On Friday, the U.S. Department of Labor released a strong jobs report showing wages rising at their fastest rate since the Great Recession. Then, the stock market promptly began to plummet. The Dow Jones fell an amusingly on-the-nose 666 points—its worst day since the U.K.’s Brexit surprise. Global markets subsequently took a beating, and U.S. equities are still sliding as I write this today.
Why is good news for workers turning into bad news for shareholders? The answer is a useful illustration of why the stock market is often a poor guide to the overall health of the economy.
Right now, traders seem to be worried that if wages rise too fast, it will cause the Federal Reserve to hike interest rates in order to head off inflation down the road. When, earlier this year, the central bank suggested that it would raise rates, much of the market was skeptical, in part because inflation has been so subdued for so long. But faster pay gains for workers make it more likely the Fed will follow through, both because rising wages are a sign that the whole economy is heating up and because employers will eventually have to raise prices to keep up with the cost of labor.
Federal Reserve Chairwoman Janet L. Yellen told senators Thursday that the risk of another financial crisis would increase if some Trump administration proposals to roll back regulations were enacted.
In her second straight day of Capitol Hill testimony, she walked back her statement last month that she didn’t expect another financial crisis “in our lifetimes.”
“I think we can never be confident there won’t be another financial crisis,” Yellen told members of the Senate Banking Committee.
The U.S. has “done a great deal” since the 2008 crisis to strengthen the financial system, she said. That includes forcing banks to hold more capital to cover potential losses as part of the 2010 Dodd-Frank financial regulatory overhaul law.
“It is important that we maintain the improvements that have been put in place that mitigate the risk and the potential damage,” Yellen said.
President Trump has promised to dismantle Dodd-Frank, which Republicans have said has been too burdensome for banks.
In a report last month ordered by Trump, Treasury Secretary Steven T. Mnuchin proposed sweeping regulatory reductions, including changes that would reduce capital requirements for the biggest banks.
Yellen said she would not favor reducing those capital requirements.
The American work force has been growing polarized for decades. On one end, there are highly skilled jobs like writing software or performing surgery, and on the other are service jobs like child care and cutting hair. The jobs in the middle, meanwhile, such as factory work, sales and bookkeeping, are shrinking — one of the reasons for the economy’s slow climb out of the recession.
Where did those jobs go? Part of the answer lies in Silicon Valley. It is no coincidence that many of those jobs entail the same repetitive tasks that computers, robots and other machines are uniquely suited to perform, from robots loading conveyor belts in factories to Kayak.com selling airline tickets.
A new working paper from the National Bureau of Economic Research shows how the recession accelerated the displacement of these midwage jobs. As technology now encroaches on jobs that people assumed would always belong to humans, it is useful to consider those most affected by the job displacement so far: the young, the less educated and men.
A lot of economic research has focused on the polarization of jobs, notably by David Autor of M.I.T. He differentiates between routine tasks that follow well-defined procedures — the kind of midwage jobs that computers have become so good at — and nonroutine ones that require flexibility, problem-solving and human interaction.
The new study, which analyzed data from the Current Population Survey from 1976 to 2012, illustrates that the recession had a disproportionately large effect on routine jobs, and greatly sped up their loss. That is probably because even if a new technology is cheaper and more efficient than a human laborer, bosses are unlikely to fire employees and replace them with computers when times are good. The recession, however, gave them a motive. And the people who lost those jobs are generally unable to find new ones, said Henry E. Siu, an associate professor at the University of British Columbia and an author of the study.
Young people and those with only a high school diploma are much more likely to be unemployed and replaced by a machine, he said. And to the authors’ surprise, men are more vulnerable than women.
“When you look at data, women who would otherwise be finding middle-paying routine jobs tend to be moving up the job ladder to these higher-paying brain jobs, whereas men are much more likely to just be moving from blue-collar jobs into not finding a job,” said Mr. Siu, who wrote the study with Guido Matias Cortes of the University of Manchester, Nir Jaimovich of Duke University and Christopher J. Nekarda of the Federal Reserve in Washington.
The changing demographics in the United States play a small role in the loss of midwage jobs, as do policies related to offshoring, unions and the minimum wage. But the study found that two-thirds of the decline in routine jobs is explained by a drop in the number of unemployed people who can get these jobs, and an increase in the number of people who had these jobs and lost them.
And the driver behind those shifts is technology.
“Over the very long run, technological progress is good for everybody, but over shorter time horizons, it’s not that everybody’s a winner,” Mr. Siu said. “Certain demographic groups like the young and less educated in another world would be doing fine, but in today’s world are not.”
The line between jobs that are considered routine and able to be done by a machine and those that require a human brain is a blurry one and becoming blurrier, said Erik Brynjolfsson and Andrew McAfee of M.I.T., authors of “The Second Machine Age.”
“There are examples up and down the spectrum,” Mr. Brynjolfsson said. “It’s a process of scientific discovery. It’s not like we know exactly which task will be next to automate.”
Already, machines are learning to do certain jobs that once seemed confined to humans, from elder care to wealth management to art. The question is what will happen if these jobs also disappear.
From today’s New York Times Editorial Observer by Teresa Tritch:
In recent years, it has become increasingly clear that no prominent banker would be prosecuted for fraud in the run-up to the financial crisis. In the current issue of The New York Review of Books, Judge Jed Rakoff of the Federal District Court in Manhattan asks why.
The comforting answer — that no fraud was committed — is possible, but implausible. “While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies,” he wrote, “I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities.”
So why no high-level prosecutions? According to Judge Rakoff, evidence of fraud without prosecution of fraud indicates prosecutorial weaknesses.
This is not the first time Judge Rakoff has weighed in on the prosecutorial response to the financial crisis. In 2011, he rejected a settlement between Citigroup and the Securities and Exchange Commission because it did not require the bank to admit wrongdoing.
His insights on financial-crisis cases also apply to cases that have emerged since then, like JPMorgan Chase’s settlement with the government this week over the bank’s role in Bernard Madoff’s Ponzi scheme.
Under the deal, JPMorgan Chase, which served as Mr. Madoff’s primary bank for more than two decades, must pay a $1.7 billion penalty, essentially for turning a blind eye to Mr. Madoff’s fraud. It must also take steps to improve its anti-money-laundering controls. And it had to acknowledge, among other facts, that shortly before the fraud was revealed, the bank withdrew nearly $300 million of its money from Madoff-related funds.
By adhering to the settlement terms, the bank will avoid criminal indictment on two felony violations of the Bank Secrecy Act. No individuals were named or charged.
And that is the problem. Until relatively recently, it was rare for corporations to face criminal charges without the simultaneous prosecution of managers or executives. That changed over the past three decades, as prosecutors shifted their focus away from individuals and toward corporations, as if fault resides not in executives, but in corporate culture.
Guess how many Americans correctly answered this basic financial question: Is the stock of a single company usually safer than a mutual fund?
A) 100% B) 80% C) 60% D) None of the above.
The right answer is D. Barely 1 in 2 people knew that a single stock is not safer than a mutual fund, which holds many stocks.
The question, included in a survey by a pair of college professors, underscores a fundamental problem facing millions of Americans. At a time when the world of personal finance is increasingly complex — and when people are more responsible than ever for their own financial future — Americans’ understanding of basic concepts is sorely lacking.
Despite many efforts to boost knowledge, studies show that most people don’t understand rudimentary principles of finance and investing. Even well-educated and upper-income Americans often have poor financial literacy, experts say.
“By and large, people are pretty clueless,” said Olivia Mitchell, executive director of the Pension Research Council at the University of Pennsylvania and coauthor of the study.
A 182-page analysis by the Securities and Exchange Commission last year found that “investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud.”
The result, experts say, is young people who are mired in student debt and older Americans who face bleak retirement prospects. People who don’t understand basic concepts are ill-equipped for more complex tasks, such as ferreting out hidden fees or conflicts of interest that are embedded in many financial products.
The collective ignorance has played a role in recent financial crises, according to some experts. The subprime mortgage meltdown would have been less severe, they say, if people understood the pitfalls of the loans they were taking out.
This week the Justice Department announced a civil lawsuit against the credit rating agency Standard & Poor’s after a lengthy investigation. The suit alleges that the agency issued faulty credit ratings for securities tied to the “toxic assets” of mortgages and other financial instruments. The Justice Department claims that S&P’s purposely engaged in fraud by diluting their rating standards in order to generate business and accommodate long-standing clients.
The suit is being brought under a law passed in 1989 after the savings and loan crisis. The statutes in the Financial Institutions Reform, Recovery, and Enforcement Act make it easier to prosecute fraud cases against financial institutions. Since the case is civil it only requires the plaintiffs to show by a preponderance of evidence that S&P engaged in fraudulent activity such as giving subprime mortgages inflated credit ratings during the financial crisis. For example, the company rated numerous mortgage-backed securities highly, only to downgrade those same the securities quickly, leading to massive defaults in the final few months of 2007.
Then there is the usual array of inappropriate e-mails and text messages. One riffs on the Talking Heads song “Burning Down the House,” creating new lyrics: “Subprime is boi-ling o-ver. Bringing down the house.” Another e-mail from an analyst in response to a question about how his new job was going reads: “Job’s going great. Aside from the fact that the M.B.S. world is crashing, investors and the media hate us and we’re all running around to save face … no complaints.”
The complaint also included numerous emails from executives at the agency that Justice Department officials claim are proof that they knowingly inflated credit ratings and engaged in misconduct by deceiving investors. However, critics see a weakness in their case as other credit ratings agencies have not been sued, and since many of their ratings were the same as S&P’s, it is unclear whether executives will be able to say that they followed the lead of other third-party agencies such as Fitch and Moody’s. Given the industry-wide pattern of misinformation and risky behavior, the Justice Department’s suit is an important step in rectifying the egregious abuses of executives and companies in the financial world.
The nation’s second largest bank continued its struggle to find stability in the wake of the Great Recession. Bank of America announced a slight $340 million profit in the third quarter of this fiscal year yesterday. The slight profit, however, amounts to 95 percent decrease from last year, signaling that large financial institutions remain weak four years after they almost collapsed.
The precipitous drop in Bank of America’s earnings comes after a settlement last month with the Justice Department and investors over its takeover of Merrill Lynch during the financial crisis. The bank announced the $2.43 billion settlement after accusations by shareholders that it misled investors about the financial health of Merrill. The settlement is the largest securities class-action lawsuit following the financial crisis.
The acquisition of Merrill was not the only one to saddle the bank with financial problems. In 2008 it also purchased the troubled mortgage lender Countrywide Financial. Both Merrill and Countrywide were implicated in trading toxic assets and relying on complex financial instruments for risky investments that created the financial crisis. The Countrywide acquisition occurred as the subprime mortgage bubble was imploding, and it is estimated that the purchase of the troubled mortgage lender cost Bank of America more than $40 billion in losses over four years.
Starting in 2009, Bank of America began cutting its expenses by closing branches, selling billions in assets, and cutting thousands of jobs. The announcement of a slight profit yesterday was therefore touted by the bank as a kind of victory, but the reality is that America’s largest financial institutions remain unstable and continue to struggle in the post-recession economy.