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The Devil’s in the Tail: Residential Mortgage Finance and the U.S. Treasury

September 3, 2012 Comments off

The Devil’s in the Tail: Residential Mortgage Finance and the U.S. Treasury
Source: Federal Reserve Bank of Atlanta

This paper seeks to contribute to the U.S. housing finance reform conversation by providing a critical assessment of the various types of policy proposals that have been offered. There appears to be a broad consensus to maintain explicit government guarantees for certain narrowly defined borrower populations, such as Federal Housing Administration insurance guarantees for low- and moderate-income and first-time homebuyers. However, the expected role of the federal government in the broader housing finance system is in dispute. The expected role ranges from no role to insuring against only extreme or tail events to insuring against all losses. However, most proposals agree that any public insurance be priced and available only for loans meeting specified criteria to limit taxpayer exposure.

Household Formation and the Great Recession

August 29, 2012 Comments off

Household Formation and the Great Recession
Source: Federal Reserve Bank of Cleveland

During the Great Recession, the rate at which Americans formed households fell sharply. Though the rate has recently picked up, it isn’t fast enough to make up for the shortfall in household formation that occurred over the last several years. An analysis of recent household formation patterns shows that the greatest shortfall occurred among young adults and that it is related to weak economic conditions. Housing choices have shifted as well, with a greater proportion of young households living in rental housing rather than owner-occupied homes.

The Untold Story of Municipal Bond Defaults

August 17, 2012 Comments off

The Untold Story of Municipal Bond Defaults
Source: Federal Reserve Bank of New York

The $3.7 trillion U.S. municipal bond market is perhaps best known for its federal tax exemption on individuals and its low default rate relative to other fixed-income securities. These two features have resulted in household investors dominating the ranks of municipal bond holders. As shown below, individuals directly hold more than half, or $1.879 billion, of U.S. municipal debt; when $930 billion in mutual fund holdings is included, the household share rises to three-quarters. Although the low default history of municipal bonds has played a key role in luring investors to the market, frequently cited default rates published by the rating agencies do not tell the whole story about municipal bond defaults.

A Closer Look at Nonparticipants During and After the Great Recession

August 10, 2012 Comments off

A Closer Look at Nonparticipants During and After the Great Recession
Source: Federal Reserve Bank of Atlanta

This paper uses matched individual-level data from the Current Population Survey to determine that around the 2008 recession, there was a significant upward shift in trend of the share of labor force leavers giving “Schooling” and “Other” as the reason for absence from the labor market. This trend shift is observed primarily among workers between the ages of 25 and 54 and is widespread across all educational groups with at least a high school degree. In addition, the upward shift in the trend of the schooling reason share occurred among workers previously employed in occupations and industries with varying degrees of job losses during the recession. This shift suggests it was a widespread phenomenon and not isolated among sectors or occupations that suffered the most during the recession. The implication is that the upward shift in the schooling reason share has more likely been a response to lower opportunity costs of schooling during economic downturns rather than the result of workers trying to overcome skill mismatch in the labor market. In addition, since transition rates to the labor force are highest among those giving “Schooling” and “Other” as reasons for absence, the decline in labor force participation since 2008 is likely more transitory than permanent.

Federal Reserve issues FOMC statement (8/1/12)

August 1, 2012 Comments off

Federal Reserve issues FOMC statement (8/1/12)

Source: Federal Reserve Board

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Industry-Occupation Mix of U.S. Job Openings and Hires

July 27, 2012 Comments off

The Industry-Occupation Mix of U.S. Job Openings and Hires (PDF)
Source: Federal Reserve Bank of San Francisco

I introduce a method that combines data from the U.S. Current Population Survey, Job Openings and Labor Turnover Survey, and state-level Job Vacancy Surveys to construct annual estimates of the number of job openings in the U.S. in the Spring by industry and occupation. I present these estimates for 2005-2011. The results reveal that: (i) During the Great Recession job openings for all occupations declined. (ii) Job openings rates and vacancy yields vary a lot across occupations. (iii) Changes in the occupation mix of job openings and hires account for the bulk of the decline in measured aggregate match efficiency since 2007. (iv) The majority of job openings in all industries and occupations are filled with persons who previously did not work in the same industry or occupation.

Shifting Confidence in Homeownership: The Great Recession

July 26, 2012 Comments off

Shifting Confidence in Homeownership: The Great Recession
Source: Federal Reserve Bank of Boston

The authors study the responses to several questions related to real estate that were added to the Michigan Survey of Consumers in July and August 2011. In particular, they asked about attitudes toward renting versus buying a home, about commuting, and about how much to spend on a mortgage. By matching the results to data (at the ZIP-code level) about relative house price declines during the recent crisis, they can study the relationship between the U.S. housing crash and the attitudes of individual consumers. They find that younger respondents are relatively less confident about homeownership after larger price declines, while older respondents are relatively more confident. In both cases, this is observed only for those with direct experience of loss (via themselves or someone close) during the crash. They find no effect on attitudes towards commuting, and they find that people who live in the high-decline areas believe it is appropriate to spend more on a mortgage.

Presentation Videos — Bridging the Border: Reinforcing Ties between the U.S. and Mexico – April 12, 2012

July 5, 2012 Comments off

Bridging the Border: Reinforcing Ties between the U.S. and Mexico – April 12, 2012
Source: Federal Reserve Bank of Atlanta

The April 12 panel, moderated by Atlanta Fed President and CEO Dennis P. Lockhart, explored the long-standing relationship between the United States and Mexico, two countries bound by history, geography, and trade.

Mexico has experienced a decade of relative stability, thanks to a series of fiscal and monetary reforms, explained Ed Skelton, a business economist at the Dallas Fed. Those reforms include central bank independence, fiscal discipline, and the adoption of a formal inflation target.

The country’s electoral system has also undergone extensive reforms, making it one of the most impartial systems in the world, said Robert Pastor, director of American University’s Center for North American Studies. Pastor argued that it is time for the United States, Canada, and Mexico to refocus on the hemisphere, where trade relations have stalled since 2001.

CEO Pay and the Market for CEOs

July 2, 2012 Comments off

CEO Pay and the Market for CEOs
Source: Federal Reserve Board

Competitive sorting models of the CEO labor market (e.g., Edmans, Gabaix and Landier (2009)) predict that differences in CEO productive abilities, or “talent”, should be an important determinant of CEO pay. However, measuring CEO talent empirically represents a major challenge. In this paper, we document reliable evidence of pay for CEO credentials and argue that the evidence is consistent with models of the CEO labor market. Our main finding is that boards’ compensation decisions reward several reputational, career, and educational credentials of CEOs, with newly-appointed CEOs earning a 5 percent ($280,000) total pay premium for each decile improvement in the distribution of these credentials. Consistent with boards using credentials as publicly-observable signals of CEO abilities, we show that pay for credentials displays key cross-sectional features predicted by theory, such as convexity in credentials and complementarity with firm size. Our main finding is robust to a battery of identification tests that address selectivity and endogeneity concerns, including instrumental variables estimates and controlling for firm and CEO fixed effects. We also show that credentials capture variation in CEO human capital that is different from lifetime work experience, and are positively related to long-term firm performance and board monitoring, which helps to distinguish our results from alternative stories based on CEO general human capital, hype, and entrenchment. Overall, our findings suggest that sorting considerations in the CEO labor market are an important determinant of CEO pay. Our results also suggest that the rise in CEO pay over the last decades may owe at least in part to a rise in the CEO talent premium.

The Other, Other Half: Changes in the Finances of the Least Wealthy 50 Percent, 2007-2009

July 1, 2012 Comments off

The Other, Other Half: Changes in the Finances of the Least Wealthy 50 Percent, 2007-2009
Source: Federal Reserve Board

In discussions of household wealth, it is not surprising that discussion often tends to focus on the upper half of the wealth distribution: According to the 2007 Survey of Consumer Finances (SCF), that group held 97.5 percent of all directly owned household wealth. This paper investigates the wealth dynamics of this group using data from the 2007-2009 SCF panel to examine the degree of distributional mobility among this group, the demographic characteristics associated with such change and the role of initial portfolio allocation. It also provides information from earlier SCFs and the 2010 SCF to put the results in perspective.

EconSouth Examines How Trucks Move the Economy

June 30, 2012 Comments off

EconSouth Examines How Trucks Move the Economy
Source: Federal Reserve Bank of Atlanta

With trucks responsible for moving more than two-thirds of the nation’s goods, the industry is inextricably linked to the health of the U.S. economy. In “Truckonomics: An Industry on the Move,” associate editor Nancy Condon explores the factors affecting the industry.

Given trucking’s linkages to the national economy, perhaps it’s no surprise that the industry was hit hard by the 2007–09 recession. As demand plummeted, carriers were forced to lower their rates. Many smaller companies failed or were bought by larger companies.

Postrecession, the industry faces a new set of challenges, Condon explains. The consolidation that occurred during the downturn left carriers with a shortage of capacity, and the surviving carriers are operating with an aging fleet. Additionally, the industry faces tougher federal regulations and higher diesel fuel prices.

Constrained capacity has an upside for the industry, however. It’s as simple as the law of supply and demand: “Tonnage is up, capacity is down, and so trucking companies have the pricing power to raise their rates,” Condon writes. Though, the industry’s recovery ultimately hinges on overall economic performance, she concludes.

Federal Reserve issues FOMC statement (6/20/12)

June 20, 2012 Comments off

Federal Reserve issues FOMC statement (6/20/12)
Source: Federal Reserve Board

Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances

June 12, 2012 Comments off

Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances (PDF)Source: Federal Reserve Board

The Federal Reserve Board’s Survey of Consumer Finances for 2010 provides insights into changes in family income and net worth since the 2007 survey. The survey shows that, over the 2007–10 period, the median value of real (inflation-adjusted) family income before taxes fell 7.7 percent, while mean income fell more sharply, an 11.1 percent decline. Both median and mean net worth decreased even more dramatically than income over this period, though the relative movements in the median and the mean are reversed; the median fell 38.8 percent, and the mean fell 14.7 percent. This article reviews these and other changes in the financial condition of U.S. families, including developments in assets, liabilities, and debt payments.

Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment

June 7, 2012 Comments off

Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment (PDF)
Source: Federal Reserve Bank of San Francisco/NBER

We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding has a positive effect on local GDP both on impact and after 6 to 8 years, with the impact effect coming from shocks during (local) recessions. However, we find no permanent effect (as of 10 years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. The transmission channel for these responses appears to be through initial funding leading to building, over several years, of public highway capital which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that the presence of productive public capital in this model can yield impulse responses with the same qualitative pattern that we find empirically.

Federal Reserve: Beige Book – June 6, 2012

June 6, 2012 Comments off

Beige Book – June 6, 2012
Source: Federal Reserve Board

Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May. Activity in the New York, Cleveland, Atlanta, Chicago, Kansas City, Dallas, and San Francisco Districts was characterized as growing at a moderate pace, while the Richmond, St. Louis, and Minneapolis Districts noted modest growth. Boston reported steady growth, and the Philadelphia District indicated that the pace of expansion had slowed slightly since the previous Beige Book.

Manufacturing continued to expand in most Districts. Consumer spending was unchanged or up modestly. New vehicle sales remained strong and inventories of some popular models were tight. Sales of used automobiles held steady. Travel and tourism expanded, boosted by both the business and leisure segments. Demand for nonfinancial services was generally stable to slightly higher since the last report, and several Districts noted strong growth in information technology services. Conditions in residential and commercial real estate improved. Construction picked up in many areas of the country. Lenders in most Districts noted an improvement in loan demand and credit conditions. Agricultural conditions generally improved, and spring planting was well ahead of its normal pace in most reporting Districts. Energy production and exploration continued to expand, except for coal producers who noted a slight slowing in activity.

Wage pressures overall were modest. Hiring was steady or increased slightly, and contacts in a number of Districts reported difficulties in finding qualified workers, particularly those with specialized skills. Price inflation remained modest across Districts, and overall cost pressures eased as the price of energy inputs declined. Economic outlooks remain positive, but contacts were slightly more guarded in their optimism.

Federal Reserve Board releases action plans and engagement letter to correct deficiencies in residential mortgage loan servicing and foreclosure processing

June 2, 2012 Comments off

Federal Reserve Board releases action plans and engagement letter to correct deficiencies in residential mortgage loan servicing and foreclosure processing
Source: Federal Reserve Board

The Federal Reserve Board on Thursday released action plans for Citigroup and HSBC Finance Corporation to correct deficiencies in residential mortgage loan servicing and foreclosure processing. It also released the engagement letter between Ally Financial Inc. and the independent consultant retained by Ally to review foreclosures that were in process in 2009 and 2010.

In addition, the Federal Reserve released a supplemental agreement with Ally to address the institution’s foreclosure review obligations following the recent action by Ally’s mortgage servicing subsidiaries to seek protection under the U.S. Bankruptcy Code.

The action plans are required by formal enforcement actions issued by the Federal Reserve last year. The enforcement actions require the mortgage loan servicers regulated by the Federal Reserve and the parent holding companies of mortgage servicers to submit acceptable plans to improve their procedures and controls as well as oversight of foreclosure activities.

The enforcement actions further require the mortgage servicing subsidiaries to provide appropriate remediation to borrowers who suffered financial injury as a result of errors by the servicers. The engagement letter describes the procedures that will be followed by the independent consultant in reviewing Ally’s foreclosure files to determine whether borrowers suffered financial injury as a result of servicer error.

Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis

May 28, 2012 Comments off

Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis
Source: Federal Reserve Bank of Atlanta

We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

How Deeply Held Are Anti-American Attitudes among Pakistani Youth? Evidence Using Experimental Variation in Information

May 21, 2012 Comments off
Source:  Federal Reserve Bank of New York

This paper investigates how attitudes toward the United States are affected by the provision of information. We use an experimentally generated panel of attitudes, obtained by providing urban Pakistanis with fact-based statements describing the United States in either a positive or negative light. Anti-American sentiment is high and heterogenous in our sample at the baseline. We find that revised attitudes are, on average, significantly different from baseline attitudes, indicating that providing information had a meaningful effect on U.S. favorability. Observed revisions are a consequence of both the salience of already known information and information acquisition that leads to a convergence in attitudes across respondents with different priors. This analysis provides evidence that (i) public opinions are not purely a cultural phenomenon and are malleable, and (ii) the tendency of respondents to ignore information not aligned with their priors can be overcome. Our findings make the case for dissemination of accurate information about various aspects of the Pakistan-U.S. relationship in order to improve opinion toward the United States.

Full Paper (PDF)

Federal Reserve issues FOMC statement

April 25, 2012 Comments off

Federal Reserve issues FOMC statementSource: Federal Reserve Board

Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

Federal Reserve Board — Beige Book – April 11, 2012

April 16, 2012 Comments off

Beige Book – April 11, 2012Source: Federal Reserve Board

Reports from the twelve Federal Reserve Districts indicated that the economy continued to expand at a modest to moderate pace from mid-February through late March. Activity in the Boston, Atlanta, Chicago, Dallas, and San Francisco Districts grew at a moderate pace, while Cleveland and St. Louis cited modest growth. New York reported that economic growth picked up somewhat. Philadelphia and Richmond cited improving business conditions. The economy in Minneapolis grew at a solid pace and Kansas City’s economy expanded at a faster pace.

Manufacturing continued to expand in most Districts, with gains noted in automotive and high-technology industries. Manufacturers in many Districts expressed optimism about near-term growth prospects, but they are somewhat concerned about rising petroleum prices. Demand for professional business services showed modest to strong growth and freight volume was mainly higher. Reports on retail spending were positive, with the unusually warm weather being credited for boosting sales in several Districts. While the near-term outlook for household spending was encouraging, contacts in several Districts expressed concerns that rising gas prices could limit discretionary spending in the months to come. New-vehicle sales were reported as strong or strengthening across much of the United States. Tourism increased in most reporting Districts. Residential real estate showed some improvement, with many contacts citing expansion in the construction of multi-family housing. Activity in nonresidential real estate increased or held steady in most Districts. Agricultural conditions were generally favorable. Mining activity expanded and oil extraction rose, while natural gas drilling slowed. Banking conditions were largely stable, with some improvement seen in loan demand. Several Districts reported increased credit quality.

Hiring was steady or showed a modest increase across many Districts. Difficulty finding qualified workers, especially for high-skilled positions, was frequently reported. Upward pressure on wages was constrained. Overall price inflation was modest. However, contacts in many Districts commented on rising transportation costs due to higher fuel prices.

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