Fed Chairman's Remarks at Jackson Hole

"The data we had to exhaust
To show the recovery's lost
May allow me to ease
Now that everyone sees
That the benefit outweighs the cost."

The Economist's Greg Ip explains why Federal Reserve Chairman Ben Bernanke has waited so long to take action to accelerate the stalled US recovery: "Since Mr Bernanke could not escape criticism regardless of what the Fed did, tactically he was best served by waiting until the case for action was unambiguous, unsurprising and, most important, well articulated. The data have made the case unambiguous: employment and growth are weak and inflation by the Fed's preferred measure has edged down. By [the next FOMC meeting on] September 13th, it will certainly be unsurprising. Mr Bernanke's task today was to articulate the case."

See the link above for a comprehensive analysis of the Chairman's speech on Friday at the annual Kansas City Fed economic symposium at Jackson Hole, Wyoming.

School of Hard Truths

Said a grad whose finances were played out,
And whose face could not help but betray doubt:
"The lessons I learn
May improve what I earn,
But not at the prices I paid out."

College: can't afford it, can't live without it. That appears to be the message of mounting data on debt and employment. On the one hand, the New York Fed's latest Quarterly Report on Household Debt and Credit shows that, while the overall delinquency rate of US consumer debt improved from 9.3% to 9.0% in the second quarter, the student debt delinquency rate has worsened from 8.7% to 8.9%. These numbers are part of a trend; says the New York Fed: "Since the peak in household debt in 2008Q3, student loan debt has increased by $303 billion, while other forms of debt fell a combined $1.6 trillion." Clearly, student debt is on an unsustainable path.

On the other hand, there is clearly value (at some level) in higher education. The Wall Street Journal reports that the Brookings Institution recently surveyed US metropolitan areas, looking for the gap between the average level of education sought by employers vs. the average level of education attained by the population. The survey found that a lower "education gap" was associated with areas whose housing markets had best weathered the downturn. Moreover, Brookings found that, in 2011, for every unemployed worker with a college degree, there 5.6 openings requiring such a degree; for every unemployed worker with only a high school degree, there were only 1.6 openings.

It is evident then that a college education confers a great advantage in the job market, but is it worth any price?
Hat tip to Kelly Evans of CNBC for alerting us to the New York Fed consumer debt report.

Bernanke Trilogy

There once was a man named Bernank',
Who didn’t want markets to tank.
Whenever he'd ease,
Like a golfer who tees,
He took care not to hook or to shank.

A Princetonian prof named Bernank',
Who didn't want markets to tank,
Would provide some relief
Très quantitatif
À trois, sinon quatre ou à cinq.

A Central Bank chief named Bernank',
Who doesn't want markets to tank,
Instinctively knows
How not to expose
His political left or right flank.

Over in the august (web-)pages of the Wall Street Journal's Total Return personal finance blog, columnist Jason Zweig put out the clarion call for would-be limerickers to finish these opening two lines:

There once was a man named Bernank,
Who didn’t want markets to tank….

Sounds good, and Dr. Goose humbly offers his threefold contribution above, while hoping that some of you reading this will do the same. But what's this? Mr. Zweig proceeds to "correct" his perfectly adequate opening lines, in the mistaken belief that they do not scan well.

[T]hese lines don’t quite scan; in a conventionally formed limerick, the first two lines have nine syllables, the next two have six apiece and the closing line again has nine. Our first two lines had eight syllables apiece...So let’s try it again. We’ll start the limerick off, fixing the meter so it scans correctly, and you finish it with three new lines of your own. Between now and the Fed’s next meeting on Sept. 12-13, there’s plenty of time to come up with something fun. Here goes:

There once was a man named The Bernank,
Who didn’t want the markets to tank…

(*Sigh*)... amateurs.

As readers of this blog have no doubt grown to appreciate, what distinguishes a limerick is not the number of syllables in a line, but the anapestic (or amphibrachic) meter and rhythm. If one must count something, let it be the number of beats: three, plus one silent beat, in each of the first two lines; two beats each in the third and fourth lines, and three beats again in the fifth line. For more lessons in limerick rhythm and rhyme, I refer Mr. Zweig and all interested readers to my friend Madeleine Begun Kane's "How To Write A Limerick".

Overheard on Maiden Lane

"When the market was in its last throes,
We bought AIG CDOs.
With the passage of time
Their value did climb,
So gainfully we may dispose."

With the sale of $3.4 billion of toxic mortgage debt, the role of the New York Fed in the $182 billion rescue of AIG came to an end last week. As Maiden Lane III LLC repaid the last of its $24.3 billion loan from the Federal Reserve Bank of New York, the Fed could celebrate a $6.6 billion gain to the public from this rescue program. Created during the dark days of 2008, the three Maiden Lane limited liability companies were set up by the Fed to stabilize the derivative markets in which AIG was a major player, as well as facilitate the takeover of Bear Stearns by JP Morgan.

According to Bloomberg, "AIG’s rescue in 2008 swelled to include a $60 billion credit line from the New York Fed, as much as $52.5 billion for two Maiden Lane programs and a Treasury investment of up to $69.8 billion." Maiden Lane III LLC combined the New York Fed's $24.3 billion loan with $5 billion of equity from AIG, to buy $29.3 billion of collateralized debt obligations (CDOs) on which the insurer had written credit default swaps. At a time when the CDOs' values were plummeting, this allowed the swaps to be canceled, thus stabilizing AIG's potential liabilities. It also bought the luxury of time for the mortgage market to recover before selling the CDOs. Over the ensuing four years, the market recovered enough to close out the Maiden Lane programs gainfully.

Waning Middle Class

A big social sciences trust
Researched and concluded, nonplussed:
"Our suburbanite set,
Adjusted for debt
And inflation, is actually bust."

Aaron Task and Henry Blodget of Yahoo! Finance alert us to a study conducted by the Pew Research Center. Pew looked at the data related to income and wealth inequality in the US and determined: the US economy sucks because the middle class is broke. Task and Blodget agree, in their discussion below, that US employers must hire more workers and pay them more, for the good of the economy as a whole. As Henry Ford realized a century ago, well-paid workers can afford to buy things, and their liquidity feeds a rising tide that lifts all boats. Can the private economy, which is sitting on mountains of idle cash, do this on its own without the intervention of our dysfunctional government? I ask you.

Republicans in the News

The Scottish historian Niall
Said Obama had lost his appiall.
This caused a brouhaha
With Dems who said: "Ah ha!
The figures you cite are not riall."

Senatorial candidate Akin
Found his cervical knowledge mistaken.
"We must shut this thing down,"
Said Rove, "or he'll bring down
Our chance for a Senate retakin'."

"Obamacare's taking from Medicare,"
Said Ryan, "Which brings you unsteady care."
He hopes, in all fairness,
The public will care less
For ACA than they already care.

Swing States

It's an axiom proven and tested
By candidates besting and bested:
If you're looking to win,
Mind the jobless rate in
All the states where the outcome's contested.

As we all know, the economy - especially employment - is the main issue in this 2012 Presidential campaign. If the pace of job creation quickens to the extent of reducing the national 8.3% unemployment rate, those undecided votes swing to President Obama; if it doesn't, the advantage goes to the challenger, Mr. Romney. That's why, in this summer of our discontent, it has to raise concerns and hopes respectively that the unemployment rate has ticked up in many of the so-called "battleground states".

According to the Wall Street Journal, 9 out of 10 pivotal states saw their unemployment rates increase in July. That includes Iowa, Florida, Michigan, Nevada, New Hampshire, Pennsylvania, Virginia and, somewhat less so, Colorado and North Carolina. Ohio held steady after 11 months of decline. In a cruel twist of statistics, many of the higher jobless rates resulted from an improving labor climate; that is, more workers got into the job pool with rising expectations of finding employment, thus increasing the denominator in the unemployment rate.

Krugman Examines the Ryan Plan

That dapper young Congressman Ryan
Was sellin' what many were buyin'.
A wonk came along,
Announced he was wrong,
And proved it without even tryin'.

"My plan," said the Chair of the Budget,
"Will balance the books, as I judge it."
Said Krugman: "Your cuts
Are unspecified, but
Any figure looks fine if you fudge it."

"To cite what I find so offending
In the plan that the Chairman's intending,
Have a look at the dents
That he'd make in Defense
And in Other Discretion'ry Spending."

"They'll cut, say the Chair and his staff,
From 12 points to 3 1/2.
Since the Pentagon's spent -
On its own - 4%,
This projection is good for a laugh."

"If you doubt this Princetonian nerd,
Let the CBO have the last word:
'The specifications
For these calculations -
At this point - have yet to be heard.'"

Paul Krugman, in his New York Times blog, asked What's In The Ryan Plan and determined: not much. His dismissive critique of House Budget Committee Chairman Paul Ryan's US federal budget proposal is based on the analysis of the Congressional Budget Office, which found that the plan's headline numbers were unsupported by specific proposals to achieve them.

Infrastructure Inspiration

While walking, a gal named Maria
Soon stumbled upon an idea:
"To patch up, quite simply,
The pothole that tripped me
Is pro-growth, if no panacea."

The preceding verse is brought to you by the latest round of economic statistics, from which I deduce that a greater level of public spending would produce much-needed counter-cyclical effects (or stimulus, if you like). As the Wall Street Journal notes, consumer prices remain flat, unchanged in July for the fourth consecutive month. This is in line with wages, which also remained flat. As noted elsewhere in this blog, housing activity is still mixed, with recent rises noted in commencement of foreclosure activity. Manufacturing, meanwhile, is up strongly, rising 0.5% in July and 5.0% year over year, but this has not ameliorated the unemployment rate, which remains stuck at 8.3%. The missing link in all this data is the shrinkage in the public sector, which works both directly and indirectly against a struggling recovery. Not only are public sector workers laid off, but construction companies are less engaged than they could be... and those potholes won't fix themselves.

Regulatory Overlap

If three regulators, who serve you,
Have the same foreign bank in their purview,
Then one of that lot
May find the bank's not
So compliant, in his or in her view.

The one who would fulminate justly
To enforce all the statutes robustly,
Will doubtless surprise
The other two guys,
Who are only as tough as they must be.

In a case of awkward regulatory overlap, New York state's new financial regulator reached a high-profile settlement of Iranian money laundering allegations while federal authorities are still conducting their own, quieter investigation. British bank Standard Chartered has paid $340 million to the New York State Department of Financial Services to settle charges that it laundered money for Iran and lied about it to regulators. New York's chief banking regulator Benjamin Lawsky spoke of $250 billion in illicit transactions over a ten-year period, though the Fed, Treasury and the Justice Department consider the scope of the violations to be far smaller. For its part, Standard Chartered would only admit to about $14 million of money transfers in violation of federal law. Mr. Lawsky's noisy threats to revoke the bank's state charter roiled the waters with federal regulators, who accuse him of overstepping his bounds, and their British counterparts, who object to the tarnishing of their banks' reputations.

Rip the Band-Aid?

For the market in homes to get going,
One should think of arresting the slowing
Of foreclosure delays
On homes that appraise
For less than the owners are owing.

Dr. Goose, who is no expert on America's housing malaise or real estate generally, recently checked into this topic to see what progress we are making at the halfway point in what appears to be a "lost decade". First the good news: according to MarketWatch, the level of foreclosure activity declined 3% in July (10% year-over-year), making the 22nd straight month that the numbers declined on an annual basis. However, the number of properties entering foreclosure rose 6% in July, the third such monthly increase in a row. 27 states registered y-o-y increases.

To a degree, it appears that the fall in overall foreclosure activity and the more recent rise in foreclosure starts relate to the same phenomenon: in states such as Florida, Illinois and my adopted state of New Jersey, foreclosure processing and procedural issues (or "levels of dysfunction," in the words of a RealtyTrac analyst) had slowed the pace of filings last year. The resulting bottleneck is evidently only now beginning to clear, resulting in the latest uptick in starts. By the same token, well-intentioned laws to aid distressed homeowners, such as that recently enacted in Oregon, may only delay the inevitable in many cases, thereby delaying as well the hoped-for clearing of the market.

Running Mates

Mitt Romney had tried not to frighten
Those whose Medicare worries were heightened,
But picked for his second
A fellow who reckoned
He'd cut it, and put that in writin'.

Republican Presidential candidate Mitt Romney has chosen as his running mate Representative Paul Ryan of Wisconsin, Chairman of the House Budget Committee. While Mr. Romney's core beliefs can sometimes seem hard to pin down, Mr. Ryan has captured the attention of the political world with a deficit-reduction proposal that would do away with Medicare in its current form, something heretofore considered the "third rail" of American politics. In the Ryan proposal, Medicare would become a state-administered voucher program. In bringing Rep. Ryan into his campaign, Mr. Romney has given new energy to both Republicans and Democrats, each of whom now see a starker choice in November.

Gold-Footed

In a rivalry fierce, and yet friendly,
Before London's Olympic assembly,
The USA girls
Were the best in the world
On the altar of football, at Wembley.

Congratulations to Carli Lloyd and the USA women's soccer team on their Olympian efforts, culminating in today's 2-1 victory over silver medalist Japan.

Olympic Games

The Olympians train in their sports
At the pitches, the pools and the courts,
So quadrennially
We turn on the TV,
And ogle their bums in tight shorts.

The Olympian planners of London
Wanted games that were second-to-none done,
But their fear of the crowds
Made the public so cowed
That the tourism hoped-for was undone.

So the public at home safely stayed
For the coverage the TV displayed,
Enthralled by Olympi-
ans Playing in skimpy
Bikinis at Horse Guards Parade.

And so, the world over we witness
These global proponents of fitness,
As, with each golden win,
They give pride to us in
Our American-, Chinese- or Brit-ness.

Sermon on the Fiscal Mount

In Congress, there's no more finessing this:
Our budget is bound for the precipice.
The free ride is ending
(Low taxes, high spending),
Though Washington's slow in addressing this.

With the US in fiscal distress so,
We could levy more from the noblesse, though
The mean millionaire
Pays more than their share,
(If billionaires still somewhat less so).

Some say for the deficit's end,
We must simply rein in what we spend,
Though cutting back solely
Would undermine wholly
The programs on which most depend.

It's time for the US community
To realize that none have immunity;
To fix our finances,
The most likely chance is:
In sacrifice, we may find unity.

The preceding limerick homily, in this summer of the Fiscal Cliff, was inspired by David Wessel's column in The Wall Street Journal, in which he points out that there are no easy, scientific solutions to the question of "tax fairness," and by extension, deficit reduction. Mr. Wessel's figures demonstrate that, while taxes on the rich have come down over the last 30 years, so have those on everyone else. Somewhat sparingly, he does mention that the super-rich - the 0.1%, the Forbes 400 - do pay less than the "merely" rich because of their reliance on income from dividends and capital gains, which are taxed at only 15%. The aforementioned inequity notwithstanding, it appears insufficient to look for deficit reduction only by "asking the rich to pay their fair share," as it does only by "cutting out-of-control spending." In other words, we can't solve our fiscal problems only by asking the other person to take the hit.

Hat tip to Barry Ritholtz for highlighting the key facts of Mr. Wessel's column.

Proceed Cautiously

The economy, generally dreary,
Brings occasional news that is cheery,
But consider all facets
Before moving assets
Because of a bull market theory.

Marketwatch reports that "Asian stock markets were bolstered [today] after the U.S. economy added more jobs than expected in July." According to Paul Ashworth of Capital Economics, “The bigger-than-expected 163,000 increase in U.S. non-farm payrolls in July, alongside the small rise in the ISM non-manufacturing index, should ease fears that the U.S. economy is following Europe into recession.” However, there are three good reasons to proceed cautiously in reacting to a single, positive datapoint:

1. The July number does not confirm a positive trend; the average NFP increase over the last three months is only 105,000, at the lower end of the 100,000-120,000 monthly increase considered necessary to accommodate new jobseekers. 
2. The unemployment rate went up; unemployment is calculated based on a household survey "of people who are without jobs, who are available to work and who have actively sought work in the prior four weeks, and that number rose in July—by 45,000 to 12.8 million," says the Wall Street Journal's Phil Izzo. NFP is calculated from the number of jobs reported in a survey of businesses, so workers can be counted twice. 
3. A single datapoint may be influenced by one-time factors; in this case, auto manufacturing layoffs that normally occur in July did not happen, raising the possibility that they may do so in August, depressing that month's jobs data.

At the End of his String

Said Bernanke: "I wish we could bask
In the glow of achieving our task
That the jobless plateau
And inflation stay low,
But at this point, it's too much to ask."

"It's likely no difference at all if I
Induce mortgage interest to fall, if I
Have no guarantees on
The prospects who seize on
Cheap funding, but can't really qualify."

The Federal Open Market Committee wraps up its latest two-day meeting this afternoon and, as always, releases a statement at 2:15. Reuters' Pedro da Costa writes that economists expect the Fed to indicate a "readiness to act" in support of flagging US economic growth. Eric Green of TD Securities, for example, says: "We do not expect any new initiative from the Fed. A dovish statement signaling willingness to do more will manage frustrated expectations for more (monetary easing)." One such heretofore unrequited expectation is that of a third round of quantitative easing ("QE3"), in which the Fed would likely buy long-term mortgage bonds. This would help to lower long-term interest rates, making it cheaper to borrow, and also "breathe fresh life into a housing sector that is finally showing some signs of healing," as Mr. da Costa writes. One problem with such a move is that, as previously noted in this space, US households have been trying to reduce their excessive debt levels, while many who might like to exploit cheaper mortgages cannot qualify to get one.