What, Now A Trump Recession?

Popular Economics Weekly

Economists are already warning that if President-elect Trump’s policies are enacted, such as initiating trade wars, or the wrong tax cuts, or even cutting back on social security and Medicare benefits, we could see another recession, similar to the Great Recession that occurred during GW Bush’s term.

Whether his policies can be enacted depends on several things, including his unpredictable behavior, and perhaps the outcome of his November 28 RICO trial in San Diego for running Trump University as a criminal enterprise. Judge Gonzalo Curiel has just ruled that Trump’s inflammatory campaign statements can be admitted as evidence in his trial.

The Bush recession was caused by too lax regulations that caused the housing bubble (by allowing excessive bank leverage), tax cuts that increased the budget deficit while we were fighting two wars, and then Greenspan’s Federal Reserve decision to raise interest rates 16 consecutive times to bust the housing bubble.

It’s terrifying what President-elect Trump will be able to do when he controls all three branches of government (as soon as he appoints a ninth Supreme Court Justice) and carries out his campaign pledges.

Carrying out his pledge to deport all aliens when there is already an outflow of immigrants will devastate agriculture, construction, and any other industry that relies on low-cost labor, for instance.

His promise to ‘fix’ Obamacare (or abolish it outright) will endanger health benefits for the 20 million now covered by it. This makes healthcare much more expensive, since it puts the uncovered back in Emergency Room care for serious illnesses, which puts the cost of their care back on the hospitals.

And as the New York Times reports, “This is going to be a president who will be the biggest regulatory reformer since Ronald Reagan,” Stephen Moore, one of Mr. Trump’s economic advisers said in an interview on Wednesday. “There are just so many regulations that could be eased.”

It could be everything from repeal of Dodd-Frank, the successor to the Glass Steagall Act that protected federally insured depositors from risky investment banking, to repealing environmental regulations that combat global warming, and not only abolishing Obamacare, but the current Medicare system as House Speaker Paul Ryan is threatening to do.

Graph: Marketwatch

And we are reaching full employment levels, which will surely mean the Fed will begin to raise short term rates in December. This is happening already in the bond markets, as evidenced by rising longer term interest rates in anticipation of a soaring budget deficit, if Trump’s plan to increase both infrastructure and military spending while cutting taxes is implemented.

The central issue, though, maybe Trump’s misbehavior in dissing those elements that made American great. “Trump’s bigotry, dishonesty and promise-breaking will have to be denounced,” said David Brooks today. “We can’t go morally numb. But he needs to be replaced with a program that addresses the problems that fueled his ascent.
“After all, the guy will probably resign or be impeached within a year. The future is closer than you think.”

But President-elect Trump’s destruction of almost all decency in his grab for overwhelming power has let that Genie of discontent out of the bottle. We know what happened in the 1930s and even earlier when such ruthless tactics were used.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why Isn't It Easier to Qualify For A Mortgage?

The Mortgage Corner

It’s not getting any easier to obtain a mortgage. This is in spite of record low mortgage rates, as low as 3.0 percent for 30-year conforming fixed rates; as well as the appearance of so-called Alt-A, non-QM mortgages with 3 to 7 year, interest only, fixed rates that require 12 months personal bank statements to verify income.

According to a report from the Urban Institute that tracks mortgage availability among other housing issues, the pool of mortgage loans made between 2011 and 2015 have even lower default rates than the more “normal” lending period of 1999 to 2003, when less than 2 percent of the loans defaulted after 10 years.

By comparison, 12 to 13 percent of the mortgage loans made at the height of the housing bubble between 2006 and 2007 defaulted within 10 years of their origination, the Urban Institute said in August, citing Fannie Mae’s data. And that was mostly due to the Great Recession and loss of some 8 million jobs.

Graph: Calculated Risk/Black Knight

The Urban Institute noted that of Fannie Mae- and Freddie Mac-backed loans made after 2011 and through the first quarter of 2015, 69 percent of the borrowers had FICO scores better than 750. Between 1999 and 2003, only a third of people with such mortgages had a credit score that high. Less than 1 percent of loans that have been made after 2011 have defaulted, according to Fannie Mae’s data, the Urban Institute said, even for those borrowers with FICO scores under 700

Requiring higher credit scores is just one way lenders have made it more difficult to qualify. Fannie and Freddie also pile on points for scores above 680, which was a normal mid-score before the housing bubble, and in effect boosts the interest rate. For instance, just a 1 pt. cost add on for a score below 700 is the equivalent of a one-quarter percent raise in the rate.

Other problems are due to the reforms mandated by Dodd-Frank designed to protect consumers from predatory lenders, while a good idea, have made it much more difficult for lenders and slowed down the qualification time. This includes additional delays in closings for the slightest change in rates or points enacted due to the new TRID requirements (short for TILA/RESPA Integrated Disclosure) enacted last fall.

This has made lenders much more selective in granting mortgages. We are probably back to 1980s qualification standards when many fewer loans were granted—mostly by S&Ls that disappeared after the late 1980s banking scandals.

We are in a much better position today, 7 years after the Great Recession, in other words. The inventory of loans in negative equity positions dropped by 31 percent (1.5 million) in 2015, according to Black Knight. At a total of 3.2 million, or 6.5 percent of all homeowners with a mortgage, this represents significant improvement from the peak in 2010, but is still well above “normal” levels.

Graph: Black Knight

 Both the S&P Case-Shiller Home Price Index and Corelogic stats show home prices rising as much as 10 and 11 percent in Portland and Seattle, respectively, in its latest 3-month averaged, same home survey, and 5-6 percent nationally on average.  This will continue to bring back housing values and lower negative equity in homes.

So there’s no reason to continue to be as cautious as mortgage lenders are today.  There is of course the political brouhaha over whether Fannie and Freddie should become private corporations again, and so separated from US Treasury control.  With their future unclear, these entities that guarantee more than 60 percent of all mortgages make lenders doubly cautious about qualifying younger, entry-level borrowers, in particular.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Middle Class Finally Gets A Raise

Popular Economics Weekly

A new rule announced by the Obama administration will, effective December 1, double the overtime-pay salary threshold and set it to automatically increase every three years. It’s about time. The salary of employees has been diminishing since the 1970s, as a share of the economic pie, believe it or not. While the profits of businesses are at record highs, as a percentage of GDP.

The high point of employee earnings was 50.1 percent of Gross Domestic Income in 1970, a proxy for Gross Domestic Product, and the current low point is 42.5 percent.  Why the discrepancy? It’s complicated, but has resulted in the decline of middle class wealth—and so of the middle class itself. The Obama administration, thanks to Labor Secretary Thomas Perez, is set to correct the deficiency.

The Labor Department says about 4.2 million workers will gain overtime benefits as a result of the rule, though the labor think tank Economic Policy Institute, which has argued strongly in favor of the rule, says this is a major undercount. Up to 13.5 million employees could be affected.

Americans’ paychecks have not kept pace with their productivity in part because millions of lower-middle-class and even middle-class workers are working overtime but not getting paid for it. President Obama directed the Labor Department to modernize the rules that require employers to pay workers time-and-a-half if they work overtime. The department issued a proposed rule to raise the overtime threshold from $455 per week, or $23,660 per year, to a “standard salary level equal to the 40th percentile of earnings for full-time salaried workers,” which is $921 per week in 2013 dollars, or $933 per week adjusted to 2014 dollars.

Salaried workers whose earnings are $933 per week or more can be exempted from the right to receive overtime if they fall into one of three categories: professionals, administrators, and executives. Each of these exempt categories is defined by a set of duties showing that the exempt employee is skilled and exercises independent judgment, or is a boss with a department and employees to supervise.

Unfortunately this rule was ignored by the Bush administration when the overtime pay rule was last adjusted.

The threshold was kept at $23,660 per year, and even those workers were required to work overtime, even though they had little or no management duties.

The result has been record corporate profits, and very low productivity improvements with little incentive for businesses to raise workers’ wages or make investments that would create more jobs.Why does private business have so little incentive to put some of their record profits to productive use? Nobelist Joe Stiglitz and other economists have labeled it “Monopoly’s New Era”.

“Capitalists are rewarded for saving rather than consuming – for their abstinence, in the words of Nassau Senior, one of my predecessors in the Drummond Professorship of Political Economy at Oxford (in order to pass their wealth on to succeeding generations)…The second school of thought takes as its starting point “power,” including the ability to exercise monopoly control or, in labor markets, to assert authority over workers.”

 In other words, Big Business in particular has since the 1970s focused on maximizing profits, not to create even more wealth for their employees or communities, but to pass it on to future generations. Economist Thomas Piketty has labeled it a return to Europe’s Gilded Age when most of the wealth was inherited.

US President Barack Obama’s Council of Economic Advisers, led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications, says Stiglitz. In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top ten banks’ share of the deposit market, for example, increased from about 20 percent to 50 percent in just 30 years, from 1980 to 2010. Hence the need for Dodd Frank to avoid any more ‘too big to fail’ scenarios.

And the result is our middle class is shrinking, the economic class that is the most productive in our society. After more than four decades of serving as the nation’s economic majority, the American middle class is now matched in number by those in the economic tiers above and below it, reports a recent PEW Research study.

In early 2015, 120.8 million adults were in middle-income households, compared with 121.3 million in lower- and upper-income households combined, a demographic shift that could signal a tipping point, according to a new Pew Research Center analysis of government data.

Over the same period, however, the nation’s aggregate household income has substantially shifted from middle-income to upper-income households, driven by the growing size of the upper-income tier and more rapid gains in income at the top. Fully 49 percent of U.S. aggregate income went to upper-income households in 2014, up from 29 percent in 1970. The share accruing to middle-income households was 43 percent in 2014, down substantially from 62 percent in 1970.

So it’s no surprise that economic growth has slowed. There are fewer households that tend to spend their earnings into the economy, which would generate the jobs and future economic growth. This is something the wealthiest do not do—they tend to save most of their wealth for other uses.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Republicans Are the Real Socialists

Popular Economics Weekly

The new Republican Congress is exposing a not surprising fact. Its first actions are attempts to water down The Dodd-Frank Wall Street and Consumer Protection Act, and repealing Obamacare—which will pass the risks of financial meltdowns and medical catastrophes back to us, the taxpayers.

In economic parlance, it is socializing the costs of doing business in order to maximize the profits of business. The attempts to weaken financial regulations are “Kicking Dodd-Frank In the Teeth”, said Gretchen Morgenson in her most recent New York Times Sunday Oped.

“The 114^th Congress has been at work for less than a week, but a goal for many of its members is already evident: a further rollback of regulations put in place to keep markets and Main Street safe from reckless Wall Street practices.”

The story of Republicans opposition to Obamacare is no different. By attempting to roll back the eligibility of millions of uninsured Americans with the Repubs various challenges to the federal health exchange, Republicans will return the cost of maintaining health care once again to taxpayers; by putting those sickest Americans back in hospital emergency rooms, or on government welfare rolls, thus maximizing health costs (which have been declining since Obamacare kicked in). This is even though medical bankruptcies now outnumber all other bankruptcies.

Why don’t Republicans get that this flies in the face of their own ideals of self-sufficiency? Even more egregious for working Americans are their attempts to lower wages and salaries by weakening unions and the collective bargaining of government employees in states like Wisconsin. The result of Wisconsin Governor Scott Walker’s efforts has been slower growth, a larger budget deficit, and less incentives for government employees to increase productivity.

Even California Republican Ron Unz knew this with his initiative to raise the California minimum wage to $12 per hour, which would take many minimum wage-earners off the welfare rolls, yet California Republicans have even opposed that!

It is socialism in a big way that Republicans have always accused Democrats of—putting the cost of running the U.S. on government, rather than individuals and private industry.

It’s something President Roosevelt knew and voiced during the Great Depression. “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

And until Republicans understand this, they will continue to be the minority party.

Harlan Green © 2014

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Have Some Institutions Become Too Big To Succeed?

Financial FAQs

The conversation may change with JP Morgan Chase’s latest $2 plus billion faux pas. Instead of being too big to fail, we may find that the Wall Street behemoths in particular have become too big to succeed. That is to say, the literal size of corporations like Citibank, JP Morgan, Bank of America, and even AIG, all the products of banking deregulation, may have outgrown any manageable size and so have become a danger to themselves as well as the U.S. economy overall.

Whether out of ignorance or not understanding the ramifications of such high risk derivative hedges, CEOs such as JP Morgan Chase’s Jamie Dimon apparently have little control over the trades such as caused the $2 billion loss. “Top investment bank executives raised concerns about the growing size and complexity of the bets held by the bank’s chief investment office as early as 2007, according to interviews with half a dozen current and former bank officials”, said the New York Times article.

In fact, it now has been reported that Chief Investment Officer Gina Drew in charge of their risk management department had Lyme’s Disease and so was incapacitated during this period, which led to “shouting matches” between subordinates in the New York and London offices.

We know since 2000 that banks have made huge profits since the repeal of Glass-Steagall allowed them to make such risky bets. The down side has been their overleveraging that caused Greatest Recession since the Great Depression. And now we see that the excessive profits generated since then have only caused them to take even more chances.

Then there is the too-big-to-manage syndrome: “What is more, said another senior former executive, Mr. Dimon had other fires to put out, and the chief investment office wasn’t a “problem child” for either top managers or the board of directors, despite its rapid expansion,” according to the New York Times article. “Gigantic losses were piling up from bad mortgages, and new regulations were threatening the profitability of traditional banking, among other pressing matters.”

The record has not been good for large financial institutions, in particular. For with rising profits as a share of the national income pie, have been declining employee incomes, benefits, and a diminished social safety net. This is in part because the too-big-to-manage entities have used their economic muscle to divert more resources to themselves—whether as extravagant CEO salaries, less progressive tax rates that endanger new research and development, major infrastructure improvements, and rising inequality that is creating a permanent underclass of the less privileged.

What size is too big to manage? Any institution that breeds market panics, endangers other institutions, and so has to be regulated. Paul Krugman probably said it best in a recent blog. “The point, again, is that an institution like JPMorgan — a too-big-to-fail bank, not to mention a bank whose deposits are already guaranteed by U.S. taxpayers — shouldn’t be engaged in this kind of speculative investment at all. And that’s why we need a return to much stronger financial regulation, stronger even than the Dodd-Frank regulations passed back in 2010.”

So why not judge our institutions on the basis of whether they are too big to succeed? Should they even be attempting to diversify into high risk areas with federally insured deposits without limits? It looks like CEOs like JP Morgan’s Jamie Dimon are able to fool some of the people—including their investors—much of the time. It might prevent a few financial disasters.

Harlan Green © 2012