Archive for the ‘Federal Reserve Actions’ Category
Monday, January 11th, 2010Main street America is bracing for the all expected news of coming bonuses for Wall Street executives. When main street is suffering with shrinking credit and high unemployment, why should the source of the problem get a bonuses. Well they made a lot of money over the past year, right? Most of these institutions paid off the TARP funds, so why should they not get bonuses?
First let’s look at how those institutions paid off their tarp funds. Goldman Sachs is believed to be at the apex of Wall Street with their proven track record. How did Goldman Sachs pay off their TARP debt so fast? Last year the US government bailed out AIG by giving them a large chunk of tax payer money. Most of those funds given to AIG passed directly through to institutions that they owed due to bad bets with credit default swaps. Goldman Sachs was the top recipient of $12.9 billion of those tax payer dollars. Goldman Sachs owed TARP $10 billion. Shouldn’t the house be responsible for the bets they take?
They made a lot of money, right? The question is at whose expense. These institutions make a good share of their profits off the consumer. Since credit card rates have gone up and the banks cost of money gone down (fed funds rate), it would seem some of the TARP funds where paid back by the same tax payer who bailed them out.
Who should decide whether these institutions give their executives bonuses? I personally believe that the shareholders should be making the decision, since they are the ones who own the company. Let’s take a look at Goldman Sachs’s top 10 institutional shareholders as of September 30th, 2009 considering 76% of Goldman Sachs is owned by Institutional & Mutual Fund Owners.
4.62% AXA – They provide insurance and asset management services through their subsidiaries around the world.
4.41% Barclay Group – They provide financial services to United States and Europe.
3.72% State Street Corporation – Provides financial services around the world.
3.40% Wellington Management Company – Institutional investment managers.
3.29% Vanguard Group – Provides mutual funds and other financial services.
3.20% FMR LLC – Otherwise known as Fidelity Investments is one of the largest mutual fund providers in the world.
2.14% Price (T. Rowe) Associates – Large mutual fund provider.
2.07% Marsico Capital Management – Financial services and mutual fund provider.
1.76% Janus Capital Management –Asset management and mutual fund provider.
1.70% J.P. Morgan and Company – Large financial services provider.
All of the above institutions have one thing in common and that is they are all investment managers. If you hold a mutual fund or ETF (exchange traded fund) that owns Goldman Sachs, do you vote as a shareholder? The answer is no, the fund manager makes the decision. Do you think the fund manager is going to say no to bonuses?
Whether Wall Street deserves the bonuses or not, one thing is for sure they will do what they want since there is no one to stop them.
Tags: bailout, goldman sachs, main street, money, tarp, unemployment, wall street bonuses
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Thursday, December 10th, 2009In the early 1980’s mortgage rates where above 14% and other debt carried an even higher rates of interest. During the early 1980’s, banks required most home buyers to put down 20% and have spotless credit. For example if a buyer purchased a home for $125,000 he or she would more than likely need to put $25,000 down (20%) and the monthly principle and interest payment at 14% would be $1184.87.
Over the past 25 plus years, rates on mortgages and most debt have fallen considerably. The cause of this decrease in rates is mostly attributed to the Federal Reserve’s action of lowering rates and raising rates to control inflation in the US economy. Clearly the Federal Reserve has viewed the past 2 plus decades as having relatively low inflation thereby lowing more than raising rates (Fed Funds Rate).
Lowering rates more than raising them creates cheaper costs of borrowing thereby making room for more. This cheap money also creates more of a demand for credit. This excessive credit demand led to fierce competition among banks. Competition is definitely a good thing until demand starts to wane. As soon as the credit demand let up this led to banks acting as their own Federal Reserves by creating products that artificially lowered the cost of lending thereby stimulating borrowing.
Most home buyers view a home purchase not by the sales price, but by the down payment and monthly obligation. Now let’s look at the buyer from the early 1980’s with he or she’s $25,000 to put down and the ability to afford $1184.87 monthly payment. This buyer today could afford a $225,000 home with $25,000 down with $1183.08 monthly principle and interest payment with an interest rate of 5.875% and relaxed down payment restrictions. Identical down payments and same monthly, but twice the debt, was the growth in value or debt?
This rather rapid reduction in the cost of money over the past two plus decades has led to an equal increase in the price of cars, education, utilities, etc. Inflation seems to have been masked in credit. The credit markets in the US and around the world nearly collapsed because they had “maxed out their credit”. With the rapid expansion of debt at the end of the road with the Fed Funds rate at 0 to .25% target and lending rates increasing because of diminishing credit quality (except for mortgages because the Federal Reserve is supporting the rates), what’s next? Deflation?
Tags: cheap, credit, federal reserve, money, monthly payment, mortgage, us economy
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Monday, December 7th, 2009Last year the world markets suffered a massive trauma that crippled most financial institutions. This trauma, led to; the US government to taking over Fannie Mae and Freddie Mac, form the ever popular TARP fund, the Federal Reserve to reduce the Fed Funds rate to 0 to .25%, President Obama to pass a near $800 billion stimulus and many more multi-billion (probably trillions) dollar actions.
This trauma was caused by a bubble in the credit markets. America and the world essentially took on too much debt. The US and most of the world have attempted to solve this crisis by filling the credit and demand gaps with stimulus and cheap money.
GDP in the 3rd quarter did showed its first positive growth (2.8%, revised down from the 3.5% first estimated) quarter of quarter since the 2nd quarter 2008. Most of the US consumption growth (in GDP) has been attributed to the Government’s cash for clunkers program and the first time homebuyer tax credit (along with the Federal Reserve supporting low mortgage rates). The “cheap money” has reduced the value of the US dollar thereby improving exports, which also has spurred some growth in the US GDP.
The question still remains whether government stimulus and cheap money can truly carry us over the hump. Most of this growth has come at the expense of more credit and reduced buying power. Matter of fact, most the Government’s programs seem to have targeted the only individuals left who had room to expand their credit. Who owns a car worth less than $4000 and typically is a first time home buyer? These programs look to have wrung out the credit from the last remaining source in the US economy, the youth, our future.
What happens when the credit towel is dry?
Tags: cash for clunkers, cheap money, credit, fannie mae, first time homebuyer, freddie mac, mortgages, obama
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Thursday, December 3rd, 2009
Over the past few weeks Republican Congressman Ron Paul out of Texas has been making a noticeable push to get more transparency out of the Federal Reserve. The Federal Reserve members and its Chairman (Ben Bernanke) have been verbally opposed to the measures that the Congressman is attempting to have enacted. The proposal Congressman Ron Paul is pushing for would allow for an independent audit to be called for following any decisions on monetary policy by the Federal Reserve.
Currently the Federal Reserve keeps most of its dealings a secret. The Federal Reserve believes that by keeping politics and the public view out of monetary policy they will be able to act more prudently and timely without influence. They believe that this independence is crucial to maintaining their objectives.
Some believe that many of the problems today are caused by their objectives. The Federal Reserve’s deliberate reactions to economic events creates a relatively predictable cycle. When the economy contracts, the Federal Reserve lowers rates to expand credit to spur growth with cheap money. When the economy is growing too fast they raise interest rates to slow the growth. Unfortunately, it is much easier to indentify contraction than over expansion, which typically results in a late raising of rates which can result in a bubble.
For the past 25 years the Federal Reserve has lowered rates more than raising them and now is faced with a very troubling 0 to .25% Fed Funds Rate. Interest rates as a whole should be falling, but for credit that is not supported by the government, rates are rising. One can only assume that with banks profit margins so high that the rising rates are being caused by falling credit quality and defaults. The Federal Reserve has resorted to another avenue in attempts to promote lending with “quantitative easing”. Quantitative easing is essentially when the Federal Reserve becomes the lender of last resort. This form of injecting money into the economy can have adverse and unknown consequences, since much of the money is created out of thin air in the form of credit.
Who, what and how they are supporting these institutions seems to be behind Congressman Ron Paul’s motivation. Over this historical Financial Crisis the Federal Reserve’s political powers have been weakened. We will see if this weakness will lead to the Congressman getting his golden ticket.
Tags: ben bernanke, bubble, congress, economy, federal reserve, monetary policy, money, Politics, recession, ron paul
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Wednesday, May 20th, 2009Judge for yourself, but it looks like according to the US Federal Reserve the outlook has not improved. The economy has continued to “contract” and their hope is resting on the stimulus and the Federal Reserve’s steps it has already taken. They cite household spending has seen signs of stabilizing, “but” with continued job loss, declining housing wealth and tight credit, it still is “constrained. There has never been a time in history where fighting a credit crisis with credit has ever won. Maybe it isn’t a lack of credit, but too much credit in the system.
Here is a copy of their statement released today at 2:00 PM EST:
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.
Tags: credit crisis, economy, federal reserve, job loss, Real Estate, unemployment
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Friday, May 8th, 2009
Since the announcement of the Bank Stress Test the US Government has been promising a level of transparency that was suppose to shed light on the real condition of the largest banks in the USA. The official results were announced at 5:00 PM EST but the actual results had been leaked to the press over that past two weeks.
With the test scores in, Wall Street seems unsurprised by the results. The US Government seems to have spent more effort on releasing the information so as not to disrupt the markets, than realistically testing the banks. This test was supposed to see if banks could handle another future financial earthquake. Instead it seems to have tested if they could handle what may be a best case scenario.
The US government used both a worst case scenario and a more “probable case” to test the possible financial needs of Americas 19 largest banks. The “probable case” unemployment for this year has already been met. The Federal Reserve Chairman during his last testimony to congress stressed the increasingly concerning commercial real estate industry, but the test puts little weight to it. The Bank Stress test seemed to be more political propaganda to spur optimism than a true test of structural integrity.
Consumer credit was released today showing consumers paid down debt $11.1 billion in April instead of the forecasted reduction of $4.2 billion. The consumer still appears to be concerned about debt reduction than expansion. The backbone of the US governments recovery plan is to expand lending and spur consumer spending.
United States Railroad freight traffic was down 23 percent in April and 18.2% year to date. Railroads move raw goods around America. The Association of American Railroads Senior Vice President John T. Gray was quoted in a released statement “Unfortunately, it’s hard to find much in rail traffic data in April to support the idea that the economy is starting to see ‘green shoots’ … it may still just be weeds”. How can manufacturing be recovering without the raw goods to make products?
Tags: bank stress test, consumer credit, economy, federal reserve, railroads
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Tuesday, April 7th, 2009The US Government in one breathe attempts to sink the Dollar in the next speaks of a commitment to a strong Dollar. Even with all of their “innovative” methods of sinking the Dollar, it just keeps getting back up. The Dollar of recent has the resilience of a “Rocky” opponent.
So what keeps the Dollar moving up even in the face of such dramatic attempts to keep it down? Probably the most obvious is that the rest of the world is in worse shape than the USA. The old saying goes “if the USA gets a cold, typically the rest of the world gets pneumonia”.
With the US Government printing money at a feverish pace, other countries that are dependent on exports to the USA must do the same to keep their currency in pace. This process seems to extend the financial pain and fuel social unrest.
The Dollar is the Ocean eroding the cost of goods and services in the US, the solutions so far are looking like poor conceived Jetties, which typically cause more harm than good.
Tags: dollar, Economics, economy, money, recession, USA
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Thursday, March 26th, 2009The Federal Reserve and the US Treasury Department have made dramatic moves (at a heavy taxpayer cost) over the past few months to artificially suppress rates to reduce the cost of lending. Unfortunately these actions also reduce money market yields.
Recently large banks have been revealing their surprisingly profitable beginning of the year. I would note that these so-called profits are actually not including further write downs on bad loans they have made.
Are credit card rates at all time lows? Interestingly the other day I received a notice in the mail from a credit card indicating that they were raising their profit margin (prime plus their margin). My credit rating has not changed. Are they raising their profit margins on their good standings customers to help pay for the bad ones? Am I paying for their credit rating being reduced?
So even though prime is at a very low at 3.25% it seems as though credit card rates have managed to stay the same. Could mortgage rates actually be lower than they are now? Are banks gouging us to claw back from the grave?
Consumer spending is down and savings rates are on the rise. It seems to me that the people would rather make more money on their savings than letting banks make more money off of us.
Tags: banks, credit card, federal reserve, money, rates, saving, treasury, write down
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Thursday, March 19th, 2009
Ben Bernanke US Federal Reserve Chairman
Okay so our beloved fed reserve chairman has come up with a brilliant way of killing the rest of the world economies, at least until they catch up. So what happens when you are the largest consumer in the world and you try your hardest to kill the value of your currency? Well you manage to make the life of countries that live off you harder. I call this protectionism, devaluing your currency in the face of a world recession is a real low blow to those countries that depend on you for your consumption. Now the other side of the coin is that large USA companies will benefit in the short term (a little protectionism), but what happens when those foreign economies you’ve damaged find their recession deepening because of currency exchange. Well large US companies, who receive a significant source of their revenue from overseas, will start to suffer on softening foreign sales.
The actions the Federal Reserve took yesterday are intentioned to expand credit in the United States, but isn’t that what started the problem in the first place. To me it seems like our Government can’t give up the past to move onto the future where we you don’t need a new car every 2 years and 5 LCD televisions per household. We need to focus on letting the market go through the difficult process of price discovery and start saving real money instead of looking at credit as a safety net (i.e. credit cards). The US government should stop trying to fix it and maintain the laws instead of inventing new ones.
Just my opinion.
Tags: ben bernanke, credit, economy, money, recession, US, USA
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