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April 24, 2009

Should Credit Card Rates Freeze?

credit-cards  While President Obama met with executives from the leading credit card companies yesterday two senators have called on the Federal Reserve to immediately implement an emergency freeze on interest rates tied to existing balances on credit cards.

The Federal Reserve plans to put a new set of rules in effect for credit card lending beginning July 2010 but that’s an entire year from now.

In the meantime Senators Chris Dodd (D-CT) and Chuck Schumer (D-NY) wrote a letter to the Federal Reserve Chairman Ben Bernanke and other regulators saying that companies are increasing interest rates now before the new rules go into effect so Americans need help now.

“Consumers describe situations to our offices in which the interest rates on their accounts have doubled or tripled overnight, without any misconduct on their part,” the letter says. “This kind of practice clearly violates the spirit and intention of the rules, even if the delayed implementation date has the effect of making such behavior legal.”

Congress is currently developing legislation that will rearrange and organize the Fed’s new rules but they still have a way to go.

After meeting with 14 executives from companies like Bank of America, Wells Fargo and Visa, President Obama said that his administration would work with Congress to evaluate proposals for reform.

“We’re at a time where issues of credit and how businesses and families are able to finance everything from a car loan to a student loan to just paying their bills every day is on a lot of people’s minds,” President Obama said. “We want to preserve the credit card market, but we also want to do so in a way that eliminates some of the abuses and some of the problems that a lot of people are familiar with.”

The card executives at agreed to work with the Obama administration to address the President’s concerns according to the American Bankers Association, and are currently working to implement the Federal Reserves’ new rules.

(more…)

March 23, 2009

President Obama: Our Trillion Dollar Man

Obama  President Obama and his administration doesn’t want to nationalize our banks so they have unveiled a plan to remove toxic assets from banks’ books in hopes that the plan will breathe life into our financial system so that the government doesn’t have to take them over.

The plan is to finance up to $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The Public-Private Investment Program will also rely on Federal Reserve financing and FDIC debt guarantees. Doing this will allow banks to clean up their balance sheets and free up the money they were loaned under the TARP so that money can start flowing again and help resurrect our economy.

The government is taking a risk but we cannot solve a financial crisis of this magnitude without the government assuming some risk. It may take months for us to see if this is a successful approach since the government, private sector and banks have to collaborate to make this plan work.  Private asset managers have to be selected (in May), private investors have to participate and banks have to commit to sell their downgraded investments. The point of the program is to save the taxpayers’ money by attracting private capital. The private sector will invest alongside the American taxpayer on an equal basis, so both parties share the downside risk and upside potential. There is a great risk/reward potential here.

The second thing needed for this plan to work is strict oversight by Secretary Geithner. The Secretary has to keenly oversee what the banks are doing to ensure that bank executives continuously do the right things to get our economy back on track.  We have already seen that bank executives are confused, oblivious and disconnected from the reality of what they have done to our economy.  Geithner needs to keep them focused.

Fifty percent of the Treasury’s funds will go to a “Legacy Loans Program” that will be overseen by the FDIC. The Treasury will provide half of the capital going to purchase a pool of loans from banks, with private fund managers putting up the rest. The FDIC will then guarantee financing for the investors — up to a maximum of six times the capital or equity provided.

The FDIC — which has extensive experience disposing of devalued loans from taking over failed banks — will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC.

Geithner is expecting a wide range of investors to participate in the Legacy Loans Program, including insurance companies, pension funds and even individual investors.

The other fifty percent of the Treasury’s contribution will go to the “Legacy Securities Program.” The objective of this initiative is to generate prices for securities backed by mortgages that are no longer traded because investors have little confidence in the principal value of the home loans.

Under this program, the Fed will expand an existing feature that provides financing for investor purchases of asset-backed securities. The Term Asset-Backed Securities Loan Program will be broadened to take on assets such as residential mortgage-backed securities that were originally rated AAA and sold by private banks.

The Treasury will also approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” that will buy the securities.

The managers will be given time to raise private capital and receive matching funds from the Treasury.  Geithner is hoping that the private sector will compete to be partners with the government.

There is some fear by investors that if they do well by participating in this program the government will tax them at 90 percent or busloads of people might turn up at their doors. 

I don’t think that will happen, if this works and the market is on an upswing and everyone is making money  populist views will change and these private investors will be hailed as heroes.

A few weeks ago we were all in fear that banks would fail en masse.  If banks had failed en masse, then massive business failures would have followed and massive unemployment would have been the result and that would have led to more foreclosures, and more bank failures and more business failures and more foreclosures and this vicious cycle would not have ended until there was a complete collapse of our economic system.

President Obama stopped the economic free-fall and we have to recognize that and give him credit for it. 

There is more than one way to skin a cat so all of us will not agree 100 percent on this plan, but we have a plan and we must now give this trillion dollar plan the chance to work. 

As Warren Buffet said, we’re in an economic war and we have to start acting like it.  Democrats and Republicans alike have to put aside ideological differences and realize that our economy is under attack by our competitors and we have to band together since we are all in this together

If you are an American and you don’t want to see President Obama succeed then it’s time for you to give up your citizenship and move to another country — seriously.

We’re all Americans.

United we stand, divided we fall. 

Let’s pray for success!

March 10, 2009

Federal Reserve Chairman Bernanke Wants Financial Regulations Revamped!

Federal Reserve Chairman Ben Bernanke is recommending an across-the-board revamp of U.S. financial regulations in an effort to even out the explosive up and down cycles in our financial markets.

“We should review regulatory policies and accounting rules to ensure that they do not induce excessive swings in the financial system and economy,” the central bank chief said today in remarks prepared for an address to the Council on Foreign Relations in Washington.

Bernanke recommended that lawmakers and supervisors rethink everything from the amounts firms set aside against potential trading losses and deposit-insurance fees to protections for money-market funds. His remarks reflect a judgment that the U.S. — like emerging-market nations in the past — failed to properly manage a flood of capital over the past decade and a half.

Bernanke also repeated his call for an agency will keep an eye on and be responsible for financial stability. While he didn’t specify which regulator should take that job, he noted that the Federal Reserve was first formed to address banking panics and said the initiative would “require” some role for the central bank.

Analysts are skeptical that the Federal Reserve will be the singular establishment to emerge with more managerial authority since Congress has been critical of their regulatory oversight as our economic crisis grew.

Bernanke also repeated that the central bank, U.S. Treasury and other regulators “will take any necessary and appropriate steps” to ensure banks have capital to “function well in even a more severe economic downturn.”

Referring to the stress test regulators will use to determine whether banks need more capital, Bernanke said an adverse scenario “involves unemployment averaging over 10 percent for a period, which we view as certainly well within the realm of possibility.”

Among the biggest challenges faced by regulators is addressing the issue of banks that are so big that their failure would put the entire banking system at risk. He said that firms that are too big to fail are “an enormous problem” and that large firms will require “especially close” oversight in the future. Regulators need the authority to seize such firms, such as the Federal Deposit Insurance Corp. already has for deposit-taking institutions, he said.

Bernanke also urged steps to protect against an outflow of money from money-market mutual funds, and said one market where banks and securities firms finance themselves — known as the tri-party repo market — may need to move to a central clearing system.

“Given how important robust payment and settlement systems are to financial stability, a good case can be made for granting the Fed explicit oversight authority for systemically important payment and settlement systems,” he said.

The Fed chairman also called for a review of accounting and capital guidelines that may cause banks to pull back in downturns.

The chairman also believes that capital regulations should be reviewed to ensure that they are appropriately forward-looking, and that capital is allowed to serve its intended role as a buffer — one built up during good times and drawn down during bad times.

Representative Barney Frank, chairman of the House Financial Services Committee, said last month he plans by April to release a draft of legislation designating the Federal Reserve as the overseer.

Senate Banking Committee Chairman Chris Dodd expressed disbelief that the central bank is up to the task, calling its regulation and consumer protection “abject failures.”

“The question is whether we should be giving you a bigger plate, or whether we should be putting the Fed on a diet,” Dodd told Bernanke at a hearing in February, noting that financial policy should remain the Federal Reserve’s top priority.

“When you keep asking an agency to take on more and more, it becomes less and less likely that agency will succeed at any of it,” said Dodd.

The Federal Reserve already supervises about 900 state banks and is the primary regulator for bank holding companies. The Fed also writes consumer protection rules and has the final word on proposed mergers among bank holding companies.

President Obama has asked his economic team to shape legislative proposals within weeks.

The global financial crisis stemmed in part from a failure by government supervisors to accurately measure risk-taking by financial institutions and the ability of lenders and investors to exploit loopholes in oversight, regulators have said.

March 6, 2009

Economy: 651,000 Jobs Lost In February. Unemployment Rate Reaches 8.1%

unemployment-cartoon-get-a-job The U.S. economy lost 651,000 jobs in February, the fourth month in a row where job losses were near or above 600,000 and the unemployment rate climbed to 8.1%, the highest rate in over 25 years.

Of the 4.4 million jobs lost since the recession began in December 2007, more than half vanished in the last four months. Experts believe that our unemployment rate will get close to 9% in 2010 while some say it might be closer to 10%.  The Federal Reserve doesn’t expect the unemployment rate to fall below 7% until 2011.

Job losses are prevalent across most businesses with only education and health services reporting job growth.

According to a survey of businesses 660,000 jobs were lost in the private-sector in February. Goods-producing industries (i.e. car dealerships, department stores, coffee shops — businesses that provide tangible things that you can see, feel, touch or walk out of the store with) lost 276,000 jobs, while services (i.e. CPAs, Electricians, Nail Salons/Hair stylists/Spas, Dog Groomers — businesses that provide services) lost 375,000 jobs. Construction employment fell by 104,000 in February making it a total of 904,000 jobs lost in the construction industry since the recession began.

The unemployment rate for African-Americans rose to 13.4% in February, which is the highest rate it’s been since December 1993. Unemployment of young people and students rose to 21.6% because young people and students are now competing with unemployed adults for the same jobs.

Many Americans who still have jobs are under employed working an average workweek of 33.3 hours for the third straight month instead of 40 hours which is considered full-time.

The number of workers experiencing long spells of joblessness — defined by the government as 27 weeks (almost 7 months) without work — has risen to 2.9 million in February, up 1.6 million since the start of the recession in December 2007.

The number of persons working part-time who would rather be working full time jumped by 787,000 in February to reach 8.6 million. This group of workers has risen by nearly 4 million since the recession began and these workers are most likely not to have health insurance.

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