To Pay Off The National Debt Is Now Mathematically Impossible

February5, 2010

The Economic Collapse

A lot of people are very upset about the rapidly increasing U.S. national debt these days and they are demanding a solution. What they don’t realize is that there simply is not a solution under the current U.S. financial system. It is now mathematically impossible for the U.S. government to pay off the U.S. national debt. You see, the truth is that the U.S. government now owes more dollars than actually exist. If the U.S. government went out today and took every single penny from every single American bank, business and taxpayer, they still would not be able to pay off the national debt. And if they did that, obviously American society would stop functioning because nobody would have any money to buy or sell anything.

And the U.S. government would still be massively in debt.

So why doesn’t the U.S. government just fire up the printing presses and print a bunch of money to pay off the debt?

Well, for one very simple reason.

That is not the way our system works.

You see, for more dollars to enter the system, the U.S. government has to go into more debt.

The U.S. government does not issue U.S. currency – the Federal Reserve does.

The Federal Reserve is a private bank owned and operated for profit by a very powerful group of elite international bankers.

If you will pull a dollar bill out and take a look at it, you will notice that it says “Federal Reserve Note” at the top.

It belongs to the Federal Reserve.

The U.S. government cannot simply go out and create new money whenever it wants under our current system.

Instead, it must get it from the Federal Reserve.

So, when the U.S. government needs to borrow more money (which happens a lot these days) it goes over to the Federal Reserve and asks them for some more green pieces of paper called Federal Reserve Notes.

The Federal Reserve swaps these green pieces of paper for pink pieces of paper called U.S. Treasury bonds. The Federal Reserve either sells these U.S. Treasury bonds or they keep the bonds for themselves (which happens a lot these days).

So that is how the U.S. government gets more green pieces of paper called “U.S. dollars” to put into circulation. But by doing so, they get themselves into even more debt which they will owe even more interest on.

So every time the U.S. government does this, the national debt gets even bigger and the interest on that debt gets even bigger.

Are you starting to get the picture?

As you read this, the U.S. national debt is approximately 12 trillion dollars, although it is going up so rapidly that it is really hard to pin down an exact figure.

So how much money actually exists in the United States today?

Well, there are several ways to measure this.

The “M0″ money supply is the total of all physical bills and currency, plus the money on hand in bank vaults and all of the deposits those banks have at reserve banks. As of mid-2009, the Federal Reserve said that this amount was about 908 billion dollars.

The “M1″ money supply includes all of the currency in the “M0″ money supply, along with all of the money held in checking accounts and other checkable accounts at banks, as well as all money contained in travelers’ checks. According to the Federal Reserve, this totaled approximately 1.7 trillion dollars in December 2009, but not all of this money actually “exists” as we will see in a moment.

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8.4 Million Jobs Lost in Recession

February5, 2010

Nasdaq

By Luca Di Leo and Jeff Bater

The U.S. unemployment rate unexpectedly declined in January, but the economy continued to shed jobs and revisions painted a bleaker picture for 2009, casting doubt over the labor market’s strength.

The unemployment rate, calculated using a household survey, fell to 9.7% last month from an unrevised 10% in December, the Labor Department said Friday. Economists surveyed by Dow Jones Newswires had forecast the jobless rate would edge higher to 10.1%.

Meantime, nonfarm payrolls fell by 20,000 compared with a revised 150,000 drop decline in December. Economists had expected payrolls to be flat. The December figure was revised down sharply from an originally reported 85,000 drop.

The Labor Department’s annual benchmark revision to the survey that produces the monthly payroll report painted a bleaker 2009 picture. Last year, job losses were almost 600,000 more than previously reported, the revisions showed.

===========================================================
Jan Employment Report ! Consensus: !
Jan Dec ! Payrolls: Unch !
Payrolls -20K -150Kr! !
Unemployment Rate 9.7% 10.0% ! Actual: -20K !
Hourly Earnings $18.89 $18.84r! !
===========================================================

The January report was influenced by several special factors that may not be consistent with the underlying jobs trend. Temporary hiring for the U.S. 2010 census collection helped the employment picture in January, while the unusually cold weather probably hurt it. The interaction of a very bad employment year in 2009 with January seasonal factors clouds the picture further, analysts warned ahead of the release.

“We will be inclined to treat either a very strong or a very weak employment report — particularly the payroll portion — with a greater than usual skepticism,” Goldman Sachs economist Andrew Tilton warned in a note.

The so-called “underemployment” rate–which includes everyone in the official rate plus those who are neither working nor looking for work, but say they want a job and have looked for work recently–fell to 16.5% in January from 17.3%.

Since the start of the recession at the end of 2007, payroll employment has fallen by 8.4 million. Over the last quarter, however, employment has shown little net change as the economy’s recovery helped companies retain workers.

Although the revisions show there were more job losses in 2009 than previously reported, the moderation in payroll cuts in the second half of last year remained broadly in place. November was revised to show a 64,000 gain in payrolls from a previous reading that only 4,000 jobs were added.

Last month, employment fell in construction, transportation and warehousing, while retail trade and temporary help services added jobs. Temporary services added 52,000 jobs in January.

The Federal Reserve’s view that U.S. interest rates must remain at a record low for several months shouldn’t change following the jobs report. Fed officials have in the past warned against reading too much from just one set of monthly data.

The central bank’s rate-setting committee left interest rates close to zero last week in the face of low inflation and high unemployment. The labor market’s performance is likely to be the main driver of Fed decisions this year over if and when it is time to raise interest rates.

Fed officials have predicted the unemployment rate will remain above 9% in the fourth quarter of 2010 due to a slow recovery. The economy surged in the fourth quarter of last year, but that was driven by inventories, a factor that will fade this year.

Friday’s jobs report showed that average hourly earnings rose to $18.89 in Janaury from $18.84 the previous month. The average workweek was up by 0.1 hour to 33.3 hours.

These data were also revised by the Labor Department, which started to report hours and earnings for all employees, instead of just for production and non- supervisory workers.

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Ron Paul: Legalize Competing Currencies

January 26, 2010

Campaign For Liberty

by Ron Paul

Much has been made recently about the supposed economic recovery. A few blips in a few statistics and many believe our troubles are all over. Of course, they have to redefine recovery as “jobless” to account for the lack of improvement on Main Street. But the banks have money, Wall Street is chugging along, and the administration would like to get on with other agendas.

They have even set up a commission to investigate the crisis as if it were all in the past.

The truth is that Americans are still losing jobs, the Fed is still inflating, and more regulations are in the works that will prevent jobs and productivity from coming back. We are on this trajectory for the long haul. The claim has been made many times that this administration has only had a year to clean up the mess of the last administration. I wish they would at least get started! Instead of reversing course, they are maintaining Bush’s policies full speed ahead. They are even keeping the Bush-appointee in charge of the Federal Reserve! They are not even making token efforts at change in economic policy. And for all the talk of transparency, we hear that some powerful senators will do all they can to block a simple audit of the powerful and secretive Federal Reserve.

We have been on a disastrous course for a long time. The money supply has doubled in the last year, our debt is unsustainable, the value of the dollar is going to continue its drop, and those Americans who understand where we are headed feel helpless and held hostage by foolish policy makers in Washington. When the bills finally come due and the dollar stops working we are in for some real social, economic and political chaos. That is, unless we take some major steps now to allow for a peaceful transition in the future. These steps are laid out in my legislation to legalize competing currencies.

First of all, no one should be compelled by law to operate in Federal Reserve notes if they prefer an alternative. We should repeal legal tender laws and allow Americans to conduct transactions in constitutional money. Only gold and silver can constitutionally be legal tender, not paper money. Instead, it is illegal to conduct business using gold and silver instead of Federal Reserve notes. Simply legalizing the Constitution should be a no-brainer to anyone who took an oath of office. Consequently, private mints should be allowed to mint gold and silver coins. They would be subject to fraud and counterfeit laws, of course, and people would be free to use their coins or stay with Federal Reserve notes, as they see fit. Finally, we should abolish taxes on gold and silver, which puts precious metals at a competitive disadvantage to paper money.

The Federal Reserve is a government-sanctioned banking cartel that has held far too much power for far too long and is in the end stages of running the dollar into the ground, and our economy along with it. The very least Congress can do, if they are not willing to abolish the Fed, and perhaps not even conduct a serious audit of it, is to allow citizens the freedom to defend themselves from being completely wiped out by their monopoly power.

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Ron Paul: The CIA Runs Everything

January 21,2010

Info Wars

The CIA was created at the behest of the bankers on Wall Street. OSS spook and Wall Street lawyer Frank Wisner was recruited by Dean Acheson to work under Charles Saltzman, at the State Department’s Office of Occupied Territories in 1947. The CIA’s first director, Allen Dulles, was a Wall Street lawyer.

The CIA is Wall Street’s finely honed tool for the neoliberal agenda of the banksters. “A considerable proportion of the developed world’s prosperity rests on paying the lowest possible prices for the poor countries’ primary products and on exporting high-cost capital and finished goods to those countries. Continuation of this kind of prosperity requires continuation of the relative gap between developed and underdeveloped countries – it means keeping poor people poor,” former CIA agent Philip Agee wrote. “Increasingly, the impoverished masses are understanding that the prosperity of the developed countries and of the privileged minorities in their own countries is founded on their poverty.”

“Throughout its entire history, the CIA has set up an elaborate shell game of ‘proprietaries’ (front companies), money-laundering operations and off-the-books projects so complex that no outsider — and few insiders — could ever keep track of them. BCCI was neither the first nor the last of these,” writes Mark Zepezauer.

Excerpt from the Campaign for Liberty Regional Conference in Atlanta, GA.

As the crowd begins to cheer, Ron Paul states, “We need to take out the CIA”.

“They are a government unto themselves. Their in buisnesses, their in drug buisnesses… and… they take out dictators. We need to take out the CIA.”

Also, the CIA have infiltrated the Ron Paul Presidential Campaign:

From Raw Story:

US House Rep. Ron Paul says the CIA has has in effect carried out a “coup” against the US government, and the intelligence agency needs to be “taken out.”

Speaking to an audience of like-minded libertarians at a Campaign for Liberty regional conference in Atlanta this past weekend, the Texas Republican said:

There’s been a coup, have you heard? It’s the CIA coup. The CIA runs everything, they run the military. They’re the ones who are over there lobbing missiles and bombs on countries. … And of course the CIA is every bit as secretive as the Federal Reserve. … And yet think of the harm they have done since they were established [after] World War II. They are a government unto themselves. They’re in businesses, in drug businesses, they take out dictators … We need to take out the CIA.

Paul’s comments, made last weekend, were met with a loud round of applause, but they didn’t gather attention until bloggers noticed a clip of the event at YouTube.

Paul appeared to be referring to news reports that the CIA is deeply involved in air strikes against Al Qaeda targets in Afghanistan and Pakistan. A suicide bombing late last year against Forward Operating Base Chapman in Afghanistan took the lives of seven of CIA operatives, including two contracted from Blackwater. The event highlighted the CIA’s deep involvement in the war effort.

Paul’s reference to the CIA being “in the drug business” refers to long-running allegations that the CIA has funded some of its covert operations with proceeds from drug-running. That claim was most famously made in a 1996 investigative report from the San Jose Mercury-News, which alleged that cocaine from the Contra-Sandinista civil war in Nicaragua was making its way to the streets of L.A. via the CIA.

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Is The U.S. Economy Being Tanked By Mistake or By Intent?

January 20, 2010

Lew Rockwell

By Bill Sardi

The government wants Americans to believe the greatest economic collapse in history was the result of ineptness and mistakes yet still have confidence in their financial institutions.

Should American bankers be let off the hook because they self-declare, before an investigational panel, that the failure of their newly invented risk swaps and other highly leveraged investment schemes was simply due to “mistakes”? Not malfeasance – just every-day mistakes? Bankers just fell asleep at the helm at a critical juncture in American history. Is that what we are being led to believe?

Oh well, it’s just 18 million American homes that now lay empty in the wake of unprecedented foreclosures, and the bankers have collected obscene bonuses for reckless lending of their depositors’ money. It’s like the captain and crew of a ship saying, not to worry, twenty-percent of the passengers were lost overboard, but this was due to unavoidable mistakes, and then being rewarded with bonuses when they reach port.
Are Americans to believe that the Federal Reserve lowered interest rates to create a false bubble in the economy, at the same time the Securities Exchange Commission allowed investment banks risky reserve ratios and exerted lax control over investment tycoons like Bernie Madoff, and in lock step, the credit rating agencies (Fitch, Moody’s and Standard & Poor’s) handed out sterling A+ credit ratings on risky mortgage-backed securities, while the US Treasury Department stood by and did nothing?

Shall Americans conclude the world’s largest economy is beyond the management skills and regulation of virtually every financial arm of government and the private sector? If so, widespread incompetence would suggest Americans had better come up with some institution or instrument of their own invention to protect their money.

Whatever or whomever did bring down the American economy, it appears to be an orchestrated effort. If one arm of the financial industry had objected or performed their job responsibly, the whole economic collapse could have been averted. The credit rating agencies alone could have put an abrupt halt to what amounts to a financial collapse of western civilization.

Lenses into the future: a planned default?

Americans cannot see the economy as the elites do. The elites have lenses into the future. They have access to information that foretells the future of our economy. They can see a better picture of when mounting debt will rise beyond the ability to repay.

They certainly can see pension funds, private and public, are under-funded and there is no way, with Baby Boomers now entering their retirement years, these obligations can be met. Medicare expenses are totally out of control with enrollees able to rack up bills in the tens of thousands of dollars beyond what they ever paid into the system.

At some point, seeing no way out, maybe a decision was made to default on our debts. There are rumblings that the world economy is being intentionally brought to its knees in order to usher in a one-world currency.

There are other hints that the US is intentionally tanking its economy.

As of March 23, 2006, the M3 money supply is no longer published by the US central bank. So Americans can’t get a full view of what government is doing with the total money supply. The M3 is now estimated by two websites – ShadowStats.com and NowAndTheFuture.com. A severe contraction in the M3 money supply began to be reported in August of 2008. It appears there has been a sudden downturn in M3 funds, which could choke the economy at a critical time.

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11 Signs The Economy Is Heading Into The Toilet

January 18, 2010

The Economic Collapse

The vast majority of the talking heads on television are still speaking of the current economic collapse as if it is a temporary “recession” that will soon be over.  So far, the vast majority of the American people seem to believe this as well, although for many Americans there is a very deep gnawing in the pit of their stomachs that is telling them that there is something very, very wrong this time around.  The truth is that the foundations of the U.S. economy have been destroyed by an orgy of government, corporate and individual debt that has gone on for decades.  It was the greatest party in the history of the world, but now the party is over.  The following are 11 signs from just this past month that show that the U.S. economy is headed into the toilet and will not be recovering….

#1) When even Wal-Mart is closing stores you know things are bad.  Wal-Mart announced on Monday that it will close 10 money-losing Sam’s Club stores and will cut 1,500 jobs in order to reduce costs.  So if even Wal-Mart has to shut down stores, what chance do other retailers have?

#2) Americans are going broke at a staggering pace.  1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008.

#3) American workers are working harder than ever and yet making less.  After adjusting for inflation, pay for production and non-supervisory workers (80 percent of the private workforce) is 9% lower than it was in 1973.  But those Americans who do still have jobs are the fortunate ones.

#4) Unemployment is absolutely exploding all over the United States.  Minority groups have been hit particularly hard.  For example, unemployment on many U.S. Indian reservations is over 80 percent.

#5) Unfortunately the employment situation is showing no signs of turning around.  December was actually the worst month for U.S. unemployment since the so-called “Great Recession” began.

#6) So just how bad are things when compared to past recessions?  During the 2001 recession, the U.S. economy lost 2% of its jobs and it took four years to get them back. This time the U.S. economy has lost more than 5% of its jobs and there is no sign that the bleeding of jobs will stop any time soon.

#7) Can you imagine trying to get your first job in this economic climate?  Our young men and women either can’t get work or have given up on work altogether.  The percentage of Americans 16 to 24 who have jobs is 13 percent lower than ten years ago.

#8) So where did all the jobs go?  Over the past few decades we have allowed the corporate giants to ship mountains of American jobs overseas, and there are signs that this trend is only going to get worse.  In fact, Princeton University economist Alan S. Blinder estimates that 22% to 29% of all current U.S. jobs will be offshorable within two decades.  So get ready for even more of our jobs to be shipped off to Mexico, China and India.

#9) All of these job losses are leading to defaults on mortgages.  Over the past couple of years we have seen the American Dream in reverse.  According to a report that was just released, delinquent home loans at government-controlled mortgage finance giants Fannie Mae and Freddie Mac surged 20 percent from July through September.

#10) But that is nothing compared to what is coming.  A massive “second wave” of mortgage defaults is getting ready to hit the U.S. economy starting in 2010.  In fact, this “second wave” is so frightening that even 60 Minutes is reporting on it.

#11) Meanwhile, the Federal Reserve has announced that it made a record profit of $46.1 billion in 2009.  Apparently during this economic crisis it is a very good time to be a bankster.

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Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising

January 11, 2010

BusinessWeek.com

By Bob Willis and Courtney Schlisserman

An exodus of discouraged workers from the job market kept the U.S. unemployment rate from climbing above 10 percent in December, economists said.

Had the labor force not decreased by 661,000 last month, the jobless rate would have been 10.4 percent, according to economists including David Rosenberg at Gluskin Sheff & Associates in Toronto and Harm Bandholz at UniCredit Research in New York.

“The actual unemployment rate is higher than shown by the official numbers,” Bandholz said yesterday after a Labor Department report released in Washington showed the economy unexpectedly lost 85,000 jobs in December while the jobless rate was unchanged.

About 1.7 million Americans opted out of the workforce from July through December, representing a 1.1 percent drop that marks the biggest six-month decrease since 1961, the Labor Department report showed. The share of the population in the labor force last month fell to the lowest level in 24 years.

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — rose to 17.3 percent in December from 17.2 percent.

The number of discouraged workers, those not looking for work because they believe none is available, climbed to 929,000 last month, the most since records began in 1994.

Length of Unemployment

The backdrop to the disillusionment is that it’s taking longer and longer to find work, economists said. Workers were unemployed for 29.1 weeks on average last month, the most since records began in 1948.

“Longer-term unemployment is one of the biggest problems,” said Bandholz. “Payroll declines will come to a halt in the next couple of months, but the people who are unemployed are having problems getting a job and it’s getting tougher by the month.”

Revised figures showed payrolls climbed by 4,000 in November. The gain was the first since the economic slump began in December 2007.

“Workers seem to be particularly discouraged by this recession,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Participation Rate

The participation rate, or the share of the population in the labor force, fell to 64.6 percent in December, the lowest level since 1985, from 64.9 percent.

The labor force will probably grow this year as the economy continues to expand and Americans believe jobs will be easier to get. That will mean the unemployment rate will head higher because there won’t be enough jobs available to satisfy the demand for work.

“The exodus from the labor force can’t contain the unemployment rate indefinitely,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “We expect unemployment to resume rising over the next few months, peaking near 10.5 percent in the third quarter.”

Federal Reserve policy makers, while noting stabilization in the labor market, have expressed concern about unemployment and poor job prospects. That’s one reason policy makers will keep the benchmark interest rate near zero longer than most anticipate, said John Ryding.

Fed ‘On Hold’

Treasury two-year notes yesterday gained the most in three weeks following the worse-than-expected payroll numbers. The yield fell five basis points, or 0.05 percentage point, to 0.97 percent at 4:31 p.m. in New York.

President Barack Obama on Dec. 8 proposed additional spending on the nation’s transportation system, tax credits to spur hiring by small businesses and incentives to make homes more energy efficient in a second round of efforts to cut the jobless rate.

“We’re going to have to work harder to create jobs.” U.S. Labor Secretary Hilda Solis said in an interview on Bloomberg Television. “This is a very stubborn recession.”

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Obama Plan to Help 1.5 Million Homeowners Yet To Launch

January 11, 2010

The Huffington Post

An Obama administration plan announced in April to help up to half of all struggling homeowners modify their second mortgages has yet to officially launch, the Treasury Department acknowledged Friday.

The program, a component of the administration’s $75 billion Making Home Affordable effort, was supposed to attack second-lien mortgages, which are additional, second mortgages taken out on a home on top of the initial first mortgage. It’s like taking out two loans to pay the same debt.

The Second Lien Program is supposed to automatically reduce the payments on a second mortgage when the first mortgage is modified under the administration’s loan modification effort, the Home Affordable Modification Program. The administration says that by lowering monthly mortgage payments, HAMP will eventually help up to four million homeowners stay in their homes

Some housing experts say the second-mortgage component of the plan is necessary to effectively tackle the foreclosure mess — 3 million foreclosure notices were sent out in 2009; another 3 million are estimated to go out this year — because so many distressed homeowners have second mortgages. When rolling out the program in April, the administration estimated that “up to 50 percent of at-risk mortgages currently have second liens.” Addressing only the first lien is insufficient, experts say, if no changes are made to seconds.

Per the administration’s fact sheet on the program accompanying its April 28 announcement:

Second liens contribute to the number of American homeowners unable to afford their housing payments. Even where a first mortgage payment may be affordable, the addition of a second mortgage payment can increase monthly payments beyond affordable levels. In addition, second mortgages often complicate or prevent modification or refinancing of a first mortgage.

The Second Lien Program will help create a sustainably affordable mortgage payment for millions of homeowners who qualify for a first mortgage modification, yet still face challenges in affording their monthly payments because of a second mortgage.

Compounding the problem is the fact that millions of homeowners owe more on their mortgage than their house is worth, putting them “underwater.” About a quarter of all homeowners with a mortgage have negative equity, according to real estate research firm First American CoreLogic.

“The single largest problem [with the housing market] is negative equity,” said Laurie S. Goodman, senior managing director at Amherst Securities and one of country’s top mortgage bond analysts according to Institutional Investor magazine, before a Congressional panel last month. “The [government's] current modification program does not address negative equity, and is therefore destined to fail.”

Goodman is right — the administration’s Home Affordable Modification Program [HAMP] does not address negative equity. Rather, it reduces monthly payments for struggling borrowers. Housing experts and consumer advocates agree that lowering monthly payments is a good start to reducing foreclosures. For borrowers with negative equity, though, lower monthly payments does not decrease the total debt owed on the house. In fact, under the administration’s plan homeowners end up owing more on their mortgage because mortgage servicers have simply cut interest rates and lengthened the life of the loan, putting them further underwater.

Goodman added: “Any principal reduction program requires the [Obama] administration to address the second lien problem head on…It should be noted that second liens have thus far, under HAMP, been treated with kid gloves.”

In an e-mail to the Huffington Post, a Treasury Department spokeswoman confirmed that the eight-month-old program has yet to get off the ground as not a single mortgage servicer has signed a contract with the federal government for this particular effort.

“We don’t have any official contracts signed yet, but servicers are committing to the program,” Meg Reilly wrote. “We have made enormous progress and continue to move forward with innovative technological development and program implementation and expect to finalize servicer contracts soon.”

The hang-up was first discovered by Thomas A. Lawler, a former top official at Fannie Mae and an expert on housing and mortgage matters, who runs Lawler Economic & Housing Consulting.

Part of the reason why it’s taken so long for the program to start is due to the complex nature of mortgages, the Treasury Department argues. Mortgages are owned not just by the lenders themselves, but also by investors, who could be anyone from hedge funds to Wall Street banks to municipal pension funds.

“Because there has not been a systematic method of notification to second lien holders when a first lien on the same property is modified, ramp up has taken some time,” Reilly said.

Some, like influential New York Times columnist Gretchen Morgenson, have pointed their fingers squarely at four specific culprits — the four biggest banks in the country.

As of Sept. 30, Bank of America, JPMorgan Chase, Citigroup and Wells Fargo were carrying a combined $452.4 billion worth of second mortgages on their balance sheets, according to the most recent quarterly data filed with the Federal Reserve. That’s $92.1 billion in junior-lien mortgages (mostly second liens) and $360.1 billion in home equity lines of credit.

While the Big Four — which are also the nation’s four biggest mortgage servicers — may be willing to cut borrowers’ payments on mortgages owned by investors, doing so for mortgages carried on the Big Four’s books would immediately impact their income; after all, less money would be coming in.

But the country’s biggest bank may be poised to finally sign onto the program. A Treasury official told the Huffington Post that Bank of America’s new CEO, Brian Moynihan, re-committed to Treasury Secretary Timothy Geithner this week the bank’s intent to join the administration’s second lien effort.

But for now, eight months after the plan’s announcement, up to 1.5 million struggling homeowners are waiting for a program that’s, thus far, stuck in the mud.

Click here for the full report.

Federal Reserve Chairman Says Regulation Came Too Late to Stop Housing Bubble

January 5, 2010

Bloomberg

By Scott Lanman

Federal Reserve Chairman Ben S. Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.

“The best response to the housing bubble would have been regulatory, rather than monetary,” Bernanke said yesterday in remarks to the American Economic Association’s annual meeting in Atlanta. The Fed’s efforts to constrain the bubble were “too late or were insufficient,” which means that regulatory actions “must be better and smarter,” he said.

Bernanke said the Fed is improving supervision of banks and has strengthened measures to protect consumers of financial products. Senate Banking Committee Chairman Christopher Dodd, who backs Bernanke for a second term, has called the Fed’s oversight of bank lending before the crisis an “abysmal failure.” Dodd proposes stripping the Fed and other agencies of bank supervision powers and moving them to a new regulator.

Scholars such as Allan Meltzer, a historian of the central bank, have criticized the Fed for helping fuel the housing boom by keeping interest rates too low for too long. The bursting of the housing bubble led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”

Shelby Criticism

Senator Richard Shelby of Alabama, the senior Republican on the Banking Committee, has said Bernanke failed to anticipate the crisis that led to Fed-backed bailouts of financial firms including Citigroup Inc. and American International Group Inc. and doesn’t deserve a second term as Fed chief.

Shelby, at a Dec. 17 committee vote on Bernanke’s nomination to a second four-year term starting next month, said the former Princeton University professor “missed clear signals” when he was a Fed governor from 2002 until 2005. Bernanke still must be approved by the full Senate.

Bernanke didn’t discuss the outlook for the U.S. economy or Fed monetary policy in yesterday’s speech.

Separately, Fed Vice Chairman Donald Kohn said at the conference that tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets. The Standard & Poor’s 500 Index climbed 23 percent last year, its best performance since 2003.

‘Very Cautious’

“Households and businesses and bank lenders remain very cautious, and the odds are that the pickup in spending will not be very sharp,” Kohn said.

Bernanke said increased use of variable-rate and interest- only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble than low rates.

He left the door open to using interest rates for preventing “dangerous buildups of financial risks” should regulatory changes fail to be made or turn out to be insufficient.

“We must remain open to using monetary policy as a supplementary tool for addressing those risks — proceeding cautiously and always keeping in mind the inherent difficulties of that approach,” Bernanke said.

Responding to audience questions after the speech, Bernanke said he wasn’t “particularly concerned” about a possible loss of investor confidence in the U.S. financial system. When financial conditions become more “worrisome,” investors see the dollar as a safe haven and U.S. markets as the deepest and most liquid, he said.

Policy ‘Appropriate’

Bernanke devoted most of his speech to rebutting criticism that the Fed’s rate policy fueled the housing bubble. Monetary policy after the 2001 recession “appears to have been reasonably appropriate, at least in relation to” a formula based on the so-called “Taylor Rule.” In addition, Bernanke said Fed research shows the rise in housing prices had little to do with monetary policy or the broader economy.

John Taylor, a Stanford University economist and former Treasury undersecretary, created a shorthand formula that suggests how a central bank should set rates if inflation or growth veers from goals.

Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006.

Rates Slashed

Bernanke, 56, joined the Fed as a governor in 2002 and supported all of the interest-rate decisions under Greenspan before being appointed chairman in 2006. After the financial crisis struck, he cut the federal funds rate almost to zero in December 2008 from 5.25 percent in September 2007.

The standard Taylor Rule would have recommended that the Fed raise the rate to a range of 7 percent to 8 percent through the first three quarters of 2008, “a policy decision that probably would not have garnered much support among monetary specialists,” Bernanke said. A variation of the rule used by the Fed focused on anticipated rates of inflation, not actual rates, he said.

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U.S. Growth Deemed Bleak For Next Decade

January 4, 2010

Reuters

By Pedro Nicolaci da Costa

A dismal job market, a crippled real estate sector and hobbled banks will keep a lid on U.S. economic growth over the coming decade, some of the nation’s leading economists said on Sunday.

Speaking at American Economic Association’s mammoth yearly gathering, experts from a range of political leanings were in surprising agreement when it came to the chances for a robust and sustained expansion:

They are slim.

Many predicted U.S. gross domestic product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake.

“It will be difficult to have a robust recovery while housing and commercial real estate are depressed,” said Martin Feldstein, a Harvard University professor and former head of the National Bureau of Economic Research.

Housing was at the heart of the nation’s worst recession since the 1930s, with median home values falling over 30 percent from their 2005 peaks, and even more sharply in heavily affected states like California and Nevada.

The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country’s growth pattern. The steep drop in home prices has also boosted their propensity to save.

“It’s very hard to see what will replace it,” said Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. “It’s going to take a number of years.”

One reason is that U.S. consumers remain heavily indebted. Consumer credit outstanding has fallen from its mid-2008 records, but still stands at some $2.5 trillion, or nearly one-fifth of total yearly spending in the U.S. economy.

Another is that many of the country’s largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department.

Kenneth Rogoff, also of Harvard, argued that if the U.S. government ever “credibly” pulled away from its backing of the financial system, then a renewed collapse would likely ensue.

He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines.

“There’s something of an illusion of profitability,” he said.

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