone looking to buy Treasurys. In the past, an investor with $1,200 or $2,700 to put into bills or notes would only be able to invest to the nearest thousand dollars. That made mutual funds or bank deposits more attractive alternatives. Now, that barrier has been eliminated.
“The policy makers are just trying to open it up as widely as possible,” said Stephen Meyerhardt, a Treasury spokesman. “But in opening Treasurys up, I hope that people understand what they are getting and really make sure that they are getting the right investment for their needs.”
Treasury securities can be purchased noncompetitively directly from the Treasury. For this, you need to open an account through the TreasuryDirect program.
The TreasuryDirect program isn’t for traders, and knowing the rules is crucial. For many investors, savings bonds will continue to be the superior choice to Treasurys.
Savings bonds lock up your money for up to 30 years, but an investor can cash out after five years without penalty. Even if you sell after the first year, the penalty amounts to just three months’ worth of interest charges – not much considering that the current payout is fixed at 3%.
With marketable securities such as Treasurys, in contrast, you are locked in to a set term. While you can sell the security through TreasuryDirect before it reached maturity, market forces can rip into the bond’s value, plus you’ll be facing a $45 charge from TreasuryDirect for the privilege. That’s a steep fee on a small-dollar investor who was throwing a few hundred bucks into Tresaurys rather than bank deposits.
One place where the changed Treasury program will help investors is in creating laddered portfolios of securities, where you hold different maturities of bonds and each time one matures, you simply reinvest the proceeds into a new issue that is at the long end of the time spectrum. So an investor might buy one-year, two-year and three-year bonds, for example, and then buy a new three-year note every time one step of the ladder reaches maturity.
Another area where small investors might turn to Treasurys is in place of short-term government bond funds. The little secret that most fund firms don’t say is that most Treasury funds are largely unmanaged. Rather than trying to pick the perfect mix of short-term maturities, the fund manager simply pools the cash, buys a new issue meeting an appropriate time frame and repeats the process whenever there’s cash to invest.
Individual investors can do the same through TreasuryDirect and avoid bond-fund expenses.
Because of their simplicity, Treasurys are something of a commodity, and the changes allow investors to buy in for less money upfront.
“You certainly could replace a bond fund, assuming you have the time and energy to devote to doing it yourself,” said Jeff Tjornehoj, senior research analyst at fund-tracker Lipper Inc.
“You’re not getting a lot of professional management in most short-term bond funds,” he added, “so what you are really paying for is convenience. …But some people probably would feel better having their money with the government – and the full faith and credit of the United States Treasury – than with some fund company, given what we have seen happening in the financial-services business.”
For his part, Mr. Meyerhardt says investors need to be careful not to view Treasurys as a replacement for a bank account. “If what you want is a savings account, and you are below the FDIC insurance limits, you can trust that,” he said, “and not be putting just $100 or $200 into Treasurys.”
Monday, April 21, 2008
Jefferson County struggles against rising tide of debt
The following appeared in the Tuesday April 15 issue of the Financial Times on page 24. This is a warning to what will happen to the United States government if we do not get our borrowing and spending under control.
By Stacy-Marie Ishmael on why the municipality is facing the prospect of a major default
Alabama’s Jefferson County, one of the most indebted US municipalities, will today try to persuade creditors to extend the deadline for a $184m payment in its efforts to stave off default on its broader obligations.
Jefferson County has around $4.6bn in outstanding debt, and a default on that scale would dwarf 1994’s Orange County debacle, in which the California county defaulted on some $1.6bn in debt.
The country’s financial problems – it has already missed a series of payments to banks led by JPMorgan – are directly linked to the credit crisis that has rattled both Wall Street and Main Street.
Jefferson County has been hurt by soaring interest rates on the $3.2bn of debt it issued since 1997 to fund a sewer project. Investors started demanding higher interest rates in part because of problems facing the bond issuers that had guaranteed that debt, and partly as a result of a broader collapse in the auction-rate securities market, much used by municipal borrowers and where interest rates are set by auction every seven to 35 days.
County Commissioner Bettye Fine Collins said interest costs for the sewer project financing could reach $250m – almost twice the $138m in revenue the sewer system generates – if the county is unable to restructure the debt.
The county’s woes have been compounded by a series of complex agreements it entered into with Wall Street banks earlier this decade.
The agreements, known as interest rate swaps, were designed to reduce the risk and cost to the county of issuing variable-rate debt.
The swaps allowed Jefferson County to make fixed payments to investment banks including Lehman Brothers and Bank of America, and in return to receive floating payments linked to 3-month Libor.
But this strategy, which had been the favourite of municipalities across the nation, turned sour when the market for auction rate securities froze and three-month Libor started to fall. In other words, Jefferson County faced rising interest rate payments at a time when the swap contracts were paying out less than before.
Moreover, after the county skipped a $53m principal payment earlier this month, ratings agencies cut its credit ratings to the lower end of the investment grade spectrum. Those cuts triggered clauses in the swap agreements that allowed Jefferson’s creditors to demand $180m in additional collateral – money the county did not have.
Jefferson has already missed one such deadline, and a second one expires today. Unless it can persuade its banks to renegotiate the terms of the agreements, it may be pushed into bankruptcy, county officials said.
“If we don’t extend [the deadline], were basically calling in bankruptcy at that point in time,” county commissioner Jim Carns told the Birmingham News last week. But Alabama state officials are working to prevent such an outcome.
The state Senate has approved resolutions that would prevent the county from unilaterally declaring bankruptcy, for instance.
UPDATE:
The Wednesday April 16, 2008 issue of the Wall Street Journal gives an update on the Jefferson County story on page C2.
Alabama County Votes To Delay Debt Payment
Alabama’s Jefferson County Commission voted Tuesday afternoon to approve an agreement with banks that allows the county to further delay a $53 million payment on its municipal sewer debt.
This measure gives the county, which includes Birmingham, more time to negotiate a rescue plan necessary to avoid bankruptcy. Such a bankruptcy would represent the largest-ever municipal default, roughly double the size of the Orange County, Calif., debt default in 1994.
A representative for Jefferson County Commission President Bettye Fine Collins said the five-person commission voted unanimously to approve an extension of the county’s existing forbearance agreements with banks, bond insurers and swaps counterparties related to the county’s sewer debt.
The representative couldn’t confirm the length of the extension that was agreed upon, and referred queries to the office of the county attorney, who didn’t immediately return a phone call.
By Stacy-Marie Ishmael on why the municipality is facing the prospect of a major default
Alabama’s Jefferson County, one of the most indebted US municipalities, will today try to persuade creditors to extend the deadline for a $184m payment in its efforts to stave off default on its broader obligations.
Jefferson County has around $4.6bn in outstanding debt, and a default on that scale would dwarf 1994’s Orange County debacle, in which the California county defaulted on some $1.6bn in debt.
The country’s financial problems – it has already missed a series of payments to banks led by JPMorgan – are directly linked to the credit crisis that has rattled both Wall Street and Main Street.
Jefferson County has been hurt by soaring interest rates on the $3.2bn of debt it issued since 1997 to fund a sewer project. Investors started demanding higher interest rates in part because of problems facing the bond issuers that had guaranteed that debt, and partly as a result of a broader collapse in the auction-rate securities market, much used by municipal borrowers and where interest rates are set by auction every seven to 35 days.
County Commissioner Bettye Fine Collins said interest costs for the sewer project financing could reach $250m – almost twice the $138m in revenue the sewer system generates – if the county is unable to restructure the debt.
The county’s woes have been compounded by a series of complex agreements it entered into with Wall Street banks earlier this decade.
The agreements, known as interest rate swaps, were designed to reduce the risk and cost to the county of issuing variable-rate debt.
The swaps allowed Jefferson County to make fixed payments to investment banks including Lehman Brothers and Bank of America, and in return to receive floating payments linked to 3-month Libor.
But this strategy, which had been the favourite of municipalities across the nation, turned sour when the market for auction rate securities froze and three-month Libor started to fall. In other words, Jefferson County faced rising interest rate payments at a time when the swap contracts were paying out less than before.
Moreover, after the county skipped a $53m principal payment earlier this month, ratings agencies cut its credit ratings to the lower end of the investment grade spectrum. Those cuts triggered clauses in the swap agreements that allowed Jefferson’s creditors to demand $180m in additional collateral – money the county did not have.
Jefferson has already missed one such deadline, and a second one expires today. Unless it can persuade its banks to renegotiate the terms of the agreements, it may be pushed into bankruptcy, county officials said.
“If we don’t extend [the deadline], were basically calling in bankruptcy at that point in time,” county commissioner Jim Carns told the Birmingham News last week. But Alabama state officials are working to prevent such an outcome.
The state Senate has approved resolutions that would prevent the county from unilaterally declaring bankruptcy, for instance.
UPDATE:
The Wednesday April 16, 2008 issue of the Wall Street Journal gives an update on the Jefferson County story on page C2.
Alabama County Votes To Delay Debt Payment
Alabama’s Jefferson County Commission voted Tuesday afternoon to approve an agreement with banks that allows the county to further delay a $53 million payment on its municipal sewer debt.
This measure gives the county, which includes Birmingham, more time to negotiate a rescue plan necessary to avoid bankruptcy. Such a bankruptcy would represent the largest-ever municipal default, roughly double the size of the Orange County, Calif., debt default in 1994.
A representative for Jefferson County Commission President Bettye Fine Collins said the five-person commission voted unanimously to approve an extension of the county’s existing forbearance agreements with banks, bond insurers and swaps counterparties related to the county’s sewer debt.
The representative couldn’t confirm the length of the extension that was agreed upon, and referred queries to the office of the county attorney, who didn’t immediately return a phone call.
Sunday, April 20, 2008
Law of the Taxpayer
The following was sent to me by a dedicated reader of National Debtbusters:
I keep hearing (usually from liberals) "you can't legislate morality". Well, then, why do we have laws punishing those who (for example) lie [to the IRS] or steal [from their employer] ? It's because without a man-made law, that dishes out punishment in this world for transgressions, many people would pay no attention
to the ancient "religious" laws of civilisation.
My thought is, I want a law that requires the government -- my government -- to play fair. I'm giving up on the hope of a tax code that is fair or consistent or even understandable. But I know this: when Uncle Sam sends tax "refunds" or "rebates" to big corporations, BEFORE sending me my own little bitty refund, it doesn't really make all that much difference to the Big Guys -- but going without my little tax refund really does hurt me.
The Law of The Sea says the less maneuverale vessel has the right-of-way.
I propose a Law of The TaxPayer: the individuals with the smallest refunds due, get theirs first. Non-individuals (i.e. corporations) get theirs last.
The Democrats are in the majority. & they're always saying they fight for the little guy. Let me see it happen now.
Saturday, April 19, 2008
WSJ: The Loophole Factory
The following appeared on page A18 in the Tuesday April 15, 2008 issue of the Wall Street Journal.
“People say all the time: ‘We can’t pick winners and losers.’ Well then fine. Take every single dollar of subsidy out of the federal tax code. Get rid of it all…Let’s have a real level playing field where nobody gets a penny in subsidy.” – Hillary Clinton, quoted in USA Today, April 5, 2008
Now, there’s a capital idea – and just in time for April 15. The simplest, fairest and most economically efficient tax code would end all special interest tax advantages and flatten tax rates. Except Mrs. Clinton was ridiculing this idea. She went on to say, that if subsidies vanish from the tax code, we’d “hear the squeals of protest from Wall Street to Houston to Silicon Valley.”
Her philosophy certainly fits with that of the current Congress, which is becoming a tax loophole production factory for the powerful. Exhibit A is the “Foreclosure Prevention Act,” which passed the Senate last week and contains $25 billion in tax subsidies for home builders and industry interests hurt by the housing crunch. Builders will be able to offset current losses against taxes paid in the past three years, which will mean billions of dollars of tax rebate checks from Uncle Sam.
This giveaway came only a few weeks after the National Association of Home Builders threatened to suspend their PAC contributions to Congress “until further notice” – meaning until they saw more return on their political investments. Congratulations. That gambit paid off big time. Other winners include the large Wall Street banks that have lost money in the subprime mortgage meltdown, including Citigroup, Merrill Lynch, and Morgan Stanley, which also qualify for rebates to offset current losses.
Republican Johnny Isakson of Georgia won Senate passage of a $7,000 tax credit for those who buy foreclosed properties. This won’t prevent foreclosures or make these properties more affordable. Instead it will only prop up the sales price of the inventory of abandoned homes that the banks now own. Meanwhile, the House bill contains a $7,500 tax credit for first-time home buyers. The powerful Realtors’ lobby and mortgage banks that own foreclosed properties blazed the money trail across Capitol Hill to get that one passed.
Oh, and while they were at it, the Senators voted 88-8 to add $6 billion in tax deductions for renewable energy producers. (If you wonder what this has to do with the mortgage “crisis,” you just arrived off the turnip truck.) This industry is already teed up to get nearly $10 billion in tax breaks in the energy bill, including subsidies for wind and solar power producers, hybrid vehicles and biodiesel. Much of this social engineering comes from the same people on Capitol Hill who insist that taxes don’t change industry or personal behavior.
With this loophole factory open for business on Capitol Hill again, business lobbies are spending more money than ever to curry Congressional favor. The real-estate industry may be in dire financial straits, but housing industry PACs have already contributed $56 million to political campaigns this election cycle, according to the Center for Responsive Politics. Politico.com reported last week that 40 new business lobbying firms have registered since January to represent the likes of concrete makers, home builders, Freddie Mac and the Realtors. Wall Street investment banks are also pumping up the volume of campaign contributions as they seek financial relief from the subprime mess.
Congress is creating all of these new loopholes even as overall tax revenues are slowing and this year’s budget deficit could reach $450 billion to $500 billion. This will play nicely into the hands of Democrats who contend that the lower tax rates of 2001 and 2003 must expire to pay the government’s bills. So we could soon have the worst of all worlds: a leaky tax code full of exceptions for powerful interests, but with ever higher rates to make up for the loopholes, plus any extra revenue from the tax hike. The losers are taxpayers who aren’t powerful or rich enough to afford a tax lobbyist.
At least this exercise is making clear what Democrats really mean by tax “fairness.” It means raising tax rates so they can then sell tax breaks to the highest corporate bidder. We have certainly come a long way from 1986, when a Democratic Congress joined with Ronald Reagan to strip the tax code of most tax deductions and lower tax rates to a high of 28%. That reform spirit is dead on Capitol Hill.
Senators Clinton and Barack Obama are racing across the country promising Americans that they will clean up a process that “favors Wall Street over Main Street.” Fat chance. Their party and most Republicans just voted for a housing bill that is the biggest victory for corporate special interests in years – and there’s much more to follow. Happy Tax Day.
Pages in the federal tax code
1985 – 26,300
1995 – 40,500
2007 – 67,200
“People say all the time: ‘We can’t pick winners and losers.’ Well then fine. Take every single dollar of subsidy out of the federal tax code. Get rid of it all…Let’s have a real level playing field where nobody gets a penny in subsidy.” – Hillary Clinton, quoted in USA Today, April 5, 2008
Now, there’s a capital idea – and just in time for April 15. The simplest, fairest and most economically efficient tax code would end all special interest tax advantages and flatten tax rates. Except Mrs. Clinton was ridiculing this idea. She went on to say, that if subsidies vanish from the tax code, we’d “hear the squeals of protest from Wall Street to Houston to Silicon Valley.”
Her philosophy certainly fits with that of the current Congress, which is becoming a tax loophole production factory for the powerful. Exhibit A is the “Foreclosure Prevention Act,” which passed the Senate last week and contains $25 billion in tax subsidies for home builders and industry interests hurt by the housing crunch. Builders will be able to offset current losses against taxes paid in the past three years, which will mean billions of dollars of tax rebate checks from Uncle Sam.
This giveaway came only a few weeks after the National Association of Home Builders threatened to suspend their PAC contributions to Congress “until further notice” – meaning until they saw more return on their political investments. Congratulations. That gambit paid off big time. Other winners include the large Wall Street banks that have lost money in the subprime mortgage meltdown, including Citigroup, Merrill Lynch, and Morgan Stanley, which also qualify for rebates to offset current losses.
Republican Johnny Isakson of Georgia won Senate passage of a $7,000 tax credit for those who buy foreclosed properties. This won’t prevent foreclosures or make these properties more affordable. Instead it will only prop up the sales price of the inventory of abandoned homes that the banks now own. Meanwhile, the House bill contains a $7,500 tax credit for first-time home buyers. The powerful Realtors’ lobby and mortgage banks that own foreclosed properties blazed the money trail across Capitol Hill to get that one passed.
Oh, and while they were at it, the Senators voted 88-8 to add $6 billion in tax deductions for renewable energy producers. (If you wonder what this has to do with the mortgage “crisis,” you just arrived off the turnip truck.) This industry is already teed up to get nearly $10 billion in tax breaks in the energy bill, including subsidies for wind and solar power producers, hybrid vehicles and biodiesel. Much of this social engineering comes from the same people on Capitol Hill who insist that taxes don’t change industry or personal behavior.
With this loophole factory open for business on Capitol Hill again, business lobbies are spending more money than ever to curry Congressional favor. The real-estate industry may be in dire financial straits, but housing industry PACs have already contributed $56 million to political campaigns this election cycle, according to the Center for Responsive Politics. Politico.com reported last week that 40 new business lobbying firms have registered since January to represent the likes of concrete makers, home builders, Freddie Mac and the Realtors. Wall Street investment banks are also pumping up the volume of campaign contributions as they seek financial relief from the subprime mess.
Congress is creating all of these new loopholes even as overall tax revenues are slowing and this year’s budget deficit could reach $450 billion to $500 billion. This will play nicely into the hands of Democrats who contend that the lower tax rates of 2001 and 2003 must expire to pay the government’s bills. So we could soon have the worst of all worlds: a leaky tax code full of exceptions for powerful interests, but with ever higher rates to make up for the loopholes, plus any extra revenue from the tax hike. The losers are taxpayers who aren’t powerful or rich enough to afford a tax lobbyist.
At least this exercise is making clear what Democrats really mean by tax “fairness.” It means raising tax rates so they can then sell tax breaks to the highest corporate bidder. We have certainly come a long way from 1986, when a Democratic Congress joined with Ronald Reagan to strip the tax code of most tax deductions and lower tax rates to a high of 28%. That reform spirit is dead on Capitol Hill.
Senators Clinton and Barack Obama are racing across the country promising Americans that they will clean up a process that “favors Wall Street over Main Street.” Fat chance. Their party and most Republicans just voted for a housing bill that is the biggest victory for corporate special interests in years – and there’s much more to follow. Happy Tax Day.
Pages in the federal tax code
1985 – 26,300
1995 – 40,500
2007 – 67,200
Economist Kaufman says Fed failed as regulator
The following appeared on page 20 in the Monday April 14, 2008 issue of the Financial Times.
By Aline van Duyn in New York
Henry Kaufman, the distinguished Wall Street economist, has added his voice to the debate about the Federal Reserve’s role in the credit crisis, saying the central bank failed to give enough importance to its role as a regulator.
In a video interview with the Financial Times, Mr Kaufman criticized the Fed’s monetary policy. He said it allowed too much credit expansion over the past 15 years and that this contributed to the market turmoil.
“Certainly the Federal Reserve should shoulder a substantial part of this responsibility…it allowed the expansion of credit in huge magnitudes,” Mr Kaufman said.
“Besides its monetary policy approach, [the Fed] really indicated very clearly that it was performing its role as a supervisor…in a minute fashion, not in an encompassing fashion. Monetary policy had a high priority, supervision and regulation within the Fed had a smaller policy.
Mr Kaufman, who is on the board at Lehman Brothers, has long advocated tougher regulation of the biggest financial firms, arguing that they need to be made “too good to fail”, rather than remain “too large to fail”.
The near-collapse of Bear Stearns last month, and the Fed’s intervention which resulted in a purchase of the Wall Street firm by JPMorgan Chase, has triggered a renewed debate about whether banks can regulate themselves, or whether regulators need to impose tougher rules.
The credit crisis, which stems from losses on securities backed by risky mortgages made during the height of the housing bubble, could lead to total writedowns of nearly $1,000bn for banks and investors around the world, according to the International Monetary Fund.
Mr Kaufman said a distinctive feature of the financial crisis was “much greater lapses in official supervision and regulation than in earlier periods”.
He said there should be a new federal regulator appointed who would work with the Federal Reserve but who would have responsibility for “intensively” regulating the 30 or 40 biggest financial firms. Failure to do so could lead to a “crisis that’s bigger than the one which we have today”.
“The supervision of major financial institutions requires deep skills in credit, deep skills in risk analysis techniques and it requires within that organization, very skilled, trained professional people,” Mr Kaufman said. “That is lacking in the supervisory area in the United States.”
He added that recent proposals from Hank Paulson, secretary of the US Treasury, to overhaul US regulation “lack focus”.
By Aline van Duyn in New York
Henry Kaufman, the distinguished Wall Street economist, has added his voice to the debate about the Federal Reserve’s role in the credit crisis, saying the central bank failed to give enough importance to its role as a regulator.
In a video interview with the Financial Times, Mr Kaufman criticized the Fed’s monetary policy. He said it allowed too much credit expansion over the past 15 years and that this contributed to the market turmoil.
“Certainly the Federal Reserve should shoulder a substantial part of this responsibility…it allowed the expansion of credit in huge magnitudes,” Mr Kaufman said.
“Besides its monetary policy approach, [the Fed] really indicated very clearly that it was performing its role as a supervisor…in a minute fashion, not in an encompassing fashion. Monetary policy had a high priority, supervision and regulation within the Fed had a smaller policy.
Mr Kaufman, who is on the board at Lehman Brothers, has long advocated tougher regulation of the biggest financial firms, arguing that they need to be made “too good to fail”, rather than remain “too large to fail”.
The near-collapse of Bear Stearns last month, and the Fed’s intervention which resulted in a purchase of the Wall Street firm by JPMorgan Chase, has triggered a renewed debate about whether banks can regulate themselves, or whether regulators need to impose tougher rules.
The credit crisis, which stems from losses on securities backed by risky mortgages made during the height of the housing bubble, could lead to total writedowns of nearly $1,000bn for banks and investors around the world, according to the International Monetary Fund.
Mr Kaufman said a distinctive feature of the financial crisis was “much greater lapses in official supervision and regulation than in earlier periods”.
He said there should be a new federal regulator appointed who would work with the Federal Reserve but who would have responsibility for “intensively” regulating the 30 or 40 biggest financial firms. Failure to do so could lead to a “crisis that’s bigger than the one which we have today”.
“The supervision of major financial institutions requires deep skills in credit, deep skills in risk analysis techniques and it requires within that organization, very skilled, trained professional people,” Mr Kaufman said. “That is lacking in the supervisory area in the United States.”
He added that recent proposals from Hank Paulson, secretary of the US Treasury, to overhaul US regulation “lack focus”.
Friday, April 18, 2008
Lure of Stimulus Payments May Produce Record Filings
The following article appeared in the April 12-13, 2008 (Weekend Edition) of the Wall Street Journal, Page A2.
It’s crunch time for millions of procrastinators.
With Tuesday’s federal-income-tax deadline drawing near, many Americans will spend much of this weekend calculator in hand, tax software loaded, searching for last-minute deductions or credits, sifting through investment documents and trying to decipher Internal Revenue Service instructions.
Thanks in-part to the lure of economic-stimulus payments, record numbers of returns are being filed this year. Through April 4, the IRS says it had received about 96.8 million returns, up 9.3% from a year earlier.
Uncle Sam is promising these special payments as part of an economic-stimulus package passed by Congress, and the payout requires a tax return to be filed. These payments typically will be as much as $600 for an individual or $1,200 for married couples filing jointly, plus $300 for each child under 17. Not everyone is eligible; the payments begin to phase out once income exceeds a certain level.
The payments will begin flowing to about 130 million households next month in an effort to juice consumer spending and mitigate the economic slowdown.
As usual, most filers so far this year are getting refunds, which also could bolster consumer spending, unless those dollars are simply eaten up by higher gas costs and mortgage debt. The IRS approved about 75.1 million refunds through April 4, up 2.1% from a year earlier. The dollar amount of refunds rose 5.1% to $183.04 billion. The average refund: $2,436, up about 3%.
Many taxpayers think of refunds as a convenient form of forced savings. But the Treasury doesn’t pay interest on refunds. Thus, those people effectively are giving interest-free loans to Uncle Sam.
The Treasury Department reported Thursday that individual income-tax revenues for the six months through March rose to $503.6 billion from $479.2 billion in the same six-month period a year earlier. For the full fiscal year, the government’s budget estimate calls for individual income-tax revenues of more than $1.2 trillion. (The government’s fiscal year ends Sept. 30.)
As for the dreaded audits, the IRS has audited only about 1% of all individual-income-tax returns in each of the past few years. Still, the number of individual-income-tax audits reached a 10-year high in 2007, and the IRS plans to increase the number of audits this year, with an eye on high-income taxpayers. This year, the IRS reported that audits of taxpayers making $100,000 or more rose 14% in 2007 from 2006, while audits for people making $200,000 or more rose 29%. They surged 84% for those with incomes of $1 million or more.
Amid the current mortgage crisis, there are a few new related tax-list twists to watch out for this year. Among them is a deduction for private-mortgage insurance premiums. There’s also a provision that will provide relief in certain cases where a lender forgave a debt on a taxpayer’s home.
Also, there are new record-keeping requirements for cash contributions: You can’t deduct any of your monetary donations, no matter how tiny, unless you have proof, such as a cancelled check or a receipt from the charity.
As for taxpayers who can’t finish their returns in the next few days, the IRS says the agency expects to receive a record 10.3 million extension requests, up from 10 million last year. Extensions automatically give the filer until Oct. 15, although it doesn’t give any additional time to pay whatever is owed.
It’s crunch time for millions of procrastinators.
With Tuesday’s federal-income-tax deadline drawing near, many Americans will spend much of this weekend calculator in hand, tax software loaded, searching for last-minute deductions or credits, sifting through investment documents and trying to decipher Internal Revenue Service instructions.
Thanks in-part to the lure of economic-stimulus payments, record numbers of returns are being filed this year. Through April 4, the IRS says it had received about 96.8 million returns, up 9.3% from a year earlier.
Uncle Sam is promising these special payments as part of an economic-stimulus package passed by Congress, and the payout requires a tax return to be filed. These payments typically will be as much as $600 for an individual or $1,200 for married couples filing jointly, plus $300 for each child under 17. Not everyone is eligible; the payments begin to phase out once income exceeds a certain level.
The payments will begin flowing to about 130 million households next month in an effort to juice consumer spending and mitigate the economic slowdown.
As usual, most filers so far this year are getting refunds, which also could bolster consumer spending, unless those dollars are simply eaten up by higher gas costs and mortgage debt. The IRS approved about 75.1 million refunds through April 4, up 2.1% from a year earlier. The dollar amount of refunds rose 5.1% to $183.04 billion. The average refund: $2,436, up about 3%.
Many taxpayers think of refunds as a convenient form of forced savings. But the Treasury doesn’t pay interest on refunds. Thus, those people effectively are giving interest-free loans to Uncle Sam.
The Treasury Department reported Thursday that individual income-tax revenues for the six months through March rose to $503.6 billion from $479.2 billion in the same six-month period a year earlier. For the full fiscal year, the government’s budget estimate calls for individual income-tax revenues of more than $1.2 trillion. (The government’s fiscal year ends Sept. 30.)
As for the dreaded audits, the IRS has audited only about 1% of all individual-income-tax returns in each of the past few years. Still, the number of individual-income-tax audits reached a 10-year high in 2007, and the IRS plans to increase the number of audits this year, with an eye on high-income taxpayers. This year, the IRS reported that audits of taxpayers making $100,000 or more rose 14% in 2007 from 2006, while audits for people making $200,000 or more rose 29%. They surged 84% for those with incomes of $1 million or more.
Amid the current mortgage crisis, there are a few new related tax-list twists to watch out for this year. Among them is a deduction for private-mortgage insurance premiums. There’s also a provision that will provide relief in certain cases where a lender forgave a debt on a taxpayer’s home.
Also, there are new record-keeping requirements for cash contributions: You can’t deduct any of your monetary donations, no matter how tiny, unless you have proof, such as a cancelled check or a receipt from the charity.
As for taxpayers who can’t finish their returns in the next few days, the IRS says the agency expects to receive a record 10.3 million extension requests, up from 10 million last year. Extensions automatically give the filer until Oct. 15, although it doesn’t give any additional time to pay whatever is owed.
Ramsey: Recession-proof yourself
From Dave Ramsey's April 2008 newsletter.
“The sky is falling! The sky is falling!” That sounds just like what all the media people are telling us these days. “Recession! Recession!” Calm down, Chicken Little! The sky is NOT falling, and we are not in a recession.
By definition, a recession doesn’t happen until the Gross Domestic Product (GDP) numbers - how you measure the number of goods made and sold in the USA - goes down for 6 consecutive months. That has not happened yet; therefore our country is not currently in a recession. However, the economy has slowed. We could be at the edge of a recession. But it’s no reason to completely freak out and think the world is going to collapse. Don’t let the talking heads on the nightly news make you emotional and cause you to freak out about the economy. If you let your emotions dictate your actions, you’re going to be broke your whole life.
What Can I Do About It?
Regardless of the condition of the national economy, it’s a MUST that you take a look at your own personal economy. Do you have your $1,000 emergency fund saved? Are you tackling your debt snowball like crazy? If you follow my Baby Steps in order, you’ll be able to prepare for yourself and your family so that you’ll hardly notice when the national economy or your household economy faces potential setbacks:
Baby Step 1: $1,000 Emergency Fund
No one eagerly anticipates negative, unexpected events. But guess what? They’re going to happen. It’s just a fact of life. Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time. This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. Continue
Baby Step 2: The Debt Snowball
The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan. Continue
Baby Step 3: Fully Funded Emergency Fund
Ask yourself, “Self, what would it take for you to live for 3 to 6 months if you lost your income?” Your answer to that question is how much you should save. Remember, this stash of money is NOT an investment; it is insurance you’re paying to yourself, a buffer between you and life. Continue
Most importantly, remember one last thing. Your economy is up to you. If you are out of debt and have money in the bank, then the media can talk up a storm about a recession, but you won’t feel it. When you have a plan, live on less than you make and save money, you are not in trouble. If you have a paid-for house, who cares if foreclosure rates are up? YOU are all right. If you have no credit card debt and the plastic companies decide to raise interest rates to 50%, how much will you care? NOT ONE BIT! Take care of your personal money situation, and everything else will take care of itself.
There’s no time like the present to get started and recession-proof yourself! I promise… it’s a plan that works EVERY time!
The media has correctly predicted 36 of the last 2 recessions.– Zig Ziglar
“The sky is falling! The sky is falling!” That sounds just like what all the media people are telling us these days. “Recession! Recession!” Calm down, Chicken Little! The sky is NOT falling, and we are not in a recession.
By definition, a recession doesn’t happen until the Gross Domestic Product (GDP) numbers - how you measure the number of goods made and sold in the USA - goes down for 6 consecutive months. That has not happened yet; therefore our country is not currently in a recession. However, the economy has slowed. We could be at the edge of a recession. But it’s no reason to completely freak out and think the world is going to collapse. Don’t let the talking heads on the nightly news make you emotional and cause you to freak out about the economy. If you let your emotions dictate your actions, you’re going to be broke your whole life.
What Can I Do About It?
Regardless of the condition of the national economy, it’s a MUST that you take a look at your own personal economy. Do you have your $1,000 emergency fund saved? Are you tackling your debt snowball like crazy? If you follow my Baby Steps in order, you’ll be able to prepare for yourself and your family so that you’ll hardly notice when the national economy or your household economy faces potential setbacks:
Baby Step 1: $1,000 Emergency Fund
No one eagerly anticipates negative, unexpected events. But guess what? They’re going to happen. It’s just a fact of life. Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time. This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. Continue
Baby Step 2: The Debt Snowball
The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan. Continue
Baby Step 3: Fully Funded Emergency Fund
Ask yourself, “Self, what would it take for you to live for 3 to 6 months if you lost your income?” Your answer to that question is how much you should save. Remember, this stash of money is NOT an investment; it is insurance you’re paying to yourself, a buffer between you and life. Continue
Most importantly, remember one last thing. Your economy is up to you. If you are out of debt and have money in the bank, then the media can talk up a storm about a recession, but you won’t feel it. When you have a plan, live on less than you make and save money, you are not in trouble. If you have a paid-for house, who cares if foreclosure rates are up? YOU are all right. If you have no credit card debt and the plastic companies decide to raise interest rates to 50%, how much will you care? NOT ONE BIT! Take care of your personal money situation, and everything else will take care of itself.
There’s no time like the present to get started and recession-proof yourself! I promise… it’s a plan that works EVERY time!
FT: A towering disciplinarian
The frugal former Fed chief blames the current crisis on lack of restraint, says Chrystia Freeland.
This article appeared in the April 12-13, 2008 weekend edition of the Financial Times on page 7.
In an age when Manhattan financiers own helicopters to escape the traffic on their weekend treks to the Hamptons, Paul Volcker embodies the customs of another time. The 80-year old former chairman of the US Federal Reserve astonishes his hosts at New York dinner parties by asking where the nearest subway stop is; and, according to William Neikirk, one of his biographers, when he was running the world's most important central bank Mr Volcker ferried his dirty washing from his modest Washington crash pad to his daughter's home in Virginia to save on laundry costs.
But "Tall Paul", as the shy, cigar-chomping 6ft 7in banker was nicknamed by reporters, represents bygone days in more than the penny-pinching habits of a Depression-era child. Henry Kaufman, legendary Wall Street economist, describes his friend of 50 years as "a classical person. I'm not saying that he studies philosophy, but he has deep feelings about responsibilities". Another friend, hedge fund manager and philanthropist George Soros, calls him "the exemplary public servant - he embodies that old idea of civic virtue".
This reputation, and Mr Volcker's defining achievement as the banker who slayed the double-digit inflation of hte late 1970s, lent a special weight to the speech he delivered this week about the country's economic crisis. "The bright new financial system - for all its talented participants, for all its rich rewards - has failed the test of the marketplace," he told the Economic Club of New York. Despite all the noise of the volatile markets, the world listened.
"He is a towering figure," says Roger Altman, the boutique investment banker who served in the Carter administration when Mr Volcker was at the Fed. "Almost no one can speak with the authority with which he does. That authority comes from his own remarkably successful tenure at the Fed and his own integrity and his reputation for straight talk."
It is the fate of central bankers, even those who left the job more than two decades ago, to have their words parsed for hidden meanings. Some analysts saw his remarks as an attack on Ben Bernanke, the Fed's current chairman. Others contrasted Mr Volcker's critique of the new financial paradigm with the latest comments of his successor, Alan Greenspan, in defence of his own laisser-fair tenure.
Mr Volcker - reputedly not a natural politician - told a person he is close to that these perceived internecine quarrels are a mis-representation of his views. Like a good central banker, he plans to resume a gnomic silence and allow his comments to "sit out there and settle" until their meaning becomes more apparent. Some of what he said, however, is pretty clear already.
He had harsh words for private sector bankers, whose compensation practices were "most invidious of all" in the loosening of the nation's financial discipline: "the mantra of aligning incentives seems to be lost in the failure to impose symmetrical losses - or frequently any loss at all - when failures ensue". He cautioned that "it is the United States as a whole that became addicted to spending and consuming beyond its capacity to produce". Foreign money and homegrown "financial legerdemain" disguised the problem for awhile, but the man who administered the most bitter monetary medicine the country has swallowed since the second world war warned that it is again time for "painful but necessary adjustments."
Perhaps most pointedly, Mr Volcker asked why government-sponsored lenders such as Fannie Mae and Freddie Mac were not doing more to restore confidence in the mortgage market. And he reminded his listeners that the Fed's main job is not to "take many billions of uncertain assets on to its balance sheets", but rather, as "custodian of the nation's money", to "protect its value and resist chronic pressures towards inflation".
For Mr Volcker, delivering bad news is practically a professional calling. Bob Karesh, who was a graduate student at Harvard with Mr Volcker, recalls a 1979 diner they shared after a meeting between Mr Volcker and President Jimmy Carter. The conversation had been a job interview of sorts and Mr Volcker told his old classmate he feared he had flunked it by warning that "the next Fed chairman might really have to tighten up".
Mr Carter appointed him anyway. But while Mr Volcker survived the public's fury at his punishing interest rates and the subsequent recession, the presient did not. Ronald Reagan, elected in part thanks to that dismal economic mood, appointed Mr Volcker to a second term, but then replaced him with the more expansionist Alan Greenspan.
Mr Volcker, who had divided his earlier career between government and the private sector, went back to Wall Street. Even someone as frugal as he was, he told friends, needed to make a little money. Yet before long, he was back to his true love - public service - doing everything from chairing an effort to develop international accounting standards to investigating the UN's troubled Oil for Food programme to helping police the World Bank.
"He has tackled one difficult subject after another," says Gerald Corrigan, former head of the New York Fed.
Mr Volcker's oldest confreres trace his civic commitment to his father, the city manager for their town of Teaneck, New Jersey. "Paul is not an intimate person," says Mr Kaufman, but he is known for his care for his family. All his friends mention his devotion to his late wife Barbara, who suffered debilitating rheumatoid arthritis, and whom Mr Volcker was often seen wheeling along 79th Street, near their Upper East Side home, or to private dinners.
His greatest private pleasure is fly-fishing - Mr Karesh says a whole room in his apartment given over to paraphernalia. Mr Kaufman says his old friend finally decided to initiate him into the sport about 10 years ago. The pair spent two days in the waters of the Beaverkill, New York, yielding just one small fish, which Mr Kaufman landed in the first hour. Yet Mr Kaufman recalls the experience with relish: "It was amazing how patient he was in teaching me."
Pete Peterson, the private equity billionaire, describes his long-time friend as a "lovable curmudgeon". He says Mr Volcker enjoys the fact that his colleagues "are never sure where he is going to come out" on an issue - as with his recent endorsement of Barack Obama's campaign for president. Mr Soros sums up his fellow "old fogey" thus: "He has no great ambition to wealth - he gets a lot of satisfaction from the respect he has earned."
This article appeared in the April 12-13, 2008 weekend edition of the Financial Times on page 7.
In an age when Manhattan financiers own helicopters to escape the traffic on their weekend treks to the Hamptons, Paul Volcker embodies the customs of another time. The 80-year old former chairman of the US Federal Reserve astonishes his hosts at New York dinner parties by asking where the nearest subway stop is; and, according to William Neikirk, one of his biographers, when he was running the world's most important central bank Mr Volcker ferried his dirty washing from his modest Washington crash pad to his daughter's home in Virginia to save on laundry costs.
But "Tall Paul", as the shy, cigar-chomping 6ft 7in banker was nicknamed by reporters, represents bygone days in more than the penny-pinching habits of a Depression-era child. Henry Kaufman, legendary Wall Street economist, describes his friend of 50 years as "a classical person. I'm not saying that he studies philosophy, but he has deep feelings about responsibilities". Another friend, hedge fund manager and philanthropist George Soros, calls him "the exemplary public servant - he embodies that old idea of civic virtue".
This reputation, and Mr Volcker's defining achievement as the banker who slayed the double-digit inflation of hte late 1970s, lent a special weight to the speech he delivered this week about the country's economic crisis. "The bright new financial system - for all its talented participants, for all its rich rewards - has failed the test of the marketplace," he told the Economic Club of New York. Despite all the noise of the volatile markets, the world listened.
"He is a towering figure," says Roger Altman, the boutique investment banker who served in the Carter administration when Mr Volcker was at the Fed. "Almost no one can speak with the authority with which he does. That authority comes from his own remarkably successful tenure at the Fed and his own integrity and his reputation for straight talk."
It is the fate of central bankers, even those who left the job more than two decades ago, to have their words parsed for hidden meanings. Some analysts saw his remarks as an attack on Ben Bernanke, the Fed's current chairman. Others contrasted Mr Volcker's critique of the new financial paradigm with the latest comments of his successor, Alan Greenspan, in defence of his own laisser-fair tenure.
Mr Volcker - reputedly not a natural politician - told a person he is close to that these perceived internecine quarrels are a mis-representation of his views. Like a good central banker, he plans to resume a gnomic silence and allow his comments to "sit out there and settle" until their meaning becomes more apparent. Some of what he said, however, is pretty clear already.
He had harsh words for private sector bankers, whose compensation practices were "most invidious of all" in the loosening of the nation's financial discipline: "the mantra of aligning incentives seems to be lost in the failure to impose symmetrical losses - or frequently any loss at all - when failures ensue". He cautioned that "it is the United States as a whole that became addicted to spending and consuming beyond its capacity to produce". Foreign money and homegrown "financial legerdemain" disguised the problem for awhile, but the man who administered the most bitter monetary medicine the country has swallowed since the second world war warned that it is again time for "painful but necessary adjustments."
Perhaps most pointedly, Mr Volcker asked why government-sponsored lenders such as Fannie Mae and Freddie Mac were not doing more to restore confidence in the mortgage market. And he reminded his listeners that the Fed's main job is not to "take many billions of uncertain assets on to its balance sheets", but rather, as "custodian of the nation's money", to "protect its value and resist chronic pressures towards inflation".
For Mr Volcker, delivering bad news is practically a professional calling. Bob Karesh, who was a graduate student at Harvard with Mr Volcker, recalls a 1979 diner they shared after a meeting between Mr Volcker and President Jimmy Carter. The conversation had been a job interview of sorts and Mr Volcker told his old classmate he feared he had flunked it by warning that "the next Fed chairman might really have to tighten up".
Mr Carter appointed him anyway. But while Mr Volcker survived the public's fury at his punishing interest rates and the subsequent recession, the presient did not. Ronald Reagan, elected in part thanks to that dismal economic mood, appointed Mr Volcker to a second term, but then replaced him with the more expansionist Alan Greenspan.
Mr Volcker, who had divided his earlier career between government and the private sector, went back to Wall Street. Even someone as frugal as he was, he told friends, needed to make a little money. Yet before long, he was back to his true love - public service - doing everything from chairing an effort to develop international accounting standards to investigating the UN's troubled Oil for Food programme to helping police the World Bank.
"He has tackled one difficult subject after another," says Gerald Corrigan, former head of the New York Fed.
Mr Volcker's oldest confreres trace his civic commitment to his father, the city manager for their town of Teaneck, New Jersey. "Paul is not an intimate person," says Mr Kaufman, but he is known for his care for his family. All his friends mention his devotion to his late wife Barbara, who suffered debilitating rheumatoid arthritis, and whom Mr Volcker was often seen wheeling along 79th Street, near their Upper East Side home, or to private dinners.
His greatest private pleasure is fly-fishing - Mr Karesh says a whole room in his apartment given over to paraphernalia. Mr Kaufman says his old friend finally decided to initiate him into the sport about 10 years ago. The pair spent two days in the waters of the Beaverkill, New York, yielding just one small fish, which Mr Kaufman landed in the first hour. Yet Mr Kaufman recalls the experience with relish: "It was amazing how patient he was in teaching me."
Pete Peterson, the private equity billionaire, describes his long-time friend as a "lovable curmudgeon". He says Mr Volcker enjoys the fact that his colleagues "are never sure where he is going to come out" on an issue - as with his recent endorsement of Barack Obama's campaign for president. Mr Soros sums up his fellow "old fogey" thus: "He has no great ambition to wealth - he gets a lot of satisfaction from the respect he has earned."
LTTE: Why are we pawning our offspring's future?
The following letter to the editor appeared in the April 12-13, 2008 weekend edition of the Financial Times on page 6.
Sir, I am living a rather ordinary sort of life. But when I read the April 10 edition of the FT I felt transported to Wonderland. On the first page, I read that the bankers are claiming an epiphany. They will be good boys from now on, holding to higher standards of lending probity and reasonable pay.
Further down the page a headline claimed higher oil prices seemed likely to induce the Federal Reserve to cut rates. No inflation-fighting here. Rather, Ben Bernanke, the Fed chairman, wants to promote more borrowing and spending to keep the decrepit US economy out of the grave. Never mind that it is excess household debt that has helped propel us into today's perilous position.
And, by the way, more debt means less savings, less investment and less economic growth. Does Mr Bernanke think about the effects of all this on his grandchildren? Do we consider what the effect will be on our grandchildren? What kind of society pawns the future of its offspring?
Turning to page two, I read that a panel of banking regulators has endorsed a $300bn-$400bn federal guarantee of refinanced mortgages.
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, considers this will "avoid more dire consequences for all Americans". What dire consequences does she mean? Are they worse than increasing the national debt by more than $300bn? Are the consequences more dire for me who saves in order to weather rainy days such as we are having now courtesy of incompetent regulators who let the credit mess develop under their noses?
- Channing Wagg
Boxborough, MA 01719 US
Sir, I am living a rather ordinary sort of life. But when I read the April 10 edition of the FT I felt transported to Wonderland. On the first page, I read that the bankers are claiming an epiphany. They will be good boys from now on, holding to higher standards of lending probity and reasonable pay.
Further down the page a headline claimed higher oil prices seemed likely to induce the Federal Reserve to cut rates. No inflation-fighting here. Rather, Ben Bernanke, the Fed chairman, wants to promote more borrowing and spending to keep the decrepit US economy out of the grave. Never mind that it is excess household debt that has helped propel us into today's perilous position.
And, by the way, more debt means less savings, less investment and less economic growth. Does Mr Bernanke think about the effects of all this on his grandchildren? Do we consider what the effect will be on our grandchildren? What kind of society pawns the future of its offspring?
Turning to page two, I read that a panel of banking regulators has endorsed a $300bn-$400bn federal guarantee of refinanced mortgages.
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, considers this will "avoid more dire consequences for all Americans". What dire consequences does she mean? Are they worse than increasing the national debt by more than $300bn? Are the consequences more dire for me who saves in order to weather rainy days such as we are having now courtesy of incompetent regulators who let the credit mess develop under their noses?
- Channing Wagg
Boxborough, MA 01719 US
Thursday, April 17, 2008
Financial Times - Iceland interest rates rise to record 15.5%
This article appeared on page 2 of the Friday April 11, 2008 issue of the Financial Times.
By David Ibison
in Stockholm
Iceland has the highest interest rates in Europe after the central bank raised rates by 50 basis points to a record 15.5 per cent yesterday as it storve to restore confidence in its struggling currency and quench fears of a banking crisis.
The move puts the tiny North Atlantic nation above Turkey's rate of 15.25 per cent and comes just two weeks after it imposed an emergency 1.25 percentage point rise to 15 per cent, underscoring the depth of its problems.
On top of the aggressive action taken by the central bank, the authorieis are also considering further moves to ease investors' fears, such as co-ordinated action by Nordic central banks to provide additional liquidity, if needed.
There was disappointment that this proposed action plan was not unveiled yesterday.
"A sluggish reaction will hurt the financial system, financial stability and the authorities' credibility," said Glitnir Research, the research arm of the Icelandic bank, in a report. "Moreover, non-action will also play a large role in the credit rating of Iceland's sovereign debt, which is on negative outlook at all three major rating agencies, Moody's, Fitch and S&P."
But the central bank did make clear it was prepared to bolster Iceland's foreign exchange reserves in the near future.
"A policy rate increase in and of itself does not solve the problems that have developed in the FX swap market," it said. "Increased issuance of risk-free bonds that are accessible to foreign investors should open up other channels for currency inflow."
Confidence in the krona, Iceland's currency, has been damaged this year because of economic imbalances in the economy and fears over the viability of the banking sector. The krona has weakened by some 25 per cent against the euro this year.
The inflation rate was 8.7 per cent in March, well above the government's target of 2.5 per cent, and the central bank said yesterday it expected inflation to peak at 11 per cent by the third quarter of this year, pushing interest rates up further.
"Persistent inflation will be most damaging to indebted businesses and households and can undermine financial stability for the long term," it said. "It is therefore of paramount importance that inflation be brought under control."
Iceland's economic weaknesses have been exacerbated by the deterioration in global financial markets, which have led to a drastic reassessment of risk and undermined confidence in its highly leveraged banks.
On top of these macro-economic pressures, the authorities in Iceland also believe the country's financial markets may have been weakened via a speculative attack by international hedge funds.
By David Ibison
in Stockholm
Iceland has the highest interest rates in Europe after the central bank raised rates by 50 basis points to a record 15.5 per cent yesterday as it storve to restore confidence in its struggling currency and quench fears of a banking crisis.
The move puts the tiny North Atlantic nation above Turkey's rate of 15.25 per cent and comes just two weeks after it imposed an emergency 1.25 percentage point rise to 15 per cent, underscoring the depth of its problems.
On top of the aggressive action taken by the central bank, the authorieis are also considering further moves to ease investors' fears, such as co-ordinated action by Nordic central banks to provide additional liquidity, if needed.
There was disappointment that this proposed action plan was not unveiled yesterday.
"A sluggish reaction will hurt the financial system, financial stability and the authorities' credibility," said Glitnir Research, the research arm of the Icelandic bank, in a report. "Moreover, non-action will also play a large role in the credit rating of Iceland's sovereign debt, which is on negative outlook at all three major rating agencies, Moody's, Fitch and S&P."
But the central bank did make clear it was prepared to bolster Iceland's foreign exchange reserves in the near future.
"A policy rate increase in and of itself does not solve the problems that have developed in the FX swap market," it said. "Increased issuance of risk-free bonds that are accessible to foreign investors should open up other channels for currency inflow."
Confidence in the krona, Iceland's currency, has been damaged this year because of economic imbalances in the economy and fears over the viability of the banking sector. The krona has weakened by some 25 per cent against the euro this year.
The inflation rate was 8.7 per cent in March, well above the government's target of 2.5 per cent, and the central bank said yesterday it expected inflation to peak at 11 per cent by the third quarter of this year, pushing interest rates up further.
"Persistent inflation will be most damaging to indebted businesses and households and can undermine financial stability for the long term," it said. "It is therefore of paramount importance that inflation be brought under control."
Iceland's economic weaknesses have been exacerbated by the deterioration in global financial markets, which have led to a drastic reassessment of risk and undermined confidence in its highly leveraged banks.
On top of these macro-economic pressures, the authorities in Iceland also believe the country's financial markets may have been weakened via a speculative attack by international hedge funds.
Tuesday, April 15, 2008
Happy Tax Day
Happy Tax Day everybody! Once again, the Federal government will collect more revenue than it knows what to do with, but not enough to make up for frivolous spending.
As of yesterday (per TreasuryDirect), the public portion of debt stands at: $5,349,210,909,674.63
Intragovernmental holdings are: $4,095,188,999,068.57
Giving us a Tax Day 2008 bill of: $9,444,399,908,743.20
Good luck in making it through the next year financially.
As of yesterday (per TreasuryDirect), the public portion of debt stands at: $5,349,210,909,674.63
Intragovernmental holdings are: $4,095,188,999,068.57
Giving us a Tax Day 2008 bill of: $9,444,399,908,743.20
Good luck in making it through the next year financially.
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