Tag Archives: federal reserve

Deleveraging the U.S. Economy

The Chinese government, the biggest buyer of U.S. debt, expressed concern about American deficits and its impact on U.S. Treasury obligations – a budget that will raise the national deficit to nearly $2 trillion dollars. That’s $2,000,000,000,000.

Bernanke views this intervention strategy as critical and necessary to avert a deeper downturn. But as you know, spending money you don’t have can come with it some dire consequences.

This economic jump start strategy of spending America out of this downturn will need to be repaid one day, hopefully from economic growth and fiscal restraint. But deficits generally spawn higher inflation, higher interest rates and a weaker economy.

Savings Deficit

I’m not sure if any of you had the pleasure of watching Pete Peterson on CNN this weekend (IOUSA), but his insights were quite astounding.

The special program on the United States federal debt and deficit included noted investor Warren Buffett, former Federal Reserve Chairmen Alan Greenspan and Paul Volcker, former U.S. Treasury Secretaries Paul O’Neill and Robert Rubin, Dave Walker, President and CEO of the Peter G. Peterson Foundation and former U.S. Comptroller General; Alice Rivlin, noted economist and former Director of the Office of Management and Budget; and Concord Coalition Executive Director Bob Bixby.

Peterson noted that overspending still dominates the lives of U.S. citizens. Americans save less than 1 percent, the lowest of any developed country. The Chinese save 35 percent of what they earn. Singapore, Chile and Australia, he notes, have mandatory savings – outside of government control.

He concludes that there should be stronger incentives to save, because without savings America has no future.

watch an abridged version here: IOUSA

Time has Come

The Federal Reserve Board approved final rules that would better protect credit card users by prohibiting certain unfair acts or practices and improving the disclosures consumers receive in connection with credit card accounts and other revolving credit plans.

Unfortunately the timing of this new legislation is unclear.

Card issuers will be required to:

  • send statements at least 21 days prior to the payment due date
  • allocate payments exceeding the minimum payment to the balance with the highest rate first
  • not raise interest rates during the first year after account opening unless disclosed upfront or if the rate is variable
  • not increase the rate charged on pre-existing credit card balances
  • not use “two cycle” interest calculations
  • comply with limits on financing security deposits and fees for credit availability with regard to “sub-prime” cards

Disclosures must:

  • carry larger type and boldface type for key terms
  • disclose the duration that penalty rates may be in effect
  • simplify disclosures about variable rates and grace periods
  • increase the amount of advance notice before a changed term can be imposed from 15 to 45 days
  • disclose the effect of making only the minimum required payment on the time to repay balances
  • set a 5 p.m. due date cut-off time
  • consider a payment received on the next business day as timely when a due date falls on a weekend or holiday

For complete details on the new credit card rules click here.

Isn’t it Ironic… Don’t You Think?

The new Senior Vice President of the Bank Supervisions Group of the Federal Reserve Bank of New York is none other than (drum roll please)… Michael Alix. Michael was the former chief risk officer for Bear Stearns from 2006-2008, and prior to that the global head of credit risk management for the investment bank (1996-2006). So there are no excuses like “he inherited the problem.”

Former CHIEF RISK OFFICER, people. You’ve got to be kidding me. Maybe we should ask all of the common equity holders of BSC their thoughts on Senior Alix’s ability to manage risk. What planet are we living on? Was it opposite day? Or perhaps, the title more aptly denoted chief risk officer. No wonder why the economy is phuct (please pardon my german, but this is simply intolerable).

You know what I’d love to see… I’d love to see Ali G interview the HR manager on this one. Ya, I’d love to see that.

The Ultimate Credit Card

The U.S. Federal Reserve announced that it will create a special Commercial Paper Funding Facility (CPFF) to purchase three-month unsecured Commercial Paper directly from eligible issuers through a Special Purpose Vehicle (SPV) backed by the Treasury Department.

This Commercial Paper backstop represents the first time the Fed has ventured into unsecured funding activities.

The total Commercial Paper market is roughly $1.6 trillion, of which credit card and auto loans represent approximately $724 billion.

With this policy the Fed is effectively issuing credit cards to credit card issuers. The key benefit being that this is the first action the Fed has taken directed specifically at Main Street versus Wall Street. The principle detriment being that the non-secured nature of the instruments could result in more defaults and potentially capitulation.