Posted by Keegan Larson on Apr 9, 2010 | 0 comments
Where are the hardest hit real estate markets you can think of? Las Vegas instantly pops into mind. Florida and California quickly follow and the reason is because these were some of the hottest real estate markets in the U.S. leading up to the crash. These have also lead to some of the worst hit areas as far as unemployment numbers go.
Google Trends allows another method to dig through the data and see underlying trends. What Google Trends allows us to do is search a topic based on keywords and see the location that has searched that term the most often. It’s a fun little tool but also useful. Here are some of the interesting statistics that I found:
“Second Mortgage”
Second mortgage was a popular search back in 2006 when home prices were at or near their peaks. Fast rising home prices meant you could take out a lot of the equity out of the house and use it to purchase other items. Markets with booming real estate developments meant you could take out high levels using this loan process.
“Loan Modification”
Loan modifications are a much more recent topic which allow an interest rate reduction in existing loans. This is beneficial to people who have high payments and would otherwise not make them. This is a long term solution for people who have loans that are unlikely to be repaid in many cases.
“Unemployment”
Unemployment searches could have a very wide range of possibilities. Whether it is inquiring about unemployment benefits or numbers, it is a popular search in one of the most decimated areas, Las Vegas, and one of the areas that experienced a large amount of unemployment with the financial crisis, New York.
“Bankruptcy”
Bankruptcy is a popular search again because of the housing market collapse. Other hard hit areas beyond Vegas were searching for this trend including Cleveland and Phoenix.
“Foreclosure”
Foreclosure is the mother of them all as far as search trends and reality go. Three of the hottest real estate markets in the U.S. were Vegas, Florida, and Arizona. These areas also experienced some of the deepest crashes. Foreclosures became big in this area as many homes could not even be sold and were defaulted on instead.
Notice any interesting parallels between those searches? Vegas is tops on all except one! That shows just how bad the situation is in Vegas. The citizens in Vegas are searching these topics because its more than just ‘what’s happening’ in the world. Instead its happening to them and they want to know what’s may or may not happen in the process. This is the power Google has to show us what’s happening and who its happening to.
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Posted by Keegan Larson on Apr 9, 2010 | 0 comments
NY Federal Reserve Bank President William Dudley gave a speech today before the Economic Club of New York titled Asset Bubbles and the Implication for Central Bank Policy. In it he discusses reasons the Fed should regulate asset price bubbles, a bubble being any spike in asset prices without rational basis. While there are many sides to the argument of whether bubbles even exist or not, Dudley goes a step further and addresses how and why central banks should address asset bubbles.
There are many difficulties in attempting to pop a bubble with the primary problem being identification of the bubble. Bubbles are hard to identify because they can crop up in different sectors and industries and the deviation from fundamental values is hard to discern, particularly in a bull market.
One important aspect of Dudley’s speech I like is where he talks about each bubble having unique characteristics and that any rules-based strategy “is likely to be ineffective and that tackling bubbles to diminish their potential to destabilize the financial system requires judgment.” Many economists who have been on the pro-bubble side believe that rules need to be in place to make sure markets understand what constitutes a bubble and to prevent any abuse of the central bank.
The Obama administration has pushed for greater regulatory and supervisory power for the Fed rather than restrict the power of the central bank. Time will only tell who will win.
For more analysis:
Seattle Times
Street Insider
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Posted by Keegan Larson on Apr 2, 2010 | 0 comments
The new credit card law came out and its supposed to force credit card companies to be nicer to cardholders right? Here’s a look at the bill and some its highlights.
So for the average person who got himself into too much debt and couldn’t pay it off, this is probably a good thing. But what about the person who uses credit cards in a more responsible way. Never missed a payment and almost never carried a balance? You think the credit card companies would like to have this person using their card right?
Small businesses had to turn somewhere when times were tough and banks weren’t handing out loans. Many turned to credit cards as a source of short term financing. This meant getting close to the limit at times and utilizing many features like no interest on balances, six month cash advance, etc. If you have ever seen anyone who can manage multiple credit cards using different cards with varying balances and promotions while never missing a payment, I assure you it is quite impressive and became almost a necessity when banks turned their backs.
Recently, from someone I know, I learned that they were receiving downward revisions on all credit card limits. A limit of $25,000 became a limit of $18,000, a limit of $20,000 became a limit of $12,000, etc. This effectively cut the availability of credit! The reasoning was credit agencies determined that this person used a large percentage of available credit and had too many active cards. All this for someone who never missed a payment and almost never carried a balance.
This person isn’t alone. Several people I’ve talked to had to turn to their credit cards to survive, with many failing in the process. While this credit card reform might have been a good thing for the average person, small businesses are really feeling the change in policy. Where will small businesses turn when banks aren’t lending now?
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Posted by Keegan Larson on Apr 1, 2010 | 0 comments
The big headline of the health care bill was, we health care. But receiving less publicity but something that was a landmark in its own right was the reform of the student loan program. There hasn’t been much progress on student loans in the last few decades but Obama’s reform closes some loopholes and attempts to make repayment easier for recipients. Check out a timeline of the bill here. Here are a couple of the features from the bill:
- Eliminates fees paid to banks by the government, saving over $60 billion over 11 years
- Invests $2 billion in community colleges
- Expands Pell grants by 200,000 and increases then total to $5,975
- Starting in 2014, payments capped at 10% of income rather than 15%
- Loans forgiven after 20 years instead of 25 years (and only 10 years if you are in public service)
The bill on the surface is very beneficial to students and their families and will hopefully drive more students to higher education. I was shocked to learn that this bill only passed the House with a vote of 220-207. It seems that Sallie Mae, the largest supplier of student loans, spent some $3 million trying to lobby against changes in the student loan industry. Some opponents event went so far as to call it “nationalizing” the industry. This is hardly nationalizing an industry that already received plenty of government support. College just got a little more affordable for people that actually need it.
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Posted by Keegan Larson on Mar 29, 2010 | 1 comment
Hooray! Financial reform is here! Right? Well now that the health care reform bill is done and gone, Congress can turn their attention to the financial reform suggested by Senator Chris Dodd. Some of the main highlights of the bill are designed to both protect consumers and the integrity of the financial system are: a consumer protection agency, ending too big too fail, providing an early warning of systemic risk threats, increasing the regulation of financial instruments, increasing oversight of the Federal Reserve, as well as having other investor protections and regulatory powers over the system.
The consumer protection agency that Sen. Dodd envisions is designed to centralize the authority of many already in existence. His reasoning is very sound.
“The economic crisis was driven by an across-the-board failure to protect consumers. When no one office has consumer protections as its top priority, consumer protections don’t get the attention they need. The result has been unfair and deceptive practices being allowed to spread unchallenged, nearly bringing down the entire financial system.”
I agree that there were abusive practices in the housing market and that more should have been done to protect the consumer. Protecting the consumer would have in turn protected the financial system by preventing reckless loans. One thing I am not too sure about is the Office of Financial Literacy. Its intention is very constructive and for most people it will be beneficial. But what about many of the people that were harmed in the last wave of bad loans? Are they going to benefit from an Office of Financial Literacy? If this is not an active agency and aggressively ensuring that people are able to understand regulation than it is a worthless government entity.
The next highlight is one I am particularly interested in: managing systemic risk.
“The economic crisis introduced a new term to our national vocabulary – systemic risk. In July, Federal Reserve Governor Daniel Tarullo, testified that “Financial institutions are systemically important if the failure of the firm to meet its obligations to creditors and customers would have significant adverse consequences for the financial system and the broader economy.”
In short, in an interconnected global economy, it’s easy for some people’s problems to become everybody’s problems. The failures that brought down giant financial institutions last year also devastated the economic security of millions of Americans who did nothing wrong – their jobs, homes, retirement security, gone overnight.”
Managing systemic risk is incredibly hard. Everyone thought that there was no housing bubble or a large scale financial crisis until it was too late to do anything about it. This is the trouble with attempting to control systemic risk. An analogy I like very much is… put the from in boiling water and he jumps right out, but put him in the pot and bring the water to a boil around him and he will slowly boil to death. This is very much like the situation we were in, nobody knew we were in a problem until they saw the evidence. The attempt to predict the direction of the economy is big money and many firms are already attempting to do this. I like the ability to break up overly complex banks as well as ending too big to fail. The idea that one financial institution is such a liability to the system as a whole that the whole thing could topple is ludicrous and it’s long overdue that there should something that equalizes the playing field. Capitalism was built on this ideal and we are playing somewhere in between which is no good for anybody.
This area of regulation is the crux of attempting to manage the economy (or systemic risk). What happens when someone sounds the systemic risk alarm? How will the market respond? Right now the only one with the power to affect the market with their statements is the Federal Reserve. When Alan Greenspan sounded the “irrational exuberance” alarm, the markets responded briefly before plowing toward new highs. What power will this agency have with the markets? If this comes into being it will be interesting from a regulatory standpoint and will instantly be on the top of my news list. The need for an agency that is dynamic is essential and if this agency is given the freedom to act in an environment where flexibility is key than it might have a shot at being useful
How tired did you get of hearing that something was “too big to fail?” It seemed like everything met this mysterious criteria. Banks, car manufacturers…. everything. Too big to fail essentially meant that in today’s economy, businesses were so large and interconnected that allowing them to fall into bankruptcy would have devastating effects on the entire economy. With the failure of Lehman Brothers (one institution) the economy experienced extensive turmoil. Can you imagine what would have happened if other banks and companies failed? Chaos right?! Well we’ll never know for sure because the powers at be believed that it would be too tumultuous to handle. This is exactly why it needs to be addressed in the financial reform bill. Dodd’s reasoning:
“As long as giant financial firms (and their creditors) believe the government will prop them up if they get into trouble, they only have incentive to get larger and take bigger risks, believing they will reap any rewards and leave taxpayers to foot the bill if things go wrong. Since the crisis began, a number of financial institutions previously considered “too big to fail” have only grown bigger by acquiring failing companies, leaving our country with the same vulnerabilities that led to last year’s bailouts.”
Overall the bill addresses several areas of concern. The bill is long and there are several places where you can go to get a solid understanding:
New York Times
Wall Street Journal
Washington Post
Senator Dodd’s Bill
As I always say… get informed!
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