Consumer Revolts Over Increased Credit Card Fees

I liked this story about a woman who took on Bank of America after they increased her credit card rate to 30% after she was late on one payment in 2008 and a second in 2009. After she launched a widely distributed youtube video, Bank of America agreed to reduce her rate to 12.99%. It is a shame that consumers have to go to such lengths to get a favorable bank response. Here are the videos before and after the renegotiation:

- JSM

Does the way we transfer money indicate a turn in the economy?

Since 1987, the volume of transactions on FEDWIRE have consistently exceeded the volume of transactions on CHIPS. This is not necessarily unexpected. FEDWIRE handles, according to the Comptroller's Handbook one-third of its volume as federal funds transactions and one-fourth of its activities as securities transactions. Another significant source of transfers are those between Federal Reserve Banks, which would naturally include certain mortgage funds. Naturally, the volume of these transactions probably should be higher. On the other hand, CHIPS primarily deals with foreign-exchange transactions (nearly 1/2 of the dollar value. Another 1/3 of the dollar value is Eurodollar placements.

See Chart showing Number of Transfers

However, over time, the value of these transactions has changed. Consider that in 1987, the amount transferred on Fedwire was slightly higher than that transferred via Chips.

See Chart showing Amount of Transfers

From 1987 until 1998, the amount of money transferred via Chips exceeded that on Fedwire by a maximum of 28.51% difference in 1994. Beginning in 1995, however, the amount of money transferred on Fedwire began inching closer to that on Chips, and in 1998 exceeded the amount of money transferred on Chips. After 1998, the amount of money transferred on Fedwire has exponentially grown reaching a high in 2008 of a 32.61% differential; the only two years in which the growth pattern was not consistent was 2006 and 2007, and even then, the differentials were the third highest differential (2006) and the seventh highest (2007) of the years between 1988-2008.

See Chart showing Differential of amounts

As we look at the numbers, I can't help but notice the date similarities to the current economic crisis. For example, consider the following graph provided by Planet Money on the economic crisis charting debt from 1999-2008:

From 2000 to 2003, government borrowing steadily rose, followed by a short decline through 2008, when it suddenly spiked. During that same period, Business lending acted inversely: declining from 2000 to 2003; rising from 2003 to 2007; and suddenly nose-diving in 2008. In fact, in their post titled Charting Debt, the planet money guys point out that early in 2008, Americans simply stopped borrowing.

In another chart, in their post titled Chart: Inflation, not the flu, we see other similarities:

Between 2004 and 2007, we see a drastic drop in inflation. However, beginning again in 2008 and through 2009, we see a drastic rise.

This is what I am wondering. Can we make conclusions about the future of our economy by the way we transfer money now. That is, are the types of transactions reflected on Fedwire and Chips the types of transactions that give us a barometer of the economy. Moreover, is there a healthy balance of reciprocal relationship between the two -- does a substantial amount of transference on one wire service lead to high chances of inflation and higher government spending, with lower consumer activity. A few unknowns in this quest:

1. Are there funds that in certain years appear on Chips that in the last few years have appeared on Fedwire because of the type of transaction. One category of these transactions might be if foreign investment shifted from currency exchange to securities. If so, this might suggest that the way we invest foreign money does matter for the way the economy functions.

2. Are there institutional issues that have resulted in the changes and can we segregate the institutional issues from the non-institutional issues in the rise and drop of value transactions between the two wire services. For example, we know that the institutional controls for lending were significantly more lax between 2000 and 2007. This might explain a high proportion of funds on Fedwire during that period of time.

I am curious for other thoughts -- institutional or economic that might show a correlation between the current economy and the future economy.

Marc (MLR)

Banks Extending the Crisis pt. II

Photo by rjones0856
Someone needs to send these bankers to the principal's office and not let them out for recess any more--or perhaps expel them altogether. First the AIG bonus scandal, now we hear (yet again) that banks are deepening and extending the current crisis, despite Herculian federal efforts to pump them up with liquidity to solve the problem. Banks and their overly finicky underwriters are now making it difficult for even the most creditworthy borrowers to get loans. If the theory behind the stimulus moves is prop up the housing market by pumping liquidity into the mortgage finance market through the banks, it isn't working.

Tell me again why nationalizing these banks would be a bad idea . . . Does anyone reasonably believe that the feds would do a worse job of managing lending???

Great Video: "The Crisis of Credit Visualized"

Can be found here (courtesy of one of my Real Estate students). The way in which the video conceptualizes how mortgage-backed securities lose value due to the foreclosure crisis is absolutely amazing in its lucidity.

Tax Break for Auto Purchases

The proposed stimulus plan includes some incentives for new car purchases by giving a tax deduction for the sales and excise taxes on the vehicle as an above-the -line deduction (Stimulus: How It May Affect Your Wallet). There is a phase out for those making more than $75,000 per year ($150,000 for dual income couples). The original proposal also included write-offs for loan interest on new auto purchases. Who will the tax break benefit?

As to the plight of the auto manufacturers, there is serious doubt whether such a modest incentive will have any meaningful effect. For starters, the benefit to a family purchasing a new auto in the mid-$20,000 range who is under the phase-out income level will only save about $400 on their taxes. This level of tax benefit is not likely to send droves of consumers out to purchase new autos. And should they? Time magazine released its Twenty-Five People to Blame for the Financial Crisis and included consumers on the list. Consumers are rightly faulted for living beyond their means to a whopping 130% of income.

It might be good to worry if the Congress had gone for the tax write-off on the loan interest for car purchases. Tax-deductible or not, many consumers purchasing new autos would simply be incurring new debt that they might not be in a position to repay. Kathleen Keest wrote today on CreditSlips about The Other Underwater Loans: Negative Equity in Auto Finance. Kathleen cautions against the practice of rolling over the remaining loan on a trade-in auto into the new car purchase which results in a LTV of 120-140% on many auto loans, which Kathleen dubs "Drive One, Pay for Two" practice. The estimate that 25% of car loans may be underwater actually seems low to me. With all the talk of stimulus packages and TARP monies, the major thing still lacking is a new thinking about lending practices. While giving consumers tax breaks for auto purchases might increase the number of purchases made, I remain unconvinced that tax breaks focused on loan interest will ultimately benefit the American consumer. This is particularly true when the purchase may include for some consumers the negative equity from their prior auto.

Add to all of this the risk associated with car loans which is still hampering the issuance of such loans and the forecast remains gloomy for the auto industry.

— JSM

French Tortoise Beats U.S. Hare?

Photo by gnoble760

Do we not learn or do we not care? Over 2600 years after Aesop told his famous fable of the tortoise and the hare, we in the U.S. continue to insist that explosive speed punctuated by spectacular slowdowns is the best model for our economy, rather than a slow-and-steady approach to constant growth. Apparently, France has internalized the notion that "slow and steady wins the race." The W$J today has an intriguing story about how France has been spared the worst of the current global economic meltdown thanks, perhaps counterintuitively, to its restrictions on mortgage lending, a dominant public employment sector, and lack of reliance on a few sectors to drive impressive year-on-year economic growth. These characteristics of the French economic model have been criticized mercilessly by economists in recent years, but now who's eating crow? Or rather, who SHOULD be eating crow, as I'm sure few economists are abandoning their disproven theoretical models (which is ironically one reason why many are apparently finding it hard to find jobs)--after all, empirical data about what has ACTUALLY happened to the world economy seems to be less important to most economists than what their models predict SHOULD have happened (if you haven't heard the joke about the economist and the can opener, check it out). The final paragraphs of the article, of course, conclude with dire warnings from an economist that France will "return to a pattern of slower growth" after the world economy recovers. These guys just don't get it. Perhaps WE're the ones who should consider embracing "slower growth" to avoid having to recover from the next inevitable economic breakdown caused by our maniacal focus on above average growth.

Gambling and Investment Banking--Redundant?

Photo by waffler

A story on the front page of today's W$J reinforced a feeling I've had for a while now. Does the nature of the people who are drawn to working as traders at investment banks explain the rise of such ultra-risky (insane?) gambles as naked (speculative) CDS, subprime CMBS, and other derivatives and the spectacular losses that they created? I think so. Yesterday, Deutsche Bank announced its first yearly loss in a half-century. The loss was attributed to the roller-coaster investment returns of one trader, Boaz Weinstein, whose losses for 2008 wiped out the gains for the two previous years and produced a $1.8 billion annual loss for DB as a whole!

The take-home line for me was the description of Weinstein: "a chess master, poker and blackjack devotee and top trader at Deutsche Bank AG." I read a paper last night about credit default swaps, and it characterized perhaps the most common usage of that "product" as little more than gambling on the fate of third-party-owned credit products. This gambling meme has come up time after time, and I think it explains so much. Perhaps this is obvious, but it seems to me to warrant explicit observation: those who are attracted to the high-intensity job of Wall Street trader are likely to be the kind of people who like to gamble . . . and gamble big. What better way to catch the ultimate gambling rush than to trade with billions of dollars of other people's money. I don't mean this as a criticism of traders. I do mean this as a reminder that when regulators let these markets loose (as they did in the 2000 Commodity Futures Modernization Act), we should not be surprised when the stake rise sky high, and eventually the sky actually does fall.

Banker's Cognitive Dissonance

Photo by darkpatator.

Jamie Dimon just doesn't get it. I suppose it's his job as CEO of JPMorganChase not to get the point about the need for reasonable mortgage modification to avoid unnecessarily wasteful foreclosures that are deepening (causing?) the current economic mess we're in. The Financial Times reported yesterday that Dimon strongly opposes--surprise, suprise--current bills in Congress that would allow bankruptcy judges to value claims secured by principal residences at the realistic, current value of the home, rather than the fanciful, contrived value on which the mortgage was based. This isn't the place for a drawn-out explanation of "mortgage strip-down," but suffice it to say that the current bills bring the treatment of principal residence mortgages into line with the treatment of other secured claims (it's actually more involved than this, but this is the takeaway point for non-specialists).

As a policy matter, thess bills essentially punish banks (and MBS securitization trustees and servicers) for unreasonably refusing requests for modifications of distressed mortgages (that in most cases help the banks/investors to avoid major losses in foreclosure). If the lending industry had responded to Congress and supported reasonable modifications before, these bills wouldn't be in the hopper. But these banker folks are now infamous for their unreasonableness (recall, these are the same rocket scientists who valued my home at a discount to actual recent sales prices for identical homes in my townhome association because the other places had been on the market too long!). Now, Dimon will have to lie in the bed that he and his like have made. One of these bills very likely will pass, probably the Durbin bill, behind which even Citigroup and other lenders have thrown their support.

Dimon invites us to feel sorry for the banks, whom this bill would put "at the mercy of the vagaries of the courts." This is ridiculous, as the bill does no such thing--the market value of the property defines the value of the bank's claim. There's no judge discretion or beating up on mortgagees going on here; it's simple market economics. And by the way, Dimon clearly has no problem with borrowers being at the mercy of the vagaries of the market . . . What goes around, comes around.

Dimon's main argument against this bill is the same old, tried-and-true argument that every economist/banker/fill-in-the-conservative-blank levels against any kind of consumer protection or market regulating legislation: it will make banks less willing to lend for fear that loans will be modified or destroyed in bankruptcy. For Heaven's sake, when will bankers stop making this utterly ludicrous argument. First, perhaps a bit less lending is exactly what the doctor ordered, at least less lending to the droves of people who should never have received loans on the terms that these banks and brokers foisted on them in the past several years (leading to our current predicament). Second, no amount of consumer protection has ever inhibited banks from lending, either here or in other countries, even after banks have made their "sky is falling" arguments before passage of legislation (see, e.g., the broad-ranging adoption of consumer bankruptcy in Europe over the past 20 years--lending certainly hasn't ground to a halt there!). Finally, the Durbin bill (as amended in the deal to secure Citigroup's support) applies only to mortgages already existing--not to prospective mortgages. This tired argument about "we will be hesitant to lend if you pass this law" is totally off the mark with respect to the Durbin bill.

My favorite comment: Dimon warns that passage of the bill will "lead to an increase in personal bankruptcies." Well, no @#$%, Sherlock! That's the whole point. We wouldn't need more bankruptcies if the bankers would act reasonably in dealing with the foreclosure crisis, but since they've amply demonstrated that they're incapable of dealing with it responsibly, Congress is stepping in. This is like criticizing the release of a new cancer drug for fear that it will lead to more doctor visits by sick people. Indeed!

Why Are Credit Card Issuers Undermining the Economy?

Photo by SqueakyMarmot

More evidence that the financial sector is squandering the hard-won rescue funds from Congress: Not only are banks not lending to rejuvenate business, especially to the small-business backbone of the American economy, they're making existing loans rapaciously expensive for good borrowers. This can have no other effect than to drag down our struggling economy further. The story linked above observes that the banks' lame excuse for raising rates on small businesses and individuals is a vague reference to "economic reasons." What reasons? That the banks need more money from good risks because they've so messed up their investments in bad risks? I can't believe Congress hasn't jumped on this kind of thing more aggressively . . . yet.

The idea of nationalizing the banking sector is sounding better and better. The W$J reported yesterday that regulators have become more involved in internal strategy for struggling Citigroup. Perhaps this (and the FDIC's role in managing IndyMac's troubled mortgage portfolio) will be a model for the future. Even if you believe that "Socialism" is bad, some form of level-headed government oversight HAS to be better than the foolishness we're seeing from these banks.

Good news for less debt?

The government announced today that American's household debt fell for the first time ever during the third quarter. Unfortunately, net worth also fell due to declining home and stock prices. Good news? It doesn't seem so. A big part of the reduction in debt is apparently the foreclosed homes which are moved out of the debt numbers. So, we have less debt because less people now own their homes. And, then there's that darn credit crunch keeping lending rates for consumers higher which in turn keeps them from spending. Others may not even be able to obtain loans for common consumer purchases like cars.

I like the idea of less debt in general. In this case, though, it is not a good sign for the economy.

— JSM

Governor Randall S. Kroszner testimony

Federal Reserve Governor Randall S. Kroszner recently testified on the effects of the credit crisis on small businesses at the House of Representatives Committee on Small Business. Not surprisingly, Kroszner said that small businesses are finding that loans are available on less favorable terms and subject to tightened standards. Kroszner seemed hopeful that the variety of programs recently implemented, though uncertain, should help small businesses.

Krozner's more extensive comments are available on the Federal Reserve website. Both written and verbal comments reflect an honesty about the uncertainty of our economic times and how this might impact small business. Although a "Black Friday" sale at a Wal-Mart in New York lured 2000 persons who trampled one man, small retailers were less busy on what should have been a busy day. Small businesses are struggling with a slow economy and credit crunch (see National Small Business Administration Mid-Year Economic Report 2008).

The common theme that I see with the Treasury and Federal Reserve programs so far is that the programs are designed to re-building our economy without tackling the choices that landed us here. The programs are also targeted at the broader markets as a whole, hoping that they will have positive effects on consumers, homeowners and small business. As Kroszner mentioned, this has not happened yet. While many of us are harsh on the auto execs for their handling of the proposed Big 3 bailout, perhaps they really do have a point to make. Individual companies and industries beyond banking have also been hit hard by the financial crisis as a whole. We might be willing to allow the Big 3 to enter bankruptcy, but they won't be alone in ending up there.

— JSM

A New Federal Reserve Program: This Time for Consumers

Today, the Federal Reserve also announced the Term Asset-Backed Securities Loan Facility (TALF), another program in the line of snappy acronyms. The Fed intends the TALF to help market participants to meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). The aim here is that if the Fed buys up some new and recently issued ABS, then lenders will turn around and relend the money to consumers who desire a student loan or a new car. Now, this program probably won't get really going to perhaps February, so consumers should not be expecting credit markets for consumer loans to ease in the immediate future. That said, some program for consumer credit is needed. But, is this the right one?

As a law professor, I can say that I want students to be able to get their student loans without too much hassle. Although I am not a big fan of excessive consumer debt, there is a need for credit to be available. The Fed's TALF program in its announced form is a continuation of the ABSs that have helped us to arrive at the financial crisis that we are in now. Some time ago, Alan Greenspan mentioned the problems arising from lenders incorrectly pricing ABS when they retain no stake in the ABS after sale. Basically, the risk models are prone to error in these cases. Though we don't have the details of the TALF program, I don't see any indication that the Fed is tackling this problem. This means that the risk problems inherent in our current financial crisis from securitization may remain with the TALF program as well.

So, for the next few months while credit remains tight, perhaps Americans will pay down those credit cards. Adding new credit come February when the Fed's TALF takes hold? Perhaps, but let's think carefully about it.

— JSM

Help for Housing?

Today's housing news is grim. The S&P Case-Shiller Home Price national index reports a whopping 16.6% decline in the third quarter (compared to last year same time). The happy news here is that the Federal Reserve has just announced another program, this time to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs). That is: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Not surprisingly, the aim here is to lower the cost of home mortgages and increase availability in an attempt to stabilize the housing market. Not much on details yet, but this is the first major effort towards housing. Although much effort and attention has been on the health of the banks, the housing market has been waiting there, problematic as ever, needing attention. The Federal Reserve is overdue in tackling housing, but its not like they've not been busy.

— JSM

Paulson and Bernanke on Capital Hill

It was a big day today as both Henry Paulson and Ben Bernanke testified about the $700 billion bailout. Bernanke's testimony is available through the Federal Reserve. Bernanke highlights the actions taken and specific programs put in place, as well as the recent statement on lending to creditworthy borrowers. I don't have the full video of the proceedings yet, but here is a piece of it.

— JSM

Paulson says more is needed

Treasury Secretary Henry Paulson spoke this week. Jason Kilborn's post on Ray of Light for Those Feeling Grouchy does a good job of calling Paulson on the rhetoric about lending. That said, the government is clearly worried that targeted action has been taken without results. Credit markets are still tight, enough that the Federal Reserve issued a joint statement with the FDIC, Comptroller of Currency and Office of Thrift Supervision reminding banks of their important position in the economy as lenders recently in their Interagency Statement on Meeting the Needs of Creditworthy Borrowers. This seems a simple principle, but as Jason Kilborn remarked here lately, What's the Holdup?

Paulson's talk was quite lengthy, but he did deliver the message that the problems of the auto manufacturers are not within the scope of the TARP (Troubled Asset Relief Program). This leaves a pretty big issue on the table, which must be addressed. If auto is not in the scope of TARP, then separate intervention is inevitable and necessary. That does not mean, though, that it will actually happen. It seems politically difficult, at least under the Bush Administration as many Republicans oppose aid for the automakers.

In case you missed Paulson's talk, here it is:

— JSM

Rays of Light for Those Feeling Grouchy

Photo by willgame

If continued rockiness in the credit markets and broad economy have you (like me) feeling a bit grouchy, the convergence of a few news stories recently seems to offer cause for a bit of optimism.

LIBOR continues its downward trend, with the 3-month dollar rate setting this morning at 2.13%. On the one hand, this is oddly high, especially given that the money markets seem to be awash in liquidity, with investors shying away from auctions of year-end money from the Treasury! On the other hand, this is almost 275 bps better than during the vertigo-inducing days of the recent past. Incidentally, 3-month LIBOR has fallen in surprising parallel with gas prices, with the national average per gallon settling at a 21-month low yesterday of $2.20 per gallon. Good news already!

Despite this improvement, as I noted earlier, banks still are not passing this greater liquidity through to the markets that need it. Paulson today exhorted banks to step up and "play their necessary role to support economic activity," but one wonders how powerful this kind of rhetoric can be. If the banks took hundreds of billions from Treasury and hoarded it, knowing full well that the money was passed out to stimulate lending and offer the economy a much-needed liquidity infusion, what makes Paulson think his telling banks to lend will make a difference? I hope I'm wrong, and the banks will react to Paulson's entreaty, but call me a skeptic.

While Paulson's words don't offer me much hope, his deeds offer a little. He announced that the TARP program in its original design will be more or less scrapped, which looks a really good development. If banks want to deal with their "toxic" mortgages and MBS, they (and the servicers on the front lines of battling the foreclosure crisis) need to take a big, bitter dose of reality and start modifying mortgages to keep these properties out of foreclosure. Recent initiatives on this front announced by the biggest banks seem to represent a very positive step, as does the Freddie/Fannie push for modifications announced yesterday (though Alan White's criticism of that program seems compelling). In another great post, Alan points out why servicers, investors, and banks really need to get in line for a realistic haircut on these troubled loans, take responsibility for minimizing their own (and the broader economy's) losses, and clean up their own mess without externalizing these problems onto taxpayers and the economy.

Paulson's new plan for using the TARP facility seems to me to be better targeted toward fixing what really ails the U.S. economy now--consumer confidence, closed pocketbooks, and inability to get loans to leverage future earning capacity to support smoother current spending. This kind of consumer investment (spending) represents 2/3 of our economy, so juicing this sector sounds like a great idea. Again, more careful underwriting of consumer credit extension is clearly needed, but if liquidity is to find its way into the system to do the most good, the consumer portal seems like a more direct and immediately effective point of entry.

I am impressed by the agile and flexible way in which Paulson and the other managers of this rescue plan have considered options, quickly abandoned ones that didn't seem to work, and moved on to alternatives that offered better prospects. This resistance to getting bogged down by sunk costs and inertia is, it seems to me, the heart of vibrant entrepreneurialism. This kind of pragmatic flexibility is what has made the U.S. economy so great, in my view. I am hopeful that this kind of agile entrepreneurialism will bring us through these tough times.

Circuit City's Gift Card Redux!

Earlier this year, we heard lots about gift cards when Sharper Image went into bankruptcy. In the end, customers only partially lost out: to use a gift card they had to make double the purchase. So, a gift card for $50 could be used on a purchase of $100 or more.

Today, Circuit City, one of my favorite stores for customer service and service plans, filed for Chapter 11 bankruptcy. Of course, many consumers own gift cards for Circuit City and other troubled retailers. Gift cards may look like everything else in our wallets, but are not. Gift cards are really just unsecured debt. The consumer gives Circuit City money in exchange for the gift card, which is merely a promise to supply goods later. The consumer is just an unsecure debtor of Circuit City, which means if the company goes bankrupt the consumer may lose out. Circuit City has asked the Bankruptcy Court for permission to honor the gift cards. With the holidays looming ahead, gift card sales can be an important sales tool for a retailer whose customers want the chance to take advantage of after holiday sales by purchasing gift cards for loved ones. Circuit City's bankruptcy should remind consumers of the fragile state of gift cards at a time when credit is already tight. Consumer's desire for low cost gifts for family will be pitted against the risk of company failure that might make a gift worthless. Cash, as impersonal as it is, may win out over gift cards this year. Let's add to the many things needing attention is some protection for consumers who are lending to companies through the use of gift cards.

On a broader note, history shows that unless the credit markets unfreeze, consumer confidence is restored and consumers have money to spend, we will see more like this. The past week has revealed to us:

• U.S. auto makers on the brink of failure with GM stock trading at 60 year lows,
• more money needed for the AIG bailout (now at $150 billion),
• Amex becoming a bank holding company to better weather volatility and gain access to bailout funds,
• Bank of America announcing that it is assuming $16.6 billion of Country Wide's debt as part of its purchase of the troubled lender,
• Fannie Mae lost $29 billion this quarter,
• Google stock down 55% this year, and
• Starbuck's, my favorite home of the perfect coffee, reported weak earnings and will close some stores.

I could go on with more, but the point is that it is a tough world out there right now. The bailout needs more time to take hold, but for now we all better hang on for more bad news.

— JSM

What's the Holdup?

Photo by wharman

The pessimists' position seems to be gaining ground as we look back at the effects of the liquidity infusion into the banking system. They feared that banks would take Treasury's $250 billion and hoard it, rather than lending it to businesses to get the economic machine running again. Today's depressing jobs report (1.2 million jobs lost in 2008, unemployment at 6.5%) illustrates the real economic harm that the continuing lack of liquidity in the lending markets is having. Very sad.

Watching the interest rate trajectories, one would think the problem was nearing a solution. 3-month dollar LIBOR is down 253 basis points (2.53%) over the past month, and overnight LIBOR has plummeted 655 basis points (6.55%)! Note, by the way, the misleading way in which these lower rates are being described in the media: 3-month LIBOR at its lowest rate since November 2004--well, in Nov. 2004, the Fed Funds rate was much higher, so comparing one rate with its historical antecedents is almost entirely unhelpful without reference to the driver-rates, like the Fed Funds rate, as I suggested earlier. The Bloomberg story linked above makes this point, noting that the spread between 3-month LIBOR and the Fed's target lending rate continues to be much wider than historical averages, by about 100 bp, or an entire 1%. Nonetheless, LIBOR's freefall is good news in and of itself, as lots of adjustable loans pegged to LIBOR will reset to more reasonable rates as LIBOR falls. But it's not as good news as we might have hoped.

Though banks are apparently quite willing to lend to each other (at 0.33% in the overnight market), they remain reticent to lend to businesses and individuals. This is very frustrating. While more careful underwriting is a positive thing, continued blockage in the financial markets is apparently a tough nut to crack.

This post by David Zaring (particularly the comments) over at the Conglomerate offers a nice insight into why this is happening. Rate cuts by central bankers can only go so far to encourage subsequent lending when the real economic fundamentals of the market for potential borrowers are weak. Fears of a long and deep recession probably should make banks hesitant to lend to borrowers who might not make it through, though this is a vicious cycle. Uncertainty with respect to the economic plans of President-elect Obama (boy, it feels good to write that!) also puts a damper on lending markets.

Let's hope the brilliant inspirational oratory skills of our new President-to-be can convince the financial markets that brighter days are on the horizon . . . and soon!

The New Deal for the American People

Much about the economic issues of this election season is reflective of the pledge of "a new deal" made by Franklin D. Roosevelt (FDR) when he entered office in 1933. FDR's initiatives to tackle the Great Depression, including the creation of the Federal Deposit Insurance Corporation (FDIC), Tennessee Valley Authority (TVA), and the United States Securities and Exchange Commission (SEC) continue to have important roles in our economy today. Whether McCain or Obama wins the election tomorrow, the new President will face economic challenges that bear resemblance to FDR's time. The financial crisis will test the President from the outset and give him an opportunity to create lasting changes of the type that FDR initiated (see Crisis Creates Opening).

The credit crisis has eased, but not gone away. Even with LIBOR rates declining and the numerous programs that the Federal Reserve has initiated (see my post on the Federal Reserve's Money Market Investor Funding Facility), banks nevertheless remain cautious and have imposed higher credit standards for consumer mortgages and credit cards. Couple this with the record $1.4 trillion that analysts expect the government will borrow over the next year alone. The credit crisis has put pressure on business enterprises, especially manufacturing which has faced a substantial downturn. Both Bernanke and Greenspan have warned us that substantial economic problems will remain for some time (see earlier posts of Bernanke and Greenspan speeches)

The economy has been much on the minds of voters. Political rhetoric aside, we all want to know the details of who will do what and how. This is the part that is lacking during a political season. One of the early signals to the economy about direction that the business and financial reforms will take is what key cabinet members the President will choose to address these critical problems. FDR's words remind us that economic problems are much of our own creation:

While they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings.

The economy will have to wait a short time to see who the next President will be. Let's hope that action is decisive and effective.

— JSM

Bernanke on the Mortgage Meltdown

Federal Reserve Chairman Ben Bernanke spoke recently at the UC Berkeley/UCLA Symposium: The Mortgage Meltdown, the Economy, and Public Policy, Berkeley, California. Although Bernanke spoke in general terms about the importance of mortgage securitization, he did not say much about short term initiatives or what should really become of Freddie Mac and Fannie Mae.

— JSM