Investing Curiouscatblog

Tag: fed

  • USA Household Debt Jumps to Record $13.15 Trillion

    The Federal Reserve Bank of New York’s Center for Microeconomic Data today issued its Quarterly Report on Household Debt and Credit, which reported that total household debt increased by $193 billion (1.5%) to $13.15 trillion in the fourth quarter of 2017. This report marks the fifth consecutive year of positive annual household debt growth. There were increases in mortgage, student, auto, and credit card debt (increasing by 1.6%, 1.5%, 0.7% and 3.2% respectively) and another modest decline in home equity line of credit (HELOC) balances (decreasing by 0.9%).

    Outstanding consumer debt balances by type: $8.88 trillion (mortgage), $1.38 trillion (student loans), $1.22 trillion (auto), $834 billion (credit card), $444 (HELOC).

    Mortgages are the largest form of household debt and their increase of $139 billion was the most substantial increase seen in several quarters. Unlike overall debt balances, which last year surpassed their previous peak reached in the third quarter of 2008, mortgage balances remain 4.4% below it. The New York Fed issued an accompanying blog post to examine the regional differences in mortgage debt growth since the previous peak.

    chart of consumer debt delinquency rates 2004 to 2017

    As of December 31, 4.7% of outstanding debt was in some stage of delinquency. As the chart shows mortgage and credit card debt delinquency rates have decreased sharply since 2010. Student loan debt delinquency rates have increased substantially during the same period (and delinquency rates for student loans are likely to understate effective delinquency rates because about half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high). You can understand why many see student debt as a huge economic problem the economy is facing in the coming years.

    Of the $619 billion of debt that is delinquent, $406 billion is seriously delinquent (at least 90 days late or “severely derogatory”). The flow into 90+ days delinquency for credit card balances has been increasing notably from the last year and the flow into 90+ days delinquency for auto loan balances has been slowly increasing since 2012.

    (more…)

  • The Fed Should Raise the Fed Funds Rate

    The USA economy is far from strong. The global economy seems even weaker. Inflation is not an imminent risk. Under such conditions the USA Federal Reserve adding gasoline to the economy via low interest rates makes sense.

    The issue I see is that a .25% Fed Funds rate is adding gasoline to the economy via low interest rates. Many people are saying an increase is like taking away the gasoline and taking out a fire extinguisher. But it really isn’t. Raising the rate to .25% is slightly decrease the amount of gas you are adding to the fire. A .25% Federal Funds rate is pouring nearly as much gas on as you are able to but not quite the absolute most you are able to.

    It is also true that the Fed bailing out the too-big-to-fail bankers and banks resulted in them not only opening up the gasoline as much as possible (taking rates to 0) they even went far beyond that with new methods of pouring on gasoline that hadn’t even been considered until the bankers’ risk-taking doomed the economy (and bankrupted their institutions – without government bailouts propping them up).

    The Federal Reserve has finally turned off the massive extraordinary dumping of gasoline onto the economic fire (via quantitative easing). But they have kept not only dumping lots of gasoline on the economy but doing so to the absolute maximum possible via a 0% Fed Funds rate.

    Arguing for slowing the amount of fuel you are dumping into the economy is not the same as saying you are constricting the economy. We have been put into a crazy global economic condition by the too-big-to-fail bankers and the massive amounts of government and personal debt taken out. So simple analogies are not effective in making policy.

    The analogies can help explain what the intent and expectation of the policy is. It is true we have created a very tenuous economic foundation (and we haven’t in any way substantial way addressed the risk too-big-to-fail bankers can throw the global economy into and we still have massive debt problems). The main beneficiaries of the central banker’s policies the last nearly 10 years are too-big-to-fail bankers and those borrowing huge amounts of money.

    Those suffering from the policy are savers and I fear those that have to cope with the aftermath of this massive intervention with likely bubbles (government debt, personal debt [including education debt in the USA, etc.]). The main reason I believe rates should be raised are to begin the path to stop transferring wealth from savers to too-big-to-fail bankers and those with massive debt problems.

    (more…)

  • The Time to Payback the Investment in a College Education in the USA Today is Nearly as Low as Ever – Surprisingly

    While people question the value of a college degree a recent study by the New York Federal Reserve shows a degree is close to as valuable today as it has ever been. The costs to get that value have risen but even with the increased cost students earn on average a 15% annual rate of return on their investment.

    Of course, not every student will earn that, some will earn more and some less.

    The Value of a College Degree

    We estimate that the value of a college degree fell from about $120,000 in the early 1970s to about $80,000 in the early 1980s, before more than tripling to nearly $300,000 by the late 1990s, where it has remained, more or less, ever since. Despite drifting down somewhat in the aftermath of the Great Recession, the value of a bachelor’s degree has remained near its all-time high.
    …
    The time required to recoup the costs of a bachelor’s degree has fallen substantially over time, from more than twenty years in the late 1970s and early 1980s to about ten years in 2013. So despite the challenges facing today’s college graduates, the value of a college degree has remained near its all-time high, while the time required to recoup the costs of the degree has remained near its all-time low.

    graph showing averthe years to recoup the cost of college decline from 30 to 10 from 1970 to 2010

    So a college education is a great investment for most people. This can create a problem however, when people then assume that all they need to do is go to college and they will do well no matter what. The same thing happens in other markets. Real estate has proven to be a great investment. that doesn’t mean every real estate investment is good. It doesn’t mean you can ignore the costs and risks of a particular investment. The same goes for stocks.

    (more…)

  • Greenspan Says Congress Should Let Tax Cuts Expire

    Alan Greenspan made several huge errors while chairman of the Federal Reserve. Failing to deal with the massive risk taking and fraud by the member banks of the Federal Reserve was one. And supporting tax cuts for a country that was hugely in debt (while current deficits were still huge was another. Yes anyone can claim (and he did) future surpluses, but there had yet to be a single year of surplus, and obviously we would have been in deficit even before the tax cuts put us much much further in debt, history has shown .

    But Greenspan said government estimates project more than enough surplus funds to pay off the debt and reduce taxes too.

    That is either amazingly bad economic forecasting or a lie. My guess is he knew this wasn’t true. Which would make it a lie. If he really was that out of touch with economic reality, we have to question why we ever thought he had insight into the economy.

    Greenspan Says Congress Should Let Tax Cuts Expire

    WOODRUFF: On those tax cuts, they are due to expire at the end of this year. Should they be extended? What should Congress do?

    GREENSPAN: I should say they should follow the law and let them lapse.

    WOODRUFF: Meaning what happens?

    GREENSPAN: Taxes go up. The problem is, unless we start to come to grips with this long-term outlook, we are going to have major problems. I think we misunderstand the momentum of this deficit going forward.

    Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household

    Accepting that, I don’t agree with those that vilify his performance. He was Fed chairman from 1987-2006. He made some very bad decisions that cost people dearly. But it isn’t very surprising someone in such power for so long would make some very bad and costly decisions. My guess is he caved to pressure from political allies that reminded him how the current President Bush’s father blamed Greenspan’s decisions for his losing the Presidency. And so Greenspan was trying to do what he could to do what the then President Bush wanted. Not a very honorable explanation but people often do not make the most honorable choices.

    In 2003 he publicly disagreed with the wisdom of additional cuts:

    Alan Greenspan, the Federal Reserve chairman, today rebutted many of President Bush’s arguments in favor of big new tax cuts, saying that the economy probably does not need any short-term stimulus and warning that budget deficits could spiral out of control.

    Politicians, eager to give favors, at the expense of the future, went ahead and passed more tax cuts – weakening the country for their (and their political allies) short term benefit.

    Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household

    Greenspan’s thoughts on the economy, from his July 16th 2010 interview:
    (more…)

  • Commercial Real Estate Market Still Slumping

    Fed Focusing on Real-Estate Recession as Bernanke Convenes FOMC

    The collapse in commercial real estate is preventing Federal Reserve Chairman Ben S. Bernanke from declaring the economy and financial markets are healed. Property values have fallen 35 percent since October 2007, according to Moody’s Investors Service.
    …
    Commercial property is “certainly going to be a significant drag” on growth, said Dean Maki, a former Fed researcher who is now chief U.S. economist in New York at Barclays Capital Inc., the investment-banking division of London-based Barclays Plc. “The bigger risk from it would be if it causes unexpected losses to financial firms that lead to another financial crisis.”
    …
    Any sales of mortgage-backed bonds would be the first new issues in the $700 billion U.S. market for commercial-mortgage- backed securities since it was shut down by the credit freeze in 2008. About $3 billion are in the pipeline, and the success of these sales may foster as much as $25 billion in total deals in the next six months
    …
    Forty-seven percent of loans at the 7,000-plus smaller U.S. lenders are in commercial real estate, compared with 17 percent for the biggest banks…

    Related: Data Shows Subprime Mortgages Were Failing Years Before the Crisis Hit – Home Values and Rental Rates – Record Home Price Declines (Sep 2008)

  • First Quarter GDP 2009 down 6.1%

    First Quarter GDP 2009 in the USA was down 6.1%. This is after a revised 6.3% drop in fourth quarter of 2008 (preliminary fourth quarter report showed a 6.2% decline). Real exports of goods and services decreased 30% in the first quarter, compared with a decrease of 23.6% in the fourth. Real imports of goods and services decreased 34.1%, compared with a decrease of 17.5%.

    The personal saving rate — saving as a percentage of disposable personal income — was 4.2% in the first quarter, compared with 3.2% in the fourth quarter of 2008.

    The news certainly is nothing to be happy about. But the stock markets around the world were buoyed by the Federal Reserves positive words:

    Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.

    Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

    True, those words hardly sound like great news but the markets were quite happy.

    Related: The Economy is in Serious Trouble (Nov 2008) – Warren Buffett Webcast on the Credit Crisis – Fed Continues Wall Street Welfare (March 2008) – Manufacturing Data – Accuracy Questions

  • Mortgage Rates Falling on Fed Housing Focus

    Mortgages Falling to 4% Become Bernanke Housing Focus by Brian Louis and Kathleen M. Howley

    Home loans may go as low as 4 percent if the economy worsens, said Robert Edelstein, a professor at the Haas School of Business at the University of California, Berkeley. Record foreclosures, falling home prices and an economy that has lost 5.1 million jobs since December 2007 will pressure Bernanke to further reduce borrowing costs. “The Fed will have to do whatever it takes,” Edelstein said. “People will buy cheaper houses at very low interest rates.”
    …
    Conventional mortgages averaged 4.61 percent in 1951, 4 percent when backed by the Veterans Administration, and 4.25 percent by the Federal Housing Administration, according to The Postwar Residential Mortgage Market, a 1961 book written by Saul Klaman and published by Princeton University Press. Rates during the 1930s were as high as 7 percent.
    …
    Mortgages were cheaper through most of the 1940s, ranging from about 4 percent to 5.7 percent, depending on whether the lender was a life insurer, a commercial bank or a savings and loan. In that era, most loans were for 14 years and less.
    …
    The central bank has purchased more than $300 billion of mortgage-backed securities in 2009 through the week ended April 8, helping to cut home-loan rates to 4.82 percent last week from 5.1 percent at the start of the year, according to Freddie Mac data.
    …
    The difference between 30-year mortgage rates and 10-year Treasury yields has narrowed to about 2.2 percent from 3.1 percent in December, which was the widest since 1986. The spread remains almost 0.7 percentage point above the average of the past decade, data compiled by Bloomberg show. Rates for 15-year mortgages are about 1.8 percent above 10-year Treasury yields, compared with an average 1.4 percent since 1999.

    Excellent article with interesting historical information. I don’t believe mortgage rates will fall to 4% but differences of opinion about the future is one function of markets. Those that predict correctly can make a profit. I am thinking of refinancing a mortgage and I think I am getting close to pulling the trigger. If I was confident they would keep falling I would wait. It just seems to me the huge increase in federal debt and huge outstanding consumer debt along with very low USA saving will not keep interest rates so low. However, as I have mentioned previously, it is interesting that the Fed is directly targeting mortgage rates and possible they can push them lower. The 10 year bond yield has been increasing lately so the slight fall in mortgage rates over the last month are due to the reduced spread (that I can see decreasing – the biggest question for me is how much that spread can decrease).

    Related: Fed to Start Buying Treasury Bonds Today – Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities – Low Mortgage Rates Not Available to Everyone – what do mortgage terms mean?

  • April 2009 Federal Reserve Beige Book

    Federal Reserve Beige Book highlights for April 15th. The Beige Book documents comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. The book is published eight times a year.

    Manufacturing activity continued to decline in most Districts and across a wide range of industries. Several reports, however, noted that the pace of decline had slowed or that factory activity had stabilized. The Boston, Philadelphia, Richmond, Atlanta, St. Louis, Minneapolis, and San Francisco Districts cited decreases in production. The Chicago and Kansas City Districts said declines in production had slowed.
    …
    Manufacturers’ assessments of future factory activity improved marginally over the survey period as well.
    …
    Consumer spending remained generally weak. However, several Districts said sales rose slightly or declines moderated compared with the previous survey period.
    …
    Home prices continued to decline in most Districts, although a few reports noted that prices were unchanged or that the pace of decline had eased. Low mortgage rates were fueling refinancing activity. Outlooks for the housing sector were generally more optimistic than in earlier surveys, with respondents hopeful that increased buyer interest would lead to better sales.
    …
    Commercial real estate investment activity weakened further.
    …
    Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across Districts.

    Related: Central Bank Intervention Unprecedented in scale and Scope – Why do we Have a Federal Reserve Board? – Manufacturing Employment Data – 1979 to 2007 – Oil Consumption by Country

  • Fed to Start Buying Treasury Bonds Today

    Fed to start buying T-bonds today, hoping to move rates

    The Federal Reserve will try to get long-term interest rates moving down again when the central bank today launches its first purchases of Treasury bonds. The Fed triggered a stunning drop in Treasury bond yields on March 18 when policymakers surprised Wall Street by announcing a plan to buy up to $300 billion of Treasuries over the next six months.

    The yield on the 10-year T-note plunged to 2.53% on March 18 from 3% the previous day, the biggest one-day drop in decades. But since then, Treasury bond yields have been creeping higher. The 10-year T-note ended Tuesday at 2.65%. Conventional mortgage rates have flattened or inched up, although they remain historically low, in the range of 4.75% to 5%.
    …
    On Tuesday the Treasury sold $40 billion of new two-year T-notes at a yield of 0.95%, which was lower than expected, indicating healthy investor demand. The government will auction $34 billion in five-year notes today and $24 billion in seven-year notes on Thursday. Against numbers like those in just one week, the Fed’s commitment to buy $300 billion of Treasuries over six months doesn’t look like much.
    …
    there’s nothing to stop the Fed from suddenly announcing that its $300-billion commitment will get substantially bigger: The central bank can, in effect, print as much money as it wants to buy bonds — at least, until the day that global investors stop wanting dollars.

    The original announcement caused a dramatic move but since then yields have been drifting up, every day, including today. Rates are already very low. And the huge amount of increased federal borrowing is a potential serious problem for lowering rates. And potentially an even more serious problem is foreign investors deciding the yield does not provide a good investment given the risks of inflation (I know that is how I feel). It will be interesting to see what happens with rates.

    Related: Who Will Buy All the USA’s Debt? – Lowest 30 Year Fixed Mortgage Rates in 37 Years – mortgage terms

  • Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    I make a point of showing the discount rate changes by the Fed don’t translate to mortgage rate changes. I do so because many people think the discount rate does directly effect mortgage rates. But the Fed announced today, actions that actually do impact mortgage rates.

    Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae and Freddie Mac to $200 billion. Those steps are intended to lower mortgage rates. The announcement of the previous purchases pushed mortgage rates down a full percentage point.

    If you are looking at refinancing your mortgage now (or soon) might be a good time, rates were already very low and will be declining. And if you own long term bonds you just got a nice increase in your value (bond prices move up when interest rates move down).

    Related: Lowest 30 Year Fixed Mortgage Rates in 37 Years – Low Mortgage Rates Not Available to Everyone – Why do we Have a Federal Reserve Board?