11.03.10
Posted in Econ, Politics at 3:11 pm by Administrator
In spite of Republicans taking the House, the economic fundamentals of yesterday are still the same.
I read a recent analysis of the political and policy environment we face that was resonant. The facts remain.
1. The types of policies that led us to this financial crisis have not been fixed. Spending will need to be reigned in, tax policies reflect reality, and pro-growth polices adopted. Quit the tinkering around the edges and get to the hard decisions. Entitlement spending is out of control. Think longer term please.
2. The Fed needs to move from QE2 and onto developing better policies. Lower rates for savers (which we lacked too many pre-crisis) will not inspire consumption. “Monetary policy plays a key role in post-crisis economies, ” states a smart analyst, Michael Lewitt. Many top business leaders in financial services question the Fed’s actions and rationale. (See section on ‘The Stock of the Fed is Dropping’) The whole analysis “Keynesian Confusion” is well worth the read. Lewitt refers to many of the issues raised and dissected, more simply, in the RSI’s last two reports.
3. Create policies that inspire confidence and “real” economic growth prospects. Much of the American public gets the window-dressing charade played by Washington. Health care reform (tinkering with 15% of the economy) is a case in point. Stop it. Or else you will stunt or reverse one of the greatest economic dynamos in the world. Even China has more discipline than us right now. The whole currency manipulation thing is often a distraction for politicians who will not take responsibility and make hard choices. Our demographic profile is such that only sane policies can get us to the other side. Since government cannot support all the promises made in health care (Medicare) and social security somewhat, encourage private market solutions that complement what the public sector can realistically deliver.
Incrementalism that is reasonable is much better than shock-and-awe policies that please politicians, pacify the public for a day or two, and ultimately constrain future economic potential and choices. We need to step back into our leadership role in the global economy. This can be done gracefully and methodically, or painfully, with fits and starts, doing much damage to our image across the globe and Americans’ confidence along the way.
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04.13.10
Posted in Econ at 2:14 pm by Administrator
In the recent report by the RSI, we allude to the case of Greece. And while the U.S. is not exactly in a similar predicament as Greece, it’s a cautionary tale. Markets are spooked by its hefty debt load. An International Monetary Fund official indicated that ‘the wider euro zone could retain social security programs while handling expanded state debt, suggesting pension benefits must be trimmed and higher inflation targets may be an option.’ He continues, ”The way out of debt in most countries is led by a reform of the pension or health care system,” he said, adding that raising the retirement age could be one way of cutting expenditure. Why can’t elected officials and stewards of money get on the same page? Basically this official reflects that the entire euro zone faces or will face the issues of Greece, to a lesser degree however.
Fortunately in the U.S. we have raised the age to receive social security benefits to address longevity prospects, but it won’t be enough. Medicare needs to be age and income-adjusted. We continue to kick the can further down the road. Public sector pensions and benefits have not been rationalized quite enough for continued sustainability for retirees and the taxpayer base. The next five years are very important to redress the imbalances of public sector debt and spending. And if there is to be a pullback in benefits owing to sustainability issues, people need to understand how they must plan or work longer to save for retirement. A politician that could smartly present what the case of Greece represents in a U.S. context might just be a winner. People understand the truth when they see it.
The train that left the station long ago, namely the post-war era of retirement benefits, needs an update that reflects the globalized, competitive world we live in. It would go a long way in restoring confidence in government within an economic model that is sustainable. Didn’t the financial crisis teach us anything about living beyond the collective or individual means?
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01.27.10
Posted in Econ, Politics at 7:52 pm by Administrator
Yesterday, an industry trade group, the Insured Retirement Institute, said that Obama may mention annuities in his State of the Union address tonight. Whether he does or not, the insurance industry finally got some deserved recognition for one of the few products that did not unravel during the financial crisis –fixed annuities, which do not decline when markets falter, and their variable annuity counterparts that had added guarantees to curtail losses. You can read the IRI’s press release.
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01.05.10
Posted in Econ at 12:44 am by Administrator
In a speech of Jan 3 to fellow economists, Bernanke pulls out all of his analytical tools to show that loose monetary policy, a common scapegoat, was not to blame for the housing bubble. He points to regulatory and supervisory laxness as a key source of housing market woes. Through a series of related slides and calculations, he illustrates that the availability of alternative mortgage products, the ARMs standard and exotic, which were inappropriate for many borrowers, contributed to the housing bubble and its subsequent demise when price appreciation finally halted. My analysis: Of course, there’s also the many financial institutions that invested in these mortgages too, causing financial market meltdown.
He also comments on the foreign capital inflows issue –the global savings glut hypothesis. Countries with more capital inflows had greater house price appreciation over the period 2001-2006. And one-third of house price appreciation is explained by this relationship of greater inflows. Further, 11 of the 20 advanced economies analyzed had tighter monetary policy alongside greater house price appreciation. So the fed’s accommodative policy did not necessarily contribute to house price appreciation.
More people entering the housing market, which shouldn’t have, and lax underwriting standards, indicate a regulatory response. Regulators, supervisors, and the private sector could have (should have) managed their risks better– regardless of continued dreams of house price appreciation. Bottomline: Monetary policy is a blunt tool for bubbles but can be a policy prescription sidekick when needed.
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11.04.09
Posted in Econ, FYI at 6:57 pm by Administrator
John Geanakoplos of Yale was asked by the Fed to present his views on the crisis at its peak in October 2008. His theories moved away from the efficient markets and rational expectations camps to a “leverage cycle” point of view. He shows how a group of certain types of investors that demand, say more “asset-backed” securities, encouraged banks to ‘stretch’ their available supply of collateral like mortgage loans. “Using large amounts of borrowed money, or leverage, these buyers push up prices to extreme levels, ” writes the Wall Street Journal (Nov. 3, “Crisis Compels Economists…” by Mark Whitehouse). Under usual circumstances, the less leveraged buyer would not venture into these securities at higher prices; therefore this phenomenon violates the idea of efficient markets, that all available information is contained in prices of securities.
Basically, Geanakoplos says the banks created myriad debt securities to meet demand. Central bank models missed this leverage cycle because their models focus mainly on interest rates. If new thinking proves out, the way in which we have viewed the financial world will change. Whatever new ideas become accepted as the norm may be a welcome change: “Our policy seems geared toward rescuing banks and bankers.” per Geanakolpos. He hopes a paradigm shift will occur so that people are protected against the excesses of the financial markets. He suggests central banks should collect and publish data on the amount of leverage in the system. Sounds like a good start.
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10.06.09
Posted in Econ, FYI at 10:44 pm by Administrator
This summer I began to scan the horizon for answers and insight about where we had been, and more importantly , where we are going. I approached a few sponsors but found this economic climate too harsh for new “knowledge” ventures. I was calling this report “Forecast 2010.” And it was meant to be a compilation of the best research, commentary, and experts surrounding the financing of retirement, and the many facets which impact it.
Since at this time, the report outlined below will not be immediately forthcoming, I thought it best to post my outline for the project. Any individuals, businesses or institutions that are interested in working with the RSI, please feel free to contact me. (Excuse the second slide; it is my pitch to sponsors, otherwise, the outline which follows serves as a trail of thought and intended content.)
See Project Forecast 2010.
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09.18.09
Posted in Econ, Politics at 5:13 pm by Administrator
The latest central bank report showed that household net worth grew 3.9% from the first quarter, but still down about 19% since the 3rd Q peak of 2007. Households cut debt by 1.7% annualized in this quarter. All that sounds good on an individual level, but government borrowing surged at a 28% rate owing to aid and rescues packages. State and local governments also incurred more debt, an 8.3% increase annualized. Relative to government debt, what goes up must come down, eventually. This is the part which is most worrisome.
While households become more prudent with their money, so too must the government become a better custodian. Global financial players have pressed the U.S. on this issue, as have American taxpayers. With the federal debt hangover for many years to come, and baby boomers entering the rolls of Medicare, Medicaid, and Social Security (SS), some serious work needs to begin toward putting our house back onto a fiscally sustainable path. Health care reform needs to address misaligned incentives in Medicare, and waste. Pension reform should be considered that creates better generational equity and moves away from clever SS trust fund accounting; Canada’s federal pension fund weathered the financial crisis better than most. It is separated out from politicians’ hands, requires mandatory adjustments for sustainability when things go wrong, and is run with a long-term view. See Boston College’s Retirement Center studies if one wants to dig deeper.
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08.31.09
Posted in Econ, Health care at 5:17 pm by Administrator
Good story from Bloomberg about the state of financial and economic affairs. Basically they report that stock market investors are more sanguine about recovery than bond investors, and why. The WSJ reports a couple of days ago that stock market investors need to slow down — investors are piling back into the market, pushing up PE ratios above historic averages, and may be repeating some past mistakes. See August 29th’s “Why Investors Need to Slow Down and See the Light.”
In other interesting bits relating to health care, our health care reform-seeking government put out a report about/for “seniors” and Medicare. First of all, I dislike the word seniors, it’s so last century, slightly insulting, and actually about three decades out-of-date. While they give many pertinent statistics about Medicare’s looming insolvency and why, it’s really not the whole story on Medicare. Benefit growth in Medicare is more about perverse economic incentives and abuse of the system than anything they describe. They do make reference to the fraud they have identified and dealt with, and hurray for them. There’s just a lot more to go, and overall health care reform will only go a small step toward fixing what ails Medicare — escalating costs from ever-expanding benefits (many of which are abused and worked around) and increasing numbers of beneficiaries. In 2010, when the baby boomers enter Medicare’s rolls, watch the spending explode. Some real solutions have been posed but politics is trumping real reform of a program that is an entitlement, and one that all taxpayers and beneficiaries need to watch more carefully.
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07.20.09
Posted in Econ at 3:32 pm by Administrator
A group called the Investors Working Group made up of former heavy-weights in the financial world and investors overseeing $3 trillion came out with a counter proposal about the new systemic risk regulator. They don’t want the Fed taking on the role as it might dilute their mission, the group says. One statement stood out:
“The lack of sufficient authority, resources and will on the part of regulators helped fuel the financial meltdown at least as much as the absence of systemic risk oversight,” the group said.
Ex-SEC Chair Donaldson was interviewed on NPR the latter part of week when the group’s report came out. His views were very compelling.
On the more theoretical side, The Economist just published (July 18) a briefing on the state of economics. The gist of it was that economists of all camps need to do some “spadework” about the causes of crises past and present to offer some fresh thinking. They say that neglected prophets like Hyman Minsky, who acknowledged a more holistic viewpoint about the “real” economy and the financial world than many of today’s economists, should be given another look. An idea of Minsky’s that I gravitated toward in my recent presentation was:
that in spite of longer term trend projections by economists about growth, inflation, etc. — short-term developments like bubbles and manias impact theoretical projections. (Financial innovation is included as a mania in my view because it was used in overly greedy ways, not the way economists intended. I am not knocking financial innovation at all, just how it manifested in practice over the last five years or so.) This is the space in which regulators overlooked or entirely missed the party that was going on. We had signs in the form of “irrational exuberance” a decade ago.
I finally believe that more “truth” or at least relevancy is coming forth that will eventually get us on the right path. The Investors Working Group offers a voice of reason that needs to be heard. And The Economist gets back to the roots of where some of the thinking originated that has informed the path of finance.
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04.14.09
Posted in Econ, Politics at 6:53 pm by Administrator
There’s a speech given today which sums up the series of events leading up to the financial crisis and impending economic malaise. It’s presented in fairly plain English as opposed to more technical Fed speak. He addresses the global savings and liquidity glut (which lead to excess capital chasing returns). Excessive risktaking ensued. Poor choices were made by lenders and other unscrupulous types, but also innocent investors were unaware of the risks they were taking. Financial markets imploded the latter part of 2008, and we are where we are.
He ends by saying that significant reforms to financial regulation and financial practices will be needed to reduce risks of future financial crises like this one. All true. What worries me is that regulation will be imposed that identifies the easy scapegoats rather than the true culprits, that politics and quick fixes will rule over reason. I was working with some financial research for a biz school recently that gives me this concern; one piece recently posted, and another upcoming. Will post later. No need to labor over content, but you’ll see what I mean. Good intentions gone astray.
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