federal-reserve

Odysseas Papadimitriou: Why Credit Card Branding Is Costing Small Business Owners

April 20, 2011

So, what’s the difference between business credit cards and regular consumer credit cards? This might at first seem like a stupid question, but think about it and try to come up with the answer. Is it that a business credit card is opened under a corporation’s name and used only for business spending while anyone can get a consumer credit card and use it for anything? Is it that an individual is held liable for the misuse of a consumer credit card while a business credit card shields both a small business owner and his employees from personal liability? Perhaps the difference simply lies in how each type of card is reported to the major credit bureaus. According to a study by CardHub.com , however, none of these seemingly-plausible reasons actually hold water. Business and consumer credit cards are actually more similar than they are different, the study says, a contention which therefore begs the question, should the Credit CARD Act of 2009 apply to business credit cards? In order to truly answer this question, we must take a closer look at the law itself. As it turns out, Congress made a distinction between the two card segments, structuring the CARD Act so that it applies to “open-ended consumer agreements” and directing the Federal Reserve Board of Governors to study the law’s future applicability to the business credit card market. In case you’re wondering, an open-ended consumer agreement is legally defined as credit extended to a natural person for the purpose of making personal, family or household-related transactions. Thus, it’s pretty clear that the protections enumerated in the CARD Act do not apply to business credit cards, right? Wrong. According to the Card Hub study, every major business credit card issuer holds the individual who opens such a card liable for use in addition to the small business he represents. Six of the 10 largest issuers in the U.S. also report usage information to the individual cardholder’s credit reports (Wells Fargo, HSBC, and U.S. Bank refused to be transparent about their practices, so this number might actually be even higher). And any prospective business credit card user must provide personal financial information on his application. It’s therefore obvious that credit is extended to a natural person, and since a small business owner uses his credit card to provide for his family and earn a living, it would seem that so-called business credit cards qualify as open-ended consumer agreements under the language of the law and should therefore be extended protection under the CARD Act. Either that or personal credit cards should not receive these protections when used for business spending. Ultimately, the answer to the original question about the nature of the difference between business and consumer credit cards therefore seems to be branding. There is no fundamental difference between the two. Eligibility for both is based on an individual’s credit history and income; both can be used to make the same types of purchases; both have individual liability; both relay information to an individual’s credit reports. One simply has the label “business” attached to its name and the other does not. As a result, the Fed must remove the wool from before its eyes, forget about labels and apply the CARD Act with some sort of consistency. In order words, either all consumer-based credit cards receive its protections, or none do; either every card used for business spending is exempt, or none are. Until this happens, small business owners can simply exploit the imbalance of the law’s application by using personal credit cards to fund any business purchases that will not be paid for in full by the end of the month. Odysseas Papadimitriou is the founder of Card Hub, a website that helps consumers and small business owners find the best credit card deals .

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Dory Rand: On Principal Writedowns and Moral Hazard: Do We Want to Put Out the Fire or Not?

April 19, 2011

We at Woodstock Institute have long argued that, in order for loan modifications programs to effectively prevent foreclosures on a broad scale, they need to include a component of reducing the principal owed on underwater homes. In fact, we bring it up pretty much every time we talk to policymakers, regulators, and the media when they ask us what needs to be done to fix the foreclosure mess. Principal writedowns became more relevant — and controversial — than ever when it was recently revealed that Attorneys Generals may include a principal writedown component to their settlement with loan servicers over improperly preparing foreclosure documents. A common criticism of principal writedown is that by offering to reduce the amount a borrower owes, it would encourage other borrowers who owe more than their home is worth but could afford to continue making payments to default on their loans so they too could get their principal reduced — or, as economists call it, moral hazard. That concern is not unreasonable, but it shouldn’t stop us from pursuing principal writedowns for one simple reason: they work. The concerns about moral hazard are twofold: there’s an economic concern, where moral hazard would trigger a wave of countless dollars lost to forgiven principal; and an ethical issue, where critics believe that principal writedowns would violate the spirit of fairness by protecting borrowers from losses on an investment that inherently includes an amount of risk. While it’s not clear how many homeowners would choose to default in order to cure their negative equity, it is clear that NOT addressing negative equity will cause defaults — and significant losses for investors. A body of research on borrowers’ incentives to pay demonstrate that negative equity is a strong predictor for default. A study by researchers at the University of Chicago and Northwestern University, cited by Alan White at Public Citizen , examines the relationship between negative equity and propensity to strategically default, or walk away from your mortgage even if you can afford the monthly payments. The study finds that that borrowers largely do not consider strategically defaulting on their loans until negative equity reaches a tipping point. For example, if negative equity was at 10 percent, no homeowners would choose to default because of economic costs associated with foreclosure and moral constraints. However, when negative equity reaches 50 percent or greater, economic benefits of default and moral constraints loosen, raising the likelihood that the borrower will default. The study found that borrowers are more likely to consider walking away from their underwater homes if they believe that many of their peers have done so. As more homes fall more deeply underwater, it’s likely that the stigma of walking away from your home is not as potent as it once was. This suggests that a significant campaign of principal reduction, particularly in areas with widespread negative equity, would curb strategic defaults and the resulting losses. Principal reductions also address the risk that a borrower will default on their loan after it has been modified, which is referred to as re-default. Re-default is a real risk that threatens the viability of foreclosure prevention programs: bank regulators found that nearly 24 percent of all modified loans since 2008 (which have largely relied on reducing interest rates and extending loan terms) have become seriously delinquent again, and another 13.6 percent were in foreclosure or have completed foreclosure. A recent Federal Reserve Bank of New York study points out that “modification is only worthwhile if it induces borrowers who would otherwise default to continue paying.” The report found that while both promoting affordability and reducing negative equity lower re-default rates, reducing negative equity impacts re-defaults to a much bigger degree: the authors estimated that “restoring the borrower’s incentive to pay [by writing down principal to current market value] nearly quadruples the reduction in re-default rates achieved by payment reductions through interest rate modifications and term extensions alone.” Additionally, negative equity could be exacerbating the unemployment rate: if an unemployed borrower gets a job offer in another state, but can’t sell his or her house because he or she owes more than it will sell for, he or she faces a significant barrier to accepting that new job. One study cited by the New York Fed found that borrowers in negative equity are one-third less mobile than borrowers with positive equity. As for the criticism that principal writedown is “wrong”? Well, figuring that out is above my pay grade, but there are ways to introduce costs for receiving a principal writedown to make it less desirable to borrowers who don’t really need it. One way would be to allow principal writedowns to happen in bankruptcy court . A borrower would still be able to keep his or her home and would have incentive to continue paying his or her mortgage, but would have to suffer the consequences of a bankruptcy on his or her credit report and pay significant costs to his or her debtors. In an editorial questioning “moral hazard fundamentalists,” Larry Summers pointed out that the fact that some people smoke in bed does not mean that we shouldn’t put out their fires. We don’t condemn the bed-smokers to suffer the consequences of their risky behavior because the fire can spread. If we want to stop the spread of strategic defaults caused by negative equity, principal writedowns are the most effective option. This post was coauthored by Katie Buitrago.

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Video: Romer Says S&P’s Revised U.S. Outlook Is `Puzzling’

April 18, 2011

April 18 (Bloomberg) — Christina Romer, former head of President Barack Obama’s Council of Economic Advisers, talks about the decision by Standard & Poor’s to revise its outlook for the long-term U.S. credit rating to “negative,” negotiations over the federal budget deficit and the Federal Reserve’s policy of quantitative easing. Romer speaks with Pimm Fox on Bloomberg Television’s “Taking Stock.” (Source: Bloomberg)

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New Financial Reform Law Could Have Resolved Lehman, Regulator Argues

April 18, 2011

The failure of Lehman Brothers Holdings Inc., which caused financial panic and sent markets into a tailspin, could have been avoided had last year’s financial reform law already been in effect. A Monday report from the Federal Deposit Insurance Corporation says the firm could have been wound down in an orderly manner, maintaining the value of its assets and ongoing operations. Counter-parties would have been prevented from fleeing and financial markets likely would have absorbed the outcome with minimal disruption, the report concludes. The legislation that forms the basis of the FDIC’s report, known as Dodd-Frank for its principal sponsors in Congress, seeks to end the perception that some financial firms are too big to fail. This could prevent future taxpayer-funded bailouts by allowing regulators to wind down large institutions outside the bankruptcy process. It came in response to the extraordinary steps taken by policymakers in 2008-09 to shore up the U.S. financial system after bankers’ and traders’ outsized risks failed to pay off, necessitating trillions of taxpayer dollars for equity investments in private firms and asset- and debt-guarantees. FDIC Chairman Sheila Bair hailed the report’s findings. Had Dodd-Frank been in place, it says, Lehman’s creditors may have recovered as much as 97 cents on the dollar. By comparison, they’re forecast to receive about 21 cents on the dollar. The optimistic analysis assumes that the FDIC would have fully used its newly-gained powers in the months leading up to Lehman’s Sept. 2008 failure to plan for its demise, find a ready buyer and maximize the value of its assets, thus minimizing the effect the failure would have on the broader market and on taxpayers. The report assumes the FDIC would have begun taking action about six months earlier, in March 2008. But the global investment bank had substantial operations overseas. It also had about 8,000 subsidiaries and affiliates, Harvey R. Miller, one of Lehman’s bankruptcy attorneys, said last September before the Financial Crisis Inquiry Commission. And on the day of its bankruptcy filing, the firm was a party to more than 10,000 derivatives contracts worldwide relating to about 1.7 million transactions, Miller said. Finance experts say regulators will never be able to resolve failing international firms like Lehman in the kind of orderly manner envisioned by policymakers. “We need a cross-border resolution authority, but we’re not going to get one,” said Simon Johnson, a former chief economist of the International Monetary Fund and a professor at MIT’s Sloan School of Management. “The disruption in the U.S. was due to what happened in Europe and the U.K., and unless you have a cross-border regime you can’t deal with that going forward.” “And that’s not something anyone is working on,” he added. Policymakers in office at the time, including Federal Reserve Chairman Ben Bernanke and current Treasury Secretary Timothy Geithner, argue the government was forced to bail out firms and their creditors because they lacked a legal mechanism to resolve so-called “nonbanks,” whose size and reach prevented them from undergoing an orderly wind-down in bankruptcy. But Lehman was not bailed out and panic ensued as markets were caught unprepared. Commentators and Wall Street figures point to the government’s decision to let the firm fail as the biggest mistake of the crisis, one that led to such widespread panic that investors fled and asset prices plunged, making bailouts of multiple other banks inevitable. Dodd-Frank would have helped if Lehman were purely a domestic outfit, Johnson said, but if that were the case, bankruptcy should have been used to “let the market sort out the winners and losers.” Lehman entered bankruptcy claiming $639 billion in assets. It’s the largest bankruptcy in U.S. history. Fees associated with the filing have already topped $1 billion and continue to grow. The agency’s new powers “give us the tools to end Too Big to Fail and eliminate future bailouts,” Bair said in a statement. But, she noted, “much work remains to be done.”

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Video: Herrmann Sees `Modest, Moderate’ Core Inflation Ahead

April 15, 2011

April 15 (Bloomberg) — John Herrmann, a senior fixed-income strategist at State Street Global Markets, talks about the U.S. consumer-price index for March and the outlook for the U.S. economy. Price gains for U.S. goods and services other than food and fuel unexpectedly cooled in March, supporting Federal Reserve Chairman Ben S. Bernanke’s view that the surge in commodity costs will not cause inflation to flare. Herrmann speaks with Melissa Long on Bloomberg Television’s “Fast Forward.” (Source: Bloomberg)

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Video: UBS’s Harris Says Fed Should Start `Unwinding’ Easing

April 15, 2011

April 15 (Bloomberg) — Maury Harris, chief economist at UBS Securities, talks about U.S. consumer prices in March and Federal Reserve monetary policy. The consumer price index excluding volatile food and energy charges rose 0.1 percent, according to the Labor Department. Harris speaks with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg)

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Soaring Prices Still Don’t Indicate Real Inflation, Economists Say

April 15, 2011

Despite American consumers being hard hit by rising gas and grocery prices, federal regulators continue to insist the country need not fear inflation. Gas prices, which rose nearly 6 percent in March alone, are now almost 28 percent higher than they were a year ago, according to figures from the Bureau of Labor Statistics released Friday. Overall, the Consumer Price Index, a closely-watched measure of inflation, rose 0.5 percent in March, the Labor Department reported. The Consumer Price Index tracks changes in the cost of a virtual basket of goods for consumers in cities across the country. Rising food and gas prices accounted for almost three quarters of the March CPI increase. Those findings are in line with economists’ expectations . Still, the Federal Reserve has no plans to combat inflation by raising interest rates ; many economists argue that higher food and energy prices do not necessarily trigger overall price increases for goods and services. “Prices for energy are certainly putting pressure on headline CPI,” said Constance Hunter, Chief Economist at investment banking firm Aladdin Capital. “We saw this in the summer in 2008, when due to oil prices, the CPI got up 5.53 percent. But the point is it didn’t stay there because we had demand destruction.” As gas prices spiked in summer 2008, Hunter noted, many Americans changed their driving habits, opting to take more public transport and start carpooling rather than pay higher prices. That caused oil demand to fall, and prices followed. Now again, there is some indication Americans are already cutting back on driving . The strongest evidence counteracting inflationary fears, however, lies in the core inflation level, which does not include volatile food and energy prices and is widely considered to be a more accurate inflationary predictor. According to that BLS measurement, inflation only inched up 0.1 percent in March — the smallest increase this year — suggesting core inflation is on track to rise 1.2 percent overall in 2011. Inflation below 2 percent normally doesn’t trigger alarm at the Federal Reserve. “The Fed tends to see through temporary increases in headline inflation that are driven by rising fuel and food costs,” said Sal Guatieri, senior economist at financial services provider BMO Capital Markets. “Because the view is those costs cannot rise infinitely.” What is clear, though, is that many Americans are feeling the pinch of those rising costs anyway. “People are still spending very cautiously,” Guatieri noted. Higher gas prices buoyed just a 0.4 percent jump in retail sales in March, according to figures released by the Commerce Department on Wednesday. Consumer spending, which makes up 70 percent of U.S. spending, has risen for nine consecutive months, jumping over 7 percent since March 2010. Sales at gas stations accounted for almost 11 percent of overall retail sales in March — a sign March’s spending increase was more a result of rising costs than increasing optimism.

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Small Business Confidence Slips In March: NFIB

April 12, 2011

(Reuters) – Small businesses grew less optimistic about the economy in March but raised prices for a second straight month, a potential warning sign about inflation, a survey showed on Tuesday. The National Federation of Independent Business’ overall optimism index slipped 2.6 points to 91.9 as owners anticipated a slowdown in economic activity over the next six months and few saw higher real sales growth. Although businesses were pessimistic about sales, a net nine percent reported raising prices, up from 5 percent in February — when the price gauge swung into positive territory for the first time in 26 months. The survey was conducted through March 31 and covered 811 businesses. “The bad news for the Fed is that price pressures continue to mount,” the NFIB said in a statement. “It is not clear why owners expect a deterioration in the economy over the next six month. GDP and employment growth have not been spectacular, but have maintained positive momentum.” Rising food and energy prices are putting upward pressure on headline inflation, but Federal Reserve officials expect the impact to be temporary. The central bank tracks core inflation, which excludes food and energy prices, for monetary policy purposes. Indications are that rising commodity prices and bad weather held back economic growth in early 2011 after expanding at a 3.1 percent annual rate in the fourth quarter. The NFIB survey showed sluggish sales remained a major hurdle, with the share of owners expecting higher real sales declining eight percentage points to 6 percent. It found that 24 percent of respondents planned to raise average selling prices, many by 10 percent or more. The NFIB attributed the planned price hikes to the elimination of unwanted inventory, noting that some increases started long before the commodity price spike. “The ‘fire sale’ is over and profits are badly in need of some price support,” the NFIB said. Although hiring plans eased in March, job creation remained in positive terrain, with 18 percent of owners looking to add workers over the next three months and six percent planning to reduce their workforce. “The largest hole in the employment picture remains housing, a million housing starts short of ‘normal’ and all the associated jobs missing,” the NFIB said. Employers added 216,000 jobs in March, the government reported early this month. Despite concerns about weak sales, more businesses planned capital investment and many continued to liquidate unwanted inventory — but at the lowest frequency in 35 months, the NFIB said. (Reporting by Lucia Mutikani, Editing by Chizu Nomiyama) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Matt Taibbi: The Real Housewives Of Wall Street

April 12, 2011

Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?

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Bond Market Yawned At Budget Showdown

April 12, 2011

But the market for Treasury bonds lately has been exceedingly calm. While the money managers who invest in those bonds say they monitored last week’s drama over a potential shutdown, it wasn’t the major driver of ups and downs in the market. Rather, prices moved based on the usual economic reports and new evidence about what the Federal Reserve will do next.

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Tom Silva: 2011: Obama’s Reagan Moment

April 9, 2011

It is rare that a commentator gets to write a column that is unreservedly rosy and infused with optimism for the future. This kind of positive punditry doesn’t sell newspapers, but I think it’s certainly salutary given all that we’ve had to contend with over the last few years. So, here it goes: Unemployment is at 8.8%, a 2-year low. We added 216,000 jobs last month, of which 200,000 were private sector (just what we needed to fill the void left by the receding stimulus). We’ve seen a full percentage point drop in unemployment over four months and now economists expect 2.5 million jobs to be created this year. No doubt, the countervailing news is from the public sector where local governments have shed 416,000 jobs since an employment peak in September 2008, and dropped 15,000 jobs in March. The fact remains that the last time we made up this kind of ground was in 1983. You’ll remember that in 1982, the economy contracted 6.4% and the prime interest rate reached 21.5% in June of 1982 as the Federal Reserve under Paul Volcker put a stranglehold on inflation. A year later, the U.S. posted six consecutive quarters of growth above 5%. Like Obama, Reagan employed a combination of deficit spending and the lowering of interest rates. One think tank, The Economic Cycle Research Institute in New York now seems prescient. All the way back in 2009, they predicted that we’d stage the strongest bounce back since 1983. Of course, the staunch realists will say that all this is Pollyannaish on the eve of a possible government shutdown and our crippling deficits. Try this sentence: “Soaring military spending for overseas commitments and the refusal to make significant cuts in most major domestic programs have created the worst deficits in American history.” Sound familiar? That’s what the Cato Institute said about the Reagan administration in 1982. The administration had raised spending by $143 billion in just two years (that’s 17% of the entire budget) and optimistically projected deficits of $104 billion in 1983 and $84 billion in 1984. Reagan increased the federal debt by 6.8% and then 15% in his first two years. The analogies between then and now abound. Given our budget travails, how can we afford to be optimistic? Talk to the people who are bringing their money here. The doldrums of Europe and the tragedy of Asia have vaulted America back into a sort of ascendancy economically — at least in the eyes of the investment community. The dollar’s share of global currency reserves is stable at about 61%, while the Euro fell from 27.9% to 26.3%. Foreign investors represent 60% of 10-year Treasury note buyers. Using real estate as a bellwether, foreign investment in property doubled last year to $13.37 billion nationwide. Foreign investors — including pension funds and sovereign wealth — are once again committing huge amounts of capital to America in a number of ways, from joint ventures to buying stock in REITs. And they’re from all over — Australians, Scandinavians, Middle Easterners and the Hong Kong players — looking for safe harbor for their capital in America. The significance of foreign capital arriving at our shores is being able to see ourselves as others see us. I am required to say that we are not out of the woods yet, but it nevertheless seems churlish not to celebrate good news when it comes. And good news is important because so much of a recovery is psychological. One of the drags on the unemployment numbers is the fact that labor participation is low. Just 64.2% of adults are either in the work force or looking for a job. That is the lowest labor participation rate in a quarter-century. And it signals the fact that many people simply gave up. Buoyant numbers and a positive valence around the economy are important because they encourage people to try again. Towards that end, I think it is important to say that we could be at a watershed. In recessions to come, perhaps 2011 will be produced as a symbol of changing fortunes the way 1983 was.

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Shutdown: Economic Support Systems Would Continue, Even As Housing, Small Businesses Take Hits

April 8, 2011

If the federal government shuts down tonight, much of the apparatus that has helped prop up the faltering economy will remain in place. The Federal Reserve will continue its $600 billion asset-purchase program, buying government debt from Wall Street banks in an effort to get money flowing through the economy. The Treasury, which, as of late March, owned $142 billion of mortgage securities, will continue to sell that portfolio, as it works to earn a profit on the taxpayers’ investment. The New York Fed will continue selling the toxic securities it bought from AIG during the height of the financial crisis. Even if thousands of workers are furloughed, and struggling families miss government checks , these economic support systems will continue. “We got ourselves in a situation by letting banks become too big to fail, that they’re now basically sucking at the tit of the government,” said Mark Blyth, a professor of international political economy at Brown University. “If we let them go, we harm ourselves.” Two and a half years after the worst financial crisis since the Great Depression, the broader economy remains on fragile ground. The unemployment rate is close to nine percent. Home prices are still falling. As fighting continues in the Middle East, oil prices are rising, pushing up energy costs and tearing precious resources from the American economy. During the last major government shutdown, from late 1995 to early 1996, the economy was stronger. Then, as now, the country was emerging from a recession. But at that point, the recovery was being felt throughout the broader economy. The unemployment rate was 5.6 percent. Nothing like today’s economic support system was in place back then. “The apparatus wasn’t in place because it wasn’t necessary,” said Gus Faucher, director of macroeconomics at Moody’s Analytics. A shutdown now would come at a time when the economy is relying on government support to a historic degree. Since the recent financial crisis, government programs have helped promote a recovery. But the progress has been uneven. Flush with the taxpayer bailout and confident in explicit and implicit government guarantees, big banks have seen their revenues and profits skyrocket. Pay at Wall Street firms last year hit a new record, while wages for middle class Americans stagnated. Since the Fed launched a second so-called “quantitative easing” program late last year, the central bank’s New York branch has been buying U.S. government debt from big banks, allowing those firms to reap easy profits. The policy is designed to lower interest rates throughout the economy in order to stimulate a broader recovery. The Federal Reserve, which relies on separate funding, would not be affected by a shutdown of the federal government. Similarly, the Treasury holds a massive portfolio of mortgage-backed securities, which it bought during the worst of the crisis in an effort to calm markets. It began the process of selling this $142 billion portfolio last month. Those operations will continue if the government shuts down, a Treasury spokesperson confirmed on Thursday. But other economic programs that aren’t explicitly tied to the current slump would halt. The Federal Housing Administration, which insures and guarantees nearly a third of U.S. mortgages, would stop its operations, potentially causing further slowdowns in the housing market. Since spring is normally peak home-buying season, the shutdown could present a further obstacle to an already weakened sector of the economy. Without the government insuring mortgages, some mortgage issuance will likely stop. JPMorgan Chase plans to stop making new FHA loans in the event of a shutdown, The New York Times reported. “This is the worst time that we could introduce that uncertainty into this fragile housing market,” Housing Secretary Shaun Donovan told a Senate subcommittee on Thursday. Small businesses, too, could suffer. The Small Business Association would stop approving applications for loan guarantees and direct loans to small businesses, potentially hampering these businesses’ growth. Small businesses pay 44 percent of the nation’s private payroll, according to the SBA. “We will continue to do our part, we just won’t be able to close loans,” said Dave Rader, head of SBA lending at Wells Fargo. A shutdown, he added, would hamper the bank’s ability to “provide access to capital for small business borrowers.” If the shutdown drags on for more than a few weeks, it could wither Americans’ confidence enough to provoke a relapse into recession , Mark Zandi, chief economist at Moody’s Analytics, said last week. But the real danger, experts say, is if the gridlock in Congress infects the debate on whether to raise the federal debt limit . The government must borrow money to finance its existing debt and other obligations. It will hit its ceiling in mid-May, Treasury Secretary Tim Geithner said this week before a Senate subcommittee. If the government were to default, U.S. interest rates would likely rise, potentially touching off an economic crisis that could send panic around the globe. “This is a symbolic exercise we’re going through,” said Robert Shapiro, a fellow at the Georgetown Center for Business and Public Policy and a former U.S. Under Secretary of Commerce for Economic Affairs. “If it goes a month, that means you’ve got much more serious problems. You’ve got problems with real political gridlock, at a real fundamental level. That begins to really worry markets.” Nathaniel Cahners Hindman contributed to this report.

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Americans Feel Inflation That Fed Says Doesn’t Exist

April 8, 2011

NEW YORK (Daniel Trotta) – On the streets of America, the debate over inflation is over. Prices are too high and rising too fast, many people say. “The government says inflation is low, but that’s not what I’m seeing at the grocery story,” Jorge Alberto, an 88-year-old retiree in Miami, said walking out of a supermarket. “My pension is being put to the test.” Policy-makers at the U.S. Federal Reserve largely agree that promoting economic growth is still more urgent that constraining a nascent pick-up in consumer prices. They look beyond the volatile fuel and food prices that have pushed up inflation and focus instead on data showing little if any upward rise in wages, something they would see as the seed of a sustained and broad-based rise in prices. “I don’t think the Federal Reserve has a clue about us little people,” said J. McKeever, an instructor at the Montessori Institute of Milwaukee. “I am very frugal, so I watch what I spend. And what I have noticed in recent months is that I have less money before than I used to, while making the same amount of money and having to pay for health care,” she said. Across the country, Americans tell of a disconnect between the real economy they live in and the macroeconomic picture as described by economic indicators. Consumer prices rose 0.5 percent in February from January, and 2.1 percent over the previous year but the rates were half that when stripping out food and energy. “There are no salary increases and you know you have the pressure at work to cut, but on a personal level everything else keeps going up. You never seem to be able to catch up,” said Paty Peterson, 50, of suburban San Francisco. Policy-makers at the Fed must weigh how much the perception of inflation might trigger actual price increases. The worry would be if businesses pushed up prices to cover their rising costs and workers in turn demanded higher wages to cover theirs — which could spark a self-feeding cycle. Consumers’ inflation expectations rose briskly in March, according to the Thomson Reuters-University of Michigan survey. U.S. households are facing higher prices for staple products such as Tide laundry detergent and Hershey chocolate bars as cocoa, sugar, oil, wheat, corn and other commodity prices climb. Major consumer products makers have said in recent weeks that they will be raising prices including Procter & Gamble Co (PG.N: Quote, Profile, Research, Stock Buzz), which said it would raise laundry detergent prices 4.5 percent in June. Kimberly-Clark Corp (KMB.N: Quote, Profile, Research, Stock Buzz) is raising prices on diapers, baby wipes and toilet paper as much as 7 percent. “My grocery bill is up 30 percent over last year,” said Cheryl Holbrook, 47, who educates her seven children at home in Mobile, Alabama. “We have to pinch every little penny and make it squeak.” The Fed’s hawks, who stress the risks of inflation, have stepped up their argument that it may be time to wind down the central bank’s $2.3 trillion securities-buying program to stimulate the economy. So far, they have been out-argued by those who see recovery from the Great Recession as fragile and still in need of a boost. The European Central Bank, by contrast, on Thursday raised interest rates for the first time since 2008 to contain rising prices. If underlying prices rise, or an inflationary psychology starts to take hold, the Fed could change course. A recent Reuters poll found long-term expectations for the food and fuel prices that have pushed inflation higher in recent month are on the rise. Consumers meanwhile complain that food and gasoline consume too much of their income, forcing difficult decisions to stay within budgets. Eileen Reilly, 72, a retired resident of the Chicago suburb of Geneva, said higher gasoline and food prices have forced her to drive less, buy a cheaper food for her dog Lucky, and stop taking pills for a liver condition she declined to identify. “My doctor said I could die if I don’t take them,” Reilly said, rolling her eyes. “I told him that I’m 72 and I’ll be dead soon as it is. Besides, it was either the pills or the car and the dog. And I need the car and I love the dog.” (Reporting by Kevin Gray in Miami, Mark Felsenthal in Washington, Verna Gates in Birmingham, Alabama, Nick Carey in Chicago, Brad Dorfman in Chicago, John Rondy in Waukesha, Wisconsin, Peter Henderson in San Francisco) (Writing by Daniel Trotta) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Video: Eichengreen Says Americans `Posture’ on Fiscal Solvency

April 8, 2011

April 8 (Bloomberg) — Barry Eichengreen, professor of economics and politics at the University of California at Berkeley, talks about currencies, Federal Reserve and European Central Bank policy, and the political battle over the U.S. budget. Eichengreen, speaking with Tom Keene on Bloomberg Television’s “Surveillance Midday,” also discusses his book “Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.” (Source: Bloomberg)

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Bob Samuels: Why California Is Broke, and What We Can Do About It

April 7, 2011

Last week, I wrote an article arguing that Governor Jerry Brown should push for a progressive tax that would raise enough revenue to prevent any cuts to needed social programs. I stressed that California has a $1.9 trillion economy, but its current state budget is less than $86 billion. The main reason why that state has so few resources is that its tax system is plagued with loopholes and corporate tax breaks. To understand how the wealthiest corporations in the world avoid paying taxes, we can look at a recent list of Fortune 500 businesses paying little or no taxes: Exxon Mobil made19 billion in profits in 2009. Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings. Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion. Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS. Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009. Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS last year. Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction. Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department. Citigroup last year made more than4 billion in profits but paid no federal income taxes. It received a $2.5 trillion bailout from the Federal Reserve and U.S. Treasury. Conoco Phillips, the fifth largest oil company in the United States, made $16 billion in profits from 2007 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction. Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1 percent. 57 Fortune 500 corporations have their home headquarters in California, and they all do business in this state, yet it is unclear if any are paying their full taxes here. For instance, Apple computer avoided paying most of its state taxes to California by moving its investment wing to Nevada, and Intel has done the same by locating its finance department (Intel Capital) in the Cayman Islands. Thus, as California has led the way in the high-tech global economy, its corporations have used new technologies to simply avoid paying state and federal taxes. In fact, many of these corporations use a loophole in our tax code to declare their profits in countries that charge a low tax rate. So even if companies stay in California and use the schools, police, and roads of the Golden State, they claim that their revenue was generated in another country. While the Republicans want to argue that the real issue is excessive governmental spending, it should be clear that the main problem is that wealthy individuals and corporations are simply not paying their fair share. The solution then for California and the rest of the country is to get rid of corporate and millionaire welfare. Of course, people will argue that companies will simply move to places charging lower taxes, but many studies have shown that corporations like to be located in places with good schools and infrastructure, they simply don’t want to pay for anything. A progressive tax in California would make everyone pay their fair share.

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Oil Tops $122 Per Barrel, Gold Hits Another Record

April 5, 2011

By Leah Schnurr – NEW YORK – Prices of spot gold notched a record high on Tuesday as a downgrade of Portugal’s debt stirred a bid for safety, while Brent crude ended above $122 a barrel, at a 2-1/2 year high. The rise in oil prices on unrest in oil-exporting countries overshadowed another interest rate hike from China and fed inflation fears, which supported gold prices. Spot gold rose to a record high above $1,450 an ounce. “What it shows is that big money continues to believe gold will go higher … because Bernanke wants to grow at any cost,” said Axel Merk, portfolio manager of the $600 million Merk Mutual Funds, referring to Federal Reserve Chairman Ben Bernanke’s comments late on Monday suggesting he was committed to completing a $600 billion stimulus program as scheduled in June. “The other reason for gold to go up is that there was a downgrade in Portugal, so people realize there are still some issues,” Merk added. The U.S. dollar briefly rose to its highest in more than five months against the yen and gained versus the euro after minutes of the Fed’s most recent meeting showed some officials said the central bank should move to tighter conditions before year-end. The minutes also showed some believed they would have to hold to an easy monetary policy course beyond this year. A large U.S. technology company merger helped keep stocks afloat, but indexes were dampened by profit-taking late in the session. Texas Instruments Inc (TXN.N: Quote, Profile, Research, Stock Buzz) said on Monday it would buy rival National Semiconductor Corp (NSM.N: Quote, Profile, Research, Stock Buzz) for $6.5 billion, driving National Semiconductor’s stock up more than 70 percent. The deal offset the impact of an interest rate hike by China, its fourth increase since October. China is viewed as a main source of global growth. Shares of Apple Inc (AAPL.O: Quote, Profile, Research, Stock Buzz) were down 0.7 percent at $338.80 after the stock’s weighting was cut in a rebalancing of the Nasdaq 100 index . The rebalancing, which takes effect May 2, forced some to sell Apple’s stock. The Dow Jones industrial average .DJI was up 4.28 points, or 0.03 percent, at 12,404.31. The Standard & Poor’s 500 Index .SPX was up 0.34 points, or 0.03 percent, at 1,333.21. The Nasdaq Composite Index .IXIC was up 2.09 points, or 0.07 percent, at 2,791.28. Global stocks were little changed, with the MSCI All-Country World Index breaking five straight days of gains. The index was off 0.1 percent. DEBT FEARS Rating agency Moody’s cut Portugal’s sovereign debt by one notch, saying the incoming government would urgently need to seek financial aid from the European Union. Portuguese bond yields rose to euro lifetime highs. Portugal’s leading banks told the central bank on Monday the country urgently needs a bridge loan and banks have virtually no more capacity to buy government debt, sources said. Yields on Portugal’s 10-year government bonds rose as high as 9.033 percent, while Portuguese stocks slumped 1 percent. The broader FTSEurofirst 300 index .FTEU3, closed up 0.2 percent. It was the highest close for European shares in almost four weeks, with energy shares rising with oil prices. Credit default swaps implied a 41 percent probability of a Portuguese default within five years, compared with 33 percent at the end of February, data provider CMA said. The euro traded at $1.4229, slightly up on the day. The greenback was last at 84.65 yen, up 0.7 percent. Brent crude prices rose as worries about supply from oil-producing countries in Africa and the Middle East overshadowed China’s rate hike. Brent futures settled up $1.16 at $122.22 a barrel, while U.S. crude futures were down 32 cents at $108.15. (Additional reporting by Nick Olivari, Frank Tang, Mark Felsenthal and Glenn Somerville; Editing by Dan Grebler) Copyright 2011 Thomson Reuters. Click for Restrictions .

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What Happened To Entrepreneurship During The Recession?

April 5, 2011

They were among the recession’s most inspiring stories: laid-off workers who went on to start their own businesses rather than dropping out of the labor force or crawling back to corporate America. But a recent analysis of Census data calls into question the popular belief that the financial crisis spurred American entrepreneurship. Instead, entrepreneurial activity took a nosedive during the downturn, according to a new paper from the Federal Reserve Bank of Cleveland. The new report challenges another study that used identical Census data. According to a widely-circulated study by the Kauffman Foundation, a Kansas City-based entrepreneurship advocacy group, new business creation spiked during the recession. Released last May, the study found the monthly rate of people transitioning into self-employment steadily rose from late 2007 to a 14-year high in 2009 . “Kauffman’s findings give only half the picture,” says Scott Shane, the new paper’s author and entrepreneurship professor at Case Western Reserve University. “Sure, the number of Americans who became self-employed grew. But that number was dwarfed by the amount of US entrepreneurs whose businesses failed during the recession, and who were forced to exit self-employment.” As a result, the total number of self-employed Americans shrank to 9.8 million in June 2009 from 10.2 million in November 2007, Census data show. All told, 68,490 more businesses closed in 2009 than in 2007, an 11.6 percent increase in the business closure rate. “If you have more people giving up than going in, I can’t see how entrepreneurship went up,” says Shane. The main point of contention between the two reports is which measure does a better job of capturing entrepreneurial activity: the net change in the total number of self-employed workers or the rate by which people become self-employed. One thing both studies can agree on is that the majority of the businesses formed during the recession are not hiring employees in the short term. But Dane Stangler, research manager at Kauffman, is bullish over the long term. Even though they have not yet hired an employee, “non-employer firms started during the most recent recession will become the employer firms of the next decade,” Stangler says. So will the hoards of new businesses created since the downturn began — many of which still don’t employ workers — boost the economy? Even though only three percent of new businesses created without employees eventually evolve into businesses with employees, a 2007 study by the National Bureau of Economic Research found that those three percent made up over a fourth of “young businesses,” or companies under three years old with employees. That three percent also accounted for 20 percent of the revenue generated by young businesses. And relatively young businesses — not small businesses — are the biggest engines of job growth, according to Census economists . ‪If these trends are still valid in the post-recession economy, then Kauffman may have been right to focus on the flow of entrepreneurs into the economy during the recession, rather than the total stock.‬

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Daniel Dicker: Oil Speculation Continues Unabated — $5 Gas Next?

April 4, 2011

While prices at the pump shoot over $4 a gallon, five United States senators are calling on the Federal Trade Commission (FTC) to investigate whether gas prices are being manipulated. The job of assuring that our energy markets are fair actually falls not upon the FTC but upon the Commodity Futures Trading Commission (CFTC), but it’s had little success to date at curbing oil speculation and slowing this latest run-up in price. The senators may be hoping that the FTC, using a newly crafted 2009 law, can lend a hand. There’s good reason for Senators Maria Cantwell (D-Wash.), Olympia Snowe (R-Maine), Jay Rockefeller (D-W.Va.), Mark Pryor (D-Ark.) and Ron Wyden (D-Ore.) to be frustrated with the CFTC. The Dodd-Frank Financial Reform bill, signed into law on July 21, 2010, mandated that the CFTC write rules for the oil markets designed to stop speculation from controlling prices on crude oil and gasoline and driving them to astronomical levels, as they did in 2008. The bill also demanded that these rules be in place and working by February of this year. There’s just one problem: Those rules haven’t yet been written and approved. They haven’t been written largely because of the pushback that the CFTC has received from the traders that make massive profits from the financial oil markets and the advocacy groups and lawyers that represent them. As the CFTC has proposed new rules, they’ve been met by a who’s who of derivative traders and their advocates arguing for the status quo and urging caution, including PIMCO, BlackRock, Goldman Sachs, JPMorgan, the Futures Industry Association (FIA) and the Securities Industry and Financial Markets Association (SIFMA) — to name only a few. The lawyers arguing their case are predictably the best, brightest and most expensive in Washington, including attorneys from Alston & Bird, Gibson, Dunn & Crutcher, Patton Boggs, Sullivan, Cromwell and Skadden, Arps. Under this pressure, the CFTC has buckled and thrown in the towel on much of the needed rulemaking, at least for now. To take one example, the Commission has given up trying to craft a rule on position limits in oil derivatives until at least 2012 , and position limits is only one of thirty complex rulemaking areas the CFTC has acknowledged it must tackle before its mandate is complete. If these five senators are serious about restoring fair pricing to the oil market, and not merely acting outraged for the sake of their constituents, they will likely not find the Federal Trade Commission better equipped to answer their call. All of the tools at the federal government’s disposal that could be used to reduce the speculative interest in oil — in trading, clearing and reporting — reside with the overseeing regulatory agency: the CFTC. Moreover, it’s hardly assured that even the completion of the CFTC’s rulemaking mandate, if it ever comes, will make prices fair. Investment in paper barrels of oil from both commercial funds and individuals is the single most important speculative source driving energy prices higher. A ban of both commodity index funds and exchange-traded funds that use commodity futures, removing much of this investment, would be an important and instantly measurable first step. So far, however, a ban of these instruments is not even being considered. But it’s important to remember that chasing destructive speculative activity out of a commodity market is not an impossible task. In January 1980, the Federal government and the exchange overseeing silver futures trading, the COMEX, took collaborative action: In a series of draconian but necessary measures, the exchange instituted a “liquidation-only” restriction for the market, forcing speculators to either take delivery of contracts or find massive credit for their holdings while the Federal Reserve blocked commercial lenders from extending that credit. The impact was immediate: Within three months, prices dropped 77%. The example of silver in 1980 shows that the tools are available and that only with the combined will of the industry and our government can we restore fair prices to commodities. Whether we see such will in action to help lessen oil prices for consumers, however, remains to be seen.

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Video: Zentner Says Inflation Is `Monkey Wrench’ for Consumers

April 1, 2011

April 1 (Bloomberg) — Ellen Zentner, senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd., and John Herrmann, senior fixed-income strategist at State Street Global Markets, talk about the U.S. employment report for March, economic growth and inflation, and Federal Reserve monetary policy. The U.S. unemployment rate unexpectedly dropped to a two-year low of 8.8 percent in March as employers created more jobs than forecast. Zenter and Herrmann speak with Matt Miller on Bloomberg Television’s “Street Smart.” Bloomberg’s Adam Johnson also speaks. (Source: Bloomberg)

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Video: JPMorgan’s Kelly Urges `Balance’ Between Stocks, Bonds

April 1, 2011

April 1 (Bloomberg) — David Kelly, chief market strategist for JPMorgan Funds, discusses the March U.S. jobs report, the outlook for the economy and investment strategy. Kelly, speaking with Betty Liu, Dominic Chu and Jon Erlichman on Bloomberg Television’s “In the Loop,” also discusses Federal Reserve Policy.(This is an excerpt of the full interview. Source: Bloomberg)

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Video: Blinder Sees Oil Shock, Budget Battle as Recovery Risks

April 1, 2011

April 1 (Bloomberg) — Alan Blinder, a Princeton University economist and former vice chairman of the Federal Reserve, discusses the obstacles that could derail the U.S. economic recovery. Blinder speaks with Betty Liu on Bloomberg Television’s “In the Loop.” David Kelly, chief market strategist at JPMorgan Funds, also speaks. (Source: Bloomberg)

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Dividends Coming Back At Record Pace, S&P Says

April 1, 2011

NEW YORK — Big companies increased their dividends by a record amount in the first quarter. Since the start of the year, 117 companies in the Standard & Poor’s 500 index said they would raise or start paying dividends. The value of the new and raised annual dividends announced by these companies amounted to a record $16.6 billion, according to Howard Silverblatt, senior index analyst at S&P. Just 78 companies raised their dividends in the same period a year ago. The surge in dividends reflects a turning point in the long recovery from the financial meltdown in 2008. After the meltdown many companies slashed or eliminated their dividends and, like many Americans, put their cash in the bank and sat on it. As a result, U.S. companies have amassed a record $940 billion in cash. But now the economy is recovering, profits are rising and investors are demanding something for their patience. An easy way to keep shareholders happy is to restore or raise dividends. JPMorgan Chase & Co. is quintupling its annual dividend from 20 cents a share to $1, amounting to an increase of $3.1 billion. The value of the payout is a record for an S&P 500 company. Even companies that have long resisted dividends are instituting them. Cisco Systems Inc. said it would begin paying shareholders $1.3 billion per year, a record amount for a first-time dividend payer in the S&P 500. “The fact that dividends are increasing is a clear signal that the economy and businesses worldwide are on a much firmer footing than a few years ago,” said Kent Croft, the manager of the $421 million Croft Value Fund. Here is more evidence of the dividend boom: _ Financial companies announced they will raise annual dividends by $7 billion, accounting for 42 percent of all S&P 500 dividend increases. That came after the Federal Reserve announced March 18 it would allow some banks to raise dividends if they passed certain “stress tests.” JPMorgan, Wells Fargo & Co. and State Street were among those that increased their dividends for the first time since the financial crisis. Citigroup Inc. reinstated its dividend. _ Ten S&P 500 companies announced during the first quarter that they would begin paying dividends. That’s the most for any three-month period since at least 2003, when Silverblatt began collecting data. Besides Cisco, discount department store Kohl’s and health benefits company WellPoint also became first-time dividend payers. _ Besides financials, industrial companies and businesses focused on consumer products announced the most dividend increases during the quarter. Among those raising their dividends: cruise operator Carnival Corp., retailer Limited Brands and manufacturer Eaton Corp. A strong recovery in dividends hasn’t made up for all the losses the previous three. Even with the increases, quarterly dividends by companies in the S&P 500 are 13 percent lower than their peak in 2008. Some companies that have raised their dividend still pay far less than before the recession. That is particularly true for banks and other financial services companies. Their dividend yield, which measures how much cash is being paid per share, runs around 1.41 percent today, far below the 3.32 percent yield in 2007. JPMorgan’s annual dividend is still well below the $1.52 a share it paid in 2008. Citigroup will pay just 4 cents a year, the maximum federal regulators are allowing the bank to pay under the provisions of its bailout package. Citigroup had paid as much as $2.16 per share before the financial crisis. Bank of America Corp. wasn’t given the OK by the Fed to raise its dividend, which is also just 4 cents per share. At its peak in 2008, the company paid annual dividends of $2.56 per share. “Companies are paying more dividends, but they are also taking it slow,” Silverblatt says. “Dividends are far from being completely back.”

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Video: Englund Says He’s `Encouraged’ by March Jobs Report

April 1, 2011

April 1 (Bloomberg) — Mike Englund, chief economist at Action Economics LLC, discusses the March U.S. jobs report and the outlook for Federal Reserve policy. Payrolls increased by 216,000 workers last month after a revised 194,000 gain the prior month, the Labor Department said today in Washington. Englund speaks with Betty Liu, Lizzie O’Leary, Michael McKee and Jon Erlichman on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

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Video: Williams Says Fed Needs to Provide More Timely Data

April 1, 2011

April 1 (Bloomberg) — Mark Williams, a former Federal Reserve bank examiner who is now an executive-in-residence at Boston University’s School of Management, discusses the Fed’s release of data on “discount window” lending during the financial crisis and prospects for transparency at the central bank. Williams speaks with Erik Schatzker and Lizzie O’Leary on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

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Video: Roubini Says Fed, ECB Policy Divide May Be Destabilizing

April 1, 2011

April 1 (Bloomberg) — Nouriel Roubini, the New York University economist who predicted the financial crisis, talks about the outlook for monetary policy by the Federal Reserve and the European Central Bank. He speaks from Cernobbio, Italy, with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

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Federal Reserve Lent To Gaddafi-Owned Bank

April 1, 2011

At a time when credit markets shunned even the most worthy borrowers, foreign banks, including one partly-owned by Muammar Gaddafi’s Libya, fled to the Federal Reserve and borrowed at rock-bottom interest rates, Fed documents released Thursday show. During the height of the financial crisis in the fall of 2008, as investors and firms hoarded cash, the Fed reduced its rates to kickstart lending in the broader economy. Arab Banking Corp., a $28 billion lender now 59 percent-owned by Libya’s central bank, borrowed at least $3.2 billion during this time. The Fed charged it an interest rate ranging from 2.25 percent to as low as 1.25 percent on those borrowings, regular Fed data show. AAA-rated corporations paid bondholders an average rate ranging from 5.63 percent to 6.37 percent during the same period, according to the Fed. The Fed lends money to banks at cheaper rates than the market because it intends for those funds to be distributed throughout the economy. The primary facility, known as the discount window, has been in practice since 1914. Arab Banking Corp., which can borrow from the Fed because it has a subsidiary in the U.S., was among the foreign banks that had difficulty accessing cash from other lenders during that time, leaving it to turn to America’s central bank. Records show the Libyan bank borrowed its funds beginning on September 18, 2008 and lasting through at least November 13 of the same year. The daily high point came on three separate occasions in October and November, when the lender tapped the discount window for $600 million. Beginning Oct. 8, those loans were available at a 1.75 percent interest rate. A few weeks later, the rate dropped to 1.25 percent. These disclosures and more were buried in nearly 30,000 pages spread across almost 900 computer files that the Fed released to reporters under court order in response to lawsuits launched nearly three years ago by Bloomberg LP, the parent company of Bloomberg News, and Fox Business Network, the financial news television channel of Fox News. The Fed had fought against disclosing data surrounding its activities during the financial crisis. After President Barack Obama signed his financial reform package into law last July, calling for the nation’s central bank to release documents on most of its lending programs, a coalition of the nation’s largest financial institutions took the Fed’s case to the U.S. Supreme Court in an attempt to keep the records hidden. The high court declined to hear the case, and in December, the Fed released critical details on its emergency crisis-era programs. For the first time it revealed the identities of the banks, investment firms, insurance companies, automakers, corporations, and other borrowers it flooded with more than $3 trillion in taxpayer-backed cash. But it took federal courts and two determined news organizations to force the public release of the Fed’s discount-window activities during the same time. On Thursday, the Fed finally disclosed such information. Now, for the first time, the public can see which banks, from the smallest community lender to the largest Wall Street bank, accessed the backstop at their regional Federal Reserve bank during the worst financial emergency since the Great Depression. The loans are far more generous than what banks get from the market. Trillion-dollar financial behemoths like Bank of America, JPMorgan Chase, and Citigroup accessed cheap Fed cash through the discount window, as did smaller firms like Proficio Bank, a Utah lender with just $125 million in deposits. After changing its legal status from an investment firm to a bank, Goldman Sachs also benefited from the Fed’s discount window. A top Goldman executive had previously testified under oath to the Financial Crisis Inquiry Commission that it accessed the program simply to test its systems. In September 2008 — the month that saw the federal government takeover Fannie Mae and Freddie Mac; the failure of Lehman Brothers, the largest bankruptcy in U.S. history; the forced-sale of Washington Mutual, the largest bank failure in U.S. history; and a government rescue of AIG, the world’s largest insurer — the Fed lent borrowers $1,574,142,741,934 through its discount window and emergency programs, documents show. During the same period, 22 foreign-based banks borrowed $56.6 billion on 42 separate occasions from the Fed’s discount window, according to a Huffington Post analysis of Fed documents. The disclosures led Senator Bernie Sanders, an independent from Vermont, to write Fed chairman Ben Bernanke asking why the central bank lent U.S. funds to foreign firms. Sanders wrote that he had “serious concerns” in particular over the Fed’s lending to Arab Banking Corp., the Libya-owned lender. The Federal Reserve did not respond to a request for comment. William Alden contributed to this report. ************************* Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 917-267-2335.

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Video: U.S. Stocks Fall, S&P 500 Trims Best 1Q Since 1998

March 31, 2011

March 31 (Bloomberg) — Bloomberg’s Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks fell, trimming the biggest first-quarter rally for the Standard & Poor’s 500 Index since 1998, as a Federal Reserve official said interest rates may need to rise and concern about Europe’s debt crisis grew. Bloomberg’s Julie Hyman also speaks. (Source: Bloomberg)

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Video: U.S. Stocks Fall, S&P 500 Trims Best 1Q Since 1998

March 31, 2011

March 31 (Bloomberg) — Bloomberg’s Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks fell, trimming the biggest first-quarter rally for the Standard & Poor’s 500 Index since 1998, as a Federal Reserve official said interest rates may need to rise and concern about Europe’s debt crisis grew. Bloomberg’s Julie Hyman also speaks. (Source: Bloomberg)

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Fed Accepted Nearly $1 Billion In Defaulted Debt From Banks As Collateral During Crisis

March 31, 2011

The Federal Reserve accepted more defaulted debt than U.S. Treasuries as collateral to back $155.7 billion on the largest day of borrowing from the Primary Dealer Credit Facility, according to documents released today.

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Goldman Tapped Fed’s Emergency Loan Program, Contrary To Exec’s Claims

March 31, 2011

Goldman Sachs Group Inc. (GS) tapped the Federal Reserve’s discount window at least five times since September 2008, according to central bank data that contradict an executive’s testimony last year.

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U.S. Economy Growing Faster Than Rivals, But Creating Far Fewer Jobs

March 31, 2011

WASHINGTON — The United States is out of step with the rest of the world’s richest industrialized nations: Its economy is growing faster than theirs but creating far fewer jobs. The reason is U.S. workers have become so productive that it’s harder for anyone without a job to get one. Companies are producing and profiting more than when the recession began, despite fewer workers. They’re hiring again, but not fast enough to replace most of the 7.5 million jobs lost since the recession began. Measured in growth, the American economy has outperformed those of Britain, France, Germany, Italy and Japan – every Group of 7 developed nation except Canada, according to The Associated Press’ new Global Economy Tracker, a quarterly analysis of 22 countries representing more than 80 percent of global output. Yet the U.S. job market remains the group’s weakest. U.S. employment bottomed and started growing again a year ago, but there are still 5.4 percent fewer American jobs than in December 2007. That’s a much sharper drop than in any other G-7 country. The U.S. had the G-7′s highest unemployment rate as of December. Canada and Germany have actually added jobs since the recession ended in June 2009. U.S. companies aren’t acting the way economists had expected them to. In the past, when the U.S. economy fell into recession, companies typically cut jobs but often kept more than they needed. Some might have felt protective of their staffs. Or they didn’t want to risk losing skilled employees they’d need once business rebounded. Among manufacturers, for example, some tended to hoard workers during downturns by giving them make-work assignments – sweeping factory floors, counting inventory, painting warehouses. The result is that productivity – output per workers – has typically decelerated or even dropped as the economy has weakened. Japan and Europe have been following that script. At the depth of the recession in 2009, productivity shrank 3.7 percent in Japan and 2.2 percent in Europe. The United States has proved the exception. U.S. productivity growth doubled from 2008 to 2009, then doubled again in 2010, according to the Organization for Economic Cooperation and Development. Panicked by the 2008 financial crisis and deepening recession, U.S. employers cut jobs pitilessly. They slashed an average of 780,000 jobs a month in the January-March quarter of 2009. “My sense is there was much more weeding out of the weakest workers – the ones they didn’t want,” says Harvard economist Kenneth Rogoff. Yet after shrinking payrolls, many companies found they could produce just as much with fewer workers. And with that higher productivity came higher profits. By July-September quarter of 2010, U.S. corporate earnings were 12 percent more than when the recession began. By contrast, corporate profits fell 6 percent in Japan and 16 percent in Canada from the October-December quarter of 2007, according to Haver Analytics. In Reading, Pennsylvania, Remcon Plastics moved fast once sales evaporated in the fall of 2008. “I have never seen my business go so quiet,” says Peter Connors, founder of the company, which makes pharmaceutical equipment. “I recognized that business wasn’t going to be strong for some time.” So he laid off 25 temporary workers. And he put his 50 full-time employees on a three-day workweek. Remcon rethought how it did business – restructuring the workplace, for example, so employees didn’t have to walk as far to do their tasks. A plastic part that once had to be made by six workers now needs three. It can be produced faster. “So even as demand came back, we could wait to add people,” Connors says. Japanese, European and Canadian companies are less inclined to purge employees. Their customs, labor regulations and unions discourage aggressive layoffs. U.S. management practices “make it easier for employers to avoid adding permanent jobs,” says economist Erica Groshen, a vice president at the Federal Reserve Bank of New York. “They have temporary help they can hire easily. They’re less constrained by traditional human resources practices or by union contracts.” Fewer than 12 percent of American workers belong to unions, which provide some protection against job cuts. That’s the fourth-lowest union participation rate among 31 countries the OECD tracks. “When there’s pressure to cut costs in the United States, it’s borne by the workers,” says Howard Rosen, visiting fellow at the Peterson Institute for International Economics. “In Europe, it’s borne differently.” In Germany, unemployment is lower now than before the recession. To limit layoffs, German companies spread the pain by reducing workers’ hours. “Japanese companies took it upon themselves to paint the factory – do more stuff that kept people on the payroll,” says Gary Burtless, senior fellow in economic studies at the Brookings Institution. That helps explain why Japan’s unemployment rate was the lowest among G-7 countries in December at just 4.9 percent, though it may rise after the earthquake and nuclear disaster that struck Japan’s northeastern coastline. The United States is “on the other end of the spectrum,” says Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers University. “Everything is tilted in favor of the employers… The employee has no leverage. If your boss says, `I want you to come in the next two Saturdays,’ what are you going to say – no?” ____ AP Business Writer Pallavi Gogoi in New York contributed to this report.

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AIG ‘Highly Disappointed’ It Can’t Repurchase All Toxic Assets

March 31, 2011

WASHINGTON — The Federal Reserve Bank of New York has turned down an offer by American International Group to repurchase dodgy mortgage bonds that the Fed had taken off the insurance company’s hands during the financial crisis. AIG had offered $15.7 billion for the bonds. The Fed thinks it can do better by having companies competitively bid on the mortgage bonds over time. The economy and financial conditions have improved since the crisis. The Fed says there is a “high level” of interest in the bonds by investors. The government had bailed out AIG in 2008, extending lifelines worth $182 billion. At the time, the Fed also took over a portfolio of soured mortgage bonds that AIG had held. The company is repaying the government by selling some of its businesses. American International Group Inc., based in New York, said the Fed’s decision could hurt taxpayers. “We are highly disappointed in the Fed’s decision, which may prevent AIG from delivering on its goal that U.S. taxpayers earn a profit on their investment in AIG,” a statement issued by the company said. “That the Fed, which has been such a constructive partner over the last two years, would hurt the very company in which U.S. taxpayers own a 92% stake is very difficult to understand.”

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Video: Faber Expects QE3 From Fed ‘But Not Right Away’

March 30, 2011

March 30 (Bloomberg) — Marc Faber, publisher of the Gloom, Boom & Doom report, talks about the outlook for a third round of quantitative easing from the Federal Reserve, his investment strategy and the outlook for global stock and commodity markets. Faber, speaks with Matt Miller and Carol Massar on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Video: Aronstein Expects `Aggressive’ Fed Talk Before Summer

March 25, 2011

March 25 (Bloomberg) — Michael Aronstein, president of Marketfield Asset Management, talks about the outlook for the U.S. stocks, economy and Federal Reserve policy. He speaks with Matt Miller, Carol Massar, Adam Johnson and Sheila Dharmarajan on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Video: Miron Says U.S. Economy Is in `Pretty Good Shape’

March 25, 2011

March 25 (Bloomberg) — Jeffrey Miron, a professor at Harvard University, talks about the U.S. economy and the outlook for Federal Reserve monetary policy. Miron, speaking with Matt Miller on Bloomberg Television’s “Street Smart,” also discusses U.S. budget issues. (Source: Bloomberg)

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Federal Reserve Unlikely To Extend Quantitative Easing, Top Officials Say

March 25, 2011

NEW YORK, March 25 – With the economy on firmer footing the Federal Reserve Bank is unlikely to extend its bond-buying stimulus program beyond a planned $600 billion, several top Fed officials said on Friday. Members of the more hawkish wing of the Fed went further, with Philadelphia Fed Bank President Charles Plosser saying the U.S. central bank will have to reverse its easy money policy in the “not-too-distant future” to avoid sowing the seeds of inflation. The Fed has kept short-term rates near zero since December 2008 and has bought more than $2 trillion in long-term securities to push borrowing costs down further and boost recovery from the 2007-2009 recession. At its most recent policy-setting meeting, policymakers voted to continue the bond-buying program begun last November and slated to end in June. “Following through on that to the tune of $600 billion, like we’ve said, I think is appropriate,” Chicago Fed President Evans told reporters at the regional bank’s headquarters. “I personally don’t see as many needs for a further amount, as I probably thought last fall.” Evans comments, along with those of Atlanta Fed President Dennis Lockhart who said on Friday that “it’s a high bar” for the Fed to do more, suggest the debate at the Fed has moved away from a consideration of further easing. “Given the pressure, from the hawks on the Federal Open Market Committee, the public, Congress, and foreign officials, I would highly doubt Evans would say something like that if Chairman Ben Bernanke, New York Fed President William Dudley, and Fed Vice Chair Janet Yellen didn’t agree with him,” said Eric Stein, a fund manager at Eaton Vance in Boston. Minneapolis Fed President Narayana Kocherlakota told reporters in Marseilles that the U.S. economy would need to worsen “materially” for the bank to consider further bond-buying. Plosser and fellow hawk Dallas Fed Fisher continue to press for the Fed to do less. Fisher, speaking in Brussels Friday, said the Fed has done enough and may even have done too much. Speaking in New York, Plosser said consumer spending continues to expand at a “reasonably robust pace,” and the labor market is improving. The overall economy, he said, has gained “significant strength and momentum” since the summer. “If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy,” said Plosser, one of the central bank’s biggest inflation hawks. “Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future,” said Plosser, a voter on the Fed’s policy-setting committee this year. Plosser outlined his preferred strategy for eventually tightening policy. He said he would like to raise interest rates and reduce the Fed’s balance sheet — which ballooned to more than $2 trillion during the crisis — at the same time. “My proposed strategy involves raising rates and shrinking the balance sheet concurrently and tying the pace of asset sales to the pace and size of interest rate increases,” Plosser said. “By tying sales to interest rate decisions, it allows the process for selling assets to be conditional on economic outcomes in ways that are familiar to market participants,” he said. Evans, who like Plosser has a vote on the policy-setting committee this year, suggested that the Fed would not quickly move to tighten its extraordinarily loose monetary policy, and would likely try to keep its balance sheet steady once active bond-buying stopped. That would require the Fed to continue to reinvest proceeds of maturing securities in new purchases, as it has been done for some months now. “It is natural to expect there would be some period of time between when the $600 billion is completed and an assessment in the change of the trajectory,” he said. After a period of what could be some months, he said, the Fed could stop reinvestments, a “modest step” toward tightening that probably not be followed quickly by other steps unless the economy was outpacing expectations. Evans and Plosser both said the earthquake and nuclear crisis in Japan and the rise in oil prices because of turmoil in the Middle East pose a risk to the U.S. recovery — but said he expected this risk to be small and short-term. (Reporting by Kristina Cooke, Edith Honan in New York, Ann Saphir in Chicago, Pedro Nicolai da Costa in Ft. Myers, Fla., Philip Blenkinsop in Brussels, Editing by Padraic Cassidy and Andrew Hay) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Video: Ratajczak Says No One Had as Much `Courage’ as Hoenig

March 25, 2011

March 25 (Bloomberg) — Donald Ratajczak, chief consulting economist at Morgan Keegan & Co., talks about the retirement of Federal Reserve Bank of Kansas City President Thomas Hoenig and its impact on Fed monetary policy. Hoenig will retire on Oct.1. Ratajczak speaks with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg)

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Video: Lazear Doesn’t Expect `Much of a Change’ After Hoenig

March 25, 2011

March 25(Bloomberg) — Edward Lazear, a professor at Stanford University and former economic adviser to President George W. Bush, discusses the impact of Federal Reserve Bank of Kansas City Thomas Hoenig’s decision to retire on Fed monetary policy. Lazear talks with Tom Keene on Bloomberg Television’s “Surveillance Midday.” (Source: Bloomberg)

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Video: Crescenzi Says Fed Can Help Guide Inflation Expectations

March 25, 2011

March 25 (Bloomberg) — Anthony Crescenzi, market strategist and portfolio manager at Pacific Investment Management Co., discusses Federal Reserve policy and Chairman Ben S. Bernanke’s efforts at more transparent communication. Crescenzi speaks with Margaret Brennan on Bloomberg Television’s “InBusiness.” (Source: Bloomberg)

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Economy Grew Faster Than Previously Thought In Fourth Quarter

March 25, 2011

WASHINGTON: The economy grew more quickly than previously estimated in the fourth quarter as businesses maintained fairly solid spending and restocked shelves to meet rising demand, while corporate profits increased 3.3 percent, a government report showed on Friday. Gross domestic product growth was revised up to an annualized rate of 3.1 percent, the Commerce Department said in its final estimate, close to its initial estimate of 3.2 percent published two months ago and up from its tally of 2.8 percent made in February. Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.0 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.9 percent, while corporate profits grew 20.4 percent, the most since 2004. Data so far suggest the economy maintained this growth pace in the first quarter, but there are concerns that rising oil prices could crimp consumer spending and slow the economic recovery. The pick-up in growth has been acknowledged by the Federal Reserve, which injected massive amounts of money into the economy to stimulate demand. The U.S. central bank is expected to conclude its $600 billion government bond buying program at the end of June. The government raised fourth-quarter growth estimates to reflect stronger business spending and inventory accumulation than previously forecast. Business investment rose at a 7.7 percent rate instead of 5.3 percent, lifted by spending on equipment and software, as well as on structures. Spending grew at a 10.0 percent pace in the third quarter. Spending on software and equipment increased at a 7.7 percent rate instead of 5.5 percent. Investment in structures rose at a solid 7.6 percent, the first increase since the second quarter of 2008. Business inventories increased $16.2 billion instead of the $7.1 billion estimated last month, subtracting a smaller 3.42 percentage points from GDP growth rather than the previously reported 3.70 percentage points drag. Excluding inventories, the economy expanded at an unrevised 6.7 percent pace, the fastest increase in domestic and foreign demand since 1998. Domestic purchases grew at a 3.2 percent rate instead of 3.1 percent. Consumer spending — which accounts for more than two-thirds of U.S. economic activity — grew at a 4.0 percent rate in the final three months of 2010 instead of 4.1 percent. It was still the fastest since the last three months of 2006 and was an acceleration from the third quarter’s 2.4 percent rate. The growth in exports was not as strong as previously estimated, while imports were revised a touch down. Trade added 3.27 percentage points to GDP growth instead of 3.35 percentage points. Government spending contracted at a 1.7 percent rate rather than 1.5 percent, due to weak state and local government outlays. The GDP report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures (PCE) index rose at a revised 1.7 percent rate in the fourth quarter instead of 1.8 percent. That compared to the third quarter’s 0.8 percent increase. But a “core” price index closely watched by the Fed advanced at a revised 0.4 percent rate instead of 0.5 percent. The increase was the smallest rise on record. (Reporting by Lucia Mutikani, Editing by Andrea Ricci) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Fed Official: High Unemployment Isn’t Inevitable After Bubbles Collapse

March 25, 2011

The collapse of an asset bubble will not necessarily lead to higher unemployment as long as monetary policy is loose enough, a top Federal Reserve Bank official said on Friday. But a central bank that has already lowered interest rates to zero may be unable to deliver adequately accommodative policy, and unemployment may rise, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said in prepared remarks for delivery at an academic conference in Marseilles. Kocherlakota touched neither upon the U.S. economic outlook nor current monetary policy in his speech. An unusually strong disclaimer, he said his paper was only meant to explore a new economic model and contains “no information about my own thinking about current policy.” Since December 2008, the U.S. central bank has kept short-term interest rates near zero and has bought about $2 trillion in mortgage- and U.S.-government-backed debt to lower borrowing rates still further. But that has not been enough to bring down persistently high unemployment, which in February registered 8.9 percent. Meanwhile, median U.S. home prices — which soared before the crisis hit — sank to the lowest since December 2003. “The collapse of a bubble need have no impact on the economy, as long as the central bank lowers r* sufficiently,” he wrote, using economists’ shorthand for the real interest rate. “With insufficiently accommodative monetary policy (generated perhaps by the zero lower bound on nominal interest rates), the bubble collapse can lead to increases in unemployment.” In one of the paper’s more surprising claims, Kocherlakota suggested that extending unemployment benefits — sometimes seen as adding to the jobless rate because it can discourage those receiving benefits from actively seeking jobs — actually reduces it. Copyright 2011 Thomson Reuters. Click for Restrictions .

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Fed Announces Plans To Hold Regular Media Briefings

March 24, 2011

Federal Reserve Chairman Ben Bernanke will start holding regular media briefings on monetary policy next month, a historic shift to greater openness at the traditionally secretive U.S. central bank. Bernanke will kick off a program of four-times-a-year news conferences on April 27 following a regularly scheduled two-day Fed meeting on monetary policy, the central bank said on Thursday. It will be the first regularly scheduled briefing by a Fed chairman in the history of the nearly 98-year-old central bank. Future briefings will coincide with Fed meetings at which officials provide their quarterly economic forecasts, which fall in June and November this year. “The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication,” the central bank said. Bernanke has taken a number of steps to boost transparency at the Fed during his tenure as chairman, and the latest announcement brings it into line with some other central banks. The head of the European Central Bank holds a news conference after each ECB policy meeting, while the governor of the Bank of England briefs media quarterly. Congressional and public outcry for greater Fed disclosure grew louder in the wake of the recent financial crisis, during which the Fed undertook extensive unorthodox emergency measures. The Fed has a reputation for conducting its operations behind closed doors and shielding details of its decision-making from view. Despite a gradual shift to greater openness in recent years, the Fed has fought to keep some of the details of its operations secret. This week, it lost a court battle to withhold the names of banks that had taken emergency loans from its last-resort lending facility during the financial crisis. To make its operations more open, the central bank has in recent years begun issuing its forecasts quarterly, rather than twice a year, and moved up the publication of minutes of policy meetings to three weeks from about six weeks. It did not begin announcing its interest rate moves until 1994. Since the financial crisis, Bernanke has stepped up efforts to explain the central bank’s actions to the public, giving two extensive television interviews and delivering speeches at which reporters have been able to ask questions. Janet Yellen, the Fed’s vice chairman, has led a subcommittee since November to examine the central bank’s communications practices. The Fed said on Thursday it would continue to review its policies “in the interest of ensuring accountability and increasing public understanding.” (Reporting by Mark Felsenthal; Editing by Neil Stempleman and Dan Grebler) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Ed Mierzwinski: In The Public Interest: Checking the "Fact Check" From CFPB Opponents

March 24, 2011

Professor Elizabeth Warren, the architect of the Consumer Financial Protection Bureau (CFPB) , was in the press often this week letting the public know about the progress of “standing up” the new consumer protection agency. Her opponents took notice, and posted a “Fact Check” purporting to find errors in one of her interviews from earlier in the week. But their “Fact Check” needs a fact check. It’s a political spin job, not a policy paper. In its short length, it manages to make several factual mistakes while also completely missing the point. The “Fact Check” incorrectly claims that only the CFPB’s director can set the budget. In fact, the Bureau’s power and authority are similar to that of other bank regulators, except that in two respects it is more, rather than less, limited. Like them, it is subject to Congressional oversight. In addition, unlike any other bank regulator, it can have its decisions overruled by a committee of the other banking regulators under some circumstances, and its budget is capped, while other bank regulators’ budgets are not. More importantly, the “Fact Check” fails to check history. It fails to go back to the Great Crash of 2008 and recall that our economy failed because the system before – with no dedicated agency looking out for consumers – failed to protect us. The real difference between the CFPB and the other regulators is not that it will have too much power. The real difference is that the new Consumer Financial Protection Bureau will be the first banking regulator with one job- protecting and standing up for consumers in the financial marketplace. For too long, enforcement of consumer protection laws in the financial market was left to regulators whose main mission was ensuring the financial stability of banks. It didn’t work. The real outrage is the fact that existing regulators, like the Federal Reserve – (a much less accountable agency, by the way) – had the responsibility to protect the market from products like abusive subprime mortgages, but financial industry special interests objected, and they failed to do so, with disastrous consequences. What opponents of the CFPB really fear is that we now have a regulator that will put consumer interests first and hold Wall Street accountable. Wall Street plain and simple doesn’t want a consumer cop on the beat . But consumers do.

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Video: Stern Says Additional Fed Quantitative Easing `Unlikely’

March 23, 2011

March 23 (Bloomberg) — Gary Stern, former president of the Federal Reserve Bank of Minneapolis, talks about the possibility that the Federal Reserve will enact another round of its quantitative easing program. Stern also discusses the U.S. housing market and inflation. He speaks with Matt Miller and Carol Massar on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Bernanke: Dodd-Frank Should ‘Level Playing Field’ For Small Banks

March 23, 2011

SAN DIEGO – New financial regulatory reforms should help reduce the edge that large banks have over smaller ones because of their implicit support from government, Federal Reserve Chairman Ben Bernanke said on Wednesday. Bernanke argued the Dodd-Frank reform legislation will address the issue of firms perceived as too big to fail by restricting their activities, raising their capital requirements and enhancing regulators’ ability to wind them down. “A financial system dominated by too-big-to-fail firms cannot be a healthy financial system,” Bernanke told a group of community bankers in a speech that did not touch on the broader economic outlook. “One benefit of the reforms should be the creation of a more level playing field for financial institutions of all sizes,” he said. A number of other top Fed officials, including Richard Fisher, president of the Dallas Fed bank and Thomas Hoenig, president of the Kansas City Fed, have argued the legislation does not go far enough. They have called for very large banks to be broken up. WATSON NO CREDIT OFFICER Bernanke said part of the reason the new laws governing the financial sector would support community banks was that regulators are cognizant of their concerns and challenges. With that in mind, the Fed is aware that many community banks need time to recover from the financial crisis. “We recognize the importance of striking the right balance between promoting safety and soundness throughout the banking system and keeping the compliance costs for smaller banking firms as small as possible,” he said. He said the crisis suggested fancy computer models are no substitute for on-the-ground intelligence on lending, joking the IBM computer that had recently won the U.S. game show “Jeopardy!” was not well equipped to make credit decisions. “This advantage for community banks is fundamental to their effectiveness and cannot be matched by models or algorithms,” Bernanke said. “Watson may play a mean game of Jeopardy, but I would not trust it to judge the creditworthiness of a fledgling local business or to build longstanding personal relationships with customers and borrowers.” Copyright 2011 Thomson Reuters. Click for Restrictions

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Federal Reserve Rejects Bank of America’s Proposed Dividend Hike

March 23, 2011

NEW YORK — Bank of America said Wednesday the Federal Reserve has objected to its plan for raising its dividend in the second half of this year, a setback that suggests regulators need to see more evidence that the nation’s largest bank is strong enough to weather another recession. But the bank said in a regulatory filing that it’s been given another opportunity to submit a comprehensive plan to the Fed so that the central bank may reconsider its decision. The Charlotte, N.C., bank expects to resubmit a request to dole out a higher second-half dividend. The bank has paid a penny-per-share quarterly dividend for the last two years. Its last one-cent dividend was declared in January and payable on Friday. The dividend peaked at 64 cents in mid-2008 before being halved to 32 cents later that year. Bank of America shares fell 14 cents, or 1 percent, to $13.74 in pre-market trading. Last week, the Fed cleared the way for major lenders to increase their dividends if they passed “stress tests” to see if they are strong enough to stand up to another economic downturn. Banks had been forced to cut dividends to preserve cash following the financial crisis that peaked in late 2008. It was a condition of the government’s bank bailout package. The Fed said at the time it expects that “some” banks will increase or resume dividend payments, buy back shares or repay government capital, but it didn’t reveal the names or number of banks that are expected to do so. All of the 19 largest banks overseen by the Fed were subject to the tests. By increasing dividend payments, banks may be able to attract new investors, which should lead to more lending. The Fed has said it is taking a “measured and conservative approach” on banks’ dividend requests. The Fed also cleared investment bank Goldman Sachs to buy back all the preferred shares it issued to Berkshire Hathaway Inc., the conglomerate run by billionaire Warren Buffett. Other banks, including JPMorgan Chase & Co., Wells Fargo & Co. and U.S. Bancorp also announced large share repurchases. Citigroup Inc. on Monday said it planned to reinstate a penny-per-share quarterly dividend and announced a reverse stock split, which will lift the company’s stock price and allow more institutional investors to own it. BofA’s stock has lagged its competitors in the last year and has remained relatively flat so far in 2011. Investors have been worried that regulations enacted after the financial crisis will make it difficult for Bank of America to increase profits and grow many of its businesses, especially its credit and debit card business. The bank has warned that it would lose at least $2 billion in annual revenue for a few years in its card business. Last year, in Bank of America CEO Brian Moynihan’s first year at the helm, its credit card unit took a $10.4 billion write-down due to new regulations, and its home loan business struggled with fallout from the implosion of the housing bubble. The bank reported a 2010 loss of $3.6 billion. Most of the bank’s problems stem from its 2008 purchase of Countrywide Financial, which at the time was the country’s largest mortgage company. While the deep slump in the real estate market has hurt all its competitors, Bank of America has been at the center of almost every controversy involving bad home loans. It paid $2.8 billion late last year to the government-owned mortgage companies Fannie Mae and Freddie Mac to settle claims the bank sold them defective mortgages. In the fourth quarter, it kept aside $4.1 billion for more bad home loans that it could be forced to buy back from the two government agencies and other investors. It also set aside another $1.5 billion for litigation expenses related to bad mortgages.

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Video: Serebriakov Says Yen to Be Volatile for Next Few Months

March 22, 2011

March 22 (Bloomberg) — Vassili Serebriakov, a currency strategist at Wells Fargo & Co., talks about the outlook for the yen and European debt. Serebriakov, speaking with Scarlet Fu on Bloomberg Television’s “InBusiness,” also discusses the impact of the Federal Reserve’s policy of quantitative easing on the U.S. dollar. (Source: Bloomberg)

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Federal Reserve Earns Record Profits, Largely From Investments In Economy, Banks

March 22, 2011

The Federal Reserve earned a record $81.7 billion in 2010, largely on investments made to help the economy and banks weather the 2007-2009 financial crisis, and turned the bulk of it over to the U.S. Treasury. According to audited financial statements, the U.S. central bank transferred $79.3 billion to Treasury’s coffers last year, up from $47.4 billion in 2009 and a record turnover for a second straight year. The figure for the total turned over to Treasury was slightly larger than the Fed had reported in January when it said it had remitted $78.4 billion. The latest figure was based on additional data, Fed officials said on Tuesday when they issued statements for all 12 Fed regional banks and some of the entities established during the financial crisis. The Fed said that at year-end, the value of assets in its Maiden Lane investment vehicle — taken on to help rescue Bear Stearns in 2008 — had declined slightly to $27.96 billion from $28.14 billion at the end of 2009. This was due largely to payoffs of underlying mortgages, according to Fed officials. Assets held in vehicles created to rescue American International Group (AIG.N), Maiden Lane II and III, rose slightly, to a combined total of about $40 billion, but these have since been transferred to the Treasury with the payoff of Fed loans to AIG. The U.S. central bank took unprecedented actions to prop up the economy at the height of the financial crisis, in the process acquiring a swollen portfolio of assets that earns money for it but has also drawn some criticism from lawmakers. After driving overnight interest rates to near zero in December 2008, the Fed bought $1.7 trillion of longer-term Treasury and mortgage-related bonds as a supplement to its pledge to keep overnight rates near zero for an extended period. It followed that up late last year with a new $600 billion bond-buying program to spur growth. That program is scheduled to end at mid-year. The Fed said that at the end of 2010 it had total assets of $2.43 trillion, up $193 billion from a year earlier. It said its balance sheet’s makeup was changing, and that holdings of U.S. Treasury securities were up $261 billion while its holdings of federal agency and government-sponsored enterprise mortgage-backed securities had climbed by $86 billion. (additional reporting by David Lawder) (Reporting by Glenn Somerville, Editing by Kenneth Barry) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Video: Burn Says Volatility `Here to Stay’ If Fed Continues QE

March 22, 2011

March 22 (Bloomberg) — Christopher Burn, founder and portfolio manager at Goshen Invesments LLC, and Paul Giordano, chief executive officer of Tamalpais Asset Management, talk about the Federal Reserve’s policy of quantitative easing and its effect on financial markets. Speaking with Margaret Brennan on Bloomberg Television’s “InBusiness,” they also discuss the impact of the insider-trading trial of Galleon Group co-founder Raj Rajaratnam on investment firms. (Source: Bloomberg)

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Kit Yarrow, Ph.D.: The Behavioral Economics of Tax Refunds

March 21, 2011

If you were about to get a check for $3,000, what would you do with it? If you’ve already thought about it, you’re not alone. It’s tax refund time and two thirds of Americans have received or are anticipating a refund. Last year 119 million Americans received refunds totaling more than $358 billion. So far this year the average tax refund is close to $3,200. Obviously a large refund means you’ve overpaid your taxes during the year. Yet only 19 percent of Americans receiving refunds plan to reduce their withholdings. Why? Some overpay out of fear they’ll owe money at tax time. A few are surprised to be getting a refund. But most use Uncle Sam as a savings enforcer. Debt reduction seems more dramatic when it happens all at once, savings feel more meaningful in large chunks and vacations are easier to save for if the money’s automatically set aside. Having money deducted from your paycheck before you can spend it is a tried and true savings method. But with all that technology has brought to banking, it’s easier than ever to do it yourself and gain the advantage of making the savings work for you in the meantime. Here’s how Americans plan to use their tax refunds this year, and why they should have withheld less instead. Spend It Tanya admits that she looks forward to “splurging” when she gets her refund. “It’s always gone before I know it, it seems like so much money — but after dinner out, a couple bills paid and a little shopping, it’s gone.” While most people logically understand that a tax refund is simply the return of their own money, emotionally it can feel like a windfall. And windfalls are typically spent more frivolously and extravagantly than hard-earned cash. Over half of those getting refunds plan to spend it. Stacy is getting a new iPad. “Perfect timing,” she says. Rudy is getting his dog’s teeth cleaned, and Jay just bought a bigger television. According to a study conducted by BIGresearch for the National Retail Federation, 12 percent plan to use their refunds for a vacation. The same survey finds that 30 percent plan to spend their checks on “everyday expenses” and 13.2 percent on big ticket items like furniture or electronics. Save It But 42 percent plan to sock it away. That percentage has been growing since the start of the recession. In 2007, 38 percent planned to save their refund. Savers could have saved even more if they’d been tucking it away (with interest) or investing part of a bigger paycheck all year long. Pay Down Debt A “tax refund savings plan” makes the least sense of all for the 42 percent of Americans who plan to use their refunds to pay down debt. “I usually use my tax refund to pay any leftover holiday bills,” says Carrie. But if Carrie had withheld less and paid her bills when they arrived, she would have avoided finance charges. Debt reduction is normally the top pick in annual tax refund surveys. This year the lowest percentage since 2006 are using their refunds to pay off debt. Which might mean that survey-takers are getting more honest. Federal Reserve statistics show that credit debt is typically reduced or slowed around refund time but it’s nowhere near the numbers you’d anticipate by the percentage found on previous year’s surveys. BONUS STAT: Wondering if you’ll get audited? Last year the IRS examined 1.5 million individual tax returns. Sources: IRS 2010 Data Book National Retail Federation 2011 Tax Survey Federal Reserve Statistical Release on Consumer Credit IRS Tax Stats Bankrate.com 2010 Tax Survey

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