Thursday, March 23, 2023

It's Time to Raise Fed Inflation Target

 Popular Economics Weekly


In the light of the recent bank failures, and the Fed’s own missteps in fighting inflation, history is telling us that the Fed’s current 2 percent target rate for inflation is too low.

Why? Because Federal Reserve policy since the 1970s has mostly benefited banks and other financial institutions that manage money.

It’s easy to see why. The Fed is in charge of keeping our banking system sound, which is implied in its mandate to maintain price stability and maximum employment. So its primary focus has always been to defend the value of their assets, and inflation diminishes asset values.

But the Fed hasn’t maintained price stability as evidenced by the recent inflation surge and was surprised by three US bank failures, causing doubts as to the soundness of our banking system.

Former FDIC Chairman Sheila Bair highlighted the dangers of such inattention in a MarketWatch interview.

“This is a risk confronting all banks,” she said. “All examiners need to be on alert for how interest-rate risk is being managed. If there is a run, they will need to sell these securities. Those are the kinds of things all-size banks, and all examiners should be worried about in our banking system."

Current monetary policy has not improved workers’ wages, either, which haven’t kept up with inflation with the wild gyrations caused by the COVID pandemic and some $6 trillion in pandemic aid.

So isn’t it time for Fed monetary policies to focus on bringing down the record income inequality that has prevailed since then and ranked US income inequality the same as Haiti, far below that of other developed countries. per the CIA’s World-Factbook?

Why do we have red and blue states and a divided country, otherwise? Many Americans feel disenfranchised who no longer have jobs that earn what they did in the 1970s when we still had a manufacturing base in the rust belt.

The average hourly earnings of employees has never risen above the 2-3 percent range, per the St. Louis Fed’s above graph of average hourly wages dating from the 2008 Great Recession.

Chairman Powell was explicit in his press conference after the conclusion of the latest FOMC meeting, at which another 0.25 percent rate increase was announced. The labor market is still too hot, he said, and has caused wage growth to accelerate rather than decline, which the Fed deemed was necessary to bring down inflation.

So employees’ earnings have now become the culprit keeping inflation too high, when the latest research has shown excess corporate profits and the Ukraine war jump-started the current inflation surge.

In other words, the Fed has been most successful at keeping employees’ wages at or below the inflation rate since the 1970s as they labored to keep inflation in the 2 percent target range.

This is not a coincidence. Fed Governors since former Fed Chair Paul Volcker have believed conditions that prevailed since the 1970s still rule that caused the wage-price spiral and double-digit inflation of that time.

But globalization policies expanded world trade and developed just-in-time supply-chains that brought in cheaper consumer goods and exported manufacturing jobs to low wage-earning countries. Inflation became so tame during the 1990s that it was termed the Great Moderation.

So why does our Fed have a 2 percent inflation target?

Progressive labor economist Jared Bernstein opined on this matter in the Washington Post shortly after Fed Chairman Bernanke first announced the Fed’s decision to keep a 2 percent inflation target.

“The fact is that the target is 2 percent because the target is 2 percent. Were the target 3 percent or 4 percent, you’d be reasonably asking me, why 3 or 4? To the extent that there’s an anti-inflation bias among economic elites (and thus an anti-full-employment bias), and I think that’s often the case, I’d reiterate arguments I made here…that the debates over full employment and Federal Reserve policy are generally dominated by the interests of the minority who worry more about inflation and asset values than those who worry about jobs and paychecks.”

Is there real evidence the current 4.4-4.6 percent average hourly wage increases employees are enjoying that was reported in the February unemployment report inflationary?

No, average hourly wages could be contributing as little as 8 percent to product costs in one recent paper by EPI economist Josh Bivens that I cited above.

There is much that government can do to lessen income inequality, which would in turn lessen the yawning gap between the Haves and Havenots in this country. The Federal Reserve can do its part by lessening the inherent bias of a low inflation target that mainly targets wage earners, which includes 32 million Americans that still live below the poverty line.

Harlan Green © 2023

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Tuesday, March 21, 2023

The Fed Should Reverse Course

 Financial FAQs


The wild fluctuations of the 10-year Constant Maturity Treasury yield portrayed in the above St. Louis Fed graph should have alerted Federal Governors and Chairman Powell to the dangers of raising interest rates too quickly.

It is the reason three US banks have failed, who wouldn’t either hedge against or reduce their holdings backed by Treasury securities that lost value as interest rates rose.

It’s also why the Fed should begin to reverse course to lower their overnight rate target that is now at 4.5-4.75 percent.

The decline in confidence of our banking system can in part be attributed to the Fed Governors naiveté, or maybe outright ignorance, of the US banking system they are supposed to regulate.

For instance, Fed Governors did not seem to realize the risk to depositors of banks holding deposits worth more than the $250,000 ceiling set by the FDIC for insured deposits. It was 97 percent in the case of Silicon Valley Bank.

The Fed seems to have been its own worst enemy in not realizing the effect of its policy actions, as evidenced by February’s FOMC minutes.

“With respect to the relationship between monetary policy and financial stability, some participants noted that evidence regarding the link between the policy stance and elevated financial vulnerabilities was limited, with a couple of participants further observing that there were not many episodes of persistently low interest rates.”

Yet Silicon Valley Bank had been on the San Francisco Fed’s watch list for more than one year as the Fed Governors charged ahead with their rate hike policy. “By July 2022,” as reported by the NYTimes, “Silicon Valley Bank was in full supervisory review, and was ultimately rated deficient for governance and controls.”

“In addition,” continued the FOMC minutes, “some past episodes of heightened financial vulnerabilities were associated with excessive risk-taking behavior that did not seem to be very responsive to typical changes in interest rates.”

Really? The NY Times and others have reported on the hands-off attitude of Fed regulators in not doing more to demand that banks—particularly those vulnerable to large uninsured deposits—crack down on such risky behavior.

So the Fed might call a halt to its policy of taming an inflation that is mostly caused by factors outside of the Fed’s control, and focus more on banking supervision that is under its direct control.

A 2022 Gallup survey found that just 27 percent of Americans had a “great deal/quite a lot” of confidence in our banks.

At the very least, the Fed should reverse course and begin to bring down interest rates before more banks fail, and more Americans lose faith in our banking system.

Harlan Green © 2023

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Saturday, March 18, 2023

Housing Market Recovery--Part II

 The Mortgage Corner

Calculate Risk

Real estate continues its slight recovery with housing starts and new residential permits on the rise in February. Most of the action was in rental housing, as apartment construction is up 9.9 percent YoY in February. Whereas February single-family construction has been falling and is now down 31.6 percent YoY.

It’s easy to see why more multi-family housing is under construction. Single-family affordability has plunged with 30-year conforming fixed rates still around 6.75 percent.

The NAR’s Housing Affordability Index showed that from 2020 to 2022 the income required to qualify for a 90 percent LTV mortgage on an entry-level home had doubled from $49,008 to $92,688 while the 30-year fixed rate rose from 3.17 percent to 6.77 percent.

This puts many more first-time buyers out of the market. Their share of purchases has fallen to 30 percent of existing-home sales, when it was as much as 40 percent before housing prices accelerated in 2021.

Calculated Risk

The Case-Shiller Home Price Index also highlights the price fluctuations in existing-home prices that made affordability such a problem in Calculated Risk’s above graph of the Case-Shiller Index dating from 1988.

Price rises peaked in January 2004 and January 2023 when they were rising as much as 20 percent YoY before declining sharply. It was a time of multiple offers and ultra-low interest rates that crowded out first-timers.

The sharp declines in price inflation that followed both times were precipitated by the Federal Reserve’s actions to tighten credit, and the lack of entry-level housing.

One reason that builders are building again is the slow down in inflation, with the S&P Composite Home Price Index now rising in the 4 percent range. There are also some 1.4 million home still under construction, which is a tremendous backlog also bringing down prices.

“The cooling in home prices that began in June 2022 continued through year end, as December marked the sixth consecutive month of declines for our National Composite Index,” says Craig J. Lazzara, Managing Director at S&P DJI.

Mortgage rates have been up and down but won’t give much boost to housing until the Fed decides to ease up on the rate increases. Still, signs of life this early in the selling season and without any indication the feds will pause in their rate hikes is difficult to ignore.

Harlan Green © 2023

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Wednesday, March 15, 2023

What Is the Fed's Next Move?

Popular Economics Weekly


The retail Consumer Price Index rose from essentially zero in May 2020 to 8.9 percent YoY in June 2022. It has dropped to 6 percent in February, per the US Census Bureau’s latest inflation report.

This is what panicked Federal Reserve officials to begin the draconion interest rate increases that have caused at least two bank failures, and maybe more, of mid-size banks whose oversight was weakened with a modification of the Dodd-Frank legislation in 2018.

The largest failure to date is the Silicon Valley Bank, whose depositors withdrew a record $42 billion in a matter of days. Taxpayers might now be picking up the tab because of the promise by the US Treasury and FDIC to make all depositers whole (but not stock and bond holders).

The rising costs of renting and homeownership accounted for more than 70 percent of the increase in consumer prices last month due to the well-documented housing shortage.

The cost of recreation, plane tickets, auto insurance and furniture also rose sharply because the service sector is booming. Leisure/Hospitality, Education & Health had the fastest job growth in last Friday’s February unemployment report.

Some good news was that the cost of energy, including gas and natural gas, declined in February. And grocery prices rose 0.3 percent to mark the smallest increase in 21 months. They are still up 10.2 percent in the past year, however.

The wholesale cost of goods also fell last month in the Bureau of Labor Statistic’s Producer Price Index as well, led by the third straight decline in food prices. Notably, wholesale egg prices sank 41 percent. The cost of eggs had soared since the fall, doubling in price in some parts of the country.

The PPI report captures what companies pay for supplies such as fuel, metals, packaging and so forth. These costs are often passed on to customers at the retail level and give an idea of whether inflation is rising or falling.

Crunching the numbers, it has taken nine months for CPI inflation to drop to 6 percent from its peak last June. It should take approximately six months to return to the Fed’s 2 percent inflation target, if it continues to decline at the same rate that it rose, which is sometime in the fall.

But supply chains are taking longer to recover because of China’s COVID missteps and the Ukraine war that has no end in sight.

So what is the Fed to do? It would be a good time to pause and see if inflation continues to decline, as well as to ascertain whether higher interest rates do more damage to the banking industry that may have invested too heavily in certain assets.

Harlan Green © 2023

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Saturday, March 11, 2023

Fed May Pause Rates Sooner

 Popular Economics Weekly


February’s very strong unemployment report has raised fears the Fed may go back to 0.50 percent rate hikes, or even 0.75 percent (which it's done four times), because of the continuing strength of the labor market.

But maybe not. They might even pause further rate hikes, because the failure of the Silicon Valley Bank and several smaller banks could set off alarm bells at the Fed, catching some smaller banks off guard that invested heavily in Treasury and Mortgage-backed securities when rates were at rock bottom.

Job strength was mainly in the service sector, according to the Labor Department’s unemployment report. Leisure/Hospitality and Education/Health once again added most new payroll jobs in February followed by retail trade, professional services and government, as we recover from COVID-19.

The U.S, has created 4,349,000 jobs since February 2022, so quickly has been the recovery. That’s more than 362,000 jobs per month, unheard of in a post-WWII recovery, and the rest of the world is playing catch-up.

Calculated Risk

In fact, February 2022 to February 2023 has been the best 12 month period of job creation since 1980 per the Calculated Risk graph.

But it now looks like the sudden rise in inflation since the pandemic might have panicked Fed officials to raise rates too quickly—4.5 percent since last June. The result may cause more small banks to fail, which in turn might require a pause in their rate hikes, or even to reverse course sooner.

It’s becoming evident that the sudden rate increases have caught some banks flatfooted. Barron’s Magazine has listed 20 banks in a similar position to fail, if the bad news precipitates more depositor withdrawals.

Greenspan’s Fed boosted its rate 4 percent in 0.25 percent increments over two years. Yet it still precipitated the Great Recession, in part because the GW Bush administration stopped regulating Wall Street firms almost completely, which permitted the liar loans that ultimately failed and caused the busted housing bubble.

The Trump administration has acted similarly by easing oversight on mid-sized banks that could have precipitated the current missteps.

So are we looking at another banking crisis, such as occurred during Alan Greenspan’s Fed and the Bush administration?

We should be in a different world because of the banking reforms post-Great Recession. Bank balance sheets have been greatly strengthened and financial markets are more tightly regulated.

And there are many inflation elements outside of the Fed’s control that may bring down inflation. Supply chains are returning to normal, and corporate profits are coming down from the stratosphere. The Biden administration is also attempting to reduce trade tariffs to bring down import costs that businesses pass on to consumers.

But the Fed has never raised interest rates as quickly before in their history. The latest failures should be a lesson that might change some minds at the Fed.

Harlan Green © 2023

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Tuesday, March 7, 2023

The Fed Might Cause Another Recession

Financial FAQs

A headline reporting on Fed Chairman Powell’s latest testimony to congress said the Fed will battle inflation until it is subdued, sounding more hawkish because January numbers for retail spending, employment and inflation were stronger than expected.

The problem is most inflation is being caused by factors outside of the Fed’s control.

So good luck, I say, in continuing to boost interest rates without causing a recession. The last time the Fed was in such a position—battling surging inflation in early 2000 that brought on the housing bubble and was due to circumstances largely beyond its control (The War on Terror)—it resulted in the Great Recession.

The Fed had so over-reacted by raising interest rates 16 consecutive times under Fed Chair Alan Greenspan that it took his successor Ben Bernanke’s emergency Quantitative Easing policies to keep the U.S. and world economies from turning it into a second Great Depression.

The cost this time of the Fed holding to its 2 percent inflation target could be 2 million workers losing their jobs, according to Massachusetts Senator Elizabeth Warren.

Today’s Fed hasn’t seemed to even acknowledge that a major component of the current inflation is record corporate profits from the post-pandemic recovery when corporations took advantage of the supply shortages to goose their profit margins.

Economic Policy Institute economist Josh Bivens estimates that at least half of the current inflation was caused by said increase in corporate profits in a study out last year (see EPI graph).

“Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFCorporate sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase.”

January’s consumer spending was also boosted by the 8 percent inflation-adjusted rise in Social Security payments in the New Year.

Consumers reacted accordingly with January consumer spending up 1.8 percent, while personal incomes rose 0.6 percent in the BEA’s latest personal income (PCE) report.

Fear of what Fed Chair Powell may say and do next is already affecting what consumers and businesses may do next. The Conference Board Index of Leading Economic Indicators (LEI) already predicts a recession sometime this year.

Conference Board

“Among the leading indicators, deteriorating manufacturing new orders, consumers’ expectations of business conditions, and credit conditions more than offset strengths in labor markets and stock prices to drive the index lower in the month,” said said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board.

Maybe Powell’s Fed is just playing it safe in hinting that more pain is possible if January’s boost in spending and inflation isn’t a temporary glitch as more data from February come in.

Friday’s upcoming unemployment report is one such sign, since January’s red-hot employment report of 537,000 new jobs scared the Fed into believing higher inflation might be prolonged.

Harlan Green © 2023

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Saturday, March 4, 2023

Goleta's Old Town Flood


Designing a New City Center

    Many of us believed that a re-design of Old Town Goleta
would be an ideal location to practice some of the precepts of
True Urbanism, or Smart Planning, that could aid in the design
for a new city. These were labels attached to what is now a
worldwide movement.

    Flooding was also a major concern, despite periodic
droughts. Santa Barbara and the South Coast had suffered
several devastating floods during the 1990s that ended a prior
8-year drought.

    The flood that broke the drought was called the March
Miracle: in March 1991, 23 inches of rain fell, even flooding the
Santa Barbara Municipal Airport and closing it for several days.

    A second flood in 1995 caused another flooding of Old
Town Goleta’s main street. A three-foot deep stream of water from a
torrential rainfall overflowed San Jose creek at one end of Old
Town’s boundaries adjacent to a Nissan car dealer’s lot.

    More than 40 cars parked in the lot were swamped with several thrown into a culvert that diverted the flood waters onto Old Town’s main street.

    A climate scientist later said that the creek
would no longer be adequate for containing flooding because
the hard paved streets and roof surfaces in the surrounding
neighborhoods had replaced the soil that had absorbed excess

    Now the creek carried almost all of the rain’s runoff.
Hence flood control improvements, such as an enlarged
creek bed to carry the increased runoff, were required in the
CEQA report as the first step in any redevelopment effort.

    The droughts and consequential flooding also made everyone
aware of the limited water supplies in California, as well as the
potentially devastating drought/flood cycle. In fact, California’s
latest six-year drought ended (in 2017) with the greatest rainfall totals for Northern California since the 1880s.

Harlan Green © 2023

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Tuesday, February 28, 2023

Housing Market Recovering

 The Mortgage Corner

Real estate is the industry most affected by rising interest rates, so it’s encouraging to see that housing sales are showing signs of a revival. Both new-home and pending home sales jumped in January, even with still expensive mortgage rates.

One reason: builders are buying down those mortgage rates.

Sales of newly built, single-family homes in January increased 7.2 percent to a 670,000 seasonally adjusted annual rate from an upwardly revised reading in December, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

And it’s not that expensive for a builder to offer an affordable mortgage rate—just 4 points (%) to buy down a conforming 30-year fixed rate mortgage to 4.875%; not that much to tack onto a sales price.

“The latest HMI survey shows 57% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB). “Buyer incentives, along with stabilizing mortgage rates during the month of January, increased the pace of new home sales for the month. However, in a sign of current market weakness, sales are down 19.4% compared to a year ago.”

Pending home sales also improved in January for the second consecutive month, according to the National Association of RealtorsÃ’.

The Pending Home Sales Index (PHSI)* — a forward-looking indicator of home sales based on contract signings — improved 8.1 percent to 82.5 in January. (But) Year-over-year, pending transactions dropped by 24.1 percent.

“Buyers responded to better affordability from falling mortgage rates in December and January,” said NAR Chief Economist Lawrence Yun.

What is causing more optimism among homebuyers? Builders are seeing more traffic from new-home wannabes, for starters.

The National Association of Builders reports two consecutive solid monthly gains for builder confidence, spurred in part by easing mortgage rates, signal that the housing market may be turning a corner even as builders continue to contend with high construction costs and building material supply chain logjams.

A more immediate reason for the improvements is an acute housing shortage. Builders essentially stopped building new homes for a decade after the Great Recession and busted housing bubble.

“With the largest monthly increase for builder sentiment since June 2013, excluding the period immediately after the onset of the pandemic, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” said NAHB Chairman Alicia Huey. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing.”

The NAR anticipates the economy will continue to add jobs throughout 2023 and 2024, with the 30-year fixed mortgage rate steadily dropping to an average of 6.1% in 2023 and 5.4% in 2024.

Most prospective homebuyers are still on the sidelines, however. The Conference Board reported a further decline in consumer confidence reflecting large drops in confidence for households aged 35 to 54 and for households earning $35,000 or more,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board.

“While consumers’ view of current business conditions worsened in February, the Present Situation Index still ticked up slightly based on a more favorable view of the availability of jobs. In fact, the proportion of consumers saying jobs are ‘plentiful’ climbed to 52.0 percent—back to levels seen in the spring of last year.”

So what are homebuyers to do? Should they look for homebuilders willing to buy down that mortgage to 4.875%, or wait while housing prices continue to climb?

Harlan Green © 2023

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Sunday, February 26, 2023

Chapter Eleven - Building a Livable Community


Old Town’s Revival

As we began to redesign Goleta’s Old Town District, we realized our efforts might apply to a livable city as well.

As recently as 2005, the Institute of American Architects defined a such a community as. . . “broadly speaking, a livable community recognizes its own unique identity and places a high value on the planning processes that help manage growth and change to maintain and enhance its community character.”

Thoughts of forming a new city of Goleta were also revived, as the actual planning of Old Town’s future began. There had been several unsuccessful efforts to form a city since the 1970s. The Goleta Old Town Revitalization Committee, a mix of local officials and residents that wanted Old Town’s infrastructure and services upgraded, was now created, and I was appointed its chairman. Hearings were held in Old Town’s Community building so county planners could learn what Goleta’s residents wanted for a future town center. We were following the precepts of community organizing in bringing citizens together to solve some of the problems afflicting such a diverse community.

Goleta in many ways was a microcosm of small-town America and all that had happened to those communities since the sixties: rapid population growth with little concern for the environment. It had an early history combining both rural and urban life with industrial and research centers while being adjacent to the Santa Barbara Airport. I wanted to participate in this organization (that included some future Goleta city mayors), because it could aid in giving the Goleta Valley its “own unique identity” that planners and architects deemed requisite for a livable community.

I had read and was influenced by M. Scott Peck’s book The Different Drum, describing the elements that bring a community together to achieve whatever they want. His approach epitomized for me the essence of community development. Dr. Peck, a medical doctor, psychologist, and author of a better-known prequel, The Road Less Traveled, broke down the steps that a community goes through to come together in a meaningful way in The Different Drum.

He warned that the process could take time. Any community usually goes through four stages to reach agreement and to be able to function effectively, whatever its goals. He characterized these stages as Pseudo community, Chaos, Emptiness, and (true) Community.

Pseudo community is the first gathering of any group with the initial pleasantries and avoidance of conflict in the desire to be nice to each other. But it is a false community, because until the second stage of Chaos is reached, individual differences aren’t revealed, and a discussion of the real problems doesn’t surface.

Chaos described the early stages of our hearings when open discussions brought out the conflict between those residents who loved Old Town’s funkiness and cheap rents, and those landlords and landowners who wanted to improve their properties. The goal of the Old Town Advisory Committee was to bring the sides together. There was also a Goleta Beautiful organization that wanted to preserve and restore some of the more historic Old Town structures.

Dr. Peck’s third stage is Emptiness: a time of resignation, when the group or organization gives up their individual prejudices, ideologies, control needs, and begins to see what can be accomplished as a group. In Old Town, it wasn’t until the second year of the hearings that this happened. More Old Town residents were put on the committee, and we began to see a vision of what a revitalized Old Town could be for the Goleta community.

After many hearings and dialogues with planners, architects, developers, and residents that included a weekend Design Charrette that I will discuss in a later chapter, the committee members began to have a sense that we were all in this together and would be able to create something beneficial for the community.

Dr. Peck wrote:

". . . initially I thought this book’s title should be “Peacemaking and Community”. But that would put the cart before the horse. For I fail to see how we Americans could effectively communicate with the Russians, (or any peoples of other cultures) when we don’t even know how to communicate with the neighbors next door, much less the neighbors on the other side of the tracks."

In our culture of rugged individualism— in which we generally feel that we dare not be honest about ourselves, even with the person in the pew next to us—we bandy around the word, “community”. . . [but] if we are to use the word meaningfully, we must restrict it to a group of individuals who have learned how to communicate honestly with each other.1

The Old Town Revitalization Committee needed two years and 100 hearings to finally form the Old Town Revitalization Plan.

Once the Plan’s CEQA (California’s Environmental Quality Act) study was approved—a study required to name and mitigate the environmental hazards we might encounter—the County applied to the state of California for the formation of a Goleta Old Town Redevelopment Plan, which would allow a percentage of the tax monies to be withheld for use in Old Town to upgrade its housing, improve San Jose Creek that flowed under its main thoroughfare, and infrastructure.

The final report approved by the County on June 16, 1998, stated: “The purpose and objectives of this Redevelopment Plan are to eliminate the conditions of blight existing in the proposed Project Area and to prevent the recurrence of blighting conditions in said Area.”

1 Peck, M. Scott. The Different Drum. Simon & Schuster, 1987. P. 56

Saturday, February 25, 2023

Consumer Incomes/Sentiment Still Rising

 Financial FAQs

January consumer spending rose 1.8 percent (orange bar in graph) in a month, while personal incomes rose 0.6 percent in the BEA’s latest personal income (PCE) report out Friday.

This is one more headache for the Fed that wants lower incomes and spending to bring down inflation. But that ain’t happening in January, at least.

From the same month one year ago, the PCE price index for January increased 5.4 percent. Prices for goods increased 4.7 percent and prices for services increased 5.7 percent. Food prices increased 11.1 percent and energy prices increased 9.6 percent. Excluding food and energy, the PCE price index increased 4.7 percent from one year ago.

Inflation is declining, but it still caused financial markets to panic for no real reason. Such a spike in spending (orange bar in the above graph) after two negative months and the concomitant inflation rate is temporary because of the huge 8 percent SocSec inflation adjustment in January.

No wonder consumer sentiments are on the rise. The University of Michigan final monthly survey for February confirmed the preliminary February reading, rising 3 percent above January. They don’t see much of a drop in employment, either, per their graph.


“After lifting for the third consecutive month, sentiment is now 17 index points above the all-time low from June 2022 but remains almost 20 points below its historical average,” said Survey Director Joanne Hsu.

Long-run inflation expectations remained firmly anchored at 2.9 percent for the third straight month and stayed within the narrow 2.9-3.1 percent range for 18 of the last 19 months, per the U. Michigan study.

So much for Fed fears that higher inflation expectations may become imbedded and cause consumers to sustain the high inflation by shopping until they exhaust their savings.

More studies by Federal Reserve economists are showing the Fed’s unrealistic expectations to achieve a 2 percent inflation target, no matter the loss of jobs, economic growth, etc.

Progressive economist Robert Kuttner has just highlighted a Cleveland Fed study by its own staff economists that highlights the consequences of holding to a 2 percent inflation target.

The study, by Randal Verbrugge and Saeed Zaman of the Cleveland Fed, says Kuttner, found that, using the Fed’s own projections, inflation would still be at 2.75 percent by the end of 2025—moderate by historic standards—and reducing it all the way to 2.0 percent would require an unemployment rate of 7.4 percent, more than double the current rate.

Who doesn’t believe that would be disastrous at a time of geopolitical unrest, economic sanctions, and the Ukraine war?

Harlan Green © 2023

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Friday, February 24, 2023

Q4 2022 Growth Continues



Last year is ending in better shape than it began. Instead of shrinking in the first two quarters of 2022, US GDP growth has turned positive in Q3 and Q4, as portrayed in the above graph of real, or inflation adjusted, Gross Domestic Product growth.

Fourth quarter GDP was reduced slightly from 2.9 to 2.7 percent in the second of three revisions, yet the overall year is shaping up to grow 2.1 percent, much like in pre-pandemic 2019.

The BEA release said, “The increase in real GDP in the fourth quarter reflected increases in private inventory investment, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by decreases in residential fixed investment and exports. Imports decreased,” said its press release.

Its main strengths were strong consumer spending and investments in plants and equipment, no surprise with the Inflation Reduction and Infrastructure Act $trillions that are being invested over the next 10 years.

The White House said whereas the Bipartisan Infrastructure Law invests $1.2 trillion on overhauling the nation’s roads and bridges, electric and water systems, and high-speed internet; the Inflation Reduction Act would fund energy production and manufacturing, reduce carbon emissions, lower prescription prices and extend affordable healthcare coverage.

The GDP measure of inflation was better, dropping to 3.7 percent from 4.4 percent. Inflation rose at an annual 3.7 percent pace in the fourth quarter, compared with a 4.3 percent increase in the prior three-month period. For the full year, inflation surged 6.8 percent, the biggest increase since 1982, which won’t make the Fed Governors happy.

However, US inflation has fallen faster than in other developed countries, as was highlighted by the New York Times David Leonhardt in an interview with Brian Deese, who stepped down as Biden’s chief economic advisor, due to our quicker recovery.


Europeans have bigger problems in taming inflation, like greater supply chain disruptions caused by Covid and the energy price increases caused by Russia’s invasion of Ukraine that have slowed down eurozone growth.

The US is shaping up to continue strong growth in the New year with full employment and initial jobless claims at seasonal lows. Initial jobless claims fell by 3,000 to 192,000 in the week ending Feb. 18, the Labor Department said Thursday. That’s the sixth straight week below 200,000 is a signal of a strong labor market, and the lowest level in three weeks.

And the Atlanta Fed continues its upbeat GDPNow estimate of first quarter 2023 growth.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.5 percent on February 16, up from February 15. After this morning’s housing starts report from the US Census Bureau, the nowcast of first-quarter real residential investment growth increased from -10.4 percent to -8.1 percent.

Does it mean real estate could lead us out of the current slowdown? Stay tuned, as the University of Michigan consumer sentiment survey rose in early February to a 13-month high of 67, suggesting somewhat greater optimism about the economy among U.S. households.

Harlan Green © 2023

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Wednesday, February 22, 2023

Building Community Answering Kennedy's Call Book Review


Building Community, Answering Kennedy’s Call by Harlan Russell Green A Peace Corps Writers Book, 2022.

This memoir will take members of ERFSA back to the “good old days” when you might have been protesting the war in Vietnam or marching for Civil Rights before, during or after finishing graduate school. Building Community, Answering Kennedy’s Call certainly did that for me. The author, Harlan Green, joined the first wave of Peace Corps Volunteers in 1962 on the verge of graduating from UC Berkeley, with much uncertainty as to what his next step should be.

This was his lucky moment because the experience of trying to mobilize villagers in a remote Turkish village stayed a course for his life. In this brief, but well written and engaging memoir, Harlan takes to Ishmet Pasha with neither electricity or running water in 1962. Fortunately, Harlan had learned basic carpentry skills with his father while growing up and through a sincere effort to learn the Muslim villagers’ language so he could understand what they wanted, in addition to what he thought they needed, the tough experience yield results as well as path and philosophy he carried forward after completing the two year mission.

The story becomes increasingly interesting and its significance is peeled back Harlan Green returns to the States to become involved in other social movements of the 1960s and 70s. He studied film making in San Francisco and then was hired by the Environmental Protection Agency where he honed his camera chops on such issues as airplane safety and urban air quality in Los Angeles. Recounts of later work as a film maker for with Ceasar Chavez and the United Farm Workers during in 1974 are especially compelling .

This is a quick yet serious read. It could never be called a “blast from the past” because of the depth of the author’s commitment to bringing positive change into our world. It would be inspirational for undergraduates. I wished momentarily for a syllabus that I could include Building Community , Answering Kennedy’s Call as required reading.

Harlan Green © 2023

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Monday, February 20, 2023

Will It Be a Soft Landing?

 The Mortgage Corner

There is a growing optimism Jerome Powell’s Fed can engineer a so-called soft landing with its restrictive monetary policies, which means avoid an outright recession.

Why? First quarter 2023 GDP growth is predicted to be positive following strong Q3 and Q4 growth in 2022, and we are still fully employed. This is in part because the US economy has recovered faster from the pandemic than other countries.

But the Federal Reserve’s last attempt to engineer a soft landing with a 2 percent inflation target resulted in the Great Recession, the worst worldwide downturn since the Great Depression.

Alan Greenspan, the Fed Chairman and his Fed Governors at the time thought that if they raised the overnight Fed funds rate slowly enough, they could tame inflation while avoiding a recession.

The funds rate was raised in increments of 0.25 percent 16 consecutive times in a vain attempt to mitigate what actually occurred. It was an example of the Fed wanting to have its cake and eat it too.

It was a different time, however. Inflation soared then because the GW Bush administration in 2001 took their hands off regulations, allowing the falsification of credit ratings, while cutting taxes to create the first $trillion budget deficit in our history.

And many traders are under what may be a similar illusion; that a so-called ‘soft landing’ is achievable with the Fed holding to its 2 percent inflation target.

However, because inflation measures have never had more than plus or minus 2 percent accuracy, pressing for a 2 percent target could bring actual inflation to zero, which is tantamount to a recession.

This fact was explicated by David Wheelock, a St. Louis Fed group vice president and deputy director of research, in a 2017 podcast.

“The price indexes that are used to estimate inflation don’t necessarily include all goods and services in an economy. Furthermore, these indexes have a slight upward bias. So, when the observed rate of inflation is, say, 1 or 2 percent … the true measure is actually probably lower than that, closer to zero.”


Another well-known fact is that prices plunge substantially during recessions when consumers slow spending, which is portrayed in the above FRED of personal consumption expenditures, our best measure of consumer spending.

Consumption only dipped below zero once since 1950, during the 2007-09 Great Recession that was worldwide, as I said. All other recessions (gray bars in graph) showed a consumption drop that was quickly mitigated by the Fed reversing course and dropping their interest rates.

So what is different this time? The last recession lasted just two months—from Mar-April 2020—caused by the first worldwide pandemic in 100 years that shut down economic activity completely, rather than an over-heated economy.

The inflation rate quickly dropped to zero, but took off as quickly because of the $trillions in pandemic aid, igniting the latest inflation surge. Other countries are taking longer to recover, and so the supply-chains are playing catchup to the surging demand for more goods and services.

When will a new equilibrium between supply and demand be established? It’s hard to say with a fully employed economy and consumers so willing to spend.

Larry Summers is the preeminent inflation hawk, though he has softened his rhetoric of late as inflation has subsided. I repeat a recent quote of his from Bloomberg news that has been scaring financial markets.

“We need five years of unemployment above 5% to contain inflation -- in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” said Summers said in a recent speech in London. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

His remarks are based on an outmoded thesis of classical economic theory left over from the inflationary spiral of the 1970s; suppress demand by suppressing hiring and the labor market with very high interest rates rather than wait for healthier supply-chains.

And supply-chains are recovering. The US Chamber of Commerce just reported for all of 2022 that exports of goods and services increased $453.1 billion to $3,009.7 billion, passing the $3 trillion mark for the first time. Imports of goods and services hit $3,957.8 billion, up $556.1 billion from 2021 and the highest on record.

Increasing supplies should continue to bring down inflation, in other words. But holding to a 2 percent inflation target, though Powell had said the Fed would be flexible, almost guarantees a recession.

Harlan Green © 2023

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