Tuesday, November 25, 2014

The New York Fed.

                                       Comments due by Dec 3, 2014

This is a must read about the Fed . It does deal with many of the issues that we spoke about during our last class session. 


WASHINGTON, DC – The US Federal Reserve System is the world’s most important central bank. Its decisions about interest rates and financial regulation reverberate through global markets and affect millions of lives. Yet its governance structure is of another age – antiquated, increasingly problematic, and urgently in need of sensible reform.
The Fed made major mistakes in the run-up to the global economic crisis of 2007-08, most notably by adopting a lax approach to the supervision of key financial institutions, and by allowing some very large banks to become extremely fragile. In one of the great ironies of modern American politics, the post-crisis Dodd-Frank financial reforms of 2010 actually gave more power to the Fed, mostly because other US regulatory agencies were regarded as having done a worse job.
In view of the Fed’s decidedly mixed track record since the Dodd-Frank reforms, some officials evidently regarded that default by Congress as a mandate to conduct business as usual. Recent press reports have highlighted lapses in supervision, particularly in and around the Federal Reserve Bank of New York – one of 12 regional banks in the Fed System, which also has a Board of Governors in Washington, DC.
This regional structure is the result of legislative compromise in 1913, when the Fed was created, and again in the mid-1930s, when its governance was last overhauled. Whereas members of the Fed’s Washington-based Board of Governors are nominated by the US president, subject to Senate confirmation, the presidents of the regional Federal Reserve banks are appointed by local boards.
In reality, the New York Fed has always had disproportionate sway; not all regional Fed presidents are created equal. The president of the New York Fed is a permanent voting member and vice chairman of the Federal Open Market Committee, which sets interest rates, whereas other regional Fed presidents are voting members only on a rotating basis.
The New York Fed also has a particularly important role in bank supervision – most of America’s “too big to fail” banks are located in its jurisdiction (and most global banks have a presence there). And the New York Fed has long been the Fed System’s eyes and ears on Wall Street.
Or perhaps it has become the other way around. At least over the past decade, senior New York Fed officials have consistently sided with the interests of very large banks. (To be clear, I also know many Fed officials who are outstanding public servants). Though Wall Street interests have long been well represented on the board of the New York Fed, under Timothy Geithner, its president from 2003 to 2009, the big players became even more powerful – with some rather unfortunate consequences for the rest of us.
In his recent memoir, Stress Test, Geithner says, “I basically restored the New York Fed board to its historic roots as an elite roster of the local financial establishment.” His choices included Dick Fuld, CEO of Lehman Brothers, which failed spectacularly in September 2008, and Stephen Friedman, a Goldman Sachs board member, who resigned as chair of the New York Fed’s board after being accused of inappropriately trading Goldman stock during the financial crisis. Geithner also established a tangled web of connections between the New York Fed and JPMorgan Chase, some of which linger to this day.
Some senior Fed officials become angry when pressed about this reality. But the Fed’s legitimacy – and its ability to make sensible policy – is not boosted by having major banks represented, directly or indirectly, on a board that chooses and oversees a key policymaker.
Now, finally, US politicians on both the left and the right are focusing their attention on a long-overdue reform of the Fed’s governance. One important proposal comes from Senator Jack Reed, a Democrat from Rhode Island, who proposes, quite reasonably, that the president of the New York Fed should be nominated by the president and confirmed by the Senate, just like members of the Board of Governors – or any other important economic policymaker. The president of the New York Fed would also be required to testify before Congress on a regular basis.
The Fed’s defenders will respond that it would be dangerous to alter the status quo. But it is the Fed’s current governance that has become dangerous. Senators Elizabeth Warren of Massachusetts and Joe Manchin of West Virginia argue, entirely convincingly, that the composition of the Fed’s Board of Governors should be tilted away from people who are connected with big Wall Street firms.
Meanwhile, House Republicans are preparing their own Fed governance reforms, which would be even more radical – and would likely constrain monetary policy unwisely.
In any case, it is time for change at the Fed. And, as is often the case with finance, the place to start is New York.

  • Friday, November 21, 2014


                                         Comments due Nov. 30, 2014
    The Tenement Museum, on the Lower East Side, is one of my favorite places in New York City. It’s a Civil War-vintage building that housed successive waves of immigrants, and a number of apartments have been restored to look exactly as they did in various eras, from the 1860s to the 1930s (when the building was declared unfit for occupancy). When you tour the museum, you come away with a powerful sense of immigration as a human experience, which — despite plenty of bad times, despite a cultural climate in which Jews, Italians, and others were often portrayed as racially inferior — was overwhelmingly positive.
    I get especially choked up about the Baldizzi apartment from 1934. When I described its layout to my parents, both declared, “I grew up in that apartment!” And today’s immigrants are the same, in aspiration and behavior, as my grandparents were — people seeking a better life, and by and large finding it.
    That’s why I enthusiastically support President Obama’s new immigration initiative. It’s a simple matter of human decency.
    That’s not to say that I, or most progressives, support open borders. You can see one important reason right there in the Baldizzi apartment: the photo of F.D.R. on the wall. The New Deal made America a vastly better place, yet it probably wouldn’t have been possible without the immigration restrictions that went into effect after World War I. For one thing, absent those restrictions, there would have been many claims, justified or not, about people flocking to America to take advantage of welfare programs.
    Furthermore, open immigration meant that many of America’s worst-paid workers weren’t citizens and couldn’t vote. Once immigration restrictions were in place, and immigrants already here gained citizenship, this disenfranchised class at the bottom shrank rapidly, helping to create the political conditions for a stronger social safety net. And, yes, low-skill immigration probably has some depressing effect on wages, although the available evidence suggests that the effect is quite small.
    So there are some difficult issues in immigration policy. I like to say that if you don’t feel conflicted about these issues, there’s something wrong with you. But one thing you shouldn’t feel conflicted about is the proposition that we should offer decent treatment to children who are already here — and are already Americans in every sense that matters. And that’s what Mr. Obama’s initiative is about.
    Who are we talking about? First, there are more than a million young people in this country who came — yes, illegally — as children and have lived here ever since. Second, there are large numbers of children who were born here — which makes them U.S. citizens, with all the same rights you and I have — but whose parents came illegally, and are legally subject to being deported.
    What should we do about these people and their families? There are some forces in our political life who want us to bring out the iron fist — to seek out and deport young residents who weren’t born here but have never known another home, to seek out and deport the undocumented parents of American children and force those children either to go into exile or to fend for themselves.

    The real question, then, is how we’re going to treat them. Will we continue our current regime of malign neglect, denying them ordinary rights and leaving them under the constant threat of deportation? Or will we treat them as the fellow Americans they already are?

    The truth is that sheer self-interest says that we should do the humane thing. Today’s immigrant children are tomorrow’s workers, taxpayers and neighbors. Condemning them to life in the shadows means that they will have less stable home lives than they should, be denied the opportunity to acquire skills and education, contribute less to the economy, and play a less positive role in society. Failure to act is just self-destructive.
    But speaking for myself, I don’t care that much about the money, or even the social aspects. What really matters, or should matter, is the humanity. My parents were able to have the lives they did because America, despite all the prejudices of the time, was willing to treat them as people. Offering the same kind of treatment to today’s immigrant children is the practical course of action, but it’s also, crucially, the right thing to do. So let’s applaud the president for doing it.
    (P. Krugman)

    The Economics of Thanksgiving Dinner.

                                    Comments due by Nov . 29, 2014      

    From negotiating family politics at the dinner table to managing the misery of holiday travel, the entire Thanksgiving enterprise is fraught with challenges for which we're supposed to be grateful. (And, of course, we are.)
    Even the annual traditions, like the constant of the Thanksgiving dinner, is subject to the whims of the universe. On Thursday, for example, the American Farm Bureau Federation announced that the price of Thanksgiving dinner is going slightly up this year. Using an informal survey of typical Thanksgiving offerings, the group determined that "the average cost of this year’s feast for 10 is $49.41, a 37-cent increase from last year’s average of $49.04."
    And while price increases seem to be a steady part of the tradition too, this year's presumptive Thanksgiving feast offers an interesting insight into how the economy is functioning. According to the U.S. Bureau of Statistics, turkey is actually 13 percent cheaper this year, despite the rising cost of most other meats. As the Columbus Dispatch noted, "at $1.58 a pound for a frozen bird at retail in September, the latest data available, turkey was 24 cents per pound cheaper than at the same time in 2013."
    The greater trend though, it adds, snaps the wishbone less in favor of the consumer: In 10 years, the per-pound price of turkey has risen 50 cents.
    So if falling fuel prices are dovetailing with a drop in corn and soybean prices (making turkey a bit cheaper), why is the overall cost of Thanksgiving dinner going up? The AFBF says prices for other staples like "sweet potatoes, dairy products and pumpkin pie mix" all jumped up in price.
    Meanwhile, in terms of actually getting to the table, driving seems to be the way to go. As the AP reported:
    Amtrak says its ticket prices have increased an average of 2 percent over last year. Same goes for flying. The average price of an airline ticket for travel this Thanksgiving is $307.52, not including an average $51 in taxes and fees, according to the Airlines Reporting Corp.
    The secret may be out though. According to AAA estimates, over 46 million Americans will drive 50 miles or more to their Thanksgiving gatherings. That's 4.2 percent increase from last year and the highest number since 2007. (The Atlantic)

    Friday, November 07, 2014

    Job gains and voter anxiety

                                                          Comment by Nov. 15, 2014

    Only days after many voters complained that the economy was getting
    worse, the latest government report on jobs, released Friday, provided fresh
    evidence that it was getting better. Employers added an estimated 214,000
    jobs in October, the Labor Department found, and the official jobless rate,
    bolstered by a big rise in the number of people finding jobs, dropped to 5.8
    percent, down sharply from 7.2 percent last October.
    The increase, combined with a revision that showed 31,000 jobs were
    added to the numbers previously reported for August and September, puts
    the average monthly employment gain for the past six months at 235,000 —
    an indication, analysts said, that the economy’s progress was gaining
    A range of other job measures all improved. More than 683,000 people
    reported that they found a job last month, according to a separate survey by
    the Labor Department. And the number of people walking away from the
    labor market has halted, while the average number of hours worked ticked
    The primary disappointment was the lack of wage growth. Hourly
    average earnings have remained stuck, rising only 0.1 percent in October, on
    the heels of no gain in September. For the year, wage gains are up just 2
    percent, barely ahead of the pace of inflation. That lack of progress is likely
    to cause the Federal Reserve to move cautiously before raising interest rates
    from their near-zero level.
    Still, several economist were encouraged by the October numbers.
    “Labor force participation actually rose” to 62.8 percent, said Carl
    Tannenbaum, chief economist at the Northern Trust Company. “We didn’t
    see a drop in employment because people dropped out of the work force. “
    Looking back at the changes since last year, Mr. Tannenbaum noted
    that there had been a sizable decrease in the number of discouraged
    workers, who have given up hope of finding a job — down 1.2 million — and
    of part-time workers who wanted full-time employment, down 1 million.
    A broader measure of unemployment that includes discouraged job
    seekers or those stuck in part-time jobs dropped to 11.5 percent, down more
    than 2 points from the seasonally adjusted figure from a year ago. The 5.8
    percent official unemployment rate is the lowest since the summer of 2008.
    “We think this is a very strong report,” said Michael Gapen, an
    economist at Barclays, noting that the number of hours worked was on the
    upswing, rising 4.2 percent in the fourth quarter.
    This latest report represents 56 consecutive months of private-sector
    job growth, which Jason Furman, chairman of President Obama’s Council of
    Economic Advisers, characterized this week as “the longest streak in U.S.
    Yet, as Mr. Furman and other economic experts readily acknowledge,
    the experience of many Americans does not match the growing optimism
    about the job market and the overall economy recently expressed by several
    Election Day exit polls found that 78 percent of those surveyed were
    very or somewhat worried about the future direction of the economy, while
    two-thirds said they believed the economy was getting worse.
    For many Americans, it still is. Even though the recovery from the
    recession is in its sixth year, stagnant wages, an economy generating jobs
    mostly at the bottom and the top rather than in the middle, and vast
    disparities between the rewards bestowed on the rich and on ordinary
    workers have left many people disenchanted with their economic prospects.
    Some analysts now see signs that a tighter labor market may lead to
    higher wages in the near future. “The job market is steadily picking up pace,”
    said Mark Zandi, chief economist at Moody’s Analytics, reacting to a report
    from the payroll processor ADP this week that private-sector employment
    increased by 230,000 jobs in October.
    “The job market will soon be tight enough to support a meaningful
    acceleration in wage growth,” he added.
    Ian Shepherdson, chief economist at Pantheon Macroeconomics, was
    also predicting that “faster productivity growth would drive real wages
    higher next year, after a very long wait.”
    The question is how much and how quickly.
    Over the year, average hourly earnings have risen by just 2 percent, only
    slightly ahead of the pace of inflation. “We are adding jobs, but it is still a
    wageless recovery,” said Elise Gould, an economist with the left-leaning
    Economic Policy Institute, who said she was disappointed by the lack of
    progress on wages in October. . “The economy may be growing but not
    enough for workers to feel the effects in their paychecks.”
    In a report, the institute argued “that wage growth is far below the 3.5
    percent rate consistent with the Federal Reserve Board’s inflation target of 2
    percent, and far below the 4 percent rate that could easily be absorbed for a
    while to restore labor’s share of national income from its current historic
    Steve Blitz, chief economist at ITG Investment Research, said the
    report’s mixed signals indicated the economy was not necessarily gaining
    momentum. “While many tout the pace of job increases so far this year as
    signal of a budding strong consumer economy, the details suggest
    otherwise,” he noted. Average hourly wages remain stuck, “which continues
    the downside pressure on real earnings growth after paying for food,
    gasoline and rent.”
    The lack of wage growth, particularly at the bottom, helps explain why
    ballot measures to raise the minimum wage in Alaska, Arkansas, Nebraska,
    Illinois and South Dakota all passed despite widespread losses among
    Democrats in those states who supported such measures.
    While stagnant wages remain one of the biggest problems in the
    economy, the recovery appears to be gaining momentum.
    The four-week moving average for new unemployment insurance
    claims, considered a more reliable indicator than the week-to-week
    fluctuations, hit a 14-year low last week. For the federal fiscal year that
    ended on Sept. 30, the number of bankruptcy cases filed in federal courts
    dropped 13 percent to 963,739, the lowest since the 2007 fiscal year. And
    consumers, bolstered by falling gasoline prices, are more upbeat about job
    prospects than at any time in the past six years.
    The job gains in the food and service industry noted by the Labor
    Department are coming from small-business employers like Matthew
    Saravay, who runs Wizard Studios, a special event production company in
    Brooklyn. “The economy’s gotten better and people are spending money,”
    Mr. Saravay said. “I have interviews lined up, trying to keep up with the
    clamor of opportunity. We’re seeing holiday parties return in a way I haven’t
    seen in seven or eight years. This is such a paradigm shift from what we’ve
    been experiencing for the past half decade.”
    Steve Roesner, chief executive officer of Quatro Composites in Iowa,
    which produces structures for manufacturers in the aerospace industry,
    hired 100 new workers this year, bringing the company’s total staff to 220.
    He said he expected to increase his work force 20 percent more next year.
    “In our industry, there’s a lot of optimism,” Mr. Roesner said. He attributed
    the boom, in part, to technological advances.
    Jay Floersch, a solutions architect at Aon Hewitt, a human resources
    consulting firm, said business had picked up significantly in recent months.
    “We’re exceeding our own forecasts,” he said, noting that “seasonal
    hiring is peaking right now.”
    Looking ahead, Tara M. Sinclair, an economist at Indeed.com, one of
    the nation’s largest sites for job postings, said: “We seem to be reaching a
    tipping point in terms of job market maturity. Should this positive trend
    continue, we should expect people to stop looking for ‘a job’ and start to look
    for ‘the right job. (NYT)

    Saturday, November 01, 2014

    US homeownership: Is the decline permanent?

                             Comments due by Oct. 8, 2014
    THE homeownership rate in the United States plunged during the Great Recession. Many families lost their homes as prices collapsed and unemployment rose.
    Now the economy is growing, and there are more jobs than ever. Home prices have risen, although they have not fully recovered.
    But the homeownership rate continues to decline.
    The Census Bureau reported this week that the rate fell to 64.3 percent in the third quarter, the lowest level since 1994. Since the second quarter of 2004, when the rate peaked at 69.4 percent, the number of homes owned by the people who live in them is virtually unchanged, but the number occupied by renters has risen by nearly 25 percent.
    Just why that is — and whether it is a bad thing — is subject to debate.
    Before the recession, it was a government goal, promoted by presidents of both parties, to get the ownership rate up. Homeowners were thought to care more, and thus maintain their homes better. They could profit from rising home prices, helping poorer people who bought homes improve their economic status. Changes in lending practices made it much easier for people to qualify for home loans, and soaring home prices made those who still rented appear to have passed up easy profits.
    Continue reading the main story

    Renting, Not Owning

    The homeownership rate — the percentage of homes and apartments that are owned by the occupant rather than rented — has dropped to its lowest level in 20 years. As more families rent, the number of apartments being built has recovered to prerecession levels, while single-family housing starts remain depressed.
    Homeownership rate
    Seasonally adjusted
    2Q 2004
    3Q 2014
    Change in occupied housing units
    since second quarter of 2004
    Combined vacancy rate
    for houses and apartments
    Rented homes
    Owned homes
    Change in housing starts since June 2004
    Multifamily starts as a percentage of total starts
    Based on 12-month totals through date shown
    Based on 12-month totals through date shown
    Multi-unit construction

    Whatever the reason — whether many people cannot afford to buy or whether a lot of them now fear the consequences of buying — the result has been a liftoff in rentals. And that has caused builders to put far more effort into apartment buildings than they had in recent years.
    Of course, some apartments are sold as co-ops and condominiums, particularly in big cities, and some single-family homes are rented. But few builders build single-family houses hoping to rent them, while many multifamily properties are constructed with rentals in mind.
    The accompanying charts show the trend in the homeownership rate since 1980, and the trends in a variety of housing measures since the homeownership rate peaked in 2004. Vacancies leapt in the recession, and while they have declined since 2009, the proportion of vacant units is still higher than it was before the recession began. That fact could be helping discourage single-family housing starts, which remain far below prerecession levels, even though multifamily starts have fully recovered.

    In early 2006, less than 17 percent of new residences constructed were in multifamily buildings. Over the most recent 12 months, the proportion is more than twice that.

    Friday, October 24, 2014

    Wealth is growing faster than income, again.

                            Comments due by Nov. 1, 2014

    More household wealth in America sounds like good news, but it could also mean economic trouble.

    The ratio of wealth to income has hit a recent record, according to Credit Suisse.The last time it was this high was during the Great Depression. And it came close two other times: 1999, the year before the dotcom bubble burst, and leading up to 2007, before the housing market crash.
    Wealth has skyrocketed, driven mainly by the soaring stock market, and that has mostly benefited the rich. Income for the average person, meanwhile, hasn't been growing much.
    Credit Suisse analysts found that the ratio of wealth to income is 6.5. For more than 100 years, it has typically fallen between 4 and 5.
    "This is a worrying signal given that abnormally high wealth income ratios have always signaled recession in the past," the Credit Suisse report said.

    wealth to income chart

    Wealth per adult in the U.S. has risen every year since 2008. In fact, average wealth is now 19% above the pre-crisis peak hit in 2006, the report stated. And $31.5 trillion household wealth has been added to the U.S. since 2008.
    While experts said it's normal for wealth to outpace income, especially after a recession, it becomes a problem when it rises so fast that people feel overly optimistic about their wealth.
    Tim Yeager, chair of the Arkansas Bankers Association, said when wealth inequality increases, the likelihood of asset bubbles also rises.
    "Stock market and financial industry wealth are always moving around looking for the highest returns and makes bubbles more likely," he said. "When the stock market gets hot, more people pour in and that amplifies the creation of a pending bubble.
    Russell Price, senior economist at Ameriprise, is hopeful the income side of the equation will balance out soon. "The pockets of slack in the labor market are evaporating and job growth is very encouraging - both are needed to increase wages."
    The fact that there's been three periods of high wealth to income ratios in 15 years has Yeager concerned. "These asset bubbles are becoming more frequent and that causes financial instability."
    Federal Reserve Chair Janet Yellen said in a speech Friday the increasing inequality could dampen the economy. "It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority," she said. 

    Saturday, October 18, 2014

    The Inequality Trifecta

                                                  Comments due by Oct. 25 , 2014
    – There were quite a few disconnects at the recently concluded Annual Meetings of the International Monetary Fund and World Bank. Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it. This represents a profound failure of policy imagination – one that must urgently be addressed.
    There is good reason for the spike in interest. While inequality has decreased across countries, it has increased within them, in the advanced and developing worlds alike. The process has been driven by a combination of secular and structural issues – including the changing nature of technological advancement, the rise of “winner-take-all” investment characteristics, and political systems favoring the wealthy – and has been turbocharged by cyclical forces.
    In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face.
    In normal times, fiscal policy would support monetary policy, including by playing a redistributive role. But these are not normal times. With political gridlock blocking an appropriate fiscal response – after 2008, the United States Congress did not pass an annual budget, a basic component of responsible economic governance, for five years – central banks have been forced to bolster economies artificially. To do so, they have relied on near-zero interest rates and unconventional measures like quantitative easing to stimulate growth and job creation.
    Beyond being incomplete, this approach implicitly favors the wealthy, who hold a disproportionately large share of financial assets. Meanwhile, companies have become increasingly aggressive in their efforts to reduce their tax bills, including through so-called inversions, by which they move their headquarters to lower-tax jurisdictions.
    As a result, most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity.
    Given that affluent households spend a smaller share of their incomes and wealth, greater inequality translates into lower overall consumption, thereby hindering the recovery of economies already burdened by inadequate aggregate demand. Today’s high levels of inequality also impede the structural reforms needed to boost productivity, while undermining efforts to address residual pockets of excessive indebtedness.
    This is a dangerous combination that erodes social cohesion, political effectiveness, current GDP growth, and future economic potential. That is why it is so disappointing that, despite heightened awareness of inequality, the IMF/World Bank meetings – a gathering of thousands of policymakers, private-sector participants, and journalists, which included seminars on inequality in advanced countries and developing regions alike – failed to make a consequential impact on the policy agenda.
    Policymakers seem convinced that the time is not right for a meaningful initiative to address inequality of income, wealth, and opportunity. But waiting will only make the problem more difficult to resolve.
    In fact, a number of steps can and should be taken to stem the rise in inequality. In the US, for example, sustained political determination would help to close massive loopholes in estate planning and inheritance, as well as in household and corporate taxation, that disproportionately benefit the wealthy.
    Likewise, there is scope for removing the antiquated practice of taxing hedge and private-equity funds’ “carried interest” at a preferential rate. The way home ownership is taxed and subsidized could be reformed more significantly, especially at the top price levels. And a strong case has been made for raising the minimum wage.
    To be sure, such measures will make only a dent in inequality, albeit an important and visible one. In order to deepen their impact, a more comprehensive macroeconomic policy stance is needed, with the explicit goal of reinvigorating and redesigning structural-reform efforts, boosting aggregate demand, and eliminating debt overhangs. Such an approach would reduce the enormous policy burden currently borne by central banks.
    It is time for heightened global attention to inequality to translate into concerted action. Some initiatives would tackle inequality directly; others would defuse some of the forces that drive it. Together, they would go a long way toward mitigating a serious impediment to the economic and social wellbeing of current and future generations.

    (Mohamad ElArian)