Archive for October, 2011

Unhappy Halloween

31 October 2011











Case-Shiller Housing Price Index, 2003-present

As my daughter used to say while handing out Halloweeen candy: “You get what you get.”

Unlawful interest?

24 October 2011

In October 2008, as the financial crisis reached a fever pitch, the Fed started paying interest on banks’ reserves. The rate is very low, 0.25%, but it turns out that at this point in the Lesser Depression, with short-term interest rates even lower (the 3-month T-bill rate is 0.02%, and the 6-month rate is 0.06%), the Fed might actually be breaking the law by doing this. David Glasner of the Uneasy Money blog has a fascinating post about it.

According to Glasner, the Financial Services Regulatory Relief Act of 2006 allowed the Fed to pay interest on reserves but specified that the interest rate on reserves not “exceed the general level of short-term interest rates.” Normally that’s not a problem, and even in October 2008 the 3-month T-bill rate was well above 0.25%. But a month later, as the crisis deepened and panicked investors sought safe haven in T-bills, the rate fell below 0.25%, and there it has stayed ever since (except for a few weeks in 2009).

So if Glasner has interpreted the law correctly (and in typically modest fashion he does not claim to understand it perfectly), the Fed is breaking it. I am absolutely not a Fed basher: the Fed was not breaking the law back in October 2008; it was the worldwide flight to safety that caused short-term Treasury rates to fall to near zero the next month and stay there;  and Congress, despite passing that act in 2006, has not seen fit to call the Fed on the carpet on this one. Which suggests that the drafters of this act recognize the extraordinary circumstances of this financial crisis and regard the Fed’s payment of above-market interest rates on reserves as a non-problem, not even enough of a problem to warrant revising the act to allow it. As long as nobody noticed (until this month anyway), why bother?

My opinion may sound contradictory, so I’ll break it into two parts.

  1. I think Congress should revise the law to allow the Fed to pay higher interest rates on reserves, as they may need to if the economy starts to recover rapidly and banks open the floodgates by rapidly loaning out their excess reserves. Fed Chair Ben Bernanke has spoken of how the interest-on-reserves tool allows the Fed to “soak up” banks’ excess reserves before inflation starts to rage, and that may require higher-than-market interest rates on reserves.
  2. But we’re nowhere near that point now. We’re still in a depression, and it makes little sense for the Fed to be paying banks to keep their reserves idle instead of loaning them out. I recognize that part of the rationale for interest on reserves is to keep the banks from tying their reserves up in T-bills instead of loaning them out, but with T-bills paying close to zero interest, that seems unlikely to happen. In the current depression banks have been loading up on T-bills and reserves. Even if they did put more of their reserves into T-bills, that doesn’t exactly tie them up:  T-bills are the most liquid assets in the world (they’re often called “secondary reserves”) and banks could easily liquidate them if profitable loan opportunities came along. Right now, I’d say the appropriate interest rate on reserves is 0%.

Would lowering the interest rate on reserves from 0.25% to 0% spur a lot of lending? Doubtful, but it would likely make a difference at the margin in some cases, causing at least a few more loans to be made and a few more jobs to be created. Small potatoes, yes, but I don’t really see a downside here. It would also take some populist pressure off the Fed, which, as a giant financial institution, isn’t terribly popular these days, either among Republicans or among Occupy Wall Streeters. The man on the street is not pleased to hear that the Fed is paying banks interest on the money they don’t use.

Thomas Hoenig (“Too Big Has Failed”) tapped for FDIC

22 October 2011

Kansas City Federal Reserve Bank President Thomas Hoenig was my favorite recent member of the Federal Open Market Committee, mainly for his outspoken and eloquent criticism of the “too big to fail” policy. I’ve written about his ideas a few times, including here. So now that the Kansas City Fed’s rotating term on the FOMC has come to an end, it’s good to see that President Obama has nominated Hoenig to be Vice Chairman of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC).

Hoenig’s views are summed up in this quote from the article: “We must make sure that large financial organizations are not in position to hold the U.S. economy hostage. We must break up the largest banks.” His March 2009 speech “Too Big Has Failed” lays it out in detail.

Now, I have no idea how much policy-shaping ability the vice chairman of the board of directors of the FDIC has, and Hoenig himself has said the FDIC still lacks adequate resolution-authority powers for closing big bank holding companies, but I’ll be glad to have him back in the loop. Assuming that Senate Republicans don’t block his nomination for one reason or another.

The big banks are still socializing the losses; or, Sympathy for the stockholder

20 October 2011

The original bank bailout may have been repaid in full, but the big banks are still socializing the losses. This time, it’s among their shareholders. Brad DeLong offers some specifics:

‘Investors in Goldman Sachs have lost more than half their money since 2007 . . .

‘Investors in Morgan Stanley have lost more than three-quarters of their money since 2007 . . .

‘Investors in Citigroup have lost 93% of their money since 2007 . . .

‘Investors in Bank of America have lost 85% of their money since 2007 . . .

‘Investors in Bear Stearns, Lehman Brothers, and Merrill Lynch lost more than 90% if their investments as well . . .’

DeLong’s charts (click above link to see them) show that even after bank stocks started to rebound in fall 2009, the losses have still been huge.

One might think this is just a case of the rich getting poorer, but it’s not that simple. In fact, the distributional consequences seem to run the other way. The stockholders, most of whom are middle-class and upper-middle-class folks, are getting hammered. About half of the population owns stock (granted, the wealthy own most of it), so about half of The Other 99% own stock and are seeing their retirement portfolios shrink along with the rest of their savings. (If you own stock at all, you probably own a lot of big bank stock, because they are weighted heavily in index funds, other mutual funds, and pension funds.)

How has the reduced market value of these firms affected the executives and highest-paid employees at the big banks? Not much, apparently. While I don’t have precise data handy, there have been reports all through this Lesser Depression of huge payouts to bankers, including yesterday’s news of Morgan Stanley. It’s happening in England, too.

DeLong’s post includes some excellent comments about how the banks’ poor performance has affected their shareholders and their high-level employees so differently. There’s a technical term for it: looting.

P.S. The Wall Street Journal reports that bank losses have been huge of late. Goldman Sachs lost money in the second quarter of this year, and has had six straight year-over-year quarterly losses. Goldman’s stock is down 39% for the year, and Bank of America’s is down 50%. No mention of how (or whether) bonuses will be affected.

The other 90%

19 October 2011

That’s who loses from Herman Cain’s “9-9-9” tax plan, according to analysts at the nonpartisan Tax Policy Center (jointly run by the Urban Institute and the Brookings Institution). Krugman has a quick synopsis.

Income stratum   Impact on after-tax income

  • Bottom 20%       -18.7%
  • 20th-40th %ile  -15.4%
  • 40th-60th %ile  -10.1%
  • 60th-80th %ile   -6.1%
  • 80th-90th %ile  -2.3%
  • 90th-95th %ile  +0.9%
  • 95th-99th %ile  +6.5%
  • Top 1%  +19.7%
  • Top 0.1%  +26.6%

Howard Gleckman of the Tax Policy Center notes, “In Cain’s world, a typical household making more than $2.7 million would pay a smaller share of its income in federal taxes than one making less than $18,000.”

I wrote before that the Cain tax plan seemed calculated to appeal to Republicans whose idea of economic injustice is poor people not paying income tax (which happens because they earn less than the standard deduction and personal exemption. Never mind that they do pay payroll taxes, sales taxes, and excise taxes). But even if you do think the tax system is too generous to the poor, you probably don’t think we should raise taxes on the middle and upper-middle class while cutting taxes on millionaires. In fact, a poll this month found that 64% of Americans wanted to raise taxes on millionaires, including 83% of Democrats, 65% of independents, and 40% of Republicans.

9-9-9 is a joke

13 October 2011

I think this is the first time I’ve ever agreed with Grover Norquist on anything: Herman Cain’s tax plan is bogus. Naturally, old Grover and I have different reasons for thinking it so. He says that having three 9% tax rates — income, profits, and sales — is “like having three needles in your arm.” There’s also the conservative objection that a sales tax is just too easy a way to raise revenue, making it harder for Norquist to realize his dream of starving the government beast and drowning it in the bathtub.

Unlike Norquist and Cain, I’m one of those people who’s against regressive taxes, like, you know, a 9% sales tax. As David Weigel at Slate noted, it seems to be about sticking it to that alleged freeloading 47% who don’t pay income taxes (but do pay payroll, excise, and state income taxes). And, as Bruce Bartlett notes, there’s no mention in Cain’s income tax plan of a personal exemption, so the income tax rate is presumably 9% for everyone. So Cain would raise taxes on nearly half the population by up to 18% of their income.

Once upon a time Republicans boasted about taking poor people off the income tax rolls (as with the Reagan tax reform of 1986 and even the Bush tax cuts of 2001), but times have changed. Demanding that almost half of Americans pay an extra 9% of their income in taxes is now the order of the day, as long as that half is the poorer half.

Oh, and if lowering the top income tax rates to 9% weren’t enough Robin Hood in reverse, Cain’s plan would also exempt capital gains from taxes altogether. Imagine, hedge fund managers might not have to pay income taxes at all!

And then there’s the issue of lost revenue from slashing tax rates and shrinking the tax base for the affluent. The basic rationale for progressive taxation is that it raises more revenue more easily than flat or regressive taxation. Cain claims that his upper-income tax cuts would spur so much prosperity that they’d pay for themselves. Stop me if you’ve heard that one before.

The ones that never knock

9 October 2011

Stay in school, kids. At least till you’re 25, or maybe for as long as you can. That’s the message of the wildly different unemployment rates for college graduates age 20-24 versus age 25 and over.

The September 2011 unemployment rate for college graduates was 4.2%, which sounds pretty good, even though it’s more than double what it was before the recession. However, that’s for college graduates age 25 and over. I reported this a couple days ago but didn’t have a separate rate for younger college graduates, since that wasn’t in last Friday’s BLS employment report. But the data do exist. The New York Times mentioned today that the jobless rate for college grads under age 25 averaged an eye-popping 9.6% over the past year. Before the recession it was just 3.7%. Which sent me scurrying to The Google.

The latest BLS Current Population Survey shows that the rate was 8.1% as of last month — trending down, but still historically high and only a percentage point less than the overall unemployment rate. And this is just by the official definition of unemployment, which doesn’t include discouraged job-seekers who’ve stopped looking, involuntary part-timers, or college grads working in “high school” (or less) jobs that don’t require a college degree. Evidently it’s a lot easier to keep a “college job” than to land one.

Staying in school past college seems almost necessary, too, considering that median pay for moderately young (age 25 to 34) college grads with bachelor’s degree is almost 10% lower than it was a decade ago.

As bad as it is for young college grads, it’s vastly worse for those with less education. Unemployment rates for 20-24 year-olds by educational attainment:

  • some college, no degree: 12.9%
  • high school diploma or GED: 22.4%
  • no high school diploma: 28.5%

With hordes of unemployed young people, thousands of them engaged in mass protests in Wall Street and other locales, this country is reminding me a lot of Europe in the early 1980s. Which makes a bunch of classic English punk and post-punk songs timely again. I’ll go with this one:

As good as it gets, and still lousy

7 October 2011

The best that can be said about today’s BLS employment report is that it revealed 202,000 new jobs, which is in the right ballpark for how many jobs the economy needs to generate each month for the next eight years in order to get back to a normal unemployment rate. The bad news is that only 103,000 of those jobs are from last month. The other 99,000 are from revisions to July and August, which push those months’ net-new-jobs totals up to 127,000 and 57,000. So the average employment gain for the last three months is less than half of what we need to be on that eight-year recovery track.

It gets worse. Quoth the BLS: “Since April, payroll employment has increased by an average of 72,000 per month, compared with an average of 161,000 for the prior 7 months.” So now we’re down to about one-third of the needed monthly job creation to be on that eight-year recovery track.

NPR’s Planet Money reports that the job market is bad across all demographic groups, even the college educated. While college-educated people age 25 and over are the only group with an unemployment rate below 5%, the BLS historical tables show that the current rate (4.2%) is more than double what it was four years ago (2.0%). And the employment-to-population ratio of this group has fallen almost 3 percentage points (to 73.0%) over the same span.

The employment-to-population ratio is really where the worst news is. Even the expanded unemployment rates, which include discouraged job-seekers and/or involuntary part-timers, have shown some improvement over the past two years. But the improved unemployment rates seem to be entirely an artifact of people dropping out of the labor force. The labor force is actually slightly smaller today (154 million) than it was in mid-2009, at the trough of the recession. The economy has added about 1.6 million jobs since the employment trough of October 2009, but that hasn’t been been enough to keep pace with population. The current employment-to-population ratio (58.3%) is actually slightly lower than that of October 2009 (58.5%), even as the main unemployment rate has fallen from 10.1% to 9.1%.

Along those lines, the BLS’s “Alternate Measures of Labor Underutilization” are instructive. The official (U-3) unemployment rate counts only the jobless who say they are actually looking for a job. The U-4 unemployment rate includes “discouraged workers,” i.e., jobless people who are not looking but would take a job if one came along. The U-5 unemployment rate adds in “marginally attached workers,” who are a similar state of joblessness. Yet the U-5 unemployment rate (10.5%) is only 1.4 percentage points higher than the official rate, which suggests that most of the unemployed are either (1) still looking for work or (2) really not even thinking about it, i.e., have found life, or despair, or something,  outside the labor force.

The oft-cited U-6 unemployment rate, which is by far the highest, includes part-time workers who cannot get full-time work. This one is 16.5%, so most of the addition comes from the involuntary part-timers. So 6.0% of the labor force is involuntarily working part time. How does 6% compare with other times? The BLS data here go back only to 1994, so it’s hard to be definitive, but about 3% seems to be the norm. That’s what it was for most of 1994-2007, including even the recession and slow recovery of 2001-2003. That’s right — the involuntary-part-time employment rate is double what it was in the last recession and “jobless recovery.” It edged up to 4% in 2008, above 5% in 2009, reached 6% in September 2010 and has hovered around there ever since. That’s a lot of involuntary part-time jobs, and it adds another dimension of lousiness to the current depression. Also, if those are the kind of jobs this economy is creating, it’s no wonder that many people would rather hold onto their unemployment benefits, which, depending on their previous jobs, might pay more. But that’s a subject for another post.