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."
Friday, April 18, 2008
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.
Friday, April 11, 2008
WSJ: The Tax Me More Act
From the Friday April 11, 2008 Wall Street Journal opinion page (A16).
We recently suggested that if Bill and Hillary Clinton are eager to pay more taxes, they should write a personal check to the U.S. Treasury to compensate for the lower tax rates they so frequently decry. And lo, here comes legislation to make it easier for the former first lady and other pseudo-populists to do just that.
California Republican John Campbell yesterday introduced in the House his "Put Your Money Where Your Mouth Is Act," which would amend the tax code to allow individuals to make voluntary donations to the federal government above their normal tax liability. The bill would place a new line on IRS tax forms to make this easy.
Mr. Campbell says he has heard the "cries" of those wealthy Americans - Mrs. Clinton, Warren Buffett, Barbra Streisand- who reject the lower tax rates passed in 2001 and 2003 and complain that they and their fellow rich don't pay enough. "It's a great injustice that citizens wishing to fulfill their dream of paying more taxes cannot simply check a box on their 1040 form to make a donation," he says. His bill would give liberals a chance to salve their consciences without having to raise taxes on millions of Americans who already feel overtaxed as it is.
Still, don't expect many to take Mr. Campbell up on his offer. The Treasury already accepts voluntary donations to decrease the nation's debt; last year it received all of $2.6 million. Apparently even most liberals would rather keep their money, or bequeath their estates to charity rather than to the IRS.
We recently suggested that if Bill and Hillary Clinton are eager to pay more taxes, they should write a personal check to the U.S. Treasury to compensate for the lower tax rates they so frequently decry. And lo, here comes legislation to make it easier for the former first lady and other pseudo-populists to do just that.
California Republican John Campbell yesterday introduced in the House his "Put Your Money Where Your Mouth Is Act," which would amend the tax code to allow individuals to make voluntary donations to the federal government above their normal tax liability. The bill would place a new line on IRS tax forms to make this easy.
Mr. Campbell says he has heard the "cries" of those wealthy Americans - Mrs. Clinton, Warren Buffett, Barbra Streisand- who reject the lower tax rates passed in 2001 and 2003 and complain that they and their fellow rich don't pay enough. "It's a great injustice that citizens wishing to fulfill their dream of paying more taxes cannot simply check a box on their 1040 form to make a donation," he says. His bill would give liberals a chance to salve their consciences without having to raise taxes on millions of Americans who already feel overtaxed as it is.
Still, don't expect many to take Mr. Campbell up on his offer. The Treasury already accepts voluntary donations to decrease the nation's debt; last year it received all of $2.6 million. Apparently even most liberals would rather keep their money, or bequeath their estates to charity rather than to the IRS.
WSJ: U.S. Deficit Hits Record As Corporate Profits Fall
From the Friday April 11, 2008 issue of the Wall Street Journal (page A12)
By Michael M. Phillips
The foreclosure crisis and the turmoil on Wall Street appear to be putting a squeeze on the federal budget, leaving record deficits in their wake as corporate-income-tax revenues fall.
The Treasury Department reported Thursday that receipts from corporate income taxes fell 16% to $129 billion in the first half of fiscal 2008, which began Oct. 1. The federal deficit during the period hit an all-time high of $311 billion, and was up 20% from a year earlier.
"Corporate tax revenues are declining significantly," Peter Orszag, head of the nonpartisan Congressional Budget Office, said in an interview. "We're experiencing a period in which corporate tax revenues grew extremely rapidly for several years, and now that's being reversed to some degree."
While government data don't identify revenue sources by industry, analysts looking at corporate profitibability say that the biggest revenue declines probably are due to the setbacks to banks, investment banks and other financial institutions arising from the collapse of the subprime-mortgage market.
"It's partly an economic slowdown, but it's much more focused than that," said J.D. Foster, a former chief economist at the White House Office of Management and Budget and now a senior fellow at the conserative Heritage Foundation. "In recent years we have gotten an inordinate proportion of our corporate tax receipts from the financial sector. And who's getting hammered [now]?"
The wave of home-loan defaults sweeping the nation has sent shocks through banks and Wall Street firms that invested heavily in risky securities backed by those mortgages. The International Monetary Fund forecast this week that, over two years, the crisis will saddle financial institutions world-wide with $945 billion in losses.
In part because of rising revenues from taxes on individuals' incomes, federal receipts overall hit a record in the first half of the fiscal year, reaching $1.15 trillion, an increase of 2% from a year earlier. Individual-income-tax receipts accounted for $504 billion, up from $479 billion in the first half of fiscal 2007. The periods ended before the height of the tax-filing season in early April.
Nonetheless, the reduction in corporate tax revenues combined with a 6% jump in federal spending to $1.46 trillion to create the record budget shortfall.
By Michael M. Phillips
The foreclosure crisis and the turmoil on Wall Street appear to be putting a squeeze on the federal budget, leaving record deficits in their wake as corporate-income-tax revenues fall.
The Treasury Department reported Thursday that receipts from corporate income taxes fell 16% to $129 billion in the first half of fiscal 2008, which began Oct. 1. The federal deficit during the period hit an all-time high of $311 billion, and was up 20% from a year earlier.
"Corporate tax revenues are declining significantly," Peter Orszag, head of the nonpartisan Congressional Budget Office, said in an interview. "We're experiencing a period in which corporate tax revenues grew extremely rapidly for several years, and now that's being reversed to some degree."
While government data don't identify revenue sources by industry, analysts looking at corporate profitibability say that the biggest revenue declines probably are due to the setbacks to banks, investment banks and other financial institutions arising from the collapse of the subprime-mortgage market.
"It's partly an economic slowdown, but it's much more focused than that," said J.D. Foster, a former chief economist at the White House Office of Management and Budget and now a senior fellow at the conserative Heritage Foundation. "In recent years we have gotten an inordinate proportion of our corporate tax receipts from the financial sector. And who's getting hammered [now]?"
The wave of home-loan defaults sweeping the nation has sent shocks through banks and Wall Street firms that invested heavily in risky securities backed by those mortgages. The International Monetary Fund forecast this week that, over two years, the crisis will saddle financial institutions world-wide with $945 billion in losses.
In part because of rising revenues from taxes on individuals' incomes, federal receipts overall hit a record in the first half of the fiscal year, reaching $1.15 trillion, an increase of 2% from a year earlier. Individual-income-tax receipts accounted for $504 billion, up from $479 billion in the first half of fiscal 2007. The periods ended before the height of the tax-filing season in early April.
Nonetheless, the reduction in corporate tax revenues combined with a 6% jump in federal spending to $1.46 trillion to create the record budget shortfall.
Monday, April 7, 2008
Monthly National Debt Statement for March 2008
The newest figures are available at www.TreasuryDirect.gov for the month of March 2008.
As for April 4, 2008, the national debt is: $9,438,509,689,837.02
Public component: $5,346,703,634,865.43
Intragovernmental: $4,091,806,054,971.59
Interest payments:
March 2008 - $23,023,540,357.53
Fiscal Year- $221,541,307,516.69
Public Contributions:
February 2008 - $359,697.45
FY 2008-to-date - $887,459.53
There are six months remaining in Fiscal Year 2008.
With April 15 coming, "Happy Tax Season"
As for April 4, 2008, the national debt is: $9,438,509,689,837.02
Public component: $5,346,703,634,865.43
Intragovernmental: $4,091,806,054,971.59
Interest payments:
March 2008 - $23,023,540,357.53
Fiscal Year- $221,541,307,516.69
Public Contributions:
February 2008 - $359,697.45
FY 2008-to-date - $887,459.53
There are six months remaining in Fiscal Year 2008.
With April 15 coming, "Happy Tax Season"
Friday, March 28, 2008
Reuters: U.S. Seeks enhanced financial authority for Fed
By John Poirier and Glenn Somerville
(Reuters) The U.S. Treasury Department will propose on Monday that the Federal Reserve be given sweeping new powers that would make it chief regulator with authority to take actions to ensure market stability.
An executive summary of the proposals published by the New York Times, which Treasury Secretary Henry Paulson will make public on Monday when he unveils a blueprint for regulatory overhaul, says it is vital to fix "regulatory gaps and redundancies" exposed by an ongoing subprime mortgage crisis.
Lax regulation has been widely blamed for permitting a flood of inadequately documented loans to be made during the boom years of a U.S. housing market that has since soured and now threatens to drag the economy into a deep recession.
The proposals say a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfill its functions.
It proposes that the Fed be given broad authority to require information from all participants in financial markets and a right to collaborate with other regulators in writing the rules that companies and institutions must follow.
NEW FED POWERS
If the Fed finds that the actions of some market participants pose risks for the overall financial system or the economy, "the Federal Reserve should have authority to require corrective action to address current risks or to constrain future risk-taking," the summary said.
Among other recommendations, Treasury suggests merging the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission that oversees the activities of the futures market.
It also recommends getting rid of a Depression-era charter for thrifts that was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing up the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency that oversees national banks.
Treasury officials refused on Friday to reveal details of the proposals but numerous trade groups had been invited to a speech by Paulson on Monday at Treasury and speculation quickly swelled that its long-awaited prescription for streamlining regulation was at hand.
Treasury said it has been working on its proposals since March last year, well before calls for an overhaul began to intensify in the wake of the subprime mortgage crisis that began to wreak havoc last summer on financial markets.
Paulson had signaled some of the direction the proposals would take earlier this week when he said that since the Fed had taken the exceptional step of permitting investment banks access to its discount window for loans -- the first time it has done so for any financial entities besides commercial banks since the 1930s -- it should have some authority over the investment banks.
ACCESS BRINGS RULES
"Certainly any regular access to the discount window should involve the same type of regulation and supervision," he said in a speech to the U.S. Chamber of Commerce.
Another proposal would provide an option for insurance companies to obtain a charter to do business under federal regulation, though it says the current state-based system would continue for any that did not get a federal charter.
Most of the financial services industry in the United States is regulated by federal authorities except insurance, which the states supervise. For years, big insurance companies, however, have been calling for an optional federal charter.
The chairman of the House Financial Services Committee, Democratic Rep. Barney Frank, last week said Congress should seriously consider giving a federal agency the power to monitor all risk in the financial system and act when necessary, regardless of its corporate form.
Frank suggested one possibility would be to empower the fed as "Financial Services Risk Regulator," an idea that Treasury's proposals appear to broadly embrace.
Many analysts and some Treasury officials have said they don't expect recommendations made during the current administration to become law but hope it will be used a springboard for the next resident of the White House.
(Reporting by John Poirier and Glenn Somerville; Editing by Louise Heavens)
(Reuters) The U.S. Treasury Department will propose on Monday that the Federal Reserve be given sweeping new powers that would make it chief regulator with authority to take actions to ensure market stability.
An executive summary of the proposals published by the New York Times, which Treasury Secretary Henry Paulson will make public on Monday when he unveils a blueprint for regulatory overhaul, says it is vital to fix "regulatory gaps and redundancies" exposed by an ongoing subprime mortgage crisis.
Lax regulation has been widely blamed for permitting a flood of inadequately documented loans to be made during the boom years of a U.S. housing market that has since soured and now threatens to drag the economy into a deep recession.
The proposals say a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfill its functions.
It proposes that the Fed be given broad authority to require information from all participants in financial markets and a right to collaborate with other regulators in writing the rules that companies and institutions must follow.
NEW FED POWERS
If the Fed finds that the actions of some market participants pose risks for the overall financial system or the economy, "the Federal Reserve should have authority to require corrective action to address current risks or to constrain future risk-taking," the summary said.
Among other recommendations, Treasury suggests merging the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission that oversees the activities of the futures market.
It also recommends getting rid of a Depression-era charter for thrifts that was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing up the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency that oversees national banks.
Treasury officials refused on Friday to reveal details of the proposals but numerous trade groups had been invited to a speech by Paulson on Monday at Treasury and speculation quickly swelled that its long-awaited prescription for streamlining regulation was at hand.
Treasury said it has been working on its proposals since March last year, well before calls for an overhaul began to intensify in the wake of the subprime mortgage crisis that began to wreak havoc last summer on financial markets.
Paulson had signaled some of the direction the proposals would take earlier this week when he said that since the Fed had taken the exceptional step of permitting investment banks access to its discount window for loans -- the first time it has done so for any financial entities besides commercial banks since the 1930s -- it should have some authority over the investment banks.
ACCESS BRINGS RULES
"Certainly any regular access to the discount window should involve the same type of regulation and supervision," he said in a speech to the U.S. Chamber of Commerce.
Another proposal would provide an option for insurance companies to obtain a charter to do business under federal regulation, though it says the current state-based system would continue for any that did not get a federal charter.
Most of the financial services industry in the United States is regulated by federal authorities except insurance, which the states supervise. For years, big insurance companies, however, have been calling for an optional federal charter.
The chairman of the House Financial Services Committee, Democratic Rep. Barney Frank, last week said Congress should seriously consider giving a federal agency the power to monitor all risk in the financial system and act when necessary, regardless of its corporate form.
Frank suggested one possibility would be to empower the fed as "Financial Services Risk Regulator," an idea that Treasury's proposals appear to broadly embrace.
Many analysts and some Treasury officials have said they don't expect recommendations made during the current administration to become law but hope it will be used a springboard for the next resident of the White House.
(Reporting by John Poirier and Glenn Somerville; Editing by Louise Heavens)
Monday, March 24, 2008
WSJ: In Debt Crisis, Uncle Sam Is Piling It On
From the 3/24/2008 issue of the Wall Street Journal comes this story written by Mark Gongloff.
While everybody else is running headlong from the burning building of debt, Uncle Sam looks like he is rushing in the other direction.
As the credit crisis deepens, there's every reason to expect old-fashioned Keynesianism to become de rigueur, with the government blowing out the budget to make the downturn less painful.
It started with the recently passed $152 billion stimulus package, and it probably doesn't end there. The government is also building massive backstops for the financial system and the housing market, agreeing to hold or guarantee trillions of dollars in mortgage and other private loans through the Federal Reserve, and, less directly, through federal home loan banks, Fannie Mae and Freddie Mac.
The next steps could be more stimulus, direct bank bailouts and government purchases of mortgage securities, easily dwarfing the $125 billion or so the government spent to fix the savings and loan debacle. The alternative could be a far more devastating economic downturn now.
Is the government in any position to take on this burden? At the moment, the federal budget seems to have wiggle room. The deficit shrank last year to 1.2% of gross domestic product, the lowest since the budget was in surplus in 2001. And the Congressional Budget Office projects surpluses will reappear in 2012.
But the CBO estimates aren't very realistic. They don't take into account the stimulus package, spending on wars in Iraq and Afghanistan wars (sic) or patches for the alternative minimum tax. Nor do they account for an economic slowdown that is already having an impact on federal tax receipts. Both corporate and personal non-withheld receipts turned negative on a year-over-year basis in the fourth quarter, according to Goldman Sachs analysts, who estimate the deficit will jump to 3% of GDP this year and in 2009 - double the CBO's forecast.
Meanwhile, presidential candidates of both parties are making promises that will cost trillions of dollars more if they keep them, either in expanded health-care coverage or making the 2001 and 2003 tax cuts permanent. More ominously, all of this comes as millions of baby boomers are on the threshold of retirement, which will lead to an explosion of Medicare and Social Security spending in the years ahead.
In theory, deficits push interest rates higher as government debt competes with private debt for investors' attention. A 2003 Fed study estimated that every time the budget deficit rises by one percentage point of gross domestic product, it adds one quarter of a percentage point to what long-term rates would otherwise be.
The budget has been in deficit for most of the past two decades with little noticeable impact on borrowing costs. This is largely because foreign investors, mainly central banks, have been happy to finance the profligate spending of U.S. consumers, lawmakers and presidents by snatching up Treasury bonds, keeping the rates low.
As long as they're willing to keep buying U.S. assets, this happy symbiosis can last. At some point, they might start to worry about America's ability to pay its growing debts.
Then Uncle Sam will ahve to start deleveraging, too.
Email mark.gongloff@wsj.com
While everybody else is running headlong from the burning building of debt, Uncle Sam looks like he is rushing in the other direction.
As the credit crisis deepens, there's every reason to expect old-fashioned Keynesianism to become de rigueur, with the government blowing out the budget to make the downturn less painful.
It started with the recently passed $152 billion stimulus package, and it probably doesn't end there. The government is also building massive backstops for the financial system and the housing market, agreeing to hold or guarantee trillions of dollars in mortgage and other private loans through the Federal Reserve, and, less directly, through federal home loan banks, Fannie Mae and Freddie Mac.
The next steps could be more stimulus, direct bank bailouts and government purchases of mortgage securities, easily dwarfing the $125 billion or so the government spent to fix the savings and loan debacle. The alternative could be a far more devastating economic downturn now.
Is the government in any position to take on this burden? At the moment, the federal budget seems to have wiggle room. The deficit shrank last year to 1.2% of gross domestic product, the lowest since the budget was in surplus in 2001. And the Congressional Budget Office projects surpluses will reappear in 2012.
But the CBO estimates aren't very realistic. They don't take into account the stimulus package, spending on wars in Iraq and Afghanistan wars (sic) or patches for the alternative minimum tax. Nor do they account for an economic slowdown that is already having an impact on federal tax receipts. Both corporate and personal non-withheld receipts turned negative on a year-over-year basis in the fourth quarter, according to Goldman Sachs analysts, who estimate the deficit will jump to 3% of GDP this year and in 2009 - double the CBO's forecast.
Meanwhile, presidential candidates of both parties are making promises that will cost trillions of dollars more if they keep them, either in expanded health-care coverage or making the 2001 and 2003 tax cuts permanent. More ominously, all of this comes as millions of baby boomers are on the threshold of retirement, which will lead to an explosion of Medicare and Social Security spending in the years ahead.
In theory, deficits push interest rates higher as government debt competes with private debt for investors' attention. A 2003 Fed study estimated that every time the budget deficit rises by one percentage point of gross domestic product, it adds one quarter of a percentage point to what long-term rates would otherwise be.
The budget has been in deficit for most of the past two decades with little noticeable impact on borrowing costs. This is largely because foreign investors, mainly central banks, have been happy to finance the profligate spending of U.S. consumers, lawmakers and presidents by snatching up Treasury bonds, keeping the rates low.
As long as they're willing to keep buying U.S. assets, this happy symbiosis can last. At some point, they might start to worry about America's ability to pay its growing debts.
Then Uncle Sam will ahve to start deleveraging, too.
Email mark.gongloff@wsj.com
Saturday, March 22, 2008
IRS Publication - Gift To Reduce Debt Held by the Public
Good information if you want to help reduce the National Debt. Gifts to Reduce the Debt Held by the Public ARE tax deductible. A contribution in 2008 will be tax deductible in 2009. See instructions below:
From IRS Publication 17 (2007 Tax Year)
Gift To Reduce Debt Held by the Public
You can make a contribution (gift) to reduce debt held by the public. If you wish to do so, make a separate check payable to “Bureau of the Public Debt.” Send your check to:
Bureau of the Public Debt
Department G
P.O. Box 2188
Parkersburg, WV 26106-2188.
Or, enclose your separate check in the envelope with your income tax return. Do not add this gift to any tax you owe.
You can deduct this gift as a charitable contribution on next year's tax return if you itemize your deductions on Schedule A (Form 1040).
From IRS Publication 17 (2007 Tax Year)
Gift To Reduce Debt Held by the Public
You can make a contribution (gift) to reduce debt held by the public. If you wish to do so, make a separate check payable to “Bureau of the Public Debt.” Send your check to:
Bureau of the Public Debt
Department G
P.O. Box 2188
Parkersburg, WV 26106-2188.
Or, enclose your separate check in the envelope with your income tax return. Do not add this gift to any tax you owe.
You can deduct this gift as a charitable contribution on next year's tax return if you itemize your deductions on Schedule A (Form 1040).
AP: Treasury cuts minimum bill from $1,000 to $100
The following appeared on page 2C of the March 22, 2008 edition of the St. Paul Pioneer Press.
The Treasury Department deals in millions and billions and even trillions of dollars, but it can think small, too.
Officials announced Friday that starting next month, individuals will be able to buy Treasury securities in amounts as small as $100, down from the current minimum of $1,000.
The chane will take effect for the weekly auction of three-month and six-month Treasury bills that will be held on April 7.
The Treasury Department said the reduction in minimum bid amounts is being made possible by an improved processing system for government debt auctions. The hoe is that the reduction will attract smaller investors.
"U.S. Treasury securities, the world's safest, most liquid investments, should be accessible to the broadest universe of investors - large and small," said Anthony Ryan, assistant Treasury secretary for financial markets. "Being able to buy securities in $100 increments adds a new degree of flexibility for all market participants."
The reduction in the minimum sales amount is the first to occur since 1998, when the pruchase amount was cut to $1,000. Prior to that time, the minimum purcashe amount had been $10,000 for Treasury bills, which are securities with a maturity of one year or less, and $5,000 for Treasury notes witha maturity of up to four years.
Individuals can purchase Treasury securities directly from the Treasury Department by going to treasurydirect.gov to open an online account. - Associated Press
The Treasury Department deals in millions and billions and even trillions of dollars, but it can think small, too.
Officials announced Friday that starting next month, individuals will be able to buy Treasury securities in amounts as small as $100, down from the current minimum of $1,000.
The chane will take effect for the weekly auction of three-month and six-month Treasury bills that will be held on April 7.
The Treasury Department said the reduction in minimum bid amounts is being made possible by an improved processing system for government debt auctions. The hoe is that the reduction will attract smaller investors.
"U.S. Treasury securities, the world's safest, most liquid investments, should be accessible to the broadest universe of investors - large and small," said Anthony Ryan, assistant Treasury secretary for financial markets. "Being able to buy securities in $100 increments adds a new degree of flexibility for all market participants."
The reduction in the minimum sales amount is the first to occur since 1998, when the pruchase amount was cut to $1,000. Prior to that time, the minimum purcashe amount had been $10,000 for Treasury bills, which are securities with a maturity of one year or less, and $5,000 for Treasury notes witha maturity of up to four years.
Individuals can purchase Treasury securities directly from the Treasury Department by going to treasurydirect.gov to open an online account. - Associated Press
Thursday, March 6, 2008
Newest National Debt Statistics posted - Feb 08
The newest Monthly Statement of the Public Debt is now available at www.treasurydirect.gov
As of March 5, 2008, the National Debt is as follows:
Held by Public: $5,288,773,781,817.85
Intragovernmental Holdings: $4,091,652,694,295.38
Total size as of 3/5/08: $9,380,426,476,113.23
Interest payment - February 2008: $20,037,492,573.51
Interest payment - Fiscal Year: $198,517,767,159.16
The Fiscal Year payments reflect interest payments made as of October 2007.
Gifts to reduce the public debt: Jan 08 - $197,155.19
Gifts to reduce the public debt: FY 2008- $527,772.08
Gifts to reduce the public debt: FY07 $2,624,862.42
As of March 5, 2008, the National Debt is as follows:
Held by Public: $5,288,773,781,817.85
Intragovernmental Holdings: $4,091,652,694,295.38
Total size as of 3/5/08: $9,380,426,476,113.23
Interest payment - February 2008: $20,037,492,573.51
Interest payment - Fiscal Year: $198,517,767,159.16
The Fiscal Year payments reflect interest payments made as of October 2007.
Gifts to reduce the public debt: Jan 08 - $197,155.19
Gifts to reduce the public debt: FY 2008- $527,772.08
Gifts to reduce the public debt: FY07 $2,624,862.42
Friday, February 29, 2008
Democrat's Bill Sets Up Credit-Card Showdown
by Damian Paletta
Wall Street Journal
Thursday February 7, 2008 Pg D3
Democrats in Congress are pushing for new restrictions on credit-card companies in what could become a hot election-year issue.
Credit cards are a big concern in Washington because constituents often complain to lawmakers about confusing credit-card terms. The amount of credit-card debt is rising as the economy worsens, which will likely increase the volume of complaints.
The banking industry, for its part, is warning that legislative interference could make it even harder for consumers to access credit amid an overall tightening of credit markets.
Rep. Carolyn Maloney (D., N.Y.) could introduce a bill as soon as today that would require card companies to notify customers at least 45 days before increasing rates and prohibit companies from "arbitrarily" changing contract terms. It would require companies to mail credit-card tatements at least 25 days before payments are due, giving customers more room to avoid late fees.
"One of the things consumers are very disturbed about it when they have a contract on a card and their rates go up and the terms change," said Rep. Maloney, who chairs the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.
Her bill has the backing of House Financial Services Committee Chairman Barney Frank (D., Mass.), and several senators also have vowed to take up the matter. The push would broaden the Democrats' consumer-protection agenda beyond the mortgage industry, where much of their energy was focused last year.
A 2006 U.S. Government Accountability Office study said there were nearly 700 million outstanding credit cards, with U.S. consumers charging $1.8 trillion on their cards in 2005.
The banking industry is already girding for a fight over possible legislation. "It impacts our ability to price our products, manage risk, and ultimately our ability to offer low-rate competitive products for consumers," said Kenneth Clayton, managing director of the American Bankers Association's Card Policy Council.
Rep. Maloney said the banking industry is exaggerating her bill's impact. "What the bill fosters is fair competition and the values of a free market," she said. "It includes no price controls, no rate caps, no fee setting, and it doesn't dictate any business models to companies."
Last year, Democrats tried to persuade bank regulators into doing more to curb credit-card industry practices, and Rep. Maloney has been working on the legislation for close to a year. Separately, the Federal Reserve has been working on new policies that would attempt to improve the disclosures card companies are required to give customers.
Borrowing from cards and other unsecured lines of credit rose an annualized 11.3% in November to $937.5 billion, according to the Fed.
Wall Street Journal
Thursday February 7, 2008 Pg D3
Democrats in Congress are pushing for new restrictions on credit-card companies in what could become a hot election-year issue.
Credit cards are a big concern in Washington because constituents often complain to lawmakers about confusing credit-card terms. The amount of credit-card debt is rising as the economy worsens, which will likely increase the volume of complaints.
The banking industry, for its part, is warning that legislative interference could make it even harder for consumers to access credit amid an overall tightening of credit markets.
Rep. Carolyn Maloney (D., N.Y.) could introduce a bill as soon as today that would require card companies to notify customers at least 45 days before increasing rates and prohibit companies from "arbitrarily" changing contract terms. It would require companies to mail credit-card tatements at least 25 days before payments are due, giving customers more room to avoid late fees.
"One of the things consumers are very disturbed about it when they have a contract on a card and their rates go up and the terms change," said Rep. Maloney, who chairs the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.
Her bill has the backing of House Financial Services Committee Chairman Barney Frank (D., Mass.), and several senators also have vowed to take up the matter. The push would broaden the Democrats' consumer-protection agenda beyond the mortgage industry, where much of their energy was focused last year.
A 2006 U.S. Government Accountability Office study said there were nearly 700 million outstanding credit cards, with U.S. consumers charging $1.8 trillion on their cards in 2005.
The banking industry is already girding for a fight over possible legislation. "It impacts our ability to price our products, manage risk, and ultimately our ability to offer low-rate competitive products for consumers," said Kenneth Clayton, managing director of the American Bankers Association's Card Policy Council.
Rep. Maloney said the banking industry is exaggerating her bill's impact. "What the bill fosters is fair competition and the values of a free market," she said. "It includes no price controls, no rate caps, no fee setting, and it doesn't dictate any business models to companies."
Last year, Democrats tried to persuade bank regulators into doing more to curb credit-card industry practices, and Rep. Maloney has been working on the legislation for close to a year. Separately, the Federal Reserve has been working on new policies that would attempt to improve the disclosures card companies are required to give customers.
Borrowing from cards and other unsecured lines of credit rose an annualized 11.3% in November to $937.5 billion, according to the Fed.
Homes in foreclosure soar 79% in '07
St. Paul Pioneer Press
Wednesday January 30, 2008 Pg 2C
The number of U.S. homes that slipped into some stage of foreclosure in 2007 was 79 percent higher than in the previous year, a real estate tracking company said Tuesday. Many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year. About 1.3 million homes received foreclosure-related warnings last year, up from 717,522 in 2006, Irvine, Calif.-based RealtyTrac Inc. said. Foreclosure filings rose 75 percent from the previous year to 2.2 million. More than 1 percent of all U.S. households were in some phase of the foreclosure process last year, up from about half a percent in 2006, RealtyTrac said. Nevada, Florida, Michigan and California posted the highest foreclosure rates, the company said.
Wednesday January 30, 2008 Pg 2C
The number of U.S. homes that slipped into some stage of foreclosure in 2007 was 79 percent higher than in the previous year, a real estate tracking company said Tuesday. Many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year. About 1.3 million homes received foreclosure-related warnings last year, up from 717,522 in 2006, Irvine, Calif.-based RealtyTrac Inc. said. Foreclosure filings rose 75 percent from the previous year to 2.2 million. More than 1 percent of all U.S. households were in some phase of the foreclosure process last year, up from about half a percent in 2006, RealtyTrac said. Nevada, Florida, Michigan and California posted the highest foreclosure rates, the company said.
Those Pell Vouchers
Wall Street Journal
Wednesday January 30, 2008 Pg A16
If unrestricted federal education grants are kosher for college students, why not for grades K-12 too? That's the question President Bush is asking with his cheeky proposal Monday to create Pell Grants for Kids, a program to offer $300 million in scholarships that low-income students could use to attend the school of their choice.
Pell grants for college are among the most popular ways to spend money in Washington. Over the past seven years, Members from both sides of the aisle have lined up to expand the number and size of these grants that students can use to attend the college or university of their choice, public or private. Last year, 5.3 million students received a total of $14 billion in Pell grants, up from 4.3 million students receiving $8.8 billion at the start of the Bush Presidency. However, what no one wants to admit is that Pell grants are essentially "vouchers," with the decision about where to spend the money in the hands of parents and students.
Mr. Bush's proposal would give Pell grants to students stuck in public secondary and elementary schools that have failed to meet federal testing benchmarks for five years running or that suffer high drop out rates. The bulk of that money would go to inner-city students who otherwise have little chance of going to college or even finishing high school. In the same way, the D.C. Opportunity Scholarship program has given 2,600 of the poorest students in Washington a better chance at a good education.
Neither of these programs is getting anywhere in the current Congress, however, and the new Pell grant proposal was immediately denounced by Democrats. The reason, as ever, is because K-12 education is dominated by a union monopoly that can't abide parental choice. Lucky for students the same unions don't yet run American universities.
Wednesday January 30, 2008 Pg A16
If unrestricted federal education grants are kosher for college students, why not for grades K-12 too? That's the question President Bush is asking with his cheeky proposal Monday to create Pell Grants for Kids, a program to offer $300 million in scholarships that low-income students could use to attend the school of their choice.
Pell grants for college are among the most popular ways to spend money in Washington. Over the past seven years, Members from both sides of the aisle have lined up to expand the number and size of these grants that students can use to attend the college or university of their choice, public or private. Last year, 5.3 million students received a total of $14 billion in Pell grants, up from 4.3 million students receiving $8.8 billion at the start of the Bush Presidency. However, what no one wants to admit is that Pell grants are essentially "vouchers," with the decision about where to spend the money in the hands of parents and students.
Mr. Bush's proposal would give Pell grants to students stuck in public secondary and elementary schools that have failed to meet federal testing benchmarks for five years running or that suffer high drop out rates. The bulk of that money would go to inner-city students who otherwise have little chance of going to college or even finishing high school. In the same way, the D.C. Opportunity Scholarship program has given 2,600 of the poorest students in Washington a better chance at a good education.
Neither of these programs is getting anywhere in the current Congress, however, and the new Pell grant proposal was immediately denounced by Democrats. The reason, as ever, is because K-12 education is dominated by a union monopoly that can't abide parental choice. Lucky for students the same unions don't yet run American universities.
US state finances
Financial Times
Thursday January 29, 2008 Pg 14
The most painful time to tighten your belt is just after gorging. US state and local government expenditure - 12 percent of gross domestic product - expanded by almost 8 per cent in the third quarter of 2007, year-on-year. Now governors across the country are proposing big budget cuts. New York City lasat week said it would cut spending on a range of services, from schools to sanitation, to offset slowing tax revenues - partly because of Wall Street's woes.
It is not merely the prospect of a recession that is forcing a rethink on spending, but the nature of the potential slowdown. State and local taxes, excluding transfers, split about 60-40 in favour of states. Typically state coffers are filled by taxes on sales, personal income and corporate profits. Local taxation, meanwhile, is overwhelmingly based on property - 72 per cent of total revenues, according to Moody's.
In 2001, the primary impact of the slowdown was on personal income tax. However, consumers kept spending and house prices kept climbing, underpinning sales and property taxes. The threat this time is spread further across the tax base, primarily because of the housing downturn - California, Florida and New York are among the largest states facing deficits. Although local officials may not be in such a rush to reassess home values now that they are falling, the secondary effects on sales and income taxes would bite earlier.
Moody's believes that states are better prepared this time round. However, the uncertain environment means local officials may have to react quickly - and with unpopular measures - if big gaps open up on their ledgers. It is worth remembering that state and local spending has increased by about $100bn a year over the past three years. If expenditure now stays flat, that will dampen a signficant portion of the $150bn federal stimulus package now being finalised in Washington.
Thursday January 29, 2008 Pg 14
The most painful time to tighten your belt is just after gorging. US state and local government expenditure - 12 percent of gross domestic product - expanded by almost 8 per cent in the third quarter of 2007, year-on-year. Now governors across the country are proposing big budget cuts. New York City lasat week said it would cut spending on a range of services, from schools to sanitation, to offset slowing tax revenues - partly because of Wall Street's woes.
It is not merely the prospect of a recession that is forcing a rethink on spending, but the nature of the potential slowdown. State and local taxes, excluding transfers, split about 60-40 in favour of states. Typically state coffers are filled by taxes on sales, personal income and corporate profits. Local taxation, meanwhile, is overwhelmingly based on property - 72 per cent of total revenues, according to Moody's.
In 2001, the primary impact of the slowdown was on personal income tax. However, consumers kept spending and house prices kept climbing, underpinning sales and property taxes. The threat this time is spread further across the tax base, primarily because of the housing downturn - California, Florida and New York are among the largest states facing deficits. Although local officials may not be in such a rush to reassess home values now that they are falling, the secondary effects on sales and income taxes would bite earlier.
Moody's believes that states are better prepared this time round. However, the uncertain environment means local officials may have to react quickly - and with unpopular measures - if big gaps open up on their ledgers. It is worth remembering that state and local spending has increased by about $100bn a year over the past three years. If expenditure now stays flat, that will dampen a signficant portion of the $150bn federal stimulus package now being finalised in Washington.
Stimulus package seen worth the extra red ink
by Martin Crutsinger
Associated Press
St. Paul Pioneer Press
Tuesday January 29, 2008 Pg 3C
A proposed economic stimulus plan could boost this year's deficit by $100 billion, but political leaders believe the flood of red ink is worth the cost if it keeps the country from falling into a prolonged recession.
Worries that any recession could be a severe one, far surpassing the last two mild, brief downturns in 1990-91 and 2001, have captured the attention of President Bush and other politicans, especially with the White House up for grabs.
Bush and House leaders reached a deal in record time lsat week that would provide $150 billion in economic stimulus through tax rebates that will go to 117 million families, and temporary tax breaks for businesses.
The House is rushing the proposal to a vote this week and Senate Majority Leader Harry Reid, D-Nev., said he hopes to have the package approved by the senate and on the president's desk by Feb. 15.
Concerns have mounted with a cascade of bad news on the economy, from multibillion-dollar losses at some of the nation's biggest banks and investment houses to soaring mortgage defaults and a continued plunge in housing.
The rescue effort will not be without its own cost. Economists estimated the deficit for this year will be between $100 billion and $120 billion higher because of the stimulus package, primarily from the cost of the tax refund checks. Business tax breaks will reduce government revenue by a smaller amount this year; other costs from the business relief will take effect next year.
Economists at Global Insight, a private forecasting firm in Lexington, Mass., are projecting that this year's deficit, with the stimulus package included, will hit $400 billion. That would be the second highest imbalance on record in dollar terms, surpassed only by the all-time high of $413 billion in 2004.
Even without the stimulus package, the Congressional Budget Office is forecasting the deficit for 2008 will jump to $219 billion, up from last year's $163 billion. And CBO said its new estimate did not include still unapproved outlays for the wars in Iraq and Afghanistan, which probably will push the deficit to around $250 billion.
Adding a stimulus package will make that imbalance go even higher, but was seen by many economists as critical insurance against a severe downturn.
"Doing nothing and running the risk that the economy will slide away into a deep recession would cost the Treasury even more in lost tax revenues and increased spending," said Mark Zandi, chief economist at Moody's Economy.com.
Zandi said he believed the stimulus package that House negotiators have approved will be enough to boost economic growth by 1.5 percentage points in the second half of this year and by about 0.5 percentage point in the first half of 2009. That should translate into an additional 700,000 jobs over what the economy would have created during that period, Zandi said. The unemployment rate will still rise from teh current 5 percent to around 6 percent, but not the 6.5 percent it would hit without the stimulus package, Zandi said.
Other analysts are forecasting a boost in growth and jobs from the package, because of increased consumer spending - which accounts for two-thirds of the economy - and increased business investment to expand and modernize in response to the tax incentives.
Douglas Elmendorf, a senior fellow at the Brookings Institution and formerly an economist at the Federal Reserve, said he believed economic growth this year will be about 0.7 percentage point higher than it would be without the stimulus, although he said that may not be enough to keep the country out of a recession.
While this is the first stimulus package being put forward, it may not be the last if the slowdown becomes more severe.
"You can construct some very dark scenarios given all the uncertainty that exists over just how big the problems in the financial system might turn out to be," Zandi said.
Associated Press
St. Paul Pioneer Press
Tuesday January 29, 2008 Pg 3C
A proposed economic stimulus plan could boost this year's deficit by $100 billion, but political leaders believe the flood of red ink is worth the cost if it keeps the country from falling into a prolonged recession.
Worries that any recession could be a severe one, far surpassing the last two mild, brief downturns in 1990-91 and 2001, have captured the attention of President Bush and other politicans, especially with the White House up for grabs.
Bush and House leaders reached a deal in record time lsat week that would provide $150 billion in economic stimulus through tax rebates that will go to 117 million families, and temporary tax breaks for businesses.
The House is rushing the proposal to a vote this week and Senate Majority Leader Harry Reid, D-Nev., said he hopes to have the package approved by the senate and on the president's desk by Feb. 15.
Concerns have mounted with a cascade of bad news on the economy, from multibillion-dollar losses at some of the nation's biggest banks and investment houses to soaring mortgage defaults and a continued plunge in housing.
The rescue effort will not be without its own cost. Economists estimated the deficit for this year will be between $100 billion and $120 billion higher because of the stimulus package, primarily from the cost of the tax refund checks. Business tax breaks will reduce government revenue by a smaller amount this year; other costs from the business relief will take effect next year.
Economists at Global Insight, a private forecasting firm in Lexington, Mass., are projecting that this year's deficit, with the stimulus package included, will hit $400 billion. That would be the second highest imbalance on record in dollar terms, surpassed only by the all-time high of $413 billion in 2004.
Even without the stimulus package, the Congressional Budget Office is forecasting the deficit for 2008 will jump to $219 billion, up from last year's $163 billion. And CBO said its new estimate did not include still unapproved outlays for the wars in Iraq and Afghanistan, which probably will push the deficit to around $250 billion.
Adding a stimulus package will make that imbalance go even higher, but was seen by many economists as critical insurance against a severe downturn.
"Doing nothing and running the risk that the economy will slide away into a deep recession would cost the Treasury even more in lost tax revenues and increased spending," said Mark Zandi, chief economist at Moody's Economy.com.
Zandi said he believed the stimulus package that House negotiators have approved will be enough to boost economic growth by 1.5 percentage points in the second half of this year and by about 0.5 percentage point in the first half of 2009. That should translate into an additional 700,000 jobs over what the economy would have created during that period, Zandi said. The unemployment rate will still rise from teh current 5 percent to around 6 percent, but not the 6.5 percent it would hit without the stimulus package, Zandi said.
Other analysts are forecasting a boost in growth and jobs from the package, because of increased consumer spending - which accounts for two-thirds of the economy - and increased business investment to expand and modernize in response to the tax incentives.
Douglas Elmendorf, a senior fellow at the Brookings Institution and formerly an economist at the Federal Reserve, said he believed economic growth this year will be about 0.7 percentage point higher than it would be without the stimulus, although he said that may not be enough to keep the country out of a recession.
While this is the first stimulus package being put forward, it may not be the last if the slowdown becomes more severe.
"You can construct some very dark scenarios given all the uncertainty that exists over just how big the problems in the financial system might turn out to be," Zandi said.
Tuesday, February 26, 2008
Bernanke Revisits 'Financial Accelerator'
Wall Street Journal
Monday January 28, 2008 Pg A2
Fed Chairman Ben Bernanke's urgency in addressing the risk of recession can be traced in part to the insights from his research on the financial system and the Great Depression. In June, Mr. Bernanke delivered a speech on the "financial accelerator," which describes how weakness in the financial system an compound an economic downturn. He developed the theory in the 1980s to explain the depth and duration of the Great Depression, and later expanded on it in collaboration with Mark Gertler of New York University.
Rereading that speech helps explain last week's 0.75-percentage-point rate cut, a likely cut this week, and Mr. Bernanke's advocacy of a fiscal stimulus. Fed commentary these days contains a lot of references to "feedback loops" and self-reinforcing spirals of declining confidence and asset prices. Those are the hallmark of the financial accelerator in action. They give the current economic cycle a different cast from the typical post-World War II cycle, which was driven largely by trends in inventories, employment and - in 2001 - capital investment.
"Economic or financial news has the potential to increase financial strains and lead to further constraints on the supply of credit to households and businesses," Mr. Bernanke observed in a speech Jan. 10. Note the reference to "news": it's not just economic and financial developments, but how market confidence is affected by news of those developments, that can aggravate the downward spiral. Taht may explain why just the threat of a steep stock decline last Tuesday played a part in Mr. Bernanke's decision to cut rates: allowing the drop to play out may have had confidencedamaging consequences beond the lost stock-market wealth.
- Greg Ip
Monday January 28, 2008 Pg A2
Fed Chairman Ben Bernanke's urgency in addressing the risk of recession can be traced in part to the insights from his research on the financial system and the Great Depression. In June, Mr. Bernanke delivered a speech on the "financial accelerator," which describes how weakness in the financial system an compound an economic downturn. He developed the theory in the 1980s to explain the depth and duration of the Great Depression, and later expanded on it in collaboration with Mark Gertler of New York University.
Rereading that speech helps explain last week's 0.75-percentage-point rate cut, a likely cut this week, and Mr. Bernanke's advocacy of a fiscal stimulus. Fed commentary these days contains a lot of references to "feedback loops" and self-reinforcing spirals of declining confidence and asset prices. Those are the hallmark of the financial accelerator in action. They give the current economic cycle a different cast from the typical post-World War II cycle, which was driven largely by trends in inventories, employment and - in 2001 - capital investment.
"Economic or financial news has the potential to increase financial strains and lead to further constraints on the supply of credit to households and businesses," Mr. Bernanke observed in a speech Jan. 10. Note the reference to "news": it's not just economic and financial developments, but how market confidence is affected by news of those developments, that can aggravate the downward spiral. Taht may explain why just the threat of a steep stock decline last Tuesday played a part in Mr. Bernanke's decision to cut rates: allowing the drop to play out may have had confidencedamaging consequences beond the lost stock-market wealth.
- Greg Ip
12-Step Earmark Withdrawal
Wall Street Journal
Monday January 28, 2008 Pg A14
As every reformed addict knows, the road to recovery is long and hard. So it is for Republicans who became addicted to spending "earmarks" while running Congress, lost their majority in large part because of it, and are now struggling with mixed results to dry out.
Their latest halting effort in what appears to be at least a 12-step recovery plan will come tonight, when President Bush uses his State of the Union address to lay down his toughest anti-earmakring pledge to date. We're told he will tell Congress that he will veto any fiscal 2009 spending bills that doesn't cut earmarks in half from 2008 levels. He will also report that he is issuing a Presidential order informing executive departments that from now on they should refuse to fund earmarks that aren't explicitly mentioned in statutory language.
This is progress, though frankly less than we had hoped because Mr. Bush's executive order will not aply to the fiscal 2008 spending bills that passed late last yaer. Congress endorsed 11,735 special-interest earmarks worth $16.9 billion in fiscal 2008, yet thousands of these weren't even written into the actual budget bills. Instead, they were "air-dropped" at the last minute into non-binding conference reports that serve as advice to federal departments about where to allocate funds. This ruse means that earmarks are able to avoid scrutiny from spending hawks on the House and Senate floor.
We argued in December that Mr. Bush had the legal authority to refuse to fund those this year as well. But in the end we hear he acceded to the argument from Capitol Hill that because he hadn't made a specific earmark veto pledge last year, he would be sandbagging Congress after the fact and courting its wrath.
The President had, however, said the following last year: "even worse, over 90% of earmarks never make it to the floor of the House and Senate - they are dropped into committee reports taht are not even part of the bill that arrives on my desk. You didn't vote them into law. I didn't sign them into law. Yet they're treated as if they have the force of law. The time has come to end this practice." Members in both parties whooped and hollered in approval, even as they could barely contain their self-knowing grins.
Senate Republicans in particular lobbied hard to stop Presidential action against their 2008 earmarks, in the strange belief that they will help incumbent Members in close races this fall, including Minority Leader Mitch McConnell of Kentucky. This shows that Senate Republicans haven't even taken the first essential step of admitting their addiction.
They also don't understand that pork is overrated as incumbent protection, as ex-Congresswoman Anne Northup of Kentucky found out last year. She received five times as much pork as the average House Member, but still lost her Louisville district. Conrad Burns delivered $2 billion in earmarks for Montana - about $5,000 for every voter - but he lost too. Five pork-barrelling Republicans on the Appropriations Committee in the House and Senate were defeated in 2006. The pork could well boomerang again this year if certain GOP incumbents under investigation for earmark favoritism for political allies are indicted before Election Day.
House Republicans at least made some progress at their annual retreat late last week, offering a one-year moratorium on earmarks if Democrats go along. That probably won't happen, however. So the GOP leadership could help itself with voters by endorsing Arizona Representative Jeff Flake's request to join the Appropriations Committee, where he could serve as a taxpayer watchdog. Imagine how he could torment such all-world earmarkers as Pennsylvania Democrat Jack Murtha?
Mr. Bush's strategy of drawing a harder line on the fiscal 2009 budget might at least force an anti-earmark showdown this autumn. An an executive order will set a precedent for the next President, who would pay a political price to repeal it. But Republicans are still missing a major opportunity this year to restore their fiscal credibility by swearing off earmarking altogether. You can't claim to have kicked the habit if you keep hitting the vodka bottle in your desk drawer.
Monday January 28, 2008 Pg A14
As every reformed addict knows, the road to recovery is long and hard. So it is for Republicans who became addicted to spending "earmarks" while running Congress, lost their majority in large part because of it, and are now struggling with mixed results to dry out.
Their latest halting effort in what appears to be at least a 12-step recovery plan will come tonight, when President Bush uses his State of the Union address to lay down his toughest anti-earmakring pledge to date. We're told he will tell Congress that he will veto any fiscal 2009 spending bills that doesn't cut earmarks in half from 2008 levels. He will also report that he is issuing a Presidential order informing executive departments that from now on they should refuse to fund earmarks that aren't explicitly mentioned in statutory language.
This is progress, though frankly less than we had hoped because Mr. Bush's executive order will not aply to the fiscal 2008 spending bills that passed late last yaer. Congress endorsed 11,735 special-interest earmarks worth $16.9 billion in fiscal 2008, yet thousands of these weren't even written into the actual budget bills. Instead, they were "air-dropped" at the last minute into non-binding conference reports that serve as advice to federal departments about where to allocate funds. This ruse means that earmarks are able to avoid scrutiny from spending hawks on the House and Senate floor.
We argued in December that Mr. Bush had the legal authority to refuse to fund those this year as well. But in the end we hear he acceded to the argument from Capitol Hill that because he hadn't made a specific earmark veto pledge last year, he would be sandbagging Congress after the fact and courting its wrath.
The President had, however, said the following last year: "even worse, over 90% of earmarks never make it to the floor of the House and Senate - they are dropped into committee reports taht are not even part of the bill that arrives on my desk. You didn't vote them into law. I didn't sign them into law. Yet they're treated as if they have the force of law. The time has come to end this practice." Members in both parties whooped and hollered in approval, even as they could barely contain their self-knowing grins.
Senate Republicans in particular lobbied hard to stop Presidential action against their 2008 earmarks, in the strange belief that they will help incumbent Members in close races this fall, including Minority Leader Mitch McConnell of Kentucky. This shows that Senate Republicans haven't even taken the first essential step of admitting their addiction.
They also don't understand that pork is overrated as incumbent protection, as ex-Congresswoman Anne Northup of Kentucky found out last year. She received five times as much pork as the average House Member, but still lost her Louisville district. Conrad Burns delivered $2 billion in earmarks for Montana - about $5,000 for every voter - but he lost too. Five pork-barrelling Republicans on the Appropriations Committee in the House and Senate were defeated in 2006. The pork could well boomerang again this year if certain GOP incumbents under investigation for earmark favoritism for political allies are indicted before Election Day.
House Republicans at least made some progress at their annual retreat late last week, offering a one-year moratorium on earmarks if Democrats go along. That probably won't happen, however. So the GOP leadership could help itself with voters by endorsing Arizona Representative Jeff Flake's request to join the Appropriations Committee, where he could serve as a taxpayer watchdog. Imagine how he could torment such all-world earmarkers as Pennsylvania Democrat Jack Murtha?
Mr. Bush's strategy of drawing a harder line on the fiscal 2009 budget might at least force an anti-earmark showdown this autumn. An an executive order will set a precedent for the next President, who would pay a political price to repeal it. But Republicans are still missing a major opportunity this year to restore their fiscal credibility by swearing off earmarking altogether. You can't claim to have kicked the habit if you keep hitting the vodka bottle in your desk drawer.
Economic jitters reach younger workers
by Gita Sitaramiah
St. Paul Pioneer Press
Monday January 28, 2008 Pg 1A
Justin Fox sat his girlfriend down recently and said he'd be cutting bak on their dinner and movie dates. It's not that he's just not that into her: He's worried about the future, even though the 26-year-old made a handsome six-figure income last year.
Blame recession fears. Although economists continue to debate whether we're headed for one - or perhaps already mired in one - many consumers are voting with their wallets.
For younger workers like Fox, the prospect of a second recession so early in their careers is particularly unsettling. Experts say it could affect them long after the economy kicks back into gear.
The tumult of the housing market and rising gas and food prices have prompted Fox, a real estate broker, to pay off his Chevy Tahoe, reduce his home equity debt and move the drnks and dinner outings with this girlfriend and buddies to his Cottage Grove home.
"I probably save $300 or more a month from before, paying for two people to eat and go out to movies," he said.
The financial stress for Gen X and Y is in some ways no different than any other group starting out. Wages often are lower in first and second jobs - Fox notwithstanding - and savings nonexistent.
What makes things different is that today's young adults are carrying more debt and facing higher housing costs in inflation-adjusted dollars than their parents did. Tack on higher expectations by many raised in solidly middle-class households with indulgent parents, and the stress level spikes.
"The first 10 years of your adult work life is when the fastest wage growth happens, so to expect back-to-back recessions during that first 10 years can have a fundamental effect on your whole working life," said Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead."
"Add on to the mix that this is a generation that's just been walloped by student loan and credit card debt, so their long-term financial outlook could be bleaker than even I have predicted," Draut said.
Adult children of babyboomers are much more likely than their parents or grandparents to report feeling stress regarding finances, according to a new Ameriprise Fianancial "Money Across Generations" study. Young adults were much more reluctant to part witht heir money than older generations and expressed the lowest level of confidence that now is a good time to purchase, said a study of 301 adult children of baby boomers averaging 29-1/2 years old.
They may have reason to be more concerned if recession strikes. "They may be some of the first laid off because of lack of experience or tenure with a particular company," said Ginger Ewing, a senior financial adviser for Ameriprise Financial.
On the bright side, one of the great things about being young is the room to make changes to prepare for the future, said Clarky Davis, the Raleigh, N.C.-based author of the CareOne Credit Counseling Debt Diva blog. "If you're young, you can get a rommate, you don't mind getting a second job, you're more willing to take risks and extend yourself as far as work, and that's a good thing," she said.
Bree Halverson, 27, used to be a spender. The St. Paul resident reined in her shoe addiction, gives fewer Christmas presents and will no longer dine out with friends on weeknights, only on weekends, to pay down college and credit card debt and one day buy a house.
"I bought a Crockpot, and I'm going to be eating in more," said Halverson, a political organizer for St. Paul Trades and Labor Assembly who makes less than $50,000 and recently earned a graduate degree and some related debt.
Despite her savings plan, she's scared. The thought of retirement planning makes her anxious, despite having a union job with a pension plan. "I worry about Social Security," she said. "I don't know if I'll have to work until I'm 75."
Even big savers such as Yang Zhang Madsen, a 29-year-old city planner who lives in St. Paul, and her husband, who make a household income around the Twin Cities median of $62,223, are postponing starting a family. The decision is "a little bit about economics, because if I had a child, one of us wouldn't work full time," she said.
Kate Smith, 30, and her husband bought a house in St. Paul, started a business together and had a baby this past year. Their household income will be down to $30,000 from around $75,000 last year. She doesn't go to Kowalski's anymore. The "fancy cheeses" are too tempting; she sticks to co-op trips only. There are no more liquor store stops for beer, either.
For Smith, who grew up going on a family vacation every year, not having disposable income is tough, but she figures everybody struggles along the way. She's decided she and her friends need to do a better job at managing expectations.
"Our parents grew up with less and tried to provide us with more," she said. "And we take things for granted."
St. Paul Pioneer Press
Monday January 28, 2008 Pg 1A
Justin Fox sat his girlfriend down recently and said he'd be cutting bak on their dinner and movie dates. It's not that he's just not that into her: He's worried about the future, even though the 26-year-old made a handsome six-figure income last year.
Blame recession fears. Although economists continue to debate whether we're headed for one - or perhaps already mired in one - many consumers are voting with their wallets.
For younger workers like Fox, the prospect of a second recession so early in their careers is particularly unsettling. Experts say it could affect them long after the economy kicks back into gear.
The tumult of the housing market and rising gas and food prices have prompted Fox, a real estate broker, to pay off his Chevy Tahoe, reduce his home equity debt and move the drnks and dinner outings with this girlfriend and buddies to his Cottage Grove home.
"I probably save $300 or more a month from before, paying for two people to eat and go out to movies," he said.
The financial stress for Gen X and Y is in some ways no different than any other group starting out. Wages often are lower in first and second jobs - Fox notwithstanding - and savings nonexistent.
What makes things different is that today's young adults are carrying more debt and facing higher housing costs in inflation-adjusted dollars than their parents did. Tack on higher expectations by many raised in solidly middle-class households with indulgent parents, and the stress level spikes.
"The first 10 years of your adult work life is when the fastest wage growth happens, so to expect back-to-back recessions during that first 10 years can have a fundamental effect on your whole working life," said Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead."
"Add on to the mix that this is a generation that's just been walloped by student loan and credit card debt, so their long-term financial outlook could be bleaker than even I have predicted," Draut said.
Adult children of babyboomers are much more likely than their parents or grandparents to report feeling stress regarding finances, according to a new Ameriprise Fianancial "Money Across Generations" study. Young adults were much more reluctant to part witht heir money than older generations and expressed the lowest level of confidence that now is a good time to purchase, said a study of 301 adult children of baby boomers averaging 29-1/2 years old.
They may have reason to be more concerned if recession strikes. "They may be some of the first laid off because of lack of experience or tenure with a particular company," said Ginger Ewing, a senior financial adviser for Ameriprise Financial.
On the bright side, one of the great things about being young is the room to make changes to prepare for the future, said Clarky Davis, the Raleigh, N.C.-based author of the CareOne Credit Counseling Debt Diva blog. "If you're young, you can get a rommate, you don't mind getting a second job, you're more willing to take risks and extend yourself as far as work, and that's a good thing," she said.
Bree Halverson, 27, used to be a spender. The St. Paul resident reined in her shoe addiction, gives fewer Christmas presents and will no longer dine out with friends on weeknights, only on weekends, to pay down college and credit card debt and one day buy a house.
"I bought a Crockpot, and I'm going to be eating in more," said Halverson, a political organizer for St. Paul Trades and Labor Assembly who makes less than $50,000 and recently earned a graduate degree and some related debt.
Despite her savings plan, she's scared. The thought of retirement planning makes her anxious, despite having a union job with a pension plan. "I worry about Social Security," she said. "I don't know if I'll have to work until I'm 75."
Even big savers such as Yang Zhang Madsen, a 29-year-old city planner who lives in St. Paul, and her husband, who make a household income around the Twin Cities median of $62,223, are postponing starting a family. The decision is "a little bit about economics, because if I had a child, one of us wouldn't work full time," she said.
Kate Smith, 30, and her husband bought a house in St. Paul, started a business together and had a baby this past year. Their household income will be down to $30,000 from around $75,000 last year. She doesn't go to Kowalski's anymore. The "fancy cheeses" are too tempting; she sticks to co-op trips only. There are no more liquor store stops for beer, either.
For Smith, who grew up going on a family vacation every year, not having disposable income is tough, but she figures everybody struggles along the way. She's decided she and her friends need to do a better job at managing expectations.
"Our parents grew up with less and tried to provide us with more," she said. "And we take things for granted."
Monday, February 25, 2008
Auditors Recoup Millions For Medicare but Assailed
By Theo Francis
Wall Street Journal
January 26-27, 2008 Weekend Edition Pg A12
A pilot program to audit Medicare claims filed by hospitals and others in three states recouped nearly $250 million last year but is drawing fire from health-care providers as it prepares to go national over the coming year.
The program, which relies on private-sector auditing firms to comb through past claims filed by hospitals and other medical providers, recovered $247.4 million for Medicare last year from medical providers in California, Florida and New York, according to figures from the federal Centers for Medicare and Medicaid Services.
But hospital groups have mounted a campaign against its expansion, saying the effort is "riddled with flaws" and suffered too many problems to expand so soon. Chief among their complaints: The program's reliance on what some hospitals called a "'bounty hunter' payment mechanism" - contingency fees that reward the auditorsan incentive to be thorough at little cost to the government, since the fees come from funds the government otherwise wouldn't have recovered. Critics counter that it encourages the auditors to be too aggressive.
"Any kind of question is a reason for denial," even in subjective decisions such as determining whether an expense was medically necessary, said Don May, vice president for policy at the American Hospital Association. "Going at it from this kind of perspective really isn't, I don't believe, in the best interest of taxpayers."
The program has encountered problems. After California hospitals complained last year - enlisting help from congressional representatives - CMS spot-checked claims from inpatient rehabilition facilities that had been rejected in audits. The review upheld 60% of the auditor's findings, but determined that many had been handled inconsistently.
Medicare considers the program a success, both in recovering pasat improper payments and as a deterrent to future overbilling. "[W]e believe recovery auditing is a valuable tool in the Medicare program," Kerry Weems, the acting CMS administrator, wrote the California lawmakers last month.
Overall, auditors identified $357 million in overpayments in fiscal 2007, of which $17.8 million - or 7.1% of appealed claims - were overturned on appeal, according to CMS figures. An additional $77.7 million went to contingency fees and other administrative expenses, and the auditors identified $14.3 million in underpayments - situations in which Medicare should have paid more than it did.
Hospital groups have also complained that many claim reviews weren't done by qualified medical personnel, that the process doesn't give providers an opportunity to fix errors and that the auditors haven't been required to publicize what areas they are targeting. They also note that CMS isn't required to take the audit program national until 2010.
Supporters of the program note that in expanding the program, CMS is addressing many of these concerns: Auditing firms will have to have a medical director and medical-coding experts, return contingency fees for claims upheld on appeal even when further appeals are possible, and notify CMS sooner if they identify new kinds of problem claims. The national program also shortens the period auditors could review to three years from four, and puts all claims filed before October 2007 off-limits.
Wall Street Journal
January 26-27, 2008 Weekend Edition Pg A12
A pilot program to audit Medicare claims filed by hospitals and others in three states recouped nearly $250 million last year but is drawing fire from health-care providers as it prepares to go national over the coming year.
The program, which relies on private-sector auditing firms to comb through past claims filed by hospitals and other medical providers, recovered $247.4 million for Medicare last year from medical providers in California, Florida and New York, according to figures from the federal Centers for Medicare and Medicaid Services.
But hospital groups have mounted a campaign against its expansion, saying the effort is "riddled with flaws" and suffered too many problems to expand so soon. Chief among their complaints: The program's reliance on what some hospitals called a "'bounty hunter' payment mechanism" - contingency fees that reward the auditorsan incentive to be thorough at little cost to the government, since the fees come from funds the government otherwise wouldn't have recovered. Critics counter that it encourages the auditors to be too aggressive.
"Any kind of question is a reason for denial," even in subjective decisions such as determining whether an expense was medically necessary, said Don May, vice president for policy at the American Hospital Association. "Going at it from this kind of perspective really isn't, I don't believe, in the best interest of taxpayers."
The program has encountered problems. After California hospitals complained last year - enlisting help from congressional representatives - CMS spot-checked claims from inpatient rehabilition facilities that had been rejected in audits. The review upheld 60% of the auditor's findings, but determined that many had been handled inconsistently.
Medicare considers the program a success, both in recovering pasat improper payments and as a deterrent to future overbilling. "[W]e believe recovery auditing is a valuable tool in the Medicare program," Kerry Weems, the acting CMS administrator, wrote the California lawmakers last month.
Overall, auditors identified $357 million in overpayments in fiscal 2007, of which $17.8 million - or 7.1% of appealed claims - were overturned on appeal, according to CMS figures. An additional $77.7 million went to contingency fees and other administrative expenses, and the auditors identified $14.3 million in underpayments - situations in which Medicare should have paid more than it did.
Hospital groups have also complained that many claim reviews weren't done by qualified medical personnel, that the process doesn't give providers an opportunity to fix errors and that the auditors haven't been required to publicize what areas they are targeting. They also note that CMS isn't required to take the audit program national until 2010.
Supporters of the program note that in expanding the program, CMS is addressing many of these concerns: Auditing firms will have to have a medical director and medical-coding experts, return contingency fees for claims upheld on appeal even when further appeals are possible, and notify CMS sooner if they identify new kinds of problem claims. The national program also shortens the period auditors could review to three years from four, and puts all claims filed before October 2007 off-limits.
U.S. deficit looms over stimulus talks
Yes, I know it's old news by now, just trying to get through the backlog of information I've needed to post for quite awhile now.
U.S. deficit looms over stimulus talks
Current plan to jump-start economy could push deficit to $400 billion
By Kevin G. Hall
McClatchy Newspapers
St. Paul Pioneer Press
Thursday January 24, 2008 Pg 3A
As the Bush administration and Congress try to craft an economic stimulus plan, a dark cloud hangs over them: the federal deficit.
Iraq war costs of $9.6 billion a month and a gaping federal deficit that's funded by borrowing from foreign governments limit how aggressively the U.S. government can cut taxes or boost spending to fend off a recession.
Just over the horizon, a fiscal crisis that some call a day of reckoning looms larger.
Statistics released Wednesday by the nonpartisan Congressional Budget Office show that the federal deficit, the gap between what the government spends and the revenue it collects, is projected to leap to $250 billion in the current budget year. That's up 53 percent from the $163 billion deficit in fiscal 2007.
If Congress approves the roughly $140 billion stimulus plan now being discussed, the deficit for the 2008 fiscal year, which began Oct. 1, could swell to almost $400 billion.
The CBO presented those estimates to Congress on Wednesday as part of its budget and economic outlook for 2008 to 2018.
"Ongoing increases in health care costs, along with the aging of the population, are expected to put subtantial pressure on the budget in coming decades," Director Peter Orszag told the House Budget Committee. "Those trends are already evident in the current projection period."
Lawmakers can sharply cut government spending, sharply raise taxes or pass some combination of spending cuts and tax increases, Orszag said.
The Bush administration frequently notes that although the deficit is high, it's low in hsitorical terms as a percentage of the total economy - 1.5 percent this budget year, according to CBO estimates.
That's true. But it's a snapshot of the moment. Seen in the context of what lies ahead, the deficit puts the U.S. economy on a weaker footing to address the fiscal challenges that successive Congresses have ducked.
Comptroller General David Walker, the chief auditor of the government's balance sheet, has all but shouted from the rooftop that the U.S. government had more than $50 trillion in unfunded liabilities at the close of 2006, compared with the $20 trillion in 2000. That number is the sum of everything the government has promised to pay in the future, from pensions and government healthcare to interest on the debt.
The liabilities now amount to about $170,000 per person or $440,000 per U.S. household, according to Walker. The largest drivers of this trend are big entitlement programs such as Social Security and Medicare, the government insurance program for the elderly. These programs will come under even more strain when the first baby boomers - Americans born between 1946 and 1964 - reach official retirement age in two years.
Some economists believe that to avoid passing the burden to future generations of Americans, lawmakers and President Bush should propose ways to pay for the stimulus - a combination of tax rebates for consumers and tax relief for business - over a longer time frame.
"If we do something right now like a tax rebate and a couple of other things, it would be sensible to pay for it over a five-year period or something like that," said Alice Rivlin, a former vice chairman of the Federal Reserve who's now a senior researcher at the Brookings Institution, a center-left policy research organization.
While supportive of a short-term stimulus, Rivlin said long-term challenges must be considered.
"In the long run, we are in serious deficit trouble, and the long run is not so long anymore," said Rivlin, who was the director of the Congressional Budget Office from 1975 to 1983.
U.S. deficit looms over stimulus talks
Current plan to jump-start economy could push deficit to $400 billion
By Kevin G. Hall
McClatchy Newspapers
St. Paul Pioneer Press
Thursday January 24, 2008 Pg 3A
As the Bush administration and Congress try to craft an economic stimulus plan, a dark cloud hangs over them: the federal deficit.
Iraq war costs of $9.6 billion a month and a gaping federal deficit that's funded by borrowing from foreign governments limit how aggressively the U.S. government can cut taxes or boost spending to fend off a recession.
Just over the horizon, a fiscal crisis that some call a day of reckoning looms larger.
Statistics released Wednesday by the nonpartisan Congressional Budget Office show that the federal deficit, the gap between what the government spends and the revenue it collects, is projected to leap to $250 billion in the current budget year. That's up 53 percent from the $163 billion deficit in fiscal 2007.
If Congress approves the roughly $140 billion stimulus plan now being discussed, the deficit for the 2008 fiscal year, which began Oct. 1, could swell to almost $400 billion.
The CBO presented those estimates to Congress on Wednesday as part of its budget and economic outlook for 2008 to 2018.
"Ongoing increases in health care costs, along with the aging of the population, are expected to put subtantial pressure on the budget in coming decades," Director Peter Orszag told the House Budget Committee. "Those trends are already evident in the current projection period."
Lawmakers can sharply cut government spending, sharply raise taxes or pass some combination of spending cuts and tax increases, Orszag said.
The Bush administration frequently notes that although the deficit is high, it's low in hsitorical terms as a percentage of the total economy - 1.5 percent this budget year, according to CBO estimates.
That's true. But it's a snapshot of the moment. Seen in the context of what lies ahead, the deficit puts the U.S. economy on a weaker footing to address the fiscal challenges that successive Congresses have ducked.
Comptroller General David Walker, the chief auditor of the government's balance sheet, has all but shouted from the rooftop that the U.S. government had more than $50 trillion in unfunded liabilities at the close of 2006, compared with the $20 trillion in 2000. That number is the sum of everything the government has promised to pay in the future, from pensions and government healthcare to interest on the debt.
The liabilities now amount to about $170,000 per person or $440,000 per U.S. household, according to Walker. The largest drivers of this trend are big entitlement programs such as Social Security and Medicare, the government insurance program for the elderly. These programs will come under even more strain when the first baby boomers - Americans born between 1946 and 1964 - reach official retirement age in two years.
Some economists believe that to avoid passing the burden to future generations of Americans, lawmakers and President Bush should propose ways to pay for the stimulus - a combination of tax rebates for consumers and tax relief for business - over a longer time frame.
"If we do something right now like a tax rebate and a couple of other things, it would be sensible to pay for it over a five-year period or something like that," said Alice Rivlin, a former vice chairman of the Federal Reserve who's now a senior researcher at the Brookings Institution, a center-left policy research organization.
While supportive of a short-term stimulus, Rivlin said long-term challenges must be considered.
"In the long run, we are in serious deficit trouble, and the long run is not so long anymore," said Rivlin, who was the director of the Congressional Budget Office from 1975 to 1983.
Sunday, February 24, 2008
Washington warned on health costs
by Jeremy Grant
in Washington
Financial Times
Wednesday January 30, 2008 Pg 2
An influential US official yesterday hit out at his country's "addiction to debt" warning that the federal budget was on an "imprudent and unsustainable path" due to ballooning healthcare costs.
David Walker, US comptroller general, warned a Senate budget committee hearing that while recent falls in the budget deficit were encouraging, the long-term fiscal outlook was grim.
"Our real challenge is not this year's deficit, or even next year's; it is how to change our current path so that growing deficits and debt levels do not swamp our ship of state," he said.
"If there is one thing that could bankrupt America, it is runaway health costs. We must not allow this to happen. This is our addiction to debt."
Mr. Walker's comments echo a warning he made last year, in which he urged the US to "learn from the fall of Rome" and deal quickly with a "burning platform" of unsustainable policies, including fiscal deficits.
Moody's Investor Services, the credit rating agency, last month warned that a lack of reform to Medicare - the government-administered healthcare plan - and the social security system threatened the US's long-term fiscal outlook, and thus, its AAA bond rating.
Mr Walker said the root of the problem was the government's continuing pledge to fund the gap between promised and funded social security and Medicare benefits and other commitments. In a report released to coincide with the hearing, the Government Accountability Office - which Mr Walker heads - put the total US public debt at $9,000bn, including the debt held by social security funds. That was almost double the $5,000bn headline figure for the public debt, which excludes such funds' debt.
Including the gap between future promised and funded social security and Medicare benefits, the GAO put the total debt burden in present dollar value at $53,000bn - about four times the size of the US economy.
"Medicare and Medicaid spending threaten to consume an untenable share of the budget and economy in the coming decades," said Mr Walker. The government had essentially written a "blank cheque" for these programmes, he said.
There was a "shrinking window of opportunity" to address the issues, he added. "We have a five- to 10-year window to demonstrate to our foreign lenders that we are getting serious about this. I would say closer to five."
Kent Conrad, the committee chairman, said the US deficit was still a relatively small proportion of gross domestic product, at a projected 2.5 per cent for this year.
Mr Walker conceded that the current deficit and debt levels were "not a major problem." But he said the difference this time was that the US would be unable to grow its way out of a long term fiscal crunch. "We've never seen anything like what we are headed into."
in Washington
Financial Times
Wednesday January 30, 2008 Pg 2
An influential US official yesterday hit out at his country's "addiction to debt" warning that the federal budget was on an "imprudent and unsustainable path" due to ballooning healthcare costs.
David Walker, US comptroller general, warned a Senate budget committee hearing that while recent falls in the budget deficit were encouraging, the long-term fiscal outlook was grim.
"Our real challenge is not this year's deficit, or even next year's; it is how to change our current path so that growing deficits and debt levels do not swamp our ship of state," he said.
"If there is one thing that could bankrupt America, it is runaway health costs. We must not allow this to happen. This is our addiction to debt."
Mr. Walker's comments echo a warning he made last year, in which he urged the US to "learn from the fall of Rome" and deal quickly with a "burning platform" of unsustainable policies, including fiscal deficits.
Moody's Investor Services, the credit rating agency, last month warned that a lack of reform to Medicare - the government-administered healthcare plan - and the social security system threatened the US's long-term fiscal outlook, and thus, its AAA bond rating.
Mr Walker said the root of the problem was the government's continuing pledge to fund the gap between promised and funded social security and Medicare benefits and other commitments. In a report released to coincide with the hearing, the Government Accountability Office - which Mr Walker heads - put the total US public debt at $9,000bn, including the debt held by social security funds. That was almost double the $5,000bn headline figure for the public debt, which excludes such funds' debt.
Including the gap between future promised and funded social security and Medicare benefits, the GAO put the total debt burden in present dollar value at $53,000bn - about four times the size of the US economy.
"Medicare and Medicaid spending threaten to consume an untenable share of the budget and economy in the coming decades," said Mr Walker. The government had essentially written a "blank cheque" for these programmes, he said.
There was a "shrinking window of opportunity" to address the issues, he added. "We have a five- to 10-year window to demonstrate to our foreign lenders that we are getting serious about this. I would say closer to five."
Kent Conrad, the committee chairman, said the US deficit was still a relatively small proportion of gross domestic product, at a projected 2.5 per cent for this year.
Mr Walker conceded that the current deficit and debt levels were "not a major problem." But he said the difference this time was that the US would be unable to grow its way out of a long term fiscal crunch. "We've never seen anything like what we are headed into."
Cure the Disease, Not Just the Symptoms
by Ed Lotterman
St. Paul Pioneer Press
Thursday January 24, 2008 1C
Politicians and journalists are missing a key question when talking about ongoing U.S. economic problems: Is the current slowdown in economic activity and decline in asset prices cyclical or structural? Without answering that question, much public discussion is pointless.
Cyclical economic events result from the business cycle, the historical pattern of fluctuation in output, employment and inflation. Structural ones stem from longer-term shifts in the underlying framework of an economy.
This distinction is often applied to types of unemployment. Autoworkers laid off for a few months because auto sales drop during a recession are cyclically unemployed. The thousands of boilermakers let go in the 1950s as railroads shifted from steam locomotives to diesels represented structural unemployment.
The cyclical-structural distinction also applies to budget deficits. If tax receipts fall below outlays solely because a sluggish economy redues income - and sales-tax revenue, the deficit is cyclical. However, if a deficit persists at full employment and high output, the problem is structural.
The key question right now is wehther our economic problems are primarily cyclical - resulting from a long-established (even if not perfectly regular) pattern ofincreases and decreases in output, employment and prices. Or are our problems more fundamental and long-term?
Policies commonly deemed appropriate responses to business-cycle problems - manipulating the money supply, interest rates, taxes and government spending - are ineffective in addressing structural challenges. Indeed, they may make the situation worse rather than better.
We are in the same quandary as Japan was in 1989. That country faced an asset price bubble much greater than ours. Japanese stock prices rose by a factor of five in the 1980s. Real estate price increases were even more extreme.
At prevailing exchange rates, the grounds of the Imperial Palace in Tokyo were worth more than all of California. Ginza district land reached $139,000 per square foot.
But in 1989 the bottom fell out. Stock prices fell 50 percent from 1989 to 1990 and even more in following years. Tokyo home prices fell 90 percent. The crash wiped $25 trillion (in 2008 dollars) off of Japanese balance sheets.
The government treated the crash as a cyclical problem, lowering interest rates and increasing spending on vast public works projects. Japan went from having one of the lowest rations of national debt to GDP among industrialized countries to one of the highest.
Yes, the Bank of Japan was hesitant and erratic in money supply increases. Yes, there was poor coordination of fiscal and monetary policies. But overall, Japan had no lack of Keynesian stimulus. Yet its economy stagnated for more than a decade.
Japan's problems were structural. The economy depended too much on exports stoked by an undervalued yen. RElationships between financial institutions and corporations were too cozy and fraught with conflicts of interest. Financial regulators encouraged hiding losses than writing them off. Major corporations and banks could not go bankrupt, no matter how insolvent. An appreciating yen drew in more foreign investment than the country could absorb.
Traditional monetary and fiscal stimulus addressed none of these problems. Rather it made a bad situation worse.
President Bush repeatedly says that the U.S. economy is fundamentally sound, implying that current problems are merely cyclical. Is he correct? Will the fiscal package that he and other elected officials from both parties propose fix things?
At a very fundamental level and over the long term, the U.S. economy has great strengths. We have enormous natural resources. We have enormous natural resources. We have extensive private and public infrastructure. Most importantly, we have a hard working, skilled, creative and enterprising labor force. There is no bar to our long-term prosperity.
But in the medium term, we are ignoring important structural problems. For three decades, general government spending has exceeded general revenue by large margins - through booms as well as recessions. But the way we finance Social Security obscures the size of the general federal deficit. The national savings rate has fallen to near zero despite repeated tax cuts intended to boost savings and investment. Lenders market credit more aggressively than in any other country or era. Capital markets have created myriad complex and poorly understood financial instruments and new players, such as hedge funds, that are more difficult to regulate. We borrow hundreds of billions abroad while cheap imports suppress consumer inflation, even though the money supply grows faster than output, year after year.
If we ignore such fundamental underlying problems and expect cheaper money and a larger federal deficit to provide a quick fix, we are likely to be disappointed.
St. Paul Pioneer Press
Thursday January 24, 2008 1C
Politicians and journalists are missing a key question when talking about ongoing U.S. economic problems: Is the current slowdown in economic activity and decline in asset prices cyclical or structural? Without answering that question, much public discussion is pointless.
Cyclical economic events result from the business cycle, the historical pattern of fluctuation in output, employment and inflation. Structural ones stem from longer-term shifts in the underlying framework of an economy.
This distinction is often applied to types of unemployment. Autoworkers laid off for a few months because auto sales drop during a recession are cyclically unemployed. The thousands of boilermakers let go in the 1950s as railroads shifted from steam locomotives to diesels represented structural unemployment.
The cyclical-structural distinction also applies to budget deficits. If tax receipts fall below outlays solely because a sluggish economy redues income - and sales-tax revenue, the deficit is cyclical. However, if a deficit persists at full employment and high output, the problem is structural.
The key question right now is wehther our economic problems are primarily cyclical - resulting from a long-established (even if not perfectly regular) pattern ofincreases and decreases in output, employment and prices. Or are our problems more fundamental and long-term?
Policies commonly deemed appropriate responses to business-cycle problems - manipulating the money supply, interest rates, taxes and government spending - are ineffective in addressing structural challenges. Indeed, they may make the situation worse rather than better.
We are in the same quandary as Japan was in 1989. That country faced an asset price bubble much greater than ours. Japanese stock prices rose by a factor of five in the 1980s. Real estate price increases were even more extreme.
At prevailing exchange rates, the grounds of the Imperial Palace in Tokyo were worth more than all of California. Ginza district land reached $139,000 per square foot.
But in 1989 the bottom fell out. Stock prices fell 50 percent from 1989 to 1990 and even more in following years. Tokyo home prices fell 90 percent. The crash wiped $25 trillion (in 2008 dollars) off of Japanese balance sheets.
The government treated the crash as a cyclical problem, lowering interest rates and increasing spending on vast public works projects. Japan went from having one of the lowest rations of national debt to GDP among industrialized countries to one of the highest.
Yes, the Bank of Japan was hesitant and erratic in money supply increases. Yes, there was poor coordination of fiscal and monetary policies. But overall, Japan had no lack of Keynesian stimulus. Yet its economy stagnated for more than a decade.
Japan's problems were structural. The economy depended too much on exports stoked by an undervalued yen. RElationships between financial institutions and corporations were too cozy and fraught with conflicts of interest. Financial regulators encouraged hiding losses than writing them off. Major corporations and banks could not go bankrupt, no matter how insolvent. An appreciating yen drew in more foreign investment than the country could absorb.
Traditional monetary and fiscal stimulus addressed none of these problems. Rather it made a bad situation worse.
President Bush repeatedly says that the U.S. economy is fundamentally sound, implying that current problems are merely cyclical. Is he correct? Will the fiscal package that he and other elected officials from both parties propose fix things?
At a very fundamental level and over the long term, the U.S. economy has great strengths. We have enormous natural resources. We have enormous natural resources. We have extensive private and public infrastructure. Most importantly, we have a hard working, skilled, creative and enterprising labor force. There is no bar to our long-term prosperity.
But in the medium term, we are ignoring important structural problems. For three decades, general government spending has exceeded general revenue by large margins - through booms as well as recessions. But the way we finance Social Security obscures the size of the general federal deficit. The national savings rate has fallen to near zero despite repeated tax cuts intended to boost savings and investment. Lenders market credit more aggressively than in any other country or era. Capital markets have created myriad complex and poorly understood financial instruments and new players, such as hedge funds, that are more difficult to regulate. We borrow hundreds of billions abroad while cheap imports suppress consumer inflation, even though the money supply grows faster than output, year after year.
If we ignore such fundamental underlying problems and expect cheaper money and a larger federal deficit to provide a quick fix, we are likely to be disappointed.
Did you say deficit?
Wall Street Journal
Thursday January 24, 2008 Pg A16
The Congressional Budget Office yesterday estimated that the federal budget deficit will rise this year for the first time since 2004, and the explanation is no surprise: Revenue growth is slowing as the economy slows, while spending has begun to pick up again.
CBO forsees a fiscal 2008 deficit of $219 billion, or about 1.5% of GDP, and up about $65 billion from what the CBO projected as recently as last August. Most of the change from August is due to the one-year Alternative Minimum Tax fix passed in December - the previous "baseline" asumed 23 million new AMT victims would be welcomed into the fold this year. A smaller piece of the shortfall is due to lower projections for economic growth this year.
We should remind readers that back in 2004 CBO projected a $286 billion deficit for 2008, by that yardstick, $219 billion is an improvement. Back then, the CBO also projected some $200 billion less in corporate and personal income taxes than we actually saw, due mostly to better-than-expected growth after the 2003 tax cuts.
By the way, that $219 billion doesn't include any "stimulus" package. As we've seen since 2003, tax cuts on capital and marginal income rates can have a salutary effect on the deficit over time by helping to promote growth. The current Beltway mix of more spending and tax "rebates" will do very little for growth and thus have virtually no revenue feedback effect. Don't expect anyone in Washington to mention that while loudly deploring a higher deficit.
Thursday January 24, 2008 Pg A16
The Congressional Budget Office yesterday estimated that the federal budget deficit will rise this year for the first time since 2004, and the explanation is no surprise: Revenue growth is slowing as the economy slows, while spending has begun to pick up again.
CBO forsees a fiscal 2008 deficit of $219 billion, or about 1.5% of GDP, and up about $65 billion from what the CBO projected as recently as last August. Most of the change from August is due to the one-year Alternative Minimum Tax fix passed in December - the previous "baseline" asumed 23 million new AMT victims would be welcomed into the fold this year. A smaller piece of the shortfall is due to lower projections for economic growth this year.
We should remind readers that back in 2004 CBO projected a $286 billion deficit for 2008, by that yardstick, $219 billion is an improvement. Back then, the CBO also projected some $200 billion less in corporate and personal income taxes than we actually saw, due mostly to better-than-expected growth after the 2003 tax cuts.
By the way, that $219 billion doesn't include any "stimulus" package. As we've seen since 2003, tax cuts on capital and marginal income rates can have a salutary effect on the deficit over time by helping to promote growth. The current Beltway mix of more spending and tax "rebates" will do very little for growth and thus have virtually no revenue feedback effect. Don't expect anyone in Washington to mention that while loudly deploring a higher deficit.
Friday, February 22, 2008
PP: Quick fix is beyond government's power
Edward Lotterman: Quick fix is beyond government's power
St. Paul Pioneer Press
Wednesday January 23, 2008 Pg 1A
Don't put too much hope in the Fed's latest cut in its target interest rate or in any eventual fiscal stimulus package on which President Bush and Congress may agree. The ability of government to offset swings in employment, output and prices is much more limited than many people think, especially when dealing with a $14 trillion economy that is highly enmeshed with the rest of the world. At least that is my humble opinion.
The economic news this week has been dramatic. Several Asian stock markets fell more than 10 percent in two days. In an unscheduled meeting, the Federal Reserve's policymakers cut its target for the federal funds interest rate an unprecedented three-fourths of a percentage point, from 4.25 to 3.5 percent. Meanwhile, the president, Congress and sundry presidential candidates are falling over each other with proposals for "fiscal stimulus."
The situation raises many questions: Just what can government do to solve growing economic problems? Should the Fed cut interest rates even further? Is the danger of inflation real? Will rebates, further tax cuts or greater government spending forestall a recession?
Unfortunately, economists have different views on these issues, depending on the degree to which they are convinced by competing economic theories. John Maynard Keynes (1883-1946) argued government can manipulate four variables - taxes, government spending, the money supply and interest rates - to ward off recessions or curb inflation. Monetarists, led by the University of Chicago's articulate and energetic Milton Friedman (1912-2006), saw government tromping on fiscal and monetary gas and brake pedals as not only doomed to failure but also inherently harmful. So did a later group called "rational expectationists."
Virtually all economists agree on one thing: A central bank can control inflation if it does not let the money supply grow too fast. Prime Minister Margaret Thatcher of Great Britain and U.S. Fed Chairman Paul Volcker proved that.
What economists don't agree on is how well government policies can ward off a recession and on the relative usefulness of monetary policy (money supply and interest rates) compared to fiscal policy (government taxing and spending).
The historical record is mixed. Many argue that military spending wasa the primary factor in ending the Great Depression. Others point to the tax cuts enacted after John F. Kennedy's assassination as a success story of fiscal stimulus that worked. Some view the 2001 Bush tax cuts as having increased consumer spending, even though their stated purpose was to encourage long-term investment.
But there are many counter-arguments or examples. Rising spending on the Vietnam War was probably a bigger stimulus than the Kennedy-Johnson tax cuts. And in 2001, the Fed increased the money supply, pushing short-term interest rates to historic lows at the same time the Bush tax cuts took effect.
Moreover, after most industrialized countries overtly adopted Keynesian policies in the 1950s, many experienced increases in inflation even during recessions with high unemployment. Such "stagflation" dominated the 1970s and baffled both political parties.
Richard Nixon expolicitly proposed fiscal stimulus in 1971 and 1972 even as he cynically kept the lid on inflation with wage and price controls. Both inflation and unemployment soared a year later. Neither Gerald Ford nor Jimmy Carter could settle on a coherent response for either inflation or unemployment, and the nation suffered.
The 1980s demonstrated that the Fed could tame inflation if politicians were able to tolerate a harsh recession in the short term. Moreover, a stable price environment fostered investment by households and businesses.
But human nature leads central bankers into temptation. As memories of the 1970s inflation faded in the go-go years of the 1990s, arguments for faster money growth and lower interest rates overwhelmed calls for prudence. The Fed needed to lower interest rates to help out banks wracked by bad loans on commercial property. It needed to stop contagion from Asian financial crises or from Russia or Brazil.
Then, when the U.S. economy slowed in 2000, monetary expansion seemed necessary. People agreed it was even more true after Sept. 11.
Overall, we nearly doubled the money supply since the mid-1990s, while the real economy grew by about 50 percent. Such easy money clearly created many of the problems we face today.
Some say that calls for even lower interest rates mimic Will Rogers' sarcastic query "If stupidity got us into this mess, then why can't it get us out?" Moreover, as the Fed increases the money supply to lower interest rates, the value of the dollar tends to slide compared to other currencies.
Fiscal stimulus packages are even more fraught with difficulty.
Politicians love to step on the gas pedal, increasing spending and cutting taxes. They are especially quick to call for fiscal largesse in election years. The unemployment rate is never low enough or growth fast enough for a congressman facing reelection.
Politicans never want to step on the brake pedal, even when inflation gets out of control as it did in the 1970s. Moreover, the time lags in getting tax and spending bills through Congress are such that the economic effects often arrive too late. In many cases, they make business cycle fluctuations more extreme instead of dampening them.
At this juncture, the impulse to try anything with some plausible chance of success is powerful. Easier money and an even looser federal budget may ameliorate a bad, and worsening, situation. But the monetary, budgetary and trade imbalances that have accumulated over the years are large and difficult to resolve. Americans should not delude themselves with the idea that there are quick and easy fixes.
St. Paul Pioneer Press
Wednesday January 23, 2008 Pg 1A
Don't put too much hope in the Fed's latest cut in its target interest rate or in any eventual fiscal stimulus package on which President Bush and Congress may agree. The ability of government to offset swings in employment, output and prices is much more limited than many people think, especially when dealing with a $14 trillion economy that is highly enmeshed with the rest of the world. At least that is my humble opinion.
The economic news this week has been dramatic. Several Asian stock markets fell more than 10 percent in two days. In an unscheduled meeting, the Federal Reserve's policymakers cut its target for the federal funds interest rate an unprecedented three-fourths of a percentage point, from 4.25 to 3.5 percent. Meanwhile, the president, Congress and sundry presidential candidates are falling over each other with proposals for "fiscal stimulus."
The situation raises many questions: Just what can government do to solve growing economic problems? Should the Fed cut interest rates even further? Is the danger of inflation real? Will rebates, further tax cuts or greater government spending forestall a recession?
Unfortunately, economists have different views on these issues, depending on the degree to which they are convinced by competing economic theories. John Maynard Keynes (1883-1946) argued government can manipulate four variables - taxes, government spending, the money supply and interest rates - to ward off recessions or curb inflation. Monetarists, led by the University of Chicago's articulate and energetic Milton Friedman (1912-2006), saw government tromping on fiscal and monetary gas and brake pedals as not only doomed to failure but also inherently harmful. So did a later group called "rational expectationists."
Virtually all economists agree on one thing: A central bank can control inflation if it does not let the money supply grow too fast. Prime Minister Margaret Thatcher of Great Britain and U.S. Fed Chairman Paul Volcker proved that.
What economists don't agree on is how well government policies can ward off a recession and on the relative usefulness of monetary policy (money supply and interest rates) compared to fiscal policy (government taxing and spending).
The historical record is mixed. Many argue that military spending wasa the primary factor in ending the Great Depression. Others point to the tax cuts enacted after John F. Kennedy's assassination as a success story of fiscal stimulus that worked. Some view the 2001 Bush tax cuts as having increased consumer spending, even though their stated purpose was to encourage long-term investment.
But there are many counter-arguments or examples. Rising spending on the Vietnam War was probably a bigger stimulus than the Kennedy-Johnson tax cuts. And in 2001, the Fed increased the money supply, pushing short-term interest rates to historic lows at the same time the Bush tax cuts took effect.
Moreover, after most industrialized countries overtly adopted Keynesian policies in the 1950s, many experienced increases in inflation even during recessions with high unemployment. Such "stagflation" dominated the 1970s and baffled both political parties.
Richard Nixon expolicitly proposed fiscal stimulus in 1971 and 1972 even as he cynically kept the lid on inflation with wage and price controls. Both inflation and unemployment soared a year later. Neither Gerald Ford nor Jimmy Carter could settle on a coherent response for either inflation or unemployment, and the nation suffered.
The 1980s demonstrated that the Fed could tame inflation if politicians were able to tolerate a harsh recession in the short term. Moreover, a stable price environment fostered investment by households and businesses.
But human nature leads central bankers into temptation. As memories of the 1970s inflation faded in the go-go years of the 1990s, arguments for faster money growth and lower interest rates overwhelmed calls for prudence. The Fed needed to lower interest rates to help out banks wracked by bad loans on commercial property. It needed to stop contagion from Asian financial crises or from Russia or Brazil.
Then, when the U.S. economy slowed in 2000, monetary expansion seemed necessary. People agreed it was even more true after Sept. 11.
Overall, we nearly doubled the money supply since the mid-1990s, while the real economy grew by about 50 percent. Such easy money clearly created many of the problems we face today.
Some say that calls for even lower interest rates mimic Will Rogers' sarcastic query "If stupidity got us into this mess, then why can't it get us out?" Moreover, as the Fed increases the money supply to lower interest rates, the value of the dollar tends to slide compared to other currencies.
Fiscal stimulus packages are even more fraught with difficulty.
Politicians love to step on the gas pedal, increasing spending and cutting taxes. They are especially quick to call for fiscal largesse in election years. The unemployment rate is never low enough or growth fast enough for a congressman facing reelection.
Politicans never want to step on the brake pedal, even when inflation gets out of control as it did in the 1970s. Moreover, the time lags in getting tax and spending bills through Congress are such that the economic effects often arrive too late. In many cases, they make business cycle fluctuations more extreme instead of dampening them.
At this juncture, the impulse to try anything with some plausible chance of success is powerful. Easier money and an even looser federal budget may ameliorate a bad, and worsening, situation. But the monetary, budgetary and trade imbalances that have accumulated over the years are large and difficult to resolve. Americans should not delude themselves with the idea that there are quick and easy fixes.
LTTE: Sound as a Dollar?
Wall Street Journal
Tuesday January 22, 2008 Pg A17
Regarding David Malpass's op-ed ("Markets and the Dollar," Jan. 14), I cannot tell you how refreshing it is to see an economist take issue with the Fed lowering interest rates in these times of high inflation as well as the relentless printing of U.S. dollars, and its subsequent devaluation. While we're at it, could we please make a token effort at balancing our fiscal budget? Perhaps then we'll be real "conservative Republicans" instead of the "radical Republicans" who have been "governing" these last seven years. Doesn't anyone on the Bush economic team care what kind of currency and country their kids and grandkids will inherit? If not, please tell me where they are planning to relocate when the bottom drops out.
Mike Fitzsimmons
Crossville, Tenn.
Tuesday January 22, 2008 Pg A17
Regarding David Malpass's op-ed ("Markets and the Dollar," Jan. 14), I cannot tell you how refreshing it is to see an economist take issue with the Fed lowering interest rates in these times of high inflation as well as the relentless printing of U.S. dollars, and its subsequent devaluation. While we're at it, could we please make a token effort at balancing our fiscal budget? Perhaps then we'll be real "conservative Republicans" instead of the "radical Republicans" who have been "governing" these last seven years. Doesn't anyone on the Bush economic team care what kind of currency and country their kids and grandkids will inherit? If not, please tell me where they are planning to relocate when the bottom drops out.
Mike Fitzsimmons
Crossville, Tenn.
WSJ: Feel-Good Economics
By Bruce Bartlett
Wall Street Journal
Jan. 19-20, 2008 Weekend Edition Pg A12
With remarkable speed, Congress, the White House, Republicans, Democrats and even the Federal Reserve have come to a consensus on the need for economic stimulus to moderate and perhaps forestall a recession. It seems certain that the final stimulus package will contain a tax rebate.
The underlying theory for the rebate idea traces back to the British economist John Maynard Keynes. He believed that spending was the driving force in the economy. It didn't matter whether the spending was done by businesses on capital equipment, by governments on public works, or by consumers - spending is spending in the Keynesian modeal, and all of it is stimulative.
In Keynes' defense, his theory was developed during a severe, world-wide deflation. Spending of all kinds was paralyzed by a lack of liquidity, and the Federal Reserve had difficulty injecting money into the economy because so many banks had closed. Under these circumstances, deficit spending by governments made sense as a means of getting money into circulation and overcoming deflation. The problem is that, once World War II seemed to validate Keynes's theory, the idea of stimulating the economy by increasing government spending became the all-purpose cure for every economic slowdown, regardless of its underlying cause.
In the 1960s and 1970s, this usually took the form of public works spending. But in 1974, the White House was keen on the idea of cutting taxes to stimulate private spending. Since it was feared that a permanent tax cut might be inflationary, President Gerald Ford and the Democratic Congress agreeed on a one-shot tax rebate. It was thought that cash-strapped consumers would take their government checks and immediately run out and spend them on food, clothing and other necessities. This would give the economy a Keynesian boost.
One dissenter was economist Milton Friedman. His research had led him to conclude that consumer spending was less a function of liquidity than something he called "permanent income." Friedman observed that when workers lost their jobs, they didn't immediately cut back on spending. They borrowed or drew down savings to maintain spending, in the expectation of finding a new job shortly. Conversely, consumers didn't immediately spend windfalls. They kept spending on an even keel until they achieved a promotion at work, or other increase in their long-term income expectations.
Thus Friedman predicted that the $100 to $200 checks disbursed by the Treasury Department in the spring of 1975 would have a minimal impact on spending, because they did not alter peoples' permanent income. Most likely, people would save the money or pay down debt, which is the same thing. Very little of the rebate would cause consumers to buy things they wouldn't otherwise have bought in the near term.
Subsequent studies by MIT economists Franco Modigliani and Charles Steindel, and Alan Blinder of Princeton, showed that Freidman's prediction was correct. The 1975 rebate had very little impact on spending and much less than a permanent tax cut - which would change peoples' concept of their permanent income - of similiar magnitude.
In 2001 - despite the thoroughness and general acceptance of these studies - Congress and the White House once again chose a one-shot tax rebate to deal with an economic slowdown in 2001.
To his credit, Treasury Secretary Paul O'Neill cautioned against the rebate. "I was here when we tried that in 1975, and it just didn't work," he said. "If we want to change consumption patterns, we need to make permanent changes in peoples' tax burdens." But President George W. Bush overruled his Treasury secretary and approved the rebate idea. Checks of $300 to $600 per taxpayer were sent out in the late summer. Contemporaneous polls by Gallup, Bloomberg and the University of Michigan all found that the vast bulk of consumers expected to save the money or use it to pay bills. Subsequent studies confirmed these forecasts.
In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political - giving politicans a way of appearing to be doing something about the nation's economic problems that is superficially plausible.
A new rebate probably won't do much harm. But anyone who thinks it will prevent a recession - if one is actually in the pipeline, which is not at all certain - is dreaming. It's an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicans feel tood about themselves and buy reelection with the public purse.
Mr. Bartlett was deputy assistant secretary of the Treasury for econoimc policy during the administration of President George H.W. Bush
Wall Street Journal
Jan. 19-20, 2008 Weekend Edition Pg A12
With remarkable speed, Congress, the White House, Republicans, Democrats and even the Federal Reserve have come to a consensus on the need for economic stimulus to moderate and perhaps forestall a recession. It seems certain that the final stimulus package will contain a tax rebate.
The underlying theory for the rebate idea traces back to the British economist John Maynard Keynes. He believed that spending was the driving force in the economy. It didn't matter whether the spending was done by businesses on capital equipment, by governments on public works, or by consumers - spending is spending in the Keynesian modeal, and all of it is stimulative.
In Keynes' defense, his theory was developed during a severe, world-wide deflation. Spending of all kinds was paralyzed by a lack of liquidity, and the Federal Reserve had difficulty injecting money into the economy because so many banks had closed. Under these circumstances, deficit spending by governments made sense as a means of getting money into circulation and overcoming deflation. The problem is that, once World War II seemed to validate Keynes's theory, the idea of stimulating the economy by increasing government spending became the all-purpose cure for every economic slowdown, regardless of its underlying cause.
In the 1960s and 1970s, this usually took the form of public works spending. But in 1974, the White House was keen on the idea of cutting taxes to stimulate private spending. Since it was feared that a permanent tax cut might be inflationary, President Gerald Ford and the Democratic Congress agreeed on a one-shot tax rebate. It was thought that cash-strapped consumers would take their government checks and immediately run out and spend them on food, clothing and other necessities. This would give the economy a Keynesian boost.
One dissenter was economist Milton Friedman. His research had led him to conclude that consumer spending was less a function of liquidity than something he called "permanent income." Friedman observed that when workers lost their jobs, they didn't immediately cut back on spending. They borrowed or drew down savings to maintain spending, in the expectation of finding a new job shortly. Conversely, consumers didn't immediately spend windfalls. They kept spending on an even keel until they achieved a promotion at work, or other increase in their long-term income expectations.
Thus Friedman predicted that the $100 to $200 checks disbursed by the Treasury Department in the spring of 1975 would have a minimal impact on spending, because they did not alter peoples' permanent income. Most likely, people would save the money or pay down debt, which is the same thing. Very little of the rebate would cause consumers to buy things they wouldn't otherwise have bought in the near term.
Subsequent studies by MIT economists Franco Modigliani and Charles Steindel, and Alan Blinder of Princeton, showed that Freidman's prediction was correct. The 1975 rebate had very little impact on spending and much less than a permanent tax cut - which would change peoples' concept of their permanent income - of similiar magnitude.
In 2001 - despite the thoroughness and general acceptance of these studies - Congress and the White House once again chose a one-shot tax rebate to deal with an economic slowdown in 2001.
To his credit, Treasury Secretary Paul O'Neill cautioned against the rebate. "I was here when we tried that in 1975, and it just didn't work," he said. "If we want to change consumption patterns, we need to make permanent changes in peoples' tax burdens." But President George W. Bush overruled his Treasury secretary and approved the rebate idea. Checks of $300 to $600 per taxpayer were sent out in the late summer. Contemporaneous polls by Gallup, Bloomberg and the University of Michigan all found that the vast bulk of consumers expected to save the money or use it to pay bills. Subsequent studies confirmed these forecasts.
In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political - giving politicans a way of appearing to be doing something about the nation's economic problems that is superficially plausible.
A new rebate probably won't do much harm. But anyone who thinks it will prevent a recession - if one is actually in the pipeline, which is not at all certain - is dreaming. It's an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicans feel tood about themselves and buy reelection with the public purse.
Mr. Bartlett was deputy assistant secretary of the Treasury for econoimc policy during the administration of President George H.W. Bush
Wednesday, February 20, 2008
WSJ: In Times of Turmoil, Cautionary TIPS Tale
In Times of Turmoil, Cautionary TIPS Tale
Investors Flock to Bonds With Inflation Protection, Sending Prices Soaring
Wall Street Journal
Wednesday January 9, 2008 Pg C13
In times of market turmoil, many investors seek a haven for their money. And right now many are buying up inflation-protected U.s. government bonds in the belief that they are the safest investment around.
The markets are volatile amid worries about a recession, even as signs of inflation pressure emerge.
The best TIPS funds, meanwhile, offer low fees and a straightforward exposure to TIPS. Among the most popular, are Vanguard's Inflation Protected-Securities Index fund, and an exchange-traded fund, Lehman TIPS iShare.
All Crowd In?
The only problem is that everyone has the same idea. Huge demand has sent the price of these bonds, known as Treasury Inflation-Protected Securities, or TIPS, soaring to lofty levels. And while investors may not realize it, at current valuations thaey offer much more meager returns than normal.
TIPS are a relatively new class of government bond, launched in the 1990s. They offer an appealing double benefit for investors - especially those, such as retirees, seeking safety and conservation of capital.
First, like ordinary U.S. government bonds, they offer guaranteed income and return of capital. They are issued by the federal government and the risk of any default is miniscule.
Second, unlike most government bonds, they contain insurance against a rise in inflation as well. Through a complex formula involving both coupons and bond prices, TIPS guarantee that their annual interest rate will keep up with fluctuations in the consumer-price index over the price of the bond. They offer a guaranteed "real" yield on top of the CPI.
Careful on the Seesaw
Bonds work like a seesaw: When the price rises, the yield you get falls.
The accompanying chart shows that this is doing to TIP yields. The "real" or after-inflation yield on a benchmark 10-Year TIP has plunged by nearly half, from over 2.8% in August to just 1.57% today.
History is pretty clear. That tends to prove a poor deal for investors.
Only twice in recent history have these real yields fallen to similar levels: In early 2004, and again in 2005. On both occasions, those who invested quickly lost money as the bonds fell back again and the yields rose.
The best time to buy TIPS is when they are out of fashion and the real yield being offered is over 2%. The market seems to consider that a good long-term value.
TIPS do offer guaranteed income and protection against inflation. But always on Wall Street, price matters too. And there is no safety in numbers.
If TIPS appear to offer meager pickings right now, the same could also be said for regular government bonds - the ones with no inflation protection. The current yield on the 10-year Treasury is a dismal 3.85%, and 4.36% on the 30 year. Both have collapsed since last summer. It is worth adding that these yields are all subject to federal income tax as well, unless the bonds are held in a tax-sheltered account like an IRA.
For savers seeking better interest, it may be sensible to wait in cash for better opportunities. E*Trade Financial Corp.'s E*Trade Bank, for example, offers a savings account paying 4.93%. And deposits are federally guaranteed up to $100,000.
Investors Flock to Bonds With Inflation Protection, Sending Prices Soaring
Wall Street Journal
Wednesday January 9, 2008 Pg C13
In times of market turmoil, many investors seek a haven for their money. And right now many are buying up inflation-protected U.s. government bonds in the belief that they are the safest investment around.
The markets are volatile amid worries about a recession, even as signs of inflation pressure emerge.
The best TIPS funds, meanwhile, offer low fees and a straightforward exposure to TIPS. Among the most popular, are Vanguard's Inflation Protected-Securities Index fund, and an exchange-traded fund, Lehman TIPS iShare.
All Crowd In?
The only problem is that everyone has the same idea. Huge demand has sent the price of these bonds, known as Treasury Inflation-Protected Securities, or TIPS, soaring to lofty levels. And while investors may not realize it, at current valuations thaey offer much more meager returns than normal.
TIPS are a relatively new class of government bond, launched in the 1990s. They offer an appealing double benefit for investors - especially those, such as retirees, seeking safety and conservation of capital.
First, like ordinary U.S. government bonds, they offer guaranteed income and return of capital. They are issued by the federal government and the risk of any default is miniscule.
Second, unlike most government bonds, they contain insurance against a rise in inflation as well. Through a complex formula involving both coupons and bond prices, TIPS guarantee that their annual interest rate will keep up with fluctuations in the consumer-price index over the price of the bond. They offer a guaranteed "real" yield on top of the CPI.
Careful on the Seesaw
Bonds work like a seesaw: When the price rises, the yield you get falls.
The accompanying chart shows that this is doing to TIP yields. The "real" or after-inflation yield on a benchmark 10-Year TIP has plunged by nearly half, from over 2.8% in August to just 1.57% today.
History is pretty clear. That tends to prove a poor deal for investors.
Only twice in recent history have these real yields fallen to similar levels: In early 2004, and again in 2005. On both occasions, those who invested quickly lost money as the bonds fell back again and the yields rose.
The best time to buy TIPS is when they are out of fashion and the real yield being offered is over 2%. The market seems to consider that a good long-term value.
TIPS do offer guaranteed income and protection against inflation. But always on Wall Street, price matters too. And there is no safety in numbers.
If TIPS appear to offer meager pickings right now, the same could also be said for regular government bonds - the ones with no inflation protection. The current yield on the 10-year Treasury is a dismal 3.85%, and 4.36% on the 30 year. Both have collapsed since last summer. It is worth adding that these yields are all subject to federal income tax as well, unless the bonds are held in a tax-sheltered account like an IRA.
For savers seeking better interest, it may be sensible to wait in cash for better opportunities. E*Trade Financial Corp.'s E*Trade Bank, for example, offers a savings account paying 4.93%. And deposits are federally guaranteed up to $100,000.
WSJ: Consumer Borrowing Rises At Fastest Rate in 3 Months
Wall Street Journal
Wednesday January 9, 2008 Pg A2
U.S. consumer borrowing rose at an annual rate of 7.4% in November, the fastest pace in three months, the Federal Reserve said.
The 0.6% monthly increase in consumer credit outstanding, to $2.505 trillion, is a positive sign for consumer spending, which accounts for more than two-thirds of the nation's economic activity. Consumer credit increased at an annual rate of just 1% in October, or 0.08% for the month.
The Fed said revolving credit - largely credit-card financing - grew at an 11.3% rate to $937.5 billion, the fastest pace in six months.
Households' nonrevolving credit, such as car and boat loans, rose at an annualized 5.1% pace to $1.568 trillion, rebounding from October's drop in that category, the Fed said.
Separately, the National Association of Realtors said its forward-looking indicator of existing-home sales fell in November after rising for two months. The industry group's pending-home-sales index, based on signed contracts for homes, declined at a seasonally adjusted annual rate of 2.6% to 87.6.
Wednesday January 9, 2008 Pg A2
U.S. consumer borrowing rose at an annual rate of 7.4% in November, the fastest pace in three months, the Federal Reserve said.
The 0.6% monthly increase in consumer credit outstanding, to $2.505 trillion, is a positive sign for consumer spending, which accounts for more than two-thirds of the nation's economic activity. Consumer credit increased at an annual rate of just 1% in October, or 0.08% for the month.
The Fed said revolving credit - largely credit-card financing - grew at an 11.3% rate to $937.5 billion, the fastest pace in six months.
Households' nonrevolving credit, such as car and boat loans, rose at an annualized 5.1% pace to $1.568 trillion, rebounding from October's drop in that category, the Fed said.
Separately, the National Association of Realtors said its forward-looking indicator of existing-home sales fell in November after rising for two months. The industry group's pending-home-sales index, based on signed contracts for homes, declined at a seasonally adjusted annual rate of 2.6% to 87.6.
Monday, February 18, 2008
Delinquency rate up on consumer loans
Delinquency rate up on consumer loans
St. Paul Pioneer Press
Friday January 4, 2008 Pg 2C
Late payments on a cluster of consumer loans, including those for autos, home improvement and certain home-equity loans, climbed in the summer to their highest point since the country's last recession in 2001. The American Bankers Association said Thursday the delinquency rate on a composite of consumer loans increased to 2.44 percent in the July-to-September quarter. That was up sharply from 2.27 percent in the previous quarter and was the highest late-payment rate since the second quarter of 2001. Payments are considered delinquent if they are 30 or more days past due. The survey is based on information supplied by more than 300 banks nationwide. Late payments on credit cards, meanwhile, dipped during summer. The delinquency rate on credit cards dropped to 4.18 percent in the third quarter, down from 4.39 percent in the second quarter.
St. Paul Pioneer Press
Friday January 4, 2008 Pg 2C
Late payments on a cluster of consumer loans, including those for autos, home improvement and certain home-equity loans, climbed in the summer to their highest point since the country's last recession in 2001. The American Bankers Association said Thursday the delinquency rate on a composite of consumer loans increased to 2.44 percent in the July-to-September quarter. That was up sharply from 2.27 percent in the previous quarter and was the highest late-payment rate since the second quarter of 2001. Payments are considered delinquent if they are 30 or more days past due. The survey is based on information supplied by more than 300 banks nationwide. Late payments on credit cards, meanwhile, dipped during summer. The delinquency rate on credit cards dropped to 4.18 percent in the third quarter, down from 4.39 percent in the second quarter.
Bankruptcy filings back on the rise
Bankruptcy filings back on the rise
St. Paul Pioneer Press
Friday January 4, 2008 Pg 1C
U.S. personal bankruptcy filings jumped 40 percent in 2007 because of rising mortgage payments, job losses and other financial pressures. The increase followed a sharp decline from a year earlier, when a new law made it more difficult for consumers to seek bankruptcy-court protection from creditors.
More than 800,000 personal bankruptcy filings were made in 2007, compared with more than 573,000 in 2006 - the lowest level since 1998, according to data collected by the National Bankruptcy Research Center and published by the American Bankruptcy Institute, a research group in Alexandria, Va.
Personal bankruptcy filings soared to more than 2 million in 2005 for the nation, with more than 600,000 filings made in October, when the law took effect.
Minnesota bankruptcies through November totaled 10,834, compared with 7,729 filings for all of 2006. The 11-month 2007 total is well below 2005's 25,420 for the same period. From 1999 through 2004, Minnesota saw between 14,510 and 19,416 filings during hte first 11 months.
St. Paul Pioneer Press
Friday January 4, 2008 Pg 1C
U.S. personal bankruptcy filings jumped 40 percent in 2007 because of rising mortgage payments, job losses and other financial pressures. The increase followed a sharp decline from a year earlier, when a new law made it more difficult for consumers to seek bankruptcy-court protection from creditors.
More than 800,000 personal bankruptcy filings were made in 2007, compared with more than 573,000 in 2006 - the lowest level since 1998, according to data collected by the National Bankruptcy Research Center and published by the American Bankruptcy Institute, a research group in Alexandria, Va.
Personal bankruptcy filings soared to more than 2 million in 2005 for the nation, with more than 600,000 filings made in October, when the law took effect.
Minnesota bankruptcies through November totaled 10,834, compared with 7,729 filings for all of 2006. The 11-month 2007 total is well below 2005's 25,420 for the same period. From 1999 through 2004, Minnesota saw between 14,510 and 19,416 filings during hte first 11 months.
Financial Times: Recession Risks
This article appeared in the Wed. Jan. 2, 2008 issue of the Financial Times:
Whatever the inflationary risks lurking in the US economy, recession is the fear that is keeping policymakers up at night. Rightly so. The long-resilient US faces a series of blows that will cut into growth. The residential housing market is dealing with an almost unprecedented nationwide fall in prices. Meanwhile, unstable credit markets, roiled by the subprime crisis, could have a significant impact on the availability, and price, of credit.
How big will the impact be? US growth will certainly slow. But a house price correction in itself should be manageable, unless it turns into a freefall. After all, the pain so far has been concentrated among poorer, subprime borrowers, whose spending is very small in the context of the overall economy.
The trouble is, we are heading into largely uncharted territory on housing when it comes to guessing whether consumers, already heavily burdened with debt, will lose confidence. That is a significant risk. And it could feed back into credit market problems.
Banks are already building up their own liquidity and are worried about lending to each other because of the credit market crisis. Now they also have to factor in the risk of a recession. If they are bearish, they are likely to ratchet up credit standards and reduce lending somewhat to prepare for loan losses. There is the risk of a downward spiral, where such a credit contraction in itself increases recession risk.
As the property and credit markets undergo a slow and ugly repricing, it would be little surprise if the US slipped at least briefly into recession. Stronger export growth, on the back of a weak dollar and healthy demand from the rest of the world, will struggle to offset the domestic forces at work.
Whatever the inflationary risks lurking in the US economy, recession is the fear that is keeping policymakers up at night. Rightly so. The long-resilient US faces a series of blows that will cut into growth. The residential housing market is dealing with an almost unprecedented nationwide fall in prices. Meanwhile, unstable credit markets, roiled by the subprime crisis, could have a significant impact on the availability, and price, of credit.
How big will the impact be? US growth will certainly slow. But a house price correction in itself should be manageable, unless it turns into a freefall. After all, the pain so far has been concentrated among poorer, subprime borrowers, whose spending is very small in the context of the overall economy.
The trouble is, we are heading into largely uncharted territory on housing when it comes to guessing whether consumers, already heavily burdened with debt, will lose confidence. That is a significant risk. And it could feed back into credit market problems.
Banks are already building up their own liquidity and are worried about lending to each other because of the credit market crisis. Now they also have to factor in the risk of a recession. If they are bearish, they are likely to ratchet up credit standards and reduce lending somewhat to prepare for loan losses. There is the risk of a downward spiral, where such a credit contraction in itself increases recession risk.
As the property and credit markets undergo a slow and ugly repricing, it would be little surprise if the US slipped at least briefly into recession. Stronger export growth, on the back of a weak dollar and healthy demand from the rest of the world, will struggle to offset the domestic forces at work.
Saturday, February 16, 2008
Newest National Debt Statistics posted
Here are the most recent figures related to the size our our National Debt, per www.treasurydirect.gov
As of Feb. 14, 2008 (Happy Valentine's Day):
Publicly Held: $5,195,943,354,136.82
Intragovernmental holdings: $4,095,955,735,115.73
Total: $9,291,899,089,252.55
Interest payments for FY08:
October 2007 - $22,310,362,733.54
November 2007 - $25,344,987,578.31
December 2007 -$106,138,177,851.45
January 2008 - $24,686,746,422.35
FY08 to date: $178,480,274,585.65
Public Contributions:
December 2007: $113,092.26
FY08 to date: $330,616.89
FY07 totals: $2,624,862.42
Per the IRS, Gifts to reduce the Public Debt ARE tax deductible for income tax purposes. For more information, see www.irs.gov
As of Feb. 14, 2008 (Happy Valentine's Day):
Publicly Held: $5,195,943,354,136.82
Intragovernmental holdings: $4,095,955,735,115.73
Total: $9,291,899,089,252.55
Interest payments for FY08:
October 2007 - $22,310,362,733.54
November 2007 - $25,344,987,578.31
December 2007 -$106,138,177,851.45
January 2008 - $24,686,746,422.35
FY08 to date: $178,480,274,585.65
Public Contributions:
December 2007: $113,092.26
FY08 to date: $330,616.89
FY07 totals: $2,624,862.42
Per the IRS, Gifts to reduce the Public Debt ARE tax deductible for income tax purposes. For more information, see www.irs.gov
Friday, February 15, 2008
Dave's Thoughts on the Stimulus Tax Rebate
Dave's Thoughts on the Stimulus Tax Rebate
by Dave Ramsey
www.daveramsey.com
Most of you are jumping with joy that you're probably going to be getting a big, fat check from the government. You may be thinking, "FREE MONEY, BABY!!!"
Well, I'm not here to totally rain on your parade, but plain and simple, I'm not lovin' this plan. This government plan to try to stimulate the economy and pull us away from a possible recession is actually straight-up socialism - just the opposite of capitalism! I don't want my money to help you (if you haven't paid federal income taxes) buy an iPhone or whatever else you have your eye set on.
"Letting Americans keep more of their own money should increase consumer spending, and lift our economy at a time when people otherwise might spend less," President Bush said. The idea in theory sounds like it will work smoothly, but I have a much better idea that will eventually increase consumer spending, and in turn, cause the economy to flourish: encourage freedom from debt!
The last time a stimulus rebate like this was issued was in 2001. A recent study revealed consumers spent two-thirds of those rebates within 6 months of receiving them. Do you have a game plan already for what you'll do with your rebate this time around?
Make the Money Work For You
Don't wait until it comes in the mail to formulate a plan, and whatever you do, do NOT spend this money before it gets to your hands! Those are just formal invitations for Murphy to unpack his suitcases in your spare bedroom! Here are a handful of ways I recommend making your tax rebate work for you, depending on where you are in the Baby Steps:
Pay off debt. This may sound like a no-brainer, but I already expect that few people will actually do it! There's really no reason NOT to throw this "free" money toward your debt snowball. It will get you one step (or maybe quite a few) closer to being debt free, and THEN you will have the freedom to buy that toy or take that vacation you've had your heart set on for quite a while! Learn how
Invest it. If you put this big chunk of change into a mutual fund for a few years, you'll actually receive TONS more money than just the initial $600 or $1,200 check this summer.
Say you get back $600 and put it automatically into a mutual fund averaging 12%. In 2018, that one-time investment will grow to approximately $2,000! If left in for 20 years, it will be worth about $6,500! For the married folks, this free money can grow up to $13,000 over 20 years - WOW! Calculate your earnings!
Have some fun. I'm not a total meanie. I actually do like to have some fun with my money, and I encourage you to do the same! There's nothing wrong with taking your spouse out for a nice dinner or buying that new pair of jeans with some of this money you could be getting. Just stick within your boundaries, and remember that the quicker you get out of debt, the more fun things you can do and the more money you can give away to bless others.
Source: CNNMoney.com
by Dave Ramsey
www.daveramsey.com
Most of you are jumping with joy that you're probably going to be getting a big, fat check from the government. You may be thinking, "FREE MONEY, BABY!!!"
Well, I'm not here to totally rain on your parade, but plain and simple, I'm not lovin' this plan. This government plan to try to stimulate the economy and pull us away from a possible recession is actually straight-up socialism - just the opposite of capitalism! I don't want my money to help you (if you haven't paid federal income taxes) buy an iPhone or whatever else you have your eye set on.
"Letting Americans keep more of their own money should increase consumer spending, and lift our economy at a time when people otherwise might spend less," President Bush said. The idea in theory sounds like it will work smoothly, but I have a much better idea that will eventually increase consumer spending, and in turn, cause the economy to flourish: encourage freedom from debt!
The last time a stimulus rebate like this was issued was in 2001. A recent study revealed consumers spent two-thirds of those rebates within 6 months of receiving them. Do you have a game plan already for what you'll do with your rebate this time around?
Make the Money Work For You
Don't wait until it comes in the mail to formulate a plan, and whatever you do, do NOT spend this money before it gets to your hands! Those are just formal invitations for Murphy to unpack his suitcases in your spare bedroom! Here are a handful of ways I recommend making your tax rebate work for you, depending on where you are in the Baby Steps:
Pay off debt. This may sound like a no-brainer, but I already expect that few people will actually do it! There's really no reason NOT to throw this "free" money toward your debt snowball. It will get you one step (or maybe quite a few) closer to being debt free, and THEN you will have the freedom to buy that toy or take that vacation you've had your heart set on for quite a while! Learn how
Invest it. If you put this big chunk of change into a mutual fund for a few years, you'll actually receive TONS more money than just the initial $600 or $1,200 check this summer.
Say you get back $600 and put it automatically into a mutual fund averaging 12%. In 2018, that one-time investment will grow to approximately $2,000! If left in for 20 years, it will be worth about $6,500! For the married folks, this free money can grow up to $13,000 over 20 years - WOW! Calculate your earnings!
Have some fun. I'm not a total meanie. I actually do like to have some fun with my money, and I encourage you to do the same! There's nothing wrong with taking your spouse out for a nice dinner or buying that new pair of jeans with some of this money you could be getting. Just stick within your boundaries, and remember that the quicker you get out of debt, the more fun things you can do and the more money you can give away to bless others.
Source: CNNMoney.com
Wednesday, January 23, 2008
CBO Sees $250 Billion Deficit
CBO Sees $250 Billion Deficit
Associated Press Wednesday January 23, 10:33 am ET
By Andrew Taylor, Associated Press Writer
CBO Predicts Rising Federal Budget Deficit As Economy Weakens
WASHINGTON (AP) -- The deficit for the current budget year will jump to about $250 billion, the Congressional Budget Office estimated Wednesday, citing the weakening economy. And that figure does not reflect at least $100 billion in red ink from an economic stimulus measure in the works.
"After three years of declining budget deficits, a slowing economy this year will contribute to an increase in the deficit," the CBO report said.
The figure greatly exceeds the $163 billion in red ink registered last year. Adding likely but still unapproved outlays for the wars in Iraq and Afghanistan brings its "baseline" deficit estimate of $219 billion to about $250 billion, the nonpartisan CBO said.
Senate Budget Committee Chairman Kent Conrad, D-N.D., said the 2008 deficit would reach more than $350 billion once the costs of an upcoming economic stimulus measure under negotiation between the Bush administration and Congress are factored in.
The CBO crunches economic and budget data for lawmakers.
Unlike an increasing number of economists, CBO does not forecast a recession this year. It instead forecasts a growth rate of 1.7 percent, down from 2.2 percent real growth in the gross domestic product (GDP) last year.
"Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession," CBO said. The CBO economic forecast was completed last month, before a recent spike in unemployment and the release of disappointing holiday retail sales figures.
"A number of ominous economic signs have emerged since CBO finalized last month the forecast underlying today's report," said House Budget Committee Chairman John Spratt Jr., D-S.C. "Today's new economic forecast thus adds to the growing evidence that the economy has weakened, and that policymakers in Washington must take action."
CBO Director Peter Orszag testified before the House Budget Committee. He warned them again that regardless of the short-term fluctuations in the deficit, the longer-term picture remains bleak due to expected spiraling costs of Medicare, Medicaid and Social Security as the Baby Boom generation retires.
"A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the two will be necessary to maintain the nation's long-term fiscal stability," Orszag said.
Officially, CBO predicts the 2008 deficit at $219 billion, but that figure fails to account for at least an additional $30 billion in war costs and the likely infusion of deficit-financed economic stimulus measures such as income tax rebates, business tax breaks and help for the unemployed now under discussion on Capitol Hill and at the White House.
The deficit seems to be an afterthought as lawmakers race toward agreement with President Bush on a plan to pump perhaps $150 billion worth of deficit spending into the economy. The bulk of the plan would come as tax cuts, though Democrats are pressing for additional help for the unemployed and people on food stamps. Constituency groups in both political parties are pressing for even more, such as Democratic-sought aid to cash-strapped states and people with high heating bills.
Most of any economic stimulus bill would be released before the Oct. 1 start of the 2009 budget year, with any benefits to the economy -- and therefore federal revenues -- lagging behind.
The White House is set to release its 2009 budget on Feb. 4, and Bush has promised a plan that would erase the deficit by 2012 if his policies are followed.
The 2006 deficit was $248 billion and had closed from a high of $413 billion registered in 2004.
The deficit picture remains worse than it was when Bush took office seven years ago. Then, both White House and congressional forecasters projected cumulative surpluses of $5.6 trillion over the subsequent decade.
But a revenue bubble burst, a recession and the Sept. 11, 2001, terrorist attacks adversely affected the books. Several rounds of tax cuts, including Bush's signature $1.35 trillion 2001 tax cut, also contributed to the return to deficits in 2002 after four years of budget surpluses. The national debt has risen to $9.2 trillion.
"This guy will come close to doubling the debt of the country during his period of presidency," Conrad said.
Congressional Budget Office: http://www.cbo.gov
Associated Press Wednesday January 23, 10:33 am ET
By Andrew Taylor, Associated Press Writer
CBO Predicts Rising Federal Budget Deficit As Economy Weakens
WASHINGTON (AP) -- The deficit for the current budget year will jump to about $250 billion, the Congressional Budget Office estimated Wednesday, citing the weakening economy. And that figure does not reflect at least $100 billion in red ink from an economic stimulus measure in the works.
"After three years of declining budget deficits, a slowing economy this year will contribute to an increase in the deficit," the CBO report said.
The figure greatly exceeds the $163 billion in red ink registered last year. Adding likely but still unapproved outlays for the wars in Iraq and Afghanistan brings its "baseline" deficit estimate of $219 billion to about $250 billion, the nonpartisan CBO said.
Senate Budget Committee Chairman Kent Conrad, D-N.D., said the 2008 deficit would reach more than $350 billion once the costs of an upcoming economic stimulus measure under negotiation between the Bush administration and Congress are factored in.
The CBO crunches economic and budget data for lawmakers.
Unlike an increasing number of economists, CBO does not forecast a recession this year. It instead forecasts a growth rate of 1.7 percent, down from 2.2 percent real growth in the gross domestic product (GDP) last year.
"Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession," CBO said. The CBO economic forecast was completed last month, before a recent spike in unemployment and the release of disappointing holiday retail sales figures.
"A number of ominous economic signs have emerged since CBO finalized last month the forecast underlying today's report," said House Budget Committee Chairman John Spratt Jr., D-S.C. "Today's new economic forecast thus adds to the growing evidence that the economy has weakened, and that policymakers in Washington must take action."
CBO Director Peter Orszag testified before the House Budget Committee. He warned them again that regardless of the short-term fluctuations in the deficit, the longer-term picture remains bleak due to expected spiraling costs of Medicare, Medicaid and Social Security as the Baby Boom generation retires.
"A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the two will be necessary to maintain the nation's long-term fiscal stability," Orszag said.
Officially, CBO predicts the 2008 deficit at $219 billion, but that figure fails to account for at least an additional $30 billion in war costs and the likely infusion of deficit-financed economic stimulus measures such as income tax rebates, business tax breaks and help for the unemployed now under discussion on Capitol Hill and at the White House.
The deficit seems to be an afterthought as lawmakers race toward agreement with President Bush on a plan to pump perhaps $150 billion worth of deficit spending into the economy. The bulk of the plan would come as tax cuts, though Democrats are pressing for additional help for the unemployed and people on food stamps. Constituency groups in both political parties are pressing for even more, such as Democratic-sought aid to cash-strapped states and people with high heating bills.
Most of any economic stimulus bill would be released before the Oct. 1 start of the 2009 budget year, with any benefits to the economy -- and therefore federal revenues -- lagging behind.
The White House is set to release its 2009 budget on Feb. 4, and Bush has promised a plan that would erase the deficit by 2012 if his policies are followed.
The 2006 deficit was $248 billion and had closed from a high of $413 billion registered in 2004.
The deficit picture remains worse than it was when Bush took office seven years ago. Then, both White House and congressional forecasters projected cumulative surpluses of $5.6 trillion over the subsequent decade.
But a revenue bubble burst, a recession and the Sept. 11, 2001, terrorist attacks adversely affected the books. Several rounds of tax cuts, including Bush's signature $1.35 trillion 2001 tax cut, also contributed to the return to deficits in 2002 after four years of budget surpluses. The national debt has risen to $9.2 trillion.
"This guy will come close to doubling the debt of the country during his period of presidency," Conrad said.
Congressional Budget Office: http://www.cbo.gov
Friday, January 11, 2008
Fidelity: Debt crowds job-based savings
The following appeared in the January 11, 2008 issue of the St. Paul Pioneer Press business section, page 2C.
Fidelity: Debt crowds job-based savings
High consumer debt is slowing growth in retirement savings accounts, according to a study released Thursday by Fidelity Investments. The mutual fund company, which is based in Boston, found one in three employees of nonprofit organizations increased their contributions to job-based savings plans in 2007. Some 44 percent of participants in the survey also admitted to personal debt exceeding $5,000, not including mortgages, the study found. The impact of debt could be seen in the breakdown of savings by people who considered themselves investors, savers or spenders. The spenders tended to carry higher debt than people in the other categories. Some 42 percent of people who considered themselves investors raised their contributions in 2007, compared with 30 percent of savers and 25 percent of spenders, the study found.
Tuesday, January 8, 2008
Happy New Year
It's pretty sad when one has to celebrate for NOT hitting a milestone. I'm celebrating because we still haven't hit the $10 Trillion National Debt level. Sadly, the way things are going, I'm sure we'll hit it by the end of the year.
Since I've been out of town and have had computer problems, I haven't been able to post for the past two months. Needless to say, despite my inability to monitor our debt for the past two months, it kept creeping up.
Here are the latest statistics from TreasuryDirect.com pertaining to the National Debt (effective Jan. 4, 2008).
Debt Held by Public: $5,116,199,834,200.04
Intragovernmental: $4,081,378,046,617.39
Total Debt (4 Jan): $9,197,577,880,817.43
Interest Payments FY08:
October 2007 - $22,310,362,733.54
November 2007 - $25,344,987,578.31
December 2007 - $106,138,177,851.45
Total 1st Q: $153,793,528,163.30
Gifts to reduce the Public Debt:
November 2007 - $27,617.15
October 2007 - $189,907.48
FY08 to Date: $217,524.63
Gifts to reduce the Public Debt in FY 2007: $2,624,862.42
Now that we are into the Presidential Primary season, it would be nice if the politicians who want to be our next leader would finally address this key issue. The silence is deafening!!
Since I've been out of town and have had computer problems, I haven't been able to post for the past two months. Needless to say, despite my inability to monitor our debt for the past two months, it kept creeping up.
Here are the latest statistics from TreasuryDirect.com pertaining to the National Debt (effective Jan. 4, 2008).
Debt Held by Public: $5,116,199,834,200.04
Intragovernmental: $4,081,378,046,617.39
Total Debt (4 Jan): $9,197,577,880,817.43
Interest Payments FY08:
October 2007 - $22,310,362,733.54
November 2007 - $25,344,987,578.31
December 2007 - $106,138,177,851.45
Total 1st Q: $153,793,528,163.30
Gifts to reduce the Public Debt:
November 2007 - $27,617.15
October 2007 - $189,907.48
FY08 to Date: $217,524.63
Gifts to reduce the Public Debt in FY 2007: $2,624,862.42
Now that we are into the Presidential Primary season, it would be nice if the politicians who want to be our next leader would finally address this key issue. The silence is deafening!!
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