Federal Reserve's Fiscal Priorities

The Fedearl Reserve by law is required to keep prices stable and maximize employment. Many lawmakers, especially the Republicans, want to strip the Feds regarding the employment mandate. In order to keep the prices stable, the policymakers set inflation targets at the unofficial level of 2 percent or lower. In recent days, there is a variant to inflation-targeting mechanism floating around in fiscal circle. The variant, known as price-level targeting, was espoused by a small, but growing, circle of economists, among them is Chicago Fed President Charles Evans. The price-level targeting mechanism allows inflation to run a bit higher to make up for inflation too low today and policymakers to aim and address the long-term average.

Deficit Reduction Proposals--Recommendations from Two Panels

The presidential panel is called the National Commission on Fiscal Responsibility and Reform, and led by former Republican Sen. Alan Simpson and Democrat Erskine Bowles. The panel released the preliminary report in early November. A second report was issued on November 17, 2010 by the Bipartisan Policy Center, a think tank that includes former leaders from both political parties. This second commission is led by former Sen. Pete Domenici and Alice Rivlin, a former Clinton administration budget director. A comparative analysis shows:

2012-20 Deficit Reduction

* BPC: $5.9 trillion; NCFRR: $3.8 trillion

(I) Spending Cuts

* BPC: $2.7 trillion
-- Freeze discretionary spending at 2011 levels until 2015 (non-defense) or 2016 (defense), and then tie increases to economic growth (non-defense: $1 trillion; defense: $1.1 trillion)
-- A tax on sweetened drinks, an increase in Medicare Part B premiums, smaller payments to drug companies and other health care savings ($0.8 trillion)
-- Slap higher incomes with payroll tax, smaller cost-of-living increases for Social Security ($0.1 trillion)

* NCFRR: $2.2 trillion

-- Freeze discretionary spending at 2010 level in 2012, then cut 1% each year until 2015, when it will be tied to inflation ($1.5 trillion)
-- Pay doctors and providers less, limit Medicare cost increases
-- Strengthen the Social Security by increasing retirement age to 69 from 67 by 2075, subjecting higher incomes with payroll taxes and giving smaller cost-of-living increases

(II) New Revenue and Offsets

* BPC: $0.4 trillion

-- 6.5% national deficit reduction sales tax ($3 trillion)
-- One-year holiday from Social Security payroll taxes (-$0.6 trillion)
-- Income taxed at rates of either 15% or 27% (-$1.3 trillion)
-- Corporate tax rate drops to 27% from 35% (-$0.8 trillion)

* NCFRR: $0.2 trillion

-- Additional 15-cents-a-gallon federal gasoline tax by 2015
-- A change in how inflation is measured for all federal programs, including how taxes are assessed

(III) Other Tax Changes

* BPC: $1.9 trillion

-- Replace deductions for mortgage interest and charitable giving with 15% tax credits; reduce or eliminate most other tax credits ($3.5 trillion)

-- Replace earned income tax credit for low-income families; eliminate standard deduction (-$1.9 trillion)

* NCFRR: $0.8 trillion

-- Limit or eliminate the mortgage interest deduction, the child tax credit and earned income tax credit

(IV) Interest Savings

* BPC: $0.9 trillion; NCFRR: $0.7 trillion


Sources: The New York Times; The Dallas Morning News (November 21, 2010)

A New Journey for New GM

General Motors had its IPO on November 18, 2010 and raised almost $23.1b. The IPO price was set at $33 apiece. The journey GM had undertaken marked a significant turnaround from the time when the hallmark auto company had filed for bankruptcy and needed $50b bailout from the government.

Deficit Reduction Proposals

A presidential commission on deficit reduction as well as a bipartisan panel of lawmakers, led by the former Sen. Pete Domenici of New Mexico, came up with draft plan on how to control the runaway deficit. The bipartisan panel released the draft on November 17, 2010. The recommendations of Domenici and Rivlin (named after former member of Congress and Clinton administration's Budget Director Alice Rivlin) panel included:

* Reduction of deficit by nearly $5.9 trillion from 2012 to 2020 (Domenici-Rivlin Panel plans to save $2 trillion more in savings than offered by the Presidential Commission co-chaired by former Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles);

* Exemption of employers and employees from the 12.4% payroll taxes for Social Security for 2011;

* Simplifying individual tax rates into two slabs of 15% or 27% instead of current six slabs with the maximum rate at 35%;

* Reduction of corporate tax rate from the current level of 35% to 27%;

* Replacement of deductions for mortgage interest and chartable giving by 15% tax credits.

G-20 Seoul Summit

The latest two-day Seoul Summit of G-20 nations held on November 11 and November 12 came up short of expectation for the U.S. President Barack Obama with exporting nations such as China, Germany and South Korea staunchly opposing an evolving U.S. proposal of setting trade surplus/defecit numerals for guiding the currency exchange rates.

Latest Round of Quantitative Easing

The latest round of quantitative easing, also known as QE-II, came on November 3 after the two-day Federal Open Market Committee meeting with the announcement that Fed would print money to buy an additional $600b worth of treasury bonds by June 2011. The measure, aimed at making money available to borrowers, businesses and home buyers at a more affordable rate and stimulating the near-stalled economy, will help buy about $75b in treasury bonds each month for the next eight months. In addition to $600b asset purchase plan, the Federal Bank of New York will use $250b to $300b in additional money from its mortgage portfolio to buy the government debt over the same period of time (through June 2011).

The first round of asset-buying, also known as QE-I, began in November 2008 and March 2010, with Fed accumulating more than $1.7 trillion in its balance sheet. At present, the Fed has $2.3 trillion in its balance sheet, almost three times it had in December 2007, start of the Great Recession.

PROS of Quantitative Easing
Stimulates economy by availing money to businesses and consumers by driving down the long-term interest rates.

Helps U.S. exports by the drop in U.S. dollar.

CONS of Quantitative Easing
Propels run-away inflation.

Creates bubble in bond market.

Flash Crash

Investigators from the Securities and Exchange Commission and the Commodity Futures Trading Commission issued a report on October 1, 2010 that dealt and discussed in details the chain events behind the May 6, 2010 flash crash, in which DOW fell more than 600 points in 15 minutes. The report pointed out that "a large fundamental trader" (read Overland Park, Kan.-based Waddell & Reed Financial Inc.) put an order to sell $4.1b of an indexed stock futures contract known as an "E-Mini". However, the report did not say that the trader had tried to disrupt the market intentionally.

G-20 Finance Ministers and Central Bank Chiefs Meet

The two-day meeting of finance ministers and heads of central banks from G-20 nations began on October 23 at the South Korean city of Gyeongju in the run up to next month's G-20 summit at Seoul. The most contentious and controversial issue is the currency exchange rates of developing nations, especially China. The U.S. Treasury chief Timothy Geithner is in favor of numerical targets for current account balance for deficit/surplus that would trigger adjustment of currency exchange rates. However, developing nations are fiercely opposed to this mechanism.

HOUSING SECTOR, Fannie and Freddie--Costs of Rescue

On October 21, 2010, Federal Housing Finance Administration laid out three distinct scenarios of how much U.S. needs to pump into Fannie Mae and Freddie Mac in addition to $148b the government had funneled to the two quasi government agencies since their seizure in 2008.

Scenario I: This scenario assumes that the economic situation will deteriorate. The companies need $215b more from the government, and will return $104b, including $13b already paid. The total cost to taxpayers is $215b + $148b - $104b = $259b.

Scenario II: This scenario assumes that housing prices fall and then recover. Under this scenario, both companies need $90b in additional aid and they will return about $84b, including $13b already paid. The cost to taxpayers is $90b + $148b - $84b = $154b.

Scenario III: This sscenario assumes that housing prices will stay flat for the next three years. Under this scenario, government needs to pump in an additional $73b. They will return $80b, including $13b already paid. Total cost to taxpayers is estimated $141b.

Together the companies received $187 billion in taxpayer money. Both companies--Fannie Mae and Freddie Mac--reported profits on November 7, 2013, helping repay the government almost all of the money due. Fannie announced that it made profit of $8.7 billion in the third quarter, and would pay $8.6 billion to the treasury, paying off a total of $114 billion. Freddie on November 7, 2013 announced profit of $30.5 billion for July-September quarter, and would send the treasury $30.4 billion and would have paid in full of its $71.3 billion in due.

Fannie-Freddie Plan Unveiled
An emerging plan in Congress on how Fannie Mae and Freddie Mac should work to avert a 2008-type of economic crisis is in the process of getting final touch, according to a Los Angeles Times report carried by The Dallas Morning News on March 12, 2014. The plan includes measures, not detailed enough until now, that will reduce gradually the government role in mortgage industry. The plan reached between Senate Banking Committee Chairman Tim Johnson, D-SD, and committee's ranking Republican Sen. Mike Crapo of Idaho builds on a bipartisan draft unveiled last year (2013) by Sen. Bob Corker, R-TN, and Sen. Mark Warner, D-VA, and co-signed by five Democrats and five Republicans, and calls for companies that underwrite and issue mortgage-backed securities to have 10 cents in reserve for each dollar in mortgage.

*************************************** HOUSING SECTOR *********************

U.S. 3.8 million Short on Homes

A Up for Growth study released on July 15, 2022 shows that the U.S. is having a home availability crisis. At present, Up for Growth estimates, U.S. is facing a housing shortfall of 3,779,410 homes in 2019. Texas ranks only second after California, with the need easily touching at least 322,105 in 2019.

*************************************** HOUSING SECTOR *********************

Staggars Rail Act of 1980

The relevance of Staggars Rail Act of 1980 is being questioned by several lawmakers in the backdrop of swelling profits in the country's railroad companies. The act was meant to allow the railway companies to charge some shippers, known as captive shippers, more than others to ensure profit.

Tax Cut Politics

The recent politics surrounding the Bush-era tax cuts, put in place in 2001 and 2003, acquires significance in the backdrop of their expiry at the end of 2010 unless the Congress renews it. Many politicians and economists want the tax cuts to be extended for two more years to make sure the economic recovery gains on firm footing. However, President Barack Obama wants to extend the tax cuts for 98% of people who have incomes $200,000 or less for individuals and $250,000 or less for families, while doing nothing for the top 2% of the taxpayers. Under the Obama plan, letting the top tax rates to be hiked to 36% from 33% and to 39.6% from 35% would save $700 billion over the next decade. If all the tax breaks are allowed to lapse, in which 10% tax bracket will be abolished, 25% tax bracket will be increased to 28%, 28% to 31%, 33% to 36% and 35% to 39.6%, total savings will be $3.7 trillion over the next decade, including $3 trillion for the middle-class with incomes less than $200,000 for singles and $250,000 for families. If the Bush-era tax cuts are extended, the total costs over the next decade will amount to $3.9 trillion.

New Banking Rules

A global panel, the 27-nation Basel Committee on Banking Supervision, has been brain-storming since 2008 to come up with a regulatory framework to avoid a financial meltdown like the ones witnessed in 2008. On September 12, the panel outlined many of the measures, including:

* Raising the so-called tier 1 capital, also known as capital reserve, to 4.5% of the total balance sheet in 2013 and eventually raising it to 6% in 2019.

* Requiring banks to keep an emergency reserve, "conservation buffer", at the 2.5% of the balance sheet.

* Allowing individual nations to demand banks to build up further reserves during good times, also known as "countercyclical buffer", at 2.5% as a cushion against excessive lending during economic good times.

* Introducing a leverage ratio of 3%, implying banks have to keep at least 3% of total assets, including derivatives or other instruments that they might not carry on their balance sheets.

* Agreeing on working towards additional safeguards for "systemetically important banks".

The new rules are expected to be endorsed by the G-20 summit in November to be held at Seoul, and to be phased in starting January 1, 2013.

India's Ascension as the Fourth Largest Economy

China has recently surpassed Japan as the second largest economy of the world. Also, India, with its burgeoning middle class and a proven record of being low-cost innovation hub, leaped forward to the fourth position. However, the U.S.A., hit hard by the Great Recession (2007-2009), still remains the strongest economy.The recent International Monetary Fund and the U.S. Chamber of Commerce statistics show the following GDP numbers adjusted for purchasing power as of 2009:

U.S.-------------------------------------------$14.2 Trillion

China------------------------------------------$8.7 Trillion

Japan------------------------------------------$4.1 Trillion

India-------------------------------------------$3.5 Triliion

Germany---------------------------------------$2.8 Trillion

Source: IMF, The US Chamber of Commerce and The Dallas Morning News

China--A Superpower in Energy Consumption

According to the Paris-based International Energy Agency, China surpassed USA in 2009 in the total consumption of energy, with the Asian giant consuming energy from sources from oil, coal, wind, solar power and others equivalent to 2.265 billion tons of oil compared to USA's consumption of 2.169 billion tons of oil. However, USA is still five times higher in energy consumption compared to China in terms of per capita energy consumption.

Double-Dip Recession

Double-dip recession is still a rare occurrence. It has happened only once in the last seventy years: 1980-82. However, that might be due to strict monetary policy, according to many financial experts, pursued by then-policymakers of the Federal Resrve.

Federal Reserve Open Market Committee Meeting

Fed policymakers left the federal funds rate unchanged during their June FOMC meeting (June 22-23, 2010). The rate is currently between zero and 0.25%.

Projected Federal Spending

The recent Congressional Budget Office report raised alarm and apprehension among economicsts and general public. The forecasts break down the spending figures for 2020:

Medicare and Medicaid: 28%

Defense: 15%

Net Interest: 14%

Social Security: 22%

Other Spending: 21%

Home Mortgage Relief: Plan B

Obama administration on March 26, 2010 announced the Plan B of the home mortgage relief. The plan would cost approximately $50b from the TARP fund. The plan includes three main components:

(1) Assistance to unemployed homeowners through mortgage companies;

(2) Encouraging mortgage service providers to write off a portion of borrowers' loans to a more manageable levels. Borrowers who owe 115% or more of the value of the home and are paying more than 31% of their monthly income toward house payment are eligible.

(3) Prodding the lenders to cut the debt of borrowers whose houses are "under water".

Jobs Bill

President Barack Obama on March 18, 2010 signed a landmark jobs bill that includes $18b in tax breaks and $20b in new transportation funding. The tax break component of the measure includes waiver of 6.2% Social Security Tax through December 2010 if the businesses hire anyone unemployed for at least 60 days and giving $1,000 to employers if the new hire stays on job for a full year. The measure also extends tax credits for businesses to buy new equipment.

Treasury Holdings: China Still Number 1

Since China has overtaken Japan in September 2008, it has maintained top spot of holding U.S. debt every month as of January 2010. However, both China and Japan are offloading trasury securities at a steady clip over the past few months. China as of January 2010 held $889 billion of U.S. debt.

Laudable Effort

Obama administration's twin goals of doubling the exports in five years and investing 3% of GDP every year in R&D are praiseworthy. It is to be seen how it gets executed.

Economic Stimulus' Price Tag Costlier

The price tag for the economic stimulus package increased almost 10% from the original figure of $787 billion to $862 billion, according to the latest estimate from the Congressional Budget Office.

Latest Estimate (November 6, 2010) is $814b.