May 02, 2008

Employment Situation 05/02/2008

New data was released this morning on national payroll employment in April. Topline results are that employment is down again in April but the loss is smaller than in previous months. April's payroll employment numbers for Pennsylvania will be released May 16th. This in combination with the the latest numbers on GDP and the Federal Reserves signal that additional cuts in the Federal Funds rate may not be forthcoming will probably shift the theme in the press to a cautious the worst may be over.

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--Mark Price

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April 25, 2008

The Employment Situation in Pennsylvania

Pennsylvania non-farm payrolls fell by 2,900 from February to March.

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--Mark Price

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April 11, 2008

Rental Prices and Home Ownership Cost in Metropolitan Philadelphia

Offshored to Young Philly Politics.

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Supposed Fat Cat bailout

Alice Rivlin has an op-ed, Money Well Spent, in the New York Times today defending the Bear Stearns bailout.

"Never mind that the supposed Fat Cat "bailout" was a disaster for Bear Stearns stockholders, and that the idea of a "moral hazard" risk - that other investment banks will be tempted to emulate Bear Stearns - is preposterous. Never mind that if markets head back up and the collateral can be sold at a profit, taxpayers may lose nothing."

Separately Dean Baker in his weekly rundown of housing bust news makes the case for dropping the word "supposed" from the phrase "Fat Cat bailout".

"The Fed has opened its discount window to the investment banks, allowing them to borrow at a below-market interest rate. Currently this rate is 2.5 percent. Commercial banks have long had this option, but in return, they had to submit to transparency requirements and regulations. In other words, if taxpayers were going to back them up, banks needed to act responsibly. Unlike the commercial banks (banks where people have checking accounts and get mortgages), the investment banks are not subject to reserve requirements and do not have their books reviewed by the Fed. That's not all. When the Fed rescued Bear Stearns, Fed Chairman Ben Bernanke said that he would also come to the rescue of any other major investment bank in trouble. This promise is incredibly valuable. Mr. Bernanke effectively told the creditors of the other investment banks that they don't have to worry about Morgan Stanley's, Lehman Brothers', or Goldman Sachs' creditworthiness. If these banks aren't good for their debts, the Fed is.

To understand the value of this guarantee, consider going downtown and selling huge insurance policies that would earn you billions of dollars in fees. When someone asks whether you can really pay off on any claims on these policies, you get to tell them, "Don't worry, the Fed is backing them up." The customers will happily hand over the cash knowing that they have the best guarantee they could possibly find.

Cheap money and free guarantees: That's what we're giving to the investment bankers. So, when we see their huge mansions, private jets, and impressive foundations, we should all feel a sense of pride. After all, we paid for them."

--Mark Price

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April 07, 2008

Dirty Pretty Things

A national foreclosure map from the New York Times.

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Morning Links: 04/07/2008:

Brad Delong says we have a magneto problem:

"The world economy, as John Maynard Keynes put it 75 years ago, is developing magneto trouble. What it needs is a push - more aggregate demand."

No word if the X-Men will answer the call.

The New York Times has a story on executive compensation which keeps rising even as shareholder returns don't. Here is a nice graphic that provides detailed info on executive pay.

Paul Krugman discusses the recent surge in food prices and spots some news about the issue on his blog.

In the Financial Times the International Monetary Fund sounds the alarm for more to be done world wide to rescue credit markets.

Also from the International Monetary Fund (IMF) some concern that housing prices are a bit high in many parts of Europe.

--Mark Price

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Union Membership in Metropolitan Philadelphia

Offshored to Young Phily Politics.

--Mark Price

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March 30, 2008

Morning Links: 03/30/2008

Keystone's Herzenberg discusses the economy and the election in the Patriot News.

Trouble with foreclosures in Lehigh and Northampton County:

The number of homes sold at sheriff's sale is on the rise in both Lehigh and Northampton counties, and the tide of foreclosures has spread to higher-priced houses in the suburbs.

The number of homes sold at sheriff's sales in Northampton County more than doubled to 99 properties during the first three months of the year, according to the county's sheriff department, which handles the sales.

In Lehigh County, 94 homes sold at sheriff's sale in January, February and March, nearly double the number in 2007. That's a turnaround from last year. While foreclosures were already on the rise in 2007 in Northampton County, the number of homes sold at sheriff's sales had fallen in Lehigh County, compared with 2006.

While the number of foreclosed homes in the Lehigh Valley remains small, the latest statistics provide a glimpse of what might lie ahead. Economists predict more homeowners nationally and in the Valley will default on mortgages this year as a larger number of adjustable rate mortgages reset to higher monthly payments.

--Mark Price

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March 27, 2008

New Data on Income Inequality from Piketty and Saez

The Center on Budget and Policy Priorities presents an update to the series on inequality maintained by Economists Thomas Piketty and Emmanuel Saez.

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You can find Keystone Research Center estimates of inequality in PA based on Piketty and Saez methods in the State of Working Pennsylvania 2007.

From our report here is data on the share of income of the top 10%:

"Figure 15 presents Sommeiller's data alongside our own estimates based on Pennsylvania Department of Revenue data and reveals the following trends: The share of personal income held by the top 10% peaked at 35% in 1921. This share declined in the 1920s before recovering somewhat to 31% in 1940. At around 28%, the share of the top 10% in the last several years is higher than it has been, with the exception of 1987, since the 1940s."

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Posted by Price at 03:02 PM | Comments (0)

Keystone Research Center in the Wall Street Journal

Estimates from State of Working Pennsylvania appear in the Wall Street Journal.

--Mark Price

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March 26, 2008

Morning Links: 03/26/2008

From the Financial Times a worry we are not out of the woods yet:

"In London, where the Bank of England has faced criticism for not being as proactive as other central banks, the three-month Libor rate was set on Tuesday at 5.995 per cent, its highest of the year. This is nearly 0.9 percentage points above the level investors demand for risk-free money, a spread nearly as high as that which led to central bank interventions in September and December."

"The Fed's latest lending to banks under its Term Auction Facility was also in heavy demand, receiving bids for $88.9bn compared with the $50bn on offer, an excess of demand almost as great as the previous auction two weeks ago, before the collapse of Bear Stearns."

Also from the Financial Times the credit squeeze stirs up trouble in Iceland:

"Fears that Iceland could be the first country to fall victim of the global financial turmoil grew on Tuesday when its central bank abruptly increased interest rates 1.25 percentage points to 15 per cent in an attempt to restore confidence in its struggling currency and stave off a full-blown economic crisis."

Daniel Gross discusses the New Deal institutions which are currently preventing a complete collapse of mortgage lending.

"1. The Federal Home Loan Bank system. Last year, the model of originating and securitizing mortgages began to break down in the wake of the subprime debacle. Mortgage companies that relied on the capital markets (rather than deposits) to raise the money for mortgages suddenly found themselves starved for cash. Many of them turned to the FHLB, which was created in 1932 (so let's give that one to Herbert Hoover) and provides capital to lenders. Indeed, had it not been for the FHLB, it's possible that the nation's largest mortgage lender, Countrywide Financial Corp., might have gone under. Sen. Charles Schumer, D-N.Y., noted last fall that Countrywide borrowed a whopping $51.4 billion from the Atlanta FHLB as its troubles mounted. On Monday, the FHLB pitched in again, relaxing regulations on member banks to allow them to double the number of mortgage-backed securities issued by Fannie Mae and Freddie Mac that they can hold on their books for the next two years. The FHLB noted that this measure could allow member banks to purchase more than $100 billion worth of such securities.

2. The Federal Housing Authority. The FHA, which was created in 1934, insures mortgages made by approved lenders to borrowers who are creditworthy but not particularly affluent. As the mortgage market grew like Topsy and subprime lenders peddled credit to underserved markets, the FHA may have seemed outdated. But in the wake of the subprime debacle, the FHA has suddenly become an important part of the effort to stanch the rising tide of foreclosures. Last summer, it created FHASecure, a program that lets certain borrowers switch from adjustable-rate mortgages into fixed-rate mortgages. "From September to December 2007, FHA facilitated more than $38 billion of much-needed mortgage activity in the housing market, more than $15 billion of which was through FHASecure, FHA's refinancing product." As part of the recently passed stimulus package, the FHA is also temporarily jacking up the size of the mortgages it will insure (in high-cost housing areas) from $362,790 to $729,750.

3. The Federal National Mortgage Association (Fannie Mae), which was created in 1938. Fannie Mae purchases so-called conforming mortgages (mortgages under a certain size) made by other lenders and packages them into securities, which it effectively insures. (Here's a historical table of the conforming loan limit, which was $417,000 for a single home last year.) Fannie Mae and its brother government-sponsored enterprise, Freddie Mac, are playing a central role in the federal response to the housing crisis. The stimulus package boosted the size of the loans Fannie and Freddie can buy, from $417,000 to "125 percent of the area median home price in high-cost areas, not to exceed $729,750." And then earlier this month, OFHEO, the body that regulates Fannie and Freddie, said it would lift the cap on the amount of capital they could use to buy mortgage-backed securities and make loans, providing "up to $200 billion of immediate liquidity to the mortgage-backed securities market."

4. The Federal Deposit Insurance Corp. The FDIC, which was founded in 1933 and insures bank deposits, is playing more of a passive role. Many of the financial institutions that have failed or suffered near-death experiences in the current crisis—subprime lenders, jumbo lenders like Thornburg Mortgage and Bear Stearns—essentially fell victim to runs on the bank. Once customers and counterparties came to believe that it wasn't safe to do business with these firms, their days were numbered. But one sector has been largely immune from runs on the bank—banks themselves. Even as banking companies have racked up significant losses on soured loans, and even as some tiny banks have failed, Americans haven't rushed to yank their cash out of their checking and savings accounts. The reason: In the event of a failure, depositors with $100,000 or less at FDIC-insured institutions are made whole."

Brad Delong and Paul Krugman push back on the recent news about the most successful New Deal institution Social Security.

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March 25, 2008

Growth in non-metropolitan housing prices in Pennsylvania

Today the Office of Federal Housing Enterprise Oversight (OFHEO) released new data on housing prices in January. The new data is from a seasonally adjusted monthly index which for the time being is only available by census division. In the Mid-Atlantic region which includes Pennsylvania, New York, and New Jersey housing prices before adjusting for inflation fell by 0.4% from December to January.

The OFHEO did however also recently release a new index of housing price data for Pennsylvania. The new data covers housing prices in non-metropolitan Pennsylvania between the 1st quarter of 1995 and the 4th quarter of 2007.

Before presenting the numbers let me briefly discuss housing prices and inflation. For the majority of Pennsylvanian's their homes represent their most valuable asset. Just like when a stock price rises, rising housing prices mean that Pennsylvanian's have more wealth. Just how much more wealth they have depends on what is happening to the overall price level (measured here as consumer prices less shelter). So in Pennsylvania from the 4th quarter of 2006 to the 4th quarter of 2007 housing prices increased by 2.8% but since over the same period consumer prices increased by 2.8% the value of Pennsylvania homes was unchanged.

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Before adjusting for inflation housing prices in non-metropolitan Pennsylvania increased by 3.3% in the 4th quarter of 2007. Factoring in inflation, housing prices increased slightly 0.5% in the region. Like in many parts of Pennsylvania there has been a sharp slowing of the growth in housing prices in non-metropolitan Pennsylvania compared to the recent past. Overall between 2001 and 2006 inflation-adjusted housing prices rose by 31% in non-metropolitan Pennsylvania. Before adjusting for inflation housing prices rose by 54% in non-metropolitan Pennsylvania.

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Given the widespread growth in housing prices it is no surprise that subprime loans (see our estimates of the subprime share of all mortgages originated by county in Pennsylvania) even in non-metropolitan counties became an important source of financing for many families.

--Mark Price

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it is an unusual period

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March 24, 2008

Dean Baker has a good idea

Dean Baker has a good proposal regarding investment banks that borrow from the discount window at the Federal Reserve:

"Even if this new lending route turns out not to help the economy much, it is certainly a good deal for these financial firms. They can now borrow tens of billions of dollars from the government at just a 2.5 percent interest rate.

Why shouldn't the taxpayers get something in return?

While we could think of all sorts of elaborate concessions we can ask from the Wall Street crew in exchange for these special discount loans, we can keep it simple. Suppose we put a cap on the compensation for their most highly paid executives of just $1 million a year."

--Mark Price

Posted by Price at 01:47 PM | Comments (0)

The Many Faces of Robert Rubin

Paul Krugman in today's column pushes for more debate over the shadow financial system and quotes Robert Rubin:

"America came out of the Great Depression with a pretty effective financial safety net, based on a fundamental quid pro quo: the government stood ready to rescue banks if they got in trouble, but only on the condition that those banks accept regulation of the risks they were allowed to take. Over time, however, many of the roles traditionally filled by regulated banks were taken over by unregulated institutions - the "shadow banking system," which relied on complex financial arrangements to bypass those safety regulations. Now, the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And the government is rushing in to help, with hundreds of billions from the Federal Reserve, and hundreds of billions more from government-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Given the risks to the economy if the financial system melts down, this rescue mission is justified. But you don't have to be an economic radical, or even a vocal reformer like Representative Barney Frank, the chairman of the House Financial Services Committee, to see that what's happening now is the quid without the quo. Last week Robert Rubin, the former Treasury secretary, declared that Mr. Frank is right about the need for expanded regulation. Mr. Rubin put it clearly: If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks."

Meanwhile on the Newshour on March 21st, 2008 Mr. Rubin:

"JUDY WOODRUFF: Do you agree with those who blame a lot of this on a lack of regulation and a lack of supervision of financial institutions?

ROBERT RUBIN: No, I do not. I think what you had was a really quite extraordinary confluence of different factors. You had the seemingly inevitable and inherent aspect of financial markets, which is a tendency to go to excess, and then to adjust and have disruption.

But then on top of that, you had low interest rates that led to a reaching for yield; you had tremendous use of complex financial instruments; and other kinds of factors. They all came together to produce what I think is really an extraordinary situation.

I don't think this is -- no, I do not think this is any fair measure a regulatory failure.

JUDY WOODRUFF: So you don't think we need more regulation, more...

ROBERT RUBIN: Well, let me say, no, I do think we need regulatory change, and I do think the one area in which the uncertainty was, at least in my judgment, an inadequate amount of regulation was in the practices in the mortgage business.

JUDY WOODRUFF: And what needs to be done about that?

ROBERT RUBIN: I think there are two sets of changes that should come out of this, but then I want to mention one very important caveat. Number one, in terms of consumer protection in the mortgage area, there certainly seemed to me -- and this is not an area I'm an expert in, but I know a little bit about -- there certainly seem to me to be practices that probably should not be allowed.

And I think there also needs to be found some way to make far more transparent to the people who are taking out mortgages what they're undertaking. And that is much harder than it seems, because it's a very complex subject for people who're not financially sophisticated.

On the financial market perspective, I think there are aspects of risks to our financial system that ought to be addressed going forward in the regulatory process, particularly around the derivatives and other kinds of complex instruments of financial engineering.
But in all of this, I think the key is to find the optimal balance between increased protection on the one hand and not smothering our free-market financial system."

Hmm? Here is Krugman on his blog "Hiding behind the invisible hand" on the 22nd including a picture that says it all:

"Actually, there was plenty of coordination - a coordinated effort to destroy effective regulation:

Consider the press conference held on June 3, 2003 - just about the time subprime lending was starting to go wild - to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.

The lack of oversight, in short, was no oversight: it was part of the plan."

Meanwhile in Bailout Nation:
Robert Reich discusses a double standard in America with regard to risky behavior:

"The real moral hazard in this saga started when Fed Chair Ben Bernanke cut the Fed's discount rate (charged on direct federal loans to banks) and announced that the Fed would take whatever action was needed to "promote the orderly financing of markets." Translated, this means that lenders, credit-rating agencies, financial intermediaries, and hedge funds will be bailed out, one way or another, because they're simply too big to fail. Note that behind every one of these institutions lie thousands of well-paid executives who would have lost big if the Fed didn't come to their rescue. Even though they had more information and experience at risk-taking than the suckers who borrowed their money, and even though executives at the top of these institutions typically earn more in a day than the borrowers do in a year, moral hazard somehow doesn't apply to them. When it comes to risky behavior in the market, America has a double standard. We're told that economic risk-taking as the key to entrepreneurial success, but when big entrepreneurs take big risks that fail it's amazing how often they get bailed out..."

JPMorgan agrees to pay $10 a share for Bear Stearns.

"The central bank had also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, people involved in the negotiations said Sunday night."

--Mark Price

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March 21, 2008

Revenue Trouble in Lebanon County

hat tip to PSOTD.

"Once considered the fastest-growing municipality in Lebanon County, South Londonderry Township is now at a dead stop - and that could mean some budget cuts in the near future, according to one township official. Thomas Ernharth, township manager, told the board of supervisors Tuesday night that revenue from the real-estate-transfer tax dropped significantly in February. A transfer tax of 1 percent of the sale price is assessed whenever real estate is purchased. The township and the school district split the proceeds."For the month of February, we received a total of $4,000," he said. "In previous years, we received twenty to twenty-four thousand a month. That's a significant hit to our budget." Knowing the economy was slow, Ernharth said, he estimated the amount of the tax the township would receive in 2008 at a total of $200,000, or about $16,000 a month. Just two or three homes in the township were sold last month, he said."

Inflation-adjusted housing prices in Lebanon increased by .4% from the 4th quarter of 2006 to the 4th quarter of 2007. If the pace of sales in South Londonderry township is representative of sales in the rest of the region it looks like we can expect price declines in the 1st quarter of 2008.

--Mark Price

Posted by Price at 04:40 PM | Comments (0)

February's Employment Situation in Pennsylvania

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Private sector payrolls declined by 8,400 jobs from January to February. While a decline is not unexpected given the losses in employment being experienced nationally the loss of 8,400 jobs is larger than we expected here at Keystone. Most of the losses were concentrated in just two sectors. Construction shed 3,800 jobs and Trade Transportation and Utilities shed 4,300 jobs. Some caution is warranted, these figures are preliminary and may be revised.

Here is the news release from the Department of Labor.

--Mark Price

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More news about economic pain spreading to main street

Peter Goodman of the New York Times writes a story (still not Pennsylvania specific) that illustrates how economic problems are spreading. Commenting on this story Dean Baker notes that the bad debt in the economy probably exceeds $1 trillion.

Paul Krugman explains the parallels between the current situation and the banking crisis of 1930-31.

James Parrot of the Fiscal Policy Institute in New York "counts the ways today's economy is not the one we thought we had".

Posted by Price at 08:34 AM | Comments (0)

March 20, 2008

How a Credit Squeeze Hits Main Street

Not a Pennsylvania specific story but this National Public Radio story illustrates how turmoil in financial markets is slowing business activity. Click to listen.

--Mark Price

Posted by Price at 04:19 PM | Comments (0)

Details about Payroll Employment in Metropolitan Philadelphia

Today's post on trends in Payroll Employment in Metropolitan Philadelphia has been offshored to Young Philly Politics.

in other news

The Business Outlook Survey of the Federal Reserve Bank of Philadelphia was released today. Some measures improved from last month but generally the survey is still showing weakness in the Manufacturing Sector of the region which includes all but western Pennsylvania.

"Continued weakness was also evident this month in responses about employment and hours worked. The percentage of firms reporting a decrease in employment (20 percent) was slightly higher than the percentage reporting an increase (15 percent), and the current employment index fell from 2.5 to -4.7, its second negative reading in three months. Weakness was most evident this month in hours worked: 21 percent indicated declines in average hours worked; 11 percent reported increases. The average workweek index dropped from -3.9 in February to -10.0 this month."

In better news the Federal Home Loan Bank of Pittsburgh a depression era cooperative that raises capital for its member banks puts some money towards affordable housing in the city of Philadelphia.

--Mark Price

Posted by Price at 03:15 PM | Comments (0)

March 19, 2008

Quick look at January Payroll Employment in 13 Pennsylvania Metropolitan Areas

Data on the employment situation in January for 13 Pennsylvania metropolitan was released today.

This data is not seasonally adjusted so the proper comparison is employment in the current month to the same month a year ago. Payroll employment in January compared to the same month a year ago declined by 600 jobs in Reading and 400 jobs in Williamsport. For both metropolitan areas this is the second consecutive month of job loss. Modest gains were made in the remaining 11 metropolitan areas.

Posted by Price at 10:06 AM | Comments (0)

Morning Links: 03/19/2008

David Leonhardt of the New York Times takes a stab at explaining how it all went wrong.

Paul Krugman is worried about a liquidity trap.

The Bureau of Labor Statistics data release schedule has been updated. We will not get data on the Pennsylvania employment situation in February until March 28th. The Pennsylvania Department of Labor often releases the same data a day earlier but there is no promised release date.

Posted by Price at 08:55 AM | Comments (0)

March 18, 2008

The roof, the roof, the roof is on fire!

Krugman describes two kinds of bank runs:

In some cases, the bank run is a pure self-fulfilling prophecy: the bank is "fundamentally sound," but a panic by depositors forces a too-hasty liquidation of its assets, and it goes bust. It's as if someone calls "fire!" in a crowded theater, provoking a stampede that kills many people, even though there wasn't actually a fire.

In other cases, the bank is fundamentally unsound - but the bank run magnifies its losses. It's as if someone calls "Fire!" in a crowded theater, and there really is a fire - but the stampede kills people who would have survived an orderly evacuation.

We're in the second case. The Fed has spent the last 7 months trying to assure people that there isn't any fire. But there is.

Suddenly everybody in the economics profession is funny. Here is some satire from EPI's Jared Bernstein.

"In a surprise move aimed at stimulating moribund financial markets and the larger economy, the Federal Reserve surprised markets with an unprecedented 50 point rate cut, taking their target rate down to -47%...Wall St, however, was critical, continuing to press the Fed to go further. "While a negative interest rate of this size will help, the 50 point cut was far too small to make up for the losses we've suffered. Most folks down here were expecting a 75 point cut, " noted Joe Whiner, a trader at Boom'n'Bust investment bank. Whiner pointed out that while his trades lost his firm "only $32 billion" last year, his bonuses have only amounted to $30 billion. "I'm still waiting for the Fed makes up the difference," he said."

Posted by Price at 05:00 PM | Comments (0)

Corrections Spending versus Higher Education Spending in Pennsylvania

Courtesy of Liana Fox at the Economic Policy Institute here is state data on the increase in spending on corrections versus the increase in spending on higher education from 1987 to 2007.

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An society that is spending money faster to lock people up that it is to educate them has an economy that is growing more slowly than it could be. Why does that matter? We are all poorer than we would otherwise be.

Via EPI here is the state by state data.

--Mark Price

Posted by Price at 12:46 PM | Comments (0)

March 17, 2008

I want my two dollars!

Bear Stearns is sold for $2 dollars a share.

Fear spreads who's next?

Krugman closes out today's column with some painful candor:

"According to late reports on Sunday, JPMorgan Chase will buy Bear for a pittance. That's an O.K. resolution for this case — but not a model for the much bigger bailout to come. Looking ahead, we probably need something similar to the Resolution Trust Corporation, which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers. And we need it quickly: things are falling apart as you read this."

Dean Baker points us to Ben Bernanke's testimony from March 28th, 2007.

"Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely."

It seems that Bear Stearns was taken down by a modern version of a bank run, where the key ingredient is fear. Dean is right what we need now is not happy talk but transparency.

The New York Times summarizes the spread of distress in financial markets to the real economy in the form of emerging budget deficits. Here is a nifty chart.

As a reminder, new data on Pennsylvania's employment situation in February should be released by Friday.

--Mark Price

Posted by Price at 08:25 AM | Comments (0)

March 16, 2008

Bailout Nation

Gretchen Morgenson of the New York Times wonders whether the bailout of Bear Stearns is wise:

"Recall, too, that back in 1998, when the Long Term Capital Management hedge fund required a Fed-arranged bailout, Bear Stearns refused to join the rescue effort. Jimmy Cayne, then chief executive at the firm, told the Fed to take a hike. And so, Bear Stearns, a firm that some say is this decade’s version of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop dominated by Michael Milken, is rescued. Almost two decades ago, Drexel was left to die. Bear Stearns and Drexel have a lot in common. And yet their differing outcomes offer proof that we are in a very different and scarier place than in the late 1980s. "Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?" asked William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.” “This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation."

Calculated Risk explores the Trade Deficit and Mortgage Equity Withdrawal.

--Mark Price

Posted by Price at 08:59 AM | Comments (0)

March 15, 2008

Financial lambs bleating in the desert

The great economic historian Richard H. Tawney once wrote:

"Few tricks of the unsophisticated intellect are more curious than the naive psychology of the business man, who ascribes his achievements to his own unaided efforts, in bland unconciousness of a social order without whose continuous support and vigilant protection he would be as a lamb bleating in the desert."

Something to ponder as the Wall Street elite, some of the highest paid individuals in our economy, place urgent calls to the New York Branch of the Federal Reserve:

"The rescue effort began late Thursday evening, when Alan D. Schwartz, Bear Stearns's chief executive, placed an urgent call to James Dimon, his counterpart at JPMorgan Chase. Mr. Schwartz said Bear Stearns was struggling to finance its day-to-day operations, according to several people briefed on the negotiations, a situation that would threaten its survival. Because JPMorgan settles transactions for Bear Stearns as its main clearing bank, it was in a good position to assess the collateral that Bear Stearns could provide against a loan. But Mr. Dimon insisted on the support of Timothy F. Geithner, president of the New York Fed. Mr. Geithner quickly agreed to the plan."

Floyd Norris of the New York Times discusses the financial system that has outgrown the regulations once designed to prevent its collapse.

Also from the New York Times an explanation why the Federal Reserve intervened to which Dean Baker responds that the taxpayer in a blink of the eye just bailed out Bear Stearns Shareholders.

The Wall Street Journal has the most detailed recount of the Bear Stearns bailout.

In other news:

Obviously its purely a coincidence that Toll Brothers, the PA based homebuilder, submitted a plan to allow bonus payments to its CEO on factors other than the firms financial performance and the fact that one of its major joint ventures in Las Vegas is under significant financial stress.

--Mark Price

Posted by Price at 07:45 AM | Comments (0)

March 14, 2008

Building Storm Update II

The first phase of anxiety over a credit squeeze was brought on by the suspension of two Bear Stearns Hedge Funds over the summer. Now it seems Bear Stearns itself is on the verge of collapse.

Perhaps now is good to time to revisit the underlying driver of all this havoc, falling housing prices.

Earlier in the week I provided an update on Pennsylvania housing prices. The Office of Federal Housing Enterprise Oversight (OFHEO) has also released new data on housing prices by metropolitan area in the 4th quarter of 2007 which I summarize below.

From the 4th quarter of 2006 to the 4th quarter of 2007 inflation-adjusted housing prices fell slightly in the Philadelphia and Allentown Metropolitan areas. There was however healthy growth in prices in Scranton (4.3%), Altoona (3.6%), and State College (3.5%).

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As reported in Building Storm from 2001 to 2006 inflation-adjusted housing prices grew the most in Philadelphia (52%), Allentown (49%), York (38%) and Reading (37%).


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Not surprisingly housing prices grew the least (or declined) in each of these same metropolitan areas in the most recent year. Of the metro's with the most growth in prices between 2001 and 2006, appreciation held up the best in the York-Hanover metropolitan area where prices grew by 1.9% in the most recent year. However that is still well below the housing price growth from 2001 to 2006 in York-Hanover where inflation-adjusted prices grew on average by 7.6% a year. Hard to believe that the recent growth in Scranton, Altoona and State College will hold up in the next couple of quarters.

--Mark Price

Posted by Price at 02:40 PM | Comments (0)

Black Gold, Gold and Cash

The New York Times summarizes the weeks movements in gas prices, gold and the dollar.

State budget troubles pile up in New Jersey (hat tip to Calculated Risk).

Paul Krugman is good but gloomy today:

"What if this initiative fails? I'm sure that Mr. Bernanke and his colleagues are frantically considering other actions that they can take, but there's only so much the Fed - whose resources are limited, and whose mandate doesn't extend to rescuing the whole financial system - can do when faced with what looks increasingly like one of history's great financial crises.The next steps will be up to the politicians.I used to think that the major issues facing the next president would be how to get out of Iraq and what to do about health care. At this point, however, I suspect that the biggest problem for the next administration will be figuring out which parts of the financial system to bail out, how to pay the cleanup bills and how to explain what it's doing to an angry public. "

Shareholders at the Pennsylvania based homebuilder Toll Brothers approved a bonus plan that moves away from awarding bonuses based on financial performance.

"Jennifer O'Dell, deputy director of corporate affairs for the Laborers' International Union of North America, whose pension funds own at least 200,000 shares of Toll Brothers, commented that the bonus plan "pays him simply for existing," and adding, "You should pay C.E.O.s for performance."

C.E.O Robert Toll made $23,408,911 in 2006 as net income declined by 15% and shareholder returns declined 22%.

Myron Scholes hedge fund manager and nobel laureate in economics is floating a bailout plan for financial markets. Scholes was also the co-founder of Long Term Capital Management (LTCM), a hedge fund that had to be rescued by the Federal Reserve after its working capital was wiped out by financial market volatility in much the same way that Carlyle Capital Corporation was wipped out this week.

Which brings us back to Krugman's column, somebody is going to pay for all this and it is probably not going to be people like Scholes or Toll who most likely benefited the most from the madness that got us into this mess.

--Mark Price

Posted by Price at 08:22 AM | Comments (0)

March 13, 2008

Economic Forecasting

The Wall Street Journal reports that 36 of the 51 economic forecasters surveyed by the Journal now believe the economy is in a recession. Maybe now would be a good time to rent the movie Weather Man.

Also from the Journal predictions of further declines in housing prices. Dean Baker one the very few economic forecasters that predicted rain before it started raining adds that housing prices do not generally follow the growth in income but over the long run grow along with the overall rate of inflation.

--Mark Price

Posted by Price at 03:52 PM | Comments (0)

March 12, 2008

Gloomy Prediction from Merril Lynch

The Wall Street Journal reports that a Merrill Lynch economist believes that rising food and energy prices in combination with falling real estate and equity values would make the recession they believe we are in now worse than any since the early 1970s.

--Mark Price

Posted by Price at 01:50 PM | Comments (0)

March 11, 2008

Building Storm Update

On January 31st Keystone released a report "A Building Storm: The Housing Market and the Pennsylvania Economy" explaining the potential effects the housing market meltdown and the credit squeeze could have on the Pennsylvania economy.

On February 26th new data on housing prices were released by the Office of Federal Housing Enterprise Oversight (OFHEO).

(see figure larger)

As a reminder what we knew as of the 3rd quarter was that housing prices from 2006 to 2007 grew in Pennsylvania by 4%. Adjusting for inflation that number fell to 1.8%.

According to the new data housing prices from the 4th quarter of 2006 to 4th quarter of 2007 increased by 2.8% (slower than in the 3rd quarter). Non-housing prices grew over the same period by 2.8% percent. Adjusting for inflation Pennsylvania housing prices grew by 0% in the 4th quarter.

As the growth in housing prices nationally slowed, they have also slowed in Pennsylvania. In fact in the fourth quarter national housing prices in the OFHEO data actually declined before adjusting for inflation. Should we expect Pennsylvania prices to follow?

The Philadelphia Federal Reserve Bank reported to in the Beige Book on March 5th that residential real estate markets in the region were weak due mainly to tightened credit conditions. They did however expect the real estate market to stabilize soon.

You will note that today the Federal Reserve announced that it would auction off $200 billion of treasury securities. The treasuries will be lent for 28 days and the fed will accept as collateral mortgage backed securities which are because of home foreclosures of suspect value. So the borrower is giving to the Fed assets of questionable value for U.S. Treasuries which can then be re-sold for cash. This is according to Paul Krugman another attempt by the Fed to encourage financial markets to get a hold of themselves.

Dean Baker worries that this is just the Fed "handing over hundreds of billions of taxpayer dollars to the world's richest people."

How does this affect Pennsylvania? If residential real estate activity in Pennsylvania is to stabilize and prices are not to fall credit markets need to recover and like soon. The same thing can be said for the broader Pennsylvania economy.

--Mark Price

Posted by Price at 04:07 PM | Comments (0)

March 10, 2008

The Good, The Bad and The Ugly

The U.S. economy shed 101,000 private sector jobs in February. Here are summaries of the bad news by EPI and CEPR.

The Good:
Private sector payrolls in Pennsylvania, which are only current through January, appear so far to have performed somewhat better than the national labor market with the private sector in Pennsylvania adding 3,700 jobs even as the U.S. economy shed 26,000 private sector payroll jobs (Figure 1). The February employment figures for Pennsylvania should be released by March 21st.

(see a larger figure)

The Bad:
In the past as the national economy went so went the Pennsylvania economy. In the 2001 recession as national employment growth slowed and then turned negative so it did in Pennsylvania (Figure 2).

see a larger figure

The Ugly:
As Mark Zandi of Economy.com put it, "The economy never got its groove back after the tech bubble burst". Employment growth nationally and in Pennsylvania since the end of the last recession never achieved the levels of growth that prevailed during the later half of the 90s. The result, hourly earnings failed to keep pace with inflation. As food and energy prices surge even as the economy appears to be headed for a recession the stagnation in wages is likely to continue. As of June of 2007, before the housing market melted down taking the U.S. financial system with it, inflation adjusted median wages in Pennsylvania remained 1.1% below their levels in 2001-2002.

(see it larger)

Posted by Price at 11:47 AM | Comments (0)

March 06, 2008

Economy Got You Down?

The local Starbucks offers up some economic stimulus.

Economy.com estimates that the Pennsylvania economy is still expanding. However by metropolitan area they find that that Erie and Altoona are in recession. Pittsburgh, Reading and Williamsport are "at risk" of being in recession.

Dean Baker questions mortgage bailouts currently being considered.

David Leonhardt of the New York Times offers up a reminder of the importance of looking beyond official unemployment rates when evaluating the health of the labor market.

The Federal Reserves Beige Book evaluates the health of the economy from the perspective of its member banks.

Here is what they have to say about real estate and construction:

"Residential real estate markets were generally weak over the last couple of months...Contacts in the Chicago, Kansas City, and Philadelphia Districts cited tight credit conditions as a reason for low sales; each of those Districts either reported or expected stabilization of demand for homes in the low and mid-price ranges...The markets for office and retail space showed signs of a slowdown in several Districts. Office vacancies were reported up, and leasing volumes down, in Manhattan, Baltimore, Washington, D.C., Memphis, portions of Maine and Rhode Island, and Las Vegas. Districts indicated that office vacancies held steady in Boston and the Carolinas, and were down in Philadelphia and in the Minneapolis and St. Louis Districts; however, contacts in the Boston and Philadelphia Districts and see some emerging slack. ...Eight of the twelve Districts reported that nonresidential construction activity was slow;"

There isn't much to say about this post at the Wall Street Journal except Eeek!

Posted by Price at 04:57 PM | Comments (0)

January 18, 2008

Gloomy Business Outlook Survey from the Federal Reserve Bank of Philadelphia

The Philadelphia Federal Reserve Bank which covers the central and eastern portions of Pennsylvania, southern New Jersey and all of Delaware conducts a monthly survey of manufacturers. January's results were not positive marking a worsening of a three month trend.

Calculated Risk plots the movement in the Philadelphia Index against the business cycle dates reaching back to the 1960s. A negative turn in sentiment in the Index doesn't always coincide with a national recession but it often does.

For Pennsylvania manufacturing workers there is no good news in the survey, here is the opening summary.

"Activity in the region's manufacturing sector weakened this month, according to firms surveyed for the January Business Outlook Survey. The general activity and new orders indexes fell sharply this month, and indexes for shipments and employment also turned negative. A significant share of firms reported a rise in prices for inputs and for their own manufactured goods. Also this month, the region’s manufacturing executives were less optimistic about future activity, and most future indicators have fallen considerably over the past three months.... Weakness was also evident in replies about employment and hours worked. The percentage of firms reporting a decrease in employment (22 percent) was slightly greater than the percentage reporting an increase (21 percent), and the current employment index declined four points, to its first negative reading since September 2003. Weakness was most evident in average hours worked this month: 31 percent reported declines in average hours worked, 15 percent reported increases, and the average workweek index fell from 7.4 in December to -16.1."

Preliminary estimates of Pennsylvania Manufacturing employment in December were released late on Thursday. The sector shed just under 2,000 jobs last month. Averaged over the year, manufacturing employment was down by 10,600 jobs from 2006. January's results from the Philadelphia Fed suggest weakness going forward. They also provide a careful reminder that in weakening economy what matters more to the employment decisions of firms is demand not tax policy. Firms will expand or maintain production if they foresee having more customers not necessarily if they are offered tax breaks.

View larger image.

--Mark Price

Posted by Price at 08:16 AM | Comments (0)

Pennsylvania Jobs Report Carries Mixed Message

Modest Job Growth, But Rise in Unemployment Mark Report

Keystone Research Economists Call for Federal Action to Forestall Recession

As Pennsylvanians, like most Americans, anxiously read the economic tea leaves to see if the economy is entering a recession, they got a mixed message today from the December jobs report released by the commonwealth's Department of Labor and Industry. The report is available online.

According to the report, Pennsylvania enjoyed modest job growth in December, with private sector payrolls climbing by 3,400. That compares to a decline in national private sector payrolls of 13,000. Less reassuring, the state unemployment rate grew by half a percentage point to 4.7 percent, compared to a U.S. unemployment rate of 5 percent.

Reacting Thursday to the new report, economists at the Keystone Research Center in Harrisburg cautioned that, although the commonwealth is faring better than some states, the future of the state's economy remains highly uncertain.

According to KRC economist Mark Price, "The new data show that the state is losing ground compared with a year ago, and trends in other states suggest where we might be headed."

Price noted that Pennsylvania's unemployment rate reached its low point, below 4 percent, nearly a year ago. Since then, it has climbed almost one percentage point.

Additionally, since the 2001 recession, annual job growth in Pennsylvania peaked at nearly 60,000 jobs per year in 2005. Recent monthly job growth rates are about two thirds as fast.

"Despite some slowdown, Pennsylvania has so far steered between the deeper economic woes to its east and west," said Price.

In New York, New Jersey, and Maryland, the bursting of the housing bubble and an associated drop in consumer spending have resulted in a plunge of state tax revenues totaling $8 billion.

And in Ohio and Michigan, the subprime mortgage crisis and the hemorrhaging of U.S. auto industry jobs have created a toxic cocktail leading to high unemployment rates and high home foreclosure rates.

"To forestall a national recession that would bring the problems of surrounding states to Pennsylvania," Price said, "Washington should take immediate action to stimulate the economy."

Price said federal policymakers should take three steps to revive the economy and steer it away from recession. They are:
(1) Put more money in the pocket of low-income and unemployed workers through extended and more generous unemployment insurance, targeted temporary tax rebates, home heating assistance, and increases in food stamps
(2) Give states a share of federal revenue to shore up state budgets, and
(3) Accelerate planned spending on infrastructure projects and make additional investments in the future, such as energy conservation, that pay for themselves in the long run.

Posted by Price at 08:02 AM | Comments (0)