Tag Archives: economics

Europe’s Dream is Dying in Greece

My Comments: Society evolves, just like animals and plants. But it takes time, and we are conditioned to want it NOW, not over the next millenia. If there is enough collective will, the European Union (EU) will survive by evolving to accomodate Greek society. The players themselves are going to have to find the right pieces, fit them together, and hope it all works out.

It’s in our best interest for the EU to survive and thrive. They are a huge market for whatever it is we produce, be it ideas or technology, or war machines. In human terms, the years since the early 20th century that saw massive conflicts between evolving states is way behind us. But the vestiges of tribal and clan loyalties take time to disappear. We can only hope they find a way to make it work.

Gideon Rachman June 29, 2015

The shuttered banks of Greece represent a profound failure for the EU. The current crisis is not just a reflection of the failings of the modern Greek state, it is also about the failure of a European dream of unity, peace and prosperity.

Over the past 30 years Europe has embraced its own version of the “end of history”. It became known as the European Union. The idea was that European nations could consign the tragedies of war, fascism and occupation to the past. By joining the EU, they could jointly embrace a better future based on democracy, the rule of law and the repudiation of nationalism.

As Lord Patten, a former EU commissioner, once boasted, the success of the union ensured that Europeans now spent their time “arguing about fish quotas or budgets, rather than murdering one another”. When the Greek colonels were overthrown in 1974, Greece became the pioneer of a new model for Europe — in which the restoration of democracy at a national level was secured by a simultaneous application to join the European Economic Community (as it then was).

Greece became the 10th member of the European club in 1981. Its early membership of an EU that now numbers 28 countries is a rebuke to those who now claim it has always been a peripheral member.

The model first established in Greece — democratic consolidation, secured by European integration — was rolled out across the continent over the next three decades. Spain and Portugal, which had also cast off authoritarian regimes in the 1970s, joined the EEC in 1986. After the fall of the Berlin Wall, almost all the countries of the former Soviet bloc followed the Greek model of linking democratic change at home to a successful application to join the EU.

For the EU itself, Greek-style enlargement became its most powerful tool for spreading stability and democracy across the continent. As one Polish politician put it to me shortly before his country joined the EU: “Imagine there is a big river running through Europe. On one side is Moscow. On the other side is Brussels. We know which side of the river we need to be on.” That powerful idea — that the EU represented good government and secure democracy — has continued to resonate in modern Europe. It is why Ukrainian demonstrators were waving the EU flag when they overthrew the corrupt government of Viktor Yanukovich in 2014.

The danger now is that, just as Greece was once a trailblazer in linking a democratic transition to the European project, so it may become an emblem of a new and dangerous process: the disintegration of the EU. The current crisis could easily lead to the country leaving the euro and eventually the union itself. That would undermine the fundamental EU proposition: that joining the European club is the best guarantee of future prosperity and stability.

Even if an angry and impoverished Greece ultimately remains inside the tent, the link between the EU and prosperity will have been ruptured. For the horrible truth is dawning that it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment — the euro — it is now actively destroying wealth, stability and European solidarity.

The dangers of that process are all the more pronounced because Greece is in a highly strategic location. To the south lies the chaos and bloodshed of Libya; to the north lies the instability of the Balkans; to the east, an angry and resurgent Russia.
Knowing all this, the administration of Barack Obama is increasingly incredulous about the EU’s apparent willingness to let Greece fail. To some in Washington, it seems as if the Europeans have forgotten all the strategic lessons learnt during the cold war about the country’s importance.

That, however, is unfair to the Europeans. Their response to the criticism from Washington is that the EU works only because it is a community of laws and mutual obligations. If you allow a country such as Greece to flout those laws and obligations — by, for example, reneging on its debts — then the club will begin to disintegrate anyway. If, by contrast, you kick Greece out there is still a chance of confining the damage to one country.

The crisis also has profound implications for democracy, the original rallying point that drew Greece into the EU more than three decades ago. Alexis Tsipras, the prime minister, now argues that far from securing Greek democracy, the EU has become its enemy, trampling on the will of the people.

In reality, of course, this is a clash of democratic mandates — pitting Greek voters’ desire to ditch austerity against the voters (and taxpayers) of other EU countries, who want to see their loans repaid and are loath to let an unreformed Greece continue to benefit from EU money.

It may be that those two democratic wills can be painfully reconciled in next Sunday’s referendum. If the Greek people vote to accept the demands of their EU creditors — demands that their government has just rejected — Greece may yet stay inside both the euro and the EU. But it will be a decision by a cowed and sullen nation. Greece would still be a member of the EU. But its European dream will have died.

Sunny with a Chance of Turbulence

coins and flagMy Comments: Many of us were blindsided by the severity of the pullback that happened in 2008-09. Many of us are still trying to get back to where we were and are fearful of it happening again soon. Some on TV are pushing the idea that it’s just around the corner.

It’s not. The chance of a massive collapse like happened a few years ago is virtually non-existent, short of an asteroid falling on us somewhere. Scott Minerd has a great understanding of financial dynamics, and his comments are always worth reading.

June 25, 2015 by Scott Minerd, Chairman of Investments, Guggenheim Partners

It seems summer brings out the sunny disposition in everyone. Despite the fact that returns across U.S. investment categories are pretty dismal year to date, markets are pricing optimistically and it seems the sunshine has brought growth back to the U.S. economy. Recent data from the Bureau of Labor Statistics showed a 280,000 increase in employment in May. Additionally, building permits rose 11.8 percent in May, better than the 3.5 percent decline forecast by economists, while the pace of existing home sales hit its fastest rate since late 2009. Taking everything into account, the likelihood that the U.S. economy will suffer a recession in the next year or two would appear to be extremely remote.

Still, seemingly isolated events could yet sour the mood. Since the euro crisis erupted back in 2010, the possibility of a “Grexit” has been a recurring issue. A number of commentators have painted the possibility of a Greek exit from the euro zone as the equivalent of a Lehman Brothers-style event, a view I’m not so certain is correct. With that said, seemingly minor occurrences have in the past set the stage for larger economic events, such as the collapse of the Thai baht, a seemingly contained event that ultimately proved to be the first domino to fall in the 1997 Asian crisis. While we cannot discount the consequences that a Greek exit could potentially herald, I believe a solution to paper over this seemingly never-ending crisis is likely to calm markets in the near term.

As for developments at the Federal Reserve, while some commentators have suggested that the Fed is leaning toward December, I can see no reason why the Fed would consider delaying a rate rise beyond September. Either way, I don’t think it matters: The bottom line is that a rate hike is coming. Personally, I consider the bond market to be in fairly good shape and capable of handling the beginning of “normalization” without a rerun of the 2013 taper tantrum, but only time will tell.

Lastly, despite the generally positive environment, it disturbs me how low returns have been across almost every asset class year to date. This tells me that markets may be getting fully priced for the near term, and that investors have already placed their bets on how they see major events of the day playing out. With all the chips on the table, new market inflows are likely needed in order to push prices higher, but I don’t envision significant inflows occurring until the fourth quarter. As evidence, the S&P 500 has not had a weekly move of more than 1 percent in either direction in two months, which is the longest such streak in over two decades. During this period, breadth has broken down in a meaningful way. For now, it doesn’t appear that investors are being compensated for the risks they are taking.

Despite poor year-to-date performance, the majority of forecasters have yet to alter their year-end S&P 500 price targets. In fact, the dispersion around analysts’ predictions is as tight as it’s been since 2009. This tells me the market doesn’t really feel like there’s a lot of uncertainty, which is concerning, because such high levels of complacency usually foreshadow some form of financial accident. I am not talking about a financial crisis, or a recession—we certainly have no indications of either yet—but there have been a number of periods of prolonged expansion where complacency climbs high and we wound up in an extremely turbulent period. Think about 2011, when there was a severe summer pullback in U.S. equities. Similar to today, at that time investors had basically put their bets on the fact the recovery was in place, and that stocks were going higher. Those bets turned out to be correct, but only after we narrowly avoided a 20 percent pullback.

With complacency as high as it is today, I fear we could be in for meaningful turbulence this summer. For this reason I would encourage investors to consider accumulating cash reserves or Treasuries in order to insulate themselves against any potential summer squalls during the next few months.

Economic Data Releases – U.S. GDP Revised Up in Final Estimate; Consumer Spending Records Fastest Growth in Nearly Six Years
• First-quarter GDP was revised up in the final estimate, but was still negative at -0.2 percent annualized. Better consumer spending helped revise the growth number upward.
• Existing home sales beat expectations in May, rising 5.1 percent to an annualized pace of 5.35 million homes. The percentage of first-time buyers rose to 32 percent.
• New home sales increased 2.2 percent in May, up to 546,000 after a positive revision to April’s data.
• Durable goods orders, excluding transportation, met expectations in May, up 0.5 percent. Nondefense capital goods orders excluding aircraft rose 0.4 percent, missing expectations after falling in April.
• The Federal Housing Free Agency House Price Index rose 0.3 percent in April, matching the previous month’s gain
• Personal spending jumped 0.9 percent in May, a stronger showing than the 0.1 percent gain in April and ahead of market expectations of a 0.7 percent increase.
• Personal income climbed by 0.5 percent in May, matching the upwardly revised increase seen in April.
• In the 12 months through May, the personal consumption expenditures (PCE) price index rose 0.2 percent. The core PCE price index, excluding food and energy, rose 1.2 percent in the 12 months through May

Euro Zone PMI Data Releases Continue to Point toward Growth
• Euro zone consumer confidence was unchanged in the initial June survey, remaining at -5.6.
• China’s HSBC manufacturing purchasing managers index (PMI) improved in June, but remained in contraction at 49.6.
• The euro zone manufacturing PMI showed a slight acceleration in activity in June, rising to 52.5 from 52.2. The services PMI rose to 54.4, a more than three-year high.
• Germany’s manufacturing PMI was better than forecast in June, rising to 51.9 vs. expectations of 51.2. The services PMI also rebounded after declining for the past two months.
• The French manufacturing PMI returned to expansion in June at 50.5, the highest reading in 14 months. The services PMI also made a multi-year high.
• Germany’s IFO Business Climate Index fell more than forecast in June, with both the current assessment and expectations worsening.

Connecting the Dots

profit-loss-riskMy Comments: Interest rates change. For the past 35 years, they’ve been on a downward trend, matched only by the down trend from 1861 to 1898. It’s a given that the Fed is going to start moving them up, probably in September. A stream of positive data supports a September rate hike, but summer storms loom on the horizon.

One thing you should NOT DO, is believe the message offered by Ron Paul as seen on TV lately. Scott Minerd, the author below is a far better predictor of what is coming. Paul is now just another shill for Wall Street firms that want you afraid so you send them your money and charge you fees. The only thing he can guarantee is that your account will be charged for whatever services they claim to provide.

Commentary by Scott Minerd, Chairman of Investments and Global CIO, Guggenheim Partners – June 19, 2015

A popular rule of thumb for defining a recession is two consecutive quarters of negative growth. As we all know, the U.S. economy shrank by 0.7 percent in the first quarter. Since then, a steady flow of positive economic indicators has successfully removed any concerns that U.S. economic activity is diminishing, confirming that the ruminations of recession based on the first quarter’s soft patch were entirely overblown.

As the U.S. economy resumes its upward march, the Federal Reserve is becoming increasingly convinced that the environment is strong enough to begin raising rates. Core inflation has increased at a 2.4 percent annualized rate through the first five months of the year, above the 2 percent goal the Fed has been saying inflation needs to reach in order for it to tighten monetary policy. This is additional confirmation that a September increase in rates is still on track.

This week, the Federal Open Market Committee (FOMC) confirmed this hypothesis in what can be generally described as a more dovish outlook for the long term, but one that clearly puts September in the crosshairs for an interest rate hike after six long years at the zero bound. The Fed’s “dots” represent where Fed presidents and governors believe short-term rates will be in the future. The market is getting more intensely focused on this rather obscure piece of information, and with good reason. In March, the last time the dots were released, the market rallied because of the unexpected decline, reflecting an expectation of lower short-term rates. This time around, the Fed did the same and U.S. stocks rallied once again, albeit modestly.

As far as the rest of the world is concerned, pressure is on China to reflate and on Europe to remain strong in the face of floundering negotiations with Greece. Volatility is a constant companion. While Europe is fairly well insulated against a collapse in the Greek economy, a breakdown in talks could cause bonds on the periphery to sell off hard, and lead German bunds and U.S. Treasury securities to rally.

In the United States, the market is starting to show signs of a summer slowdown. We’re seeing evidence of this in the subdued performance of equities, the negative performance of the high-yield bond market during the first two weeks of June, as well as in the lack of new money flowing into mutual funds. The bottom line is we are becoming vulnerable to some sort of summer risk-off trade.

While I remain generally positive on U.S. equities over the next two to three years, I think it is very likely that we are going to have some sort of a nasty market event during the course of the summer. At this stage, it would be prudent to prepare for a risk-off period by the opportunistic liquidation of lower-quality high yield and bank loans, which have appreciated in price this year, and selectively taking gains in stocks while increasing holdings in cash and Treasury securities, as a precaution in preparation of a potential looming summer dislocation.

The most recent Federal Reserve dot plot—a projection of where individual policymakers on the FOMC expect the fed funds rate to be at the end of each year—showed a more dovish stance compared to March. The median expected rates for 2016 and 2017 were lowered by 0.25 percent to 1.625 percent and 2.875 percent, respectively. While the median projection for 2015 remained unchanged at 0.625 percent, the number of members predicting rates will stay below 0.5 percent by the end of the year increased from three to seven. Despite its rather dovish stance, the Federal Reserve remains on track to end its zero-rate policy later this year, as 15 out of all 17 members indicate that a rate hike is likely before the end of the year.

Bond Crash Across the World As Deflation Trade Goes Horribly Wrong

Interest-rates-1790-2012My Comments: You can call me an alarmist if you like, I really don’t care. We are long overdue for a market correction, from both a stock value perspective and interest rate perspective. If you don’t believe it’s coming, I have some nice real estate just east of Daytona Beach I can sell you for peanuts.

By Ambrose Evans-Pritchard / 10 Jun 2015

The global deflation trade is unwinding with a vengeance. Yields on 10-year Bunds blew through 1pc today, spearheading a violent repricing of credit across the world.

The scale is starting to match the ‘taper tantrum’ of mid-2013 when the US Federal Reserve issued its first gentle warning that quantitative easing would not last forever, and that the long-feared inflexion point was nearing in the international monetary cycle.

Paper losses over the last three months have reached $1.2 trillion. Yields have jumped by 175 basis points in Indonesia, 160 in South Africa, 150 in Turkey, 130 in Mexico, and 80 in Australia.

The epicentre is in the eurozone as the “QE” bet goes horribly wrong. Bund yields hit 1.05pc this morning before falling back in wild trading, up 100 basis points since March. French, Italian, and Spanish yields have moved in lockstep.

A parallel drama is unfolding in America where the Pimco Total Return Fund has just revealed that it slashed its holdings of US debt to 8.5pc of total assets in May, from 23.4pc a month earlier. This sort of move in the staid fixed income markets is exceedingly rare.

The 10-year US Treasury yield – still the global benchmark price of money – has jumped 48 points to 2.47pc in eight trading sessions. “It is capitulation out there, and a lot of pain,” said Marc Ostwald from ADM.

The bond crash has been an accident waiting to happen for months. Money supply aggregates have been surging all this year in Europe and the US, setting a trap for a small army of hedge funds and ‘prop desks’ trying to squeeze a few last drops out of a spent deflation trade. “We we’re too dogmatic,” confessed one bond trader at RBS.

Data collected by Gabriel Stein at Oxford Economics shows that ‘narrow’ M1 money in the eurozone has been growing at a rate of 16.2pc (annualized) over the last six months. You do not have to be monetarist expert to see the glaring anomaly.

Broader M3 money has been rising at an 8.4pc rate on the same measure, a pace not seen since 2008. Economic historians will one day ask how it was possible for €2 trillion of eurozone bonds – a third of the government bond market – to have been trading at negative yields in the early spring of 2015 even as the reflation hammer was already coming down with crushing force.

“It was the greater fool theory. They always thought there would be some other sucker to buy at an even higher price. Now we are returning to sanity,” said Mr Stein.

M3 growth in the US has been running at an 8pc rate this year, roughly in line with post-war averages. The growth scare earlier this year has subsided, as was to be expected from the monetary data.

(If you want to see the charts associated with this article, go HERE)

The economy has weathered the strong dollar shock and seems to have shaken off a four-month mystery malaise. It created 280,000 jobs in May. Bank of America’s GDP ‘tracker’ is running at a 2.9pc rate this quarter.

Capital Economics calculates that hourly earnings have been rising at a rate of 2.9pc over the last three months, the fastest since the six-year expansion began.

Bond vigilantes – supposed to have a sixth sense for incipient inflation, their nemesis – strangely missed this money surge on both sides of the Atlantic. Yet M1 is typically a six-month leading indicator for the economy, and M3 leads by a year or so. The monetary mechanisms may be damaged but it would be courting fate to assume that they have broken down altogether.

Jefferies is pencilling in a headline rate of 3pc by the fourth quarter as higher oil prices feed through. If they are right, we will be facing a radically different economic landscape within six months.

This has plainly been a bond market bubble, one that is unwinding with particular ferocity because new regulations have driven market-makers out of the business and caused liquidity to evaporate. Laurent Crosnier from Amundi puts it pithily: “rather than yield at no risk, bonds have been offering risk at no yield.”

Funds thought they were on to a one-way bet as the European Central Bank launched quantitative easing, buying €60bn of eurozone bonds each month at a time when fiscal retrenchment was causing fresh supply to dry up. They expected Bunds to vanish from the market altogether as Berlin increases its budget surplus to €18bn this year and retires debt.

Instead they have discovered that the reflationary lift from QE overwhelms the ‘scarcity effect’ on bonds. Contrary to mythology – and a lot of muddled statements by central bankers who ought to know better – QE does not achieve its results by driving down yields, at least not if conducted properly and if assets are purchased from outside the banking system. It works through money creation. This in turn lifts yields.

The ECB’s Mario Draghi has achieved his objective. He has (for now) defeated deflation in Europe. After six years of fiscal overkill, monetary contraction, and an economic depression, the region is coming back to life.

How this now unfolds for the world as a whole depends on the pace of tightening by the Fed. Futures contracts are still not pricing in a full rate rise in September. They are strangely disregarding the message from the Fed’s own voting committee – the so-called ‘dots’ – that further rises will follow relatively soon and hard.

The Fed is implicitly forecasting rates of 1.875pc by the end of next year. Markets are betting on 1.25pc, brazenly defying the rate-setters in a strange game of chicken.

The International Monetary Fund warned in April that this mispricing is dangerous, fearing a “cascade of disruptive adjustments” once the Fed actually pulls the trigger.

Nobody knows what will happen when the spigot of cheap dollar liquidity is actually turned off. Dollar debts outside US jurisdiction have ballooned from $2 trillion to $9 trillion in fifteen years, leaving the world more dollarised and more vulnerable to Fed action than at any time since the fixed exchange system of the Gold Standard.

Total debt has risen by 30 percentage points to a record 275pc of GDP in the developed world since the Lehman crisis, and by 35 points to a record 180pc in emerging markets.

The pathologies of “secular stagnation” are still with us. China is still flooding the world with excess manufacturing capacity. The global savings rate is still at an all-time high of 26pc of GDP, implying more of the same savings glut and the same debilitating lack of demand that lies behind the Long Slump.

As Stephen King from HSBC wrote in a poignant report – “The World Economy’s Titanic Problem”- we have used up almost all our fiscal and monetary ammunition, and may face the next global economic downturn with no lifeboats whenever it comes.

The US is perhaps strong enough to withstand the rigours of monetary tightening. It is less clear whether others are so resilient. The risk is that rising borrowing costs in the US will set off a worldwide margin call on dollar debtors – or a “super taper tantrum” as the IMF calls it – that short-circuits the fragile global recovery and ultimately ricochets back into the US itself. In the end it could tip us all back into deflation.

“We at the Fed take the potential international implications of our policies seriously,” said Bill Dudley, head of the New York Fed. Yet in the same speech to a Bloomberg forum six weeks ago he also let slip that interest rates should naturally be 3.5pc once inflation returns to 2pc, a thought worth pondering.

Furthermore, he hinted that Fed may opt for the fast tightening cycle of the mid-1990s, an episode that caught markets badly off guard and led to the East Asia crisis and Russia’s default.

The bond reductions this week are an early warning that it will not be easy to wean the world off six years of zero rates across the G10, and off dollar largesse on a scale never seen before. Central banks have no safe margin for error.

Flawed Math on Student Loans

Piggy Bank 1My Comments: The staggering level of student loan debt has the potential to sink the economic future of this country. Young families with the debt hanging over them will be less likely to buy a house, to buy a new car, to spend money on consumption items, all of which means economic stagnation. Income earned doing whatever they can will Instead be used to pay down debt, leading to stronger profits on Wall Street. Much of that money will be transferred overseas where it will do very little for us. Absent that debt, the money will be spent and flow into the economy. With the proven multiplyer effect, it will result result in more and better jobs and increased financial freedom for ALL OF US.

I encourage you to pay attention to those presidential candidates who are willing to talk about this and find a remedy good for all ALL OF US, including leaders of corporate America. I have no problem with them making millions if the rest of us have a fair chance to survive and thrive.

Kate Flanagan – May 5, 2015

Aggregate student loan debt surpassed credit card debt in size for the first time in 2010. Since then, the gap has continued to grow and now exceeds $200 billion. Student loans (at over $1 trillion) are now the second-largest category of consumer lending, second only to home mortgage lending.

While the total pool has been growing, the share owned by the Federal government has grown even faster. In 2000, the government’s student loan book was valued by the CBO at $149 billion; now, it exceeds $1 trillion. More than 90% of new student loans are being initiated by the government.

The rapid growth in the government’s portfolio can be traced to several policy changes:
• The government chose to largely remove banks from the lending process, following the financial crisis. The commonly stated objective was to save of $60 billion in fees over ten years (though that number has been questioned by the CBO).
• A decision was also made to expand the type of lending done without screening criteria.

Typically, student lending done by banks had involved application of some basic credit criteria, even if the government would ultimately own the loans. Now, for the majority of loans, that is no longer the case. What is the quality of this massive loan book, and what are the implications for both students and taxpayers? The New York Times, on March 22 of this year, noted that “many” of these loans “appear to be troubled.”

Unfortunately, it’s difficult to know exactly how bad the problem is. The Federal government’s own lending is exempt from the stringent loan forecasting, accounting, and reporting requirements that apply to lending by financial institutions. The March 22nd Times article noted that the Fed has had to resort to purchasing student loan data from credit bureaus in an attempt to get some metrics on this portfolio. The Education Department does not provide even basic vintage delinquency data to the agencies that oversee the financial system. This is ironic, given that Federal reporting requirements for banks have grown massively since 2008, and reporting of more than 100 data elements is now required at the individual loan level on a monthly basis.

Another unknown is equally troubling. It’s really not clear whether the expertise to manage this kind of portfolio exists within the Education Department. Consumer lending is primarily driven by technology and analytics. These tools work best when deployed by staff with deep expertise in management of risk assets. Has the Federal government had the time (or budget) to invest in the massive loan tracking and management systems that underlie the operations of consumer banks? Constant updating of data (both from the students themselves and external sources) should be taking place, leading to frequent loan level modeling of default risk. This type of modeling could drive targeted rollout of both predelinquency and early delinquency programs. Such programs could potentially aid borrowers before it’s too late.

Proactive management of this $1 trillion portfolio is crucial, both for the borrowers and the lenders (the taxpayers). It’s important that the implications of this coming wave of defaults for future Federal budgets be clearly understood. How much of a loss do we expect to take?

It is particularly hard to know the answer to the last question, as the CBO is required to use an unusual method of accounting for these loans. They have released quite a few reports noting that fair value accounting would yield a much less favorable assessment of the Federal loan book. A recent report documented a negative swing of over $200 billion. Crucially, these estimates are being made without the benefit of true credit quality data, which should underlie forecasting on all risk assets. The real “hole” may be much worse. And the problem is just kicking in, as the no-payment grace period is just now expiring on many of the loans made in recent years.

Good intentions followed by poor execution can bring damaging results. Some years back, the idea of providing a way for most Americans to own homes sounded very appealing. But the result was a situation in which many lower incomes households became excessively leveraged and terribly illiquid. Many were badly harmed when housing prices started to drop, and suffered further pain when the job market tanked. In its execution, these home ownership programs seemed to end up hurting some of the very folks that they had been intended to help.

More recently, the idea of extending a loan to anyone who qualified for college also sounded appealing. However, not all courses of study will provide sufficient additional income potential to ensure payback.

Both the economic value of the asset (the degree itself) and the available credit data on the borrower should have been considered when lending was expanded. Finally, and more controversially: interest rates on Federal student loans should have been varied in relation to the risk of the loan. This is Risk Management 101. By not doing this, the government is essentially admitting upfront that they plan to subsidize loans to riskier borrowers, or in areas of study that do not typically bring large returns. Our national policy on this point should have been debated openly. College tuition grants should be done explicitly, in accordance with a comprehensive policy framework, not through the back door (and not in a way that demeans students by first having them default on obligations).

It’s worth noting that household debt can be discharged in bankruptcy court. However, Federally backed student debt cannot. Many students who were given loans initiated without appropriate risk assessment face a situation in which repayment will be difficult, and legally available opportunities to reset their obligations will be few. It seems likely that the rules governing discharge will have to be changed. As noted, loan forgiveness programs will doubtless be greatly expanded, and a sizable portion of this $1 trillion loan book will likely be written off. The impact to the lives of the graduates in question will be severe, as discharges and forgiveness programs must be reported to the bureaus. Credit scores will drop hugely as a result.

The graduates in question will therefore find it harder to get jobs, credit cards, car loans, and even apartments. Credit scores are routinely checked in relation to many transactions these days, including potential offers of employment.

The longer we wait to face this growing problem, the more future graduates (and taxpayers) we will put at risk. The bell is ringing. It’s time to get the math right on student loans.

* Kate Flanagan is a guest contributor at the Center for Financial Stability (CFS). She has spent 25 years in consumer banking, most of it with Citibank. She has extensive experience in the credit card business and in consumer lending generally, with particular expertise in risk analytics and technology. Her consumer credit experience spans 40 national markets. In her 23 years at Citibank, she moved between functions and regions to implement rigorous, analytics-based business methods across all stages of the consumer credit cycle (from originations to collections). Since 2010, she has been doing consulting in risk analytics. Kate holds a BA in Math from Brown University and an MBA in Finance from Columbia University.

The Center for Financial Stability (CFS) is a private, nonprofit institution focusing on global finance and markets. Its research is nonpartisan. This publication reflects the judgments and recommendations of the author(s). They do not necessarily represent the views of Members of the Advisory Board or Trustees, whose involvement in no way should be interpreted as an endorsement of the report by either themselves or the organizations with which they are affiliated.

US Should Not Negotiate Free Trade Behind Closed Doors

global tradeMy Comments: Recently I was reminded that I appear to have strong opinions. This is usually accompanied by a rolling of the eyes, and to which I now hang my head, but without shame. On this topic, I’ve not had an opinion worth talking about until now. I hate it when people bitch and moan but can’t be bothered to offer an alternative which might be an improvement. (See GOP arguments against the Affordable Care Act)

Since I don’t have a visceral dislike of Barack Obama and voted for him twice, I’m inclined to give him the benefit of the doubt when he talks about the need for and benefits of the Trans Pacific Parnership or TPP. If he says it will be good for the US, I’m inclined to believe him.

But I’m also not inclined to ignore the push being made by the likes of Robert Reich, of Elizabeth Warren and Bernie Sanders. I think of them as credible advocates for what is in our best interests going forward.

We do need trade deals to keep the US current with what is happening globally in the 21st century. And we need to make sure that they are focused first on what is best for you and I as citizens America and not just what is best for corporate America. Since the Supreme Court has declared that corporations are people, then it seems reasonable that we not be discriminated against just because our pockets are not as deep.

The TPP needs a new start with full transparency since, in my opinion, the idea is valid and NOT a total waste of time.

Mark Wu / May 26, 2015 / The Financial Times

Many Americans who think free trade can be good for them nevertheless doubt whether the same can be said for the international trade agreements that are actually being written, often in conditions of secrecy.

The Trans-Pacific Partnership, an agreement that the US is negotiating with 11 Pacific Rim countries, is a case in point. Beyond the few paragraphs on the White House website, most Americans have little idea what it contains. Even members of Congress have to go to a secure room in the basement to read the latest negotiating text.

The White House argues that a period of secrecy is necessary, to afford negotiators flexibility to cut deals. Once we have an agreement, officials say, there will be plenty of time for the public to debate its merits — and Congress can reject it. Yet sceptics are not convinced; last week Democratic lawmakers tried to prevent the Senate from so much as discussing a law that would give President Barack Obama broad authority to negotiate a deal.

It does not help that some Americans have greater insight into what is happening than others. The US trade representative consults with about 700 people while negotiations are in progress; most are from the private sector. This advisory system fuels fears that trade deals benefit corporate interests at the expense of ordinary Americans.

As a former trade negotiator, I know that so-called trade promotion authority and some degree of secrecy is vital for getting a deal done. But the current level of secrecy may be going too far. Instead of dismissing critics as misguided, the White House should strike a better balance between retaining flexibility for negotiators and keeping the public informed during the process.

Here are three proposals — developed with my colleague John Stubbs, a former senior adviser to the USTR — that would help restore this balance.

First, the administration should provide better accounts of US negotiating objectives. The EU does this already, publishing a two-page summary of its aims for each chapter of a trade deal, and sometimes releases its own negotiation proposals. By contrast, the USTR publishes only a terse paragraph for each chapter. It should be more forthcoming.

Second, the government should release information about proposals under consideration, provided our negotiating counterparts agree. It should solicit public comments on contentious proposals (there is no need to say which government put forward which proposal). This provides a mechanism to seek input from the broader public, rather than just select advisory group officials.

Finally, government reports of the economic benefits and losses associated with trade deals depend heavily on economic models. While the final reports of government economists are made public, the data and assumptions underlying these models often are not. Why not make that information available as well? Outside experts can re-run the model to show how the economic effects change under different conditions.

None of these proposals would hamper the ability of trade negotiators to do their jobs. Yet all three can help erase worries that the government is hiding something, and restore trust that deals are being negotiated in the broader public interest.

Outdated trade rules need to be revised. But America’s process for formulating trade policy is outdated, too. Citizens should be able to make informed decisions over whether a deal allows Americans to share broadly in the gains from trade. Supporters of trade deals need to realise that they too need to support greater transparency, if they are to rebuild a broader coalition in favour of trade.

America Could Have Been One Giant Sweden — Instead It Looks a Lot Like the Soviet Union

My Comments: This is a long, uncomfortable article that predicts how the world might evolve economically and politically over the next several decades.

My generation will have passed on soon, but regardless of your political stripes today, it will be different. If you want to take back America, or at least preserve what we have, you had better get in touch with your socialist side. Either that, or kiss your basic freedoms goodbye. Life simply does not stand still; never has and never will.

By John Feffer / May 26, 2015

Imagine an alternative universe in which the two major Cold War superpowers evolved into the United Soviet Socialist States. The conjoined entity, linked perhaps by a new Bering Straits land bridge, combines the optimal features of capitalism and collectivism. From Siberia to Sioux City, we’d all be living in one giant Sweden. It sounds like either the paranoid nightmare of a John Bircher or the wildly optimistic dream of Vermont socialist Bernie Sanders.

Back in the 1960s and 1970s, however, this was a rather conventional view, at least among influential thinkers like economist John Kenneth Galbraith who predicted that the United States and the Soviet Union would converge at some point in the future with the market tempered by planning and planning invigorated by the market. Like many an academic notion, it didn’t come to pass. The United States veered off in the direction of Reaganomics. And the Soviet Union eventually collapsed. So much for “convergence theory,” which like EST or cold fusion went the way of most crackpot ideas.

Or did it? Take another look at our world in 2015 and tell me if, somehow we haven’t backed our way through the looking glass into that very alternative universe — with a twist. The planet currently seems to be on the cusp of a decidedly unharmonic convergence.

Consider what’s happening in Russia, where an elected autocrat presides over a free market shaped by a powerful state apparatus. Similarly, China’s mash-up of market Leninism offers a one-from-column-A-and-one-from-Column-B combination platter. Both countries are also rife with crime, corruption, growing inequality, and militarism. Think of them as the un-Swedens.

Nor do such hybrids live only in the East. Hungary, a member of the European Union and a key post-Communist adherent to liberalism, has been heading off in an altogether different direction since its ruling Fidesz party took over in 2010. Last July, its prime minister, Viktor Orban, declared that he no longer looks to the West for guidance.

To survive in an ever more competitive global economy, Orban is seeking inspiration from various hybrid powers, the other un-Swedens of our planet: Turkey, Singapore, and both Russia and China. Touting the renationalization of former state assets and stricter controls on foreign investment, he has promised to remake Hungary into an “illiberal state” that both challenges laissez-faire principles and concentrates power in the leader and his party.

The United States is not exactly immune from such trends. The state has also become quite illiberal here as its reach and power have been expanded in striking ways. As it happens, however, America’s Gosplan, our state planning committee, comes with a different name: the military-industrial-homeland-security complex. Washington presides over a planet-spanning surveillance system that would have been the envy of the Communist apparatchiks of the previous century, even as it has imposed a global economic template on other countries that enables enormous corporate entities to elbow aside local competition. If the American tradition of liberalism and democracy was once all about “the little guy” — the rights of the individual, the success of small business — the United States has gone big in the worst possible way.
CONTINUE-READING