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News Analysis: Two Economies in Turmoil, for Different Reasons

June 20, 2013 by Leave a Comment

Yet his primary audience, the investors whose decisions spread Fed policy through the economy, responded as if the news had been grim. The Standard Poor’s 500-stock index took its worst two-day dive since November 2011 and has lost 5 percent of its value in the last month. Wells Fargo, the nation’s largest mortgage lender, raised its advertised rate on 30-year loans to 4.5 percent from 3.9 percent in the same period.

The call-and-response underscores the complexity of the Fed’s task as it seeks to do more to help the economy, but not too much.

Fed officials increasingly are convinced that they are finally doing enough to stimulate the economy — not just the steps already taken, but the plans they have detailed for the next several years. That is why they felt comfortable suggesting that they could begin before the end of the year to scale back their purchases of government securities. But some critics see clear evidence in the persistence of high unemployment and low inflation that the Fed should do even more. And many others are simply nervous.

“People aren’t sure that the economy is well enough for the Fed to pull back,” said Paul Christopher, chief international strategist at Wells Fargo Advisors. “The market is signaling to the Fed that we don’t trust your assessment of the economy; we don’t trust your assessment of inflation.”

On Wednesday, Mr. Bernanke sought to underscore that the Fed still planned to stimulate the economy on a big scale over the next few years. The central bank continues to hold short-term interest rates near zero, and Mr. Bernanke said it might maintain that policy for longer than previously expected. The Fed has amassed more than $3 trillion in Treasury securities and mortgage-backed securities, and Mr. Bernanke said that it no longer intended to sell the mortgage bonds as the economy improved.

Yet public attention focused almost entirely on the least potent part of the Fed’s stimulus effort, its pledge to expand its holdings of mortgage bonds and Treasuries to increase job growth.

Those purchases will continue for now, but Mr. Bernanke for the first time sketched a timeline for winding them down, beginning this year and ending next summer, as long as growth keeps pace with the Fed’s expectations. Specifically, he said that the Fed expected the unemployment rate to decline to 7 percent by next summer, from 7.6 percent in May.

Many investors responded as if Mr. Bernanke had said only that the Fed soon intended to reduce its bond purchases.

This was a good demonstration of the difference between probably and certainly. While the timeline generally corresponded to investors’ expectations, Mr. Bernanke’s remarks made it official. And his repeated insistence that investors should focus instead on the evolution of economic data worked about as well as telling people not to think about purple kangaroos.

“If you draw the conclusion that I’ve just said that our policies, that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,” Mr. Bernanke said in one response to a question at a news conference on Wednesday.

Some analysts and economists said the reaction was particularly striking because the Fed seemed more committed than ever to its stimulus campaign.

“They are getting very close to where I would have had them be two or three years ago,” said Joseph E. Gagnon, a former Fed economist and architect of the first round of asset purchases who is now a senior fellow at the Peterson Institute for International Economics. “I find it odd, and probably the chairman is surprised and unhappy with the market reaction, too.”

The Fed declined on Thursday to comment on the market reaction to Mr. Bernanke’s remarks. But he expressed himself clearly during the news conference on the negative market response since his last public appearance in May. “Well, we were a little puzzled by that,” he said.

He also acknowledged that the Fed might need to respond if the market’s reaction persisted. “It’s important to understand that our policies are economic-dependent,” he said. “And in particular, if financial conditions move in a way that makes this economic scenario unlikely, for example, then that would be a reason for us to adjust our policy.”

Some analysts said that would not be necessary, arguing that the market would soon settle down.

Others, however, saw legitimate reasons for concern.

The Fed has made the unemployment rate the measuring stick for its stimulus effort. It doubled down on Wednesday by saying that it would buy bonds until the rate fell to 7 percent.

But the unemployment rate so far has fallen almost entirely because people have stopped looking for work. The share of adults with jobs, known as the employment-to-population ratio, has barely changed over the last three years. In past recoveries, declining unemployment has encouraged people to re-enter the labor market, but some economists argue that that will not begin to happen until the rate falls well below 7 percent.

“Why is monetary policy linked to unemployment rate as opposed to employment-to-population ratio?” Amir Sufi, an economist at the University of Chicago, wrote on Twitter. “Seems bonkers. Does anyone seriously think labor market is improving dramatically?”

Jan Hatzius, chief economist at Goldman Sachs, wrote in an e-mail that he doubted the Fed’s current plans would be sufficient. “I am much less sanguine under our forecasts for the economy,” he wrote, “and to a somewhat lesser degree even under theirs.”

Article source: http://www.nytimes.com/2013/06/21/business/economy/two-economies-in-turmoil-for-different-reasons.html?partner=rss&emc=rss

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Economic Memo: Euro Zone Leaders Hail Even Weak Economic News

June 6, 2013 by Leave a Comment

“Clearly encouraging,” the nation’s prime minister, Mariano Rajoy, said of the development.

Never mind that nearly five million people in Spain are out of work. The latest unemployment report from the government, issued on Tuesday, was held up by Mr. Rajoy as a sign that maybe, just maybe, the economy is getting better.

Nearly six years after the financial crisis in the United States spread across the Atlantic, plunging Europe into recession and, in some places, desperate depression, “good” is relative. Economic figures that would be considered disastrous elsewhere are being held up by many politicians and policy makers as really not so bad at all — the first tender shoots of a recovery that is out there somewhere.

Or perhaps not. Politicians everywhere rarely tire of talking up the economy. The question is whether the supposed good news that European leaders are trumpeting is merely convenient cover. The risk — not only to Europe, but to the rest of the world — is that they are simply hoping they have done enough to restore growth, and that the hard decisions some say must still be made can be pushed into the future.

On Thursday, the European Central Bank left interest rates unchanged, defying calls for bolder action. Even so, Mario Draghi, the president of the bank, highlighted the potential “downside risks surrounding the economic outlook for the euro area.”

What few politicians acknowledge publicly is that many of the steps that economists say must still be taken are surefire vote-losers. Liberalizing rigid labor markets, for instance, might spur growth and help young people break into the work force. But it would surely alienate voters who end up losing jobs they thought they had for life.

“Policy makers have a strong interest in the current strategy’s appearing to work,” said Simon Tilford, chief economist at the Center for European Reform in London. “Even the faintest glimmer of hope is interpreted as a sign of recovery.”

Mr. Tilford said Europe was trapped in a Japanese-style malaise. “There’s a surreal debate going on that if we don’t do A, B or C there’s a risk Europe will be like Japan,” he said. “If you look at the data for the last six years, Europe is already worse.”

The danger is that a sense of economic decline has become so ingrained that mediocrity is mistaken for excellence and the status quo marketed as a forward march. Germany, the economic envy of Europe, is expected to grow a mere 0.3 percent this year — a blistering pace only by the new standards of underachievement.

Financially, Europe looks less risky than it did a year ago, when fear was rampant that the euro might fall apart. Bond markets have calmed down. Unemployment is declining, albeit very slowly, in a few countries like Spain and Ireland.

During a visit to Athens last week, the Dutch finance minister said he detected “the first signal of a turn in the economy.” Then, on Wednesday, news arrived from Brussels that the Greek economy was indeed getting better. It shrank by only — only — 5.3 percent in the first three months of the year. That was in fact an improvement: it had contracted 5.7 percent the previous quarter.

The financial markets, which have bounced back from their lows, don’t fully capture the economic pain many Europeans feel. That is because financial markets ride on hope and look forward, not back. Germany’s benchmark DAX index of stocks, for instance, has risen 39 percent in the last year, even though that nation’s economy, while strong for Europe, is hardly humming along. On Thursday, European stocks were off just modestly, despite the weak outlook from the E.C.B.

As worries continue about the long-term future of Europe and its currency, the euro, some analysts worry that the good news, such as it is, might be too good. Signs of growth could prompt a sell-off in European bond markets, driving up interest rates at a time when economies are still fragile.

Article source: http://www.nytimes.com/2013/06/07/business/economy/euro-zone-leaders-hail-even-weak-economic-news.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Australian Central Bank Cuts Key Interest Rate

May 7, 2013 by Leave a Comment

HONG KONG — The Australian central bank dropped its key interest rate to a record-low 2.75 percent Tuesday, becoming the latest central bank in recent weeks to try to stimulate growth.

Few analysts had expected the central bank, the Reserve Bank of Australia, to deliver a rate cut at its policy meeting, and the reduction, by a quarter of a percentage point, prompted the Australian dollar to decline about half a cent against the U.S. dollar, to $1.019.

In a statement accompanying the rate decision, Glenn Stevens, the central bank’s governor, struck a sanguine note about the global economy, saying it was “likely to record growth a little below trend this year before picking up next year,” with the United States currently on a path of moderate expansion and China’s growth running at a robust pace. And although commodity prices — which are important to resource-rich Australia — have moderated in recent months, they “remain high by historical standards,” he added.

Still, unemployment has edged up despite a string of rate cuts in recent years, and investment in mining, a major source of economic activity, is projected to peak this year.

A persistently strong Australian dollar has weighed on the economy. The currency has climbed against the U.S. dollar for much of the past 12 years, with only a brief slump after the Lehman Brothers collapse in late 2008, and reached parity with the U.S. dollar for the first time since 1982 in late 2010. It has been worth more than $1 for much of the time since then.

The exchange rate’s strength over the past 18 months, Mr. Stevens said, “is unusual, given the decline in export prices and interest rates during that time.” The central bank thus decided that “a further decline in the cash rate was appropriate to encourage sustainable growth in the economy,” he continued.

The fact that inflation in Australia, at 2.5 percent during the first quarter of this year, remains within the central bank’s comfort level also provided the leeway for a reduction in interest rates, analysts said. The rate cut Tuesday was the seventh by the Australian central bank since November 2011 and took the total reduction in borrowing costs to 2 percentage points.

“Further easing looks unlikely at the moment,” analysts at Standard Chartered said in a research note, adding that the central bank was likely to wait for more data before making further moves. “However, continued sluggishness in both the domestic and global economies will increase the risk of a rate cut, inflation permitting,” they said.

The Australian move follows recent efforts in several other regions and countries to prop up growth. Both the European Central Bank and the Reserve Bank of India lowered borrowing costs last week in a bid to bolster growth, which has been flagging. And in Japan, the central bank and the government have announced spending plans and asset purchases and have promised measures to attract investment in an effort to combat deflation and reignite growth.

Article source: http://www.nytimes.com/2013/05/08/business/global/australian-central-bank-cuts-key-interest-rate.html?partner=rss&emc=rss

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Bucks Blog: Still More Mortgage Protections Unveiled

January 23, 2013 by Leave a Comment

Last week, the federal government capped a slew of announcements about new mortgage rules aimed at protecting borrowers with another announcement of more rules designed to protect borrowers.

The Consumer Financial Protection Bureau, in one rule unveiled on Friday, barred lenders from paying brokers and loan officers based on the terms of the loan they sell – such as by steering customers into loans with higher interest rates, fatter fees or prepayment penalties. And, the bank or lender originating the loan can’t get paid more for selling related products, like title insurance, from affiliated companies.

“These rules recognize that people tend to do what they get paid to do,” said Richard Cordray, the agency’s director, in prepared remarks. “By removing financial incentives for originators to push borrowers towards risky loans, we are ensuring that the mortgage market will be more stable and sustainable, and consumers will be better protected.”

Some other protections that had been under consideration, however, are still under review. They include a rule, proposed by the bureau in August, that would require lenders to also offer a loan with no upfront origination charges, when they offer a loan that does include upfront charges. That provision, Mr. Cordray said, would wait for further study after the other new rules take effect, to see if it is necessary.

Also on Friday, the agency made it clear that borrowers were entitled to receive a free copy of the appraisal on which their loan was based, before the loan is finalized. That way, borrowers can see the value placed on the property that is securing the mortgage.

Have you ever had a problem obtaining a copy of an appraisal when applying for a loan?

Article source: http://bucks.blogs.nytimes.com/2013/01/22/still-more-mortgage-protections-unveiled/?partner=rss&emc=rss

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High & Low Finance: Models for Financial Risk Are Still Seen as Flawed

January 10, 2013 by Leave a Comment

Five years ago, the financial regulators of the United States — and more broadly the world — didn’t see the storm coming.

Would they if a new one were brewing now?

The answer to that is far from clear. The regulators have more information now, and they have applied the tools they have to measure risk with more vigor.

But a new assessment from a little-known agency created by the Dodd-Frank law argues that the models used by regulators to assess risk need to be fundamentally changed, and that until they are they are likely to be useful during normal times, but not when they matter the most.

“A crisis comes from the unleashing of a dynamic that is not reflected in the day-to-day variations of precrisis time,” wrote Richard Bookstaber, a research principal at the Office of Financial Research, in a working paper released by the agency. “The effect of a shock on a vulnerability in the financial system — such as excessive leverage, funding fragility or limited liquidity — creates a radical shift in the markets.”

Mr. Bookstaber argues that conventional ways to measure risk — known as “value at risk” and stress models — fail to take into account interactions and feedback effects that can magnify a crisis and turn it into something that has effects far beyond the original development.

“What happens now when people do stress tests,” he said in an interview, “is they look at each bank and say, ‘Tell me what will happen to your capital if interest rates go up by one percentage point.’ The bank says that will mean a loss of $1 billion. That is static. That is it.”

But, he added, “What you want to know is what happens next.” Perhaps the banks will reduce loans to hedge funds, which might start selling some assets, causing prices to drop and perhaps have additional negative effects on capital. “So the first shock leads to a second shock, and you also get the contagion.”

The working paper explains why the Office of Financial Research, which is part of the Treasury Department, has begun research into what is called “agent-based modeling,” which tries to analyze what each agent — in this case each bank or hedge fund — will do as a situation develops and worsens. That effort is being run by Mr. Bookstaber, a former hedge fund manager and Wall Street risk manager and the author of an influential 2008 book, “A Demon of Our Own Design,” that warned of the problems being created on Wall Street.

He said the first work, being done with the help of Mitre, a research organization that came out of the Massachusetts Institute of Technology, on the interactions between banks and leveraged asset managers, with particular attention on how so-called fire sales develop as asset values plunge. Additional work is being done by central banks in Europe, including the Bank of England.

“Agent-based modeling” has been used in a variety of nonfinancial areas, including traffic congestion and crowd dynamics (it turns out that putting a post in front of an emergency exit can actually improve the flow of people fleeing an emergency and thus save lives). But the modeling has received little attention from economists.

Richard Berner, the director of the Office of Financial Research, said in an interview that his agency was trying to gather information in many areas, understanding that “all three of those things — the origination, the transmission and the amplification of a threat — are important.” The agency is supposed to provide information that regulators can use.

Mr. Bookstaber said that he hoped that information from such models, coupled with the additional detailed data the government is now collecting on markets and trading positions, could help regulators spot potential trouble before it happens, as leverage builds up in a particular part of the markets. Perhaps regulators could then take steps to raise the cost of borrowing in that particular area, rather than use the blunt tool of raising rates throughout the market.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/01/11/business/economy/models-for-financial-risk-are-still-seen-as-flawed.html?partner=rss&emc=rss

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Markets Take a Step Backward

December 5, 2012 by Leave a Comment
Opinion »

Editorial: Rigging the Financial System

Will authorities really hold banks and bankers accountable for manipulating interest rates?

Article source: http://www.nytimes.com/2012/12/06/business/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Business News Tagged With: , ,

Bucks: Six Tips for Setting Your Financial Goals

October 30, 2012 by Leave a Comment

width=480Carl Richards

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at BAM Advisor Services. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

If you managed to get unstuck and created your personal balance sheet recently, then you should have a really clear idea of where you are today. The next questions you need to be address are these: Where do you want to go? What are your financial goals?

This can be a frustrating process, since it involves making some really important decisions under extreme uncertainty. None of us know what next week will look like, let alone where we will be in 30 years. On top of that, making financial goals involves a whole bunch of assumptions — guesses, really.

We have to guess what our 60- or 80-year-old self will want to do. We have to guess what the markets will do, where interest rates will be and how much we can save. Those reasons and many more often lead us to forget that this is a process. We get stuck, unsure what to do next.

Well, despite all the uncertainty and assumptions, we need to have goals. It reminds me of the conversation between Alice and the Cheshire Cat:

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where,” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

“— so long as I get somewhere,” Alice added as an explanation.

“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

But the problem is that we do care where we end up, and part of deciding where to go depends on setting goals.

So there are a few really important things to keep in mind here. Before you get too excited or frustrated, here are a few things to consider.

1. These are guesses. 

While it is important to admit these are guesses, you should still make them the best guesses you can. Be specific. Just saying, “I want to save for college for my kids,” isn’t enough. How about, “I’ll find $100 to add to a specific 529 account on the 15th of each month”?

Even though you need to be specific, give yourself permission to be flexible. An attitude of flexibility goes a long way toward dealing with uncertainty. There is something very powerful about having specific goals but not obsessing about them.

2. These goals will change.

It’s a continuing process, and it will change because life changes. But don’t let this knowledge stop you from doing it. You need to start somewhere.

3. Think of these goals as the destination on a trip.

You would never spend a bunch of time and energy worrying about whether you should take a car, train or plane without first deciding where you are going. Yet we spend countless hours researching the merits of one investment over another before we even decide on our goals. Why are you stressing about what stocks to pick if you don’t have goals in mind?

4. Prioritize these goals.

Once you have them all written down, rank each goal in terms of importance and urgency. Sometimes you will have to deal with something that is urgent, like paying off a credit card bill, so you can move on to something really important, like saving for retirement.

5. This is a process.

If you set goals and then forget about them forever, that is a worthless event. This is a process. Since we’ve given ourselves permission to change our assumptions about the future as more information becomes available, we need to do it. Part of the process of planning involves revisiting your goals periodically to see how you are doing and making course corrections when needed.

6. Let go!

As important as it is to regularly review your progress, it’s also very important to let go of the need to obsess over your goals. Define where you want to go, review your goals at set times, and in between, let go of them! Goals for the future are important, but so is living today. Find that balance.

This list may not seem like a big deal, but you would be surprised at the number of people who cannot tell you their goals, let alone break them down into categories or rank their priority. Once you have your goals, you will be able to move on to the next step: making a plan.

Article source: http://bucks.blogs.nytimes.com/2012/10/29/six-tips-for-setting-your-financial-goals/?partner=rss&emc=rss

Filed Under: Your Money Tagged With: , ,

As European Nations Teeter, Only Lenders Get Central Bank’s Help

November 14, 2011 by Leave a Comment

Since the beginning of the financial crisis, the E.C.B. has been lending euro area banks as much money as they want, trying to maintain the liquidity — or continual flow of money — that is the lifeblood of the global financial system.

But because the bank has refused to offer the same easy lending service to countries like Italy and Spain, it is not confronting the euro area’s most fundamental problem. And so, the governments saddled with debt are having to pay high prices to borrow money on the open market.

Investors pushed up interest rates on Italy’s debt to record-high levels last week during the political crisis there. And even Monday, after the supposedly calming effect of a new, technocratic prime minister in Rome, lenders were demanding that Italy pay interest rates at levels high enough to eventually bankrupt the country.

In an auction of five-year bonds, Italy had to pay a rate of 6.29 percent, compared with 5.32 percent at a similar auction a month ago.

And Italy’s 10-year bonds, which crested well above 7 percent last week in the secondary market, were still dangerously high Monday, at 6.77 percent — more than three times what Germany must pay on comparable bonds. In a further sign of investor anxiety about the weaker links in the euro chain, Spanish 10-year bond yields rose above 6 percent for the first time since August.

It is an atmosphere of mistrust reminiscent of the aftermath of the Lehman Brothers collapse in 2008. European banks are demanding higher interest rates for the overnight lending to one another that is essential to keep money circulating.

Some, fearing other banks’ vulnerability to the debt of Italy, Spain and other beleaguered countries, are refusing to make such loans at all. That is why the E.C.B. has been willing to lend to the banks as needed.

But the biggest fear — the one implicit in all the talk of “contagion” and a potential “Lehman moment” — is not that any one bank will succumb to a liquidity crisis. It is that an entire country might do so, if it can no longer obtain the credit it requires to stay in business.

And at least so far, the E.C.B. has not done the one thing that could help calm that fear: declare that it stands ready to be the de facto lender of last resort to national governments.

If the fear that sent Italy’s borrowing costs to record highs last week becomes a chronic condition, Italy could lose the liquidity it needs to keep paying the holders of its €1.9 trillion, or $2.6 trillion, debt. That would be the Italy Moment — the point at which Rome’s liquidity problem would quickly become everyone else’s.

“We are approaching the point where the E.C.B. has to show its hand and accept its role as a lender of last resort,” analysts at Credit Suisse said in a note to clients Friday. “The question is how much further turmoil is required for it to do so.”

Mario Draghi, the new president of the E.C.B., has insisted that European countries must help themselves, by cutting spending and taking steps to make their economies more competitive.

Jens Weidmann, president of the German Bundesbank and an influential member of the E.C.B.’s governing council, went further Monday, saying it would be illegal to use the central bank to solve government budget problems.

“The increasing demand being placed on monetary policy is dangerous,” Mr. Weidmann told an audience of bankers in Frankfurt. “Monetary policy cannot and may not solve the solvency problems of governments and banks.”

In any case, Italy is strong enough to solve its own problems, Mr. Weidmann said: “What’s needed is the political will.”

What the markets want to hear, though, is not only prescriptions for long-term overhauls but also assurances that the E.C.B. will do whatever it takes to prevent a near-term panic.

Article source: http://www.nytimes.com/2011/11/15/business/global/as-european-nations-teeter-only-lenders-get-central-banks-help.html?partner=rss&emc=rss

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Op-Ed Columnist: Revenge of the Gougers

October 9, 2011 by Leave a Comment

Then there’s the “are we really supposed to start using cash again?” angle. Or the Durbin angle — Senator Dick Durbin being the Illinois senator whose amendment to the new financial reform law, imposing a steep reduction in bank interchange fees, “forced” banks to search for ways to make up for the lost revenue. There’s even a presidential angle, with President Obama saying on Monday that banks didn’t have “some inherent right” to a certain level of profits — and then more or less withdrawing the remark the next day.

Me, I’m going with the gouging angle. The revenue that Bank of America, and many other banks, is seeking to replace with its new fees is lucre that a more honorable profession would never have touched in the first place. Indeed, 30 years ago, banks themselves would have turned their backs on it. Of course, back then, banks viewed customers as people to be helped, not marks to be taken advantage of.

It was, to be sure, a different world then, with regulated interest rates, the Glass-Steagall Act preventing banks from getting into lucrative trading and a sleepy business model that valued a steady dividend over a highflying stock price. As interest rates were deregulated, Glass-Steagall abolished and investors demanding that bank stocks perform like Internet stocks, that ethos changed. Banks began looking in some dark corners for new revenue; this is when hidden fees began to creep into credit-card agreements, for instance.

In retail banking, two new fees became crucial. One was overdraft fees, which gouged the least-sophisticated, least-wealthy customers by charging them $35 or so whenever their accounts were overdrawn.

The second source was interchange fees, which gouged merchants who accepted debit cards. Though merchants at first resisted debit cards, they eventually caved because banks made them so ubiquitous. Banks pushed debit cards in part because they are much less expensive to process than checks (which banks lose money on). But banks also got hooked on the absurdly high interchange fees they charged merchants — an average of 44 cents per transaction, even though it costs literally pennies to process a debit-card transaction.

In the summer of 2010, the Federal Reserve told the banking industry it could no longer charge overdraft fees unless customers “opted in.” To its ever-lasting credit, Bank of America, unlike its competitors, did not run a big scare campaign to persuade customers to agree to the opt-in. It chose to forgo the revenue, which amounted to some $3.3 billion, according to Credit Suisse.

The Durbin amendment tackled interchange fees. It called on the Federal Reserve to cap the fees at a level that “reasonably” accounted for the cost of processing transactions. Although the Fed’s final number was still ridiculously high — well over 20 cents — it will, nonetheless, cost Bank of America another $2 billion.

The news that Bank of America will impose the new debit card fee has infuriated many of its 50 million customers. But the bank insists that it’s not trying to alienate its customer base. Rather, a spokesman told me, the fee is part of “a much larger reconfiguration of our consumer business.” Next year, it plans to roll out a series of new offerings, most of which will be fee-based. Customers will be able to evade the fees only by maintaining large balances at all times.

One suspects that these new fees will only generate more anger, for they will make plain what has long been hidden: that, fundamentally, retail banking makes its money by gouging the have-nots. Post-financial crisis, the essence of big banking has not changed. It’s just become more obvious.

President Obama got it right the first time: Banks don’t have an inherent right to oversized profits. No industry does. Banks play a special role in society, and they get special protections from the government. In return, government has the right to impose special responsibilities.

Every person needs a bank, no matter how rich or poor. The government will never force Bank of America — or any other bank — to reduce or eliminate its fees; it doesn’t have the nerve. But, at the least, it could insist that banks display their fees in a uniform way so that customers can compare how they’re being gouged and make banking decisions on that basis. That kind of reform could stir competition and bring down fees.

This, of course, is precisely what the new Consumer Financial Protection Bureau is supposed to do — and would do if the Senate Republicans would ever allow a director to be approved.

But, sigh, that’s a column for another day.

Article source: http://feeds.nytimes.com/click.phdo?i=e3716fbd68ae666f7ca46c10e3990979

Filed Under: Economy News Tagged With: , ,

Investors Scramble to Prepare for the Unthinkable

July 23, 2011 by Leave a Comment

Some debt traders said they were looking for evidence of progress toward a deal before markets open on Monday.

“This press conference was a pretty significant moment,” said Ajay Rajadhyaksha, head of United States fixed-income strategy at Barclays Capital, referring to President Obama’s announcement after markets had closed for the week that talks had broken down. “I would be pretty surprised if investors did not exhibit a greater degree of worry when we walk in Monday morning than they have shown so far.”

Investors also are increasingly worried that even if a deal is reached, the rating agency Standard Poor’s may reconsider its certification of government securities as an ultrasafe investment. The company has said there is a 50 percent chance it will downgrade the rating in the next three months, depending on whether the federal government adopts a long-term plan to pay down its debts. Such a move could send interest rates higher for a broad range of government and consumer loans.

Some of the options still on the table to raise the debt ceiling, involving smaller packages of spending cuts, might not be sufficient to satisfy S. P. or Moody’s and Fitch, two other rating agencies that have expressed concern over the debt negotiations.

“I think the market still has confidence that the debt ceiling will be raised in time,” said Terry Belton, head of fixed-income strategy at JPMorgan Chase. “The focus is on downgrade risk.”

A downgrade would raise the government’s borrowing costs, exacerbating its financial problems, because investors generally demand higher interest rates to hold riskier debt. Consumers and businesses also would face higher borrowing costs because the rates on Treasuries are widely used as a benchmark to set the rates on other kinds of loans.

The government cannot borrow more than $14.3 trillion, the current debt ceiling, a limit that it reached in May. Since then, however, Treasury has continued to repay securities as they come due and issue new debt in their place, a process known as rolling over debt. Officials are concerned that it will become harder to find investors willing to participate in the weekly auctions, and that the remaining buyers will begin to demand higher interest rates.

Over the last few weeks staff members in the Office of Debt Management, a part of the Treasury, have been phoning the desks of the 20 major Wall Street dealers for Treasury bonds to assess investor demand for coming debt auctions, and to seek assurances that the dealers themselves will buy any surplus.

About $87 billion in federal debt comes due on Aug. 4, and roughly $410 billion comes due throughout the rest of August. If interest rates climbed even a tenth of a percentage point, the added cost to roll over the debt would be an extra $500 million a year.

Wall Street is also worried about the effect that a ratings downgrade would have on various assets that are implicitly backed by the federal government, including agency mortgages or municipal bonds.

That, coupled with the myriad problems that failing to raise the debt ceiling could cause, prompted Wall Street’s main lobbying arm, the Securities and Investment Management Association, to organize an advocacy campaign earlier this week. “Urge the administration and Congress to raise the debt ceiling and protect our economy from additional strain,” it said in an e-mail circulated to member firms.

The heightened uncertainty is prompting financial firms and other companies to stockpile cash. Walter Todd of Greenwood Capital, a wealth management firm in Greenwood, S.C., said that so far he had advised his own worried customers not to do the same, operating under the assumption that a deal would be reached. But after the talks fell apart on Friday, Mr. Todd said he and his partners began to discuss a more pessimistic possibility.

“If nothing changes, if the headline out of the weekend is that the talks have broken down, I think you’ll start to see assets reacting to that,” Mr. Todd said. “It blows my mind that it’s come to this. It’s incredibly irresponsible what’s happening, on the part of both sides.”

Other investors said they did not view the opening of markets on Monday as a critical deadline, as they still expected a deal, but that each passing day would put a little more stress on the markets. Bond prices fluctuated last week on the news from Washington, falling Thursday after S. P.’s latest warning, then rising on Friday amid renewed talk that a deal was imminent.

“Every day without an agreement increases the risk of default,” said Ward McCarthy, chief financial economist at Jefferies Company. “Congress likes to go to the edge of the precipice with the debt ceiling, and we are headed toward the edge again.”

Binyamin Appelbaum reported from Washington, and Eric Dash from New York. Louise Story contributed reporting from New York.

Article source: http://www.nytimes.com/2011/07/24/business/investors-weigh-options-after-debt-talks-stall.html?partner=rss&emc=rss

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