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.
From Mother Jones, June 7, 2017 by Hannah Levintova:
From the earliest days of his campaign, Donald Trump has opposed the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Obama-era financial reform law passed in response to the 2008 financial crisis. Trump has characterized it asa “disaster” that has created obstacles for the financial sector and hurt growth. In April, he repeated his promise to gut the existing law.
“We’re doing a major elimination of the horrendous Dodd-Frank regulations, keeping some, obviously, but getting rid of many,” Trump said in ameeting with top executives during a “Strategic and Policy CEO Discussion,” which included the leaders of major companies like Walmart and Pepsi. He added, “For the the bankers in the room, they’ll be very happy.”
The Republican Congress shares Trump’s dislike ofDodd-Frank and this week, the House plans to vote on the Financial CHOICE Act, a Dodd-Frank overhaul bill that will, as promised, make banks and Wall Street “very happy” if it becomes law, while undoing numerous financial safeguards for regular Americans. (CHOICE is an acronym for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.”)
The bill, sponsored by Rep. Jeb Hensarling (R-Texas), takes aim at some of Dodd-Frank’s main achievements: It guts rules intended to protect mortgage borrowers and military veterans, and restrict predatory lenders. It also weakens the Consumer Financial Protection Bureau’s ability to oversee and enforce consumer protection laws against banks around the country—upending a mix of powers that have helped the CFPB recover nearly $12 billion for 29 million individuals since opening its doors in July 2011. The bill also weakens or outright cuts a number of bank regulations enacted through Dodd-Frank to keep risky investing behavior in check in order to avoid the economic devastation of another financial crisis or taxpayer-funded bailout.
From today’s NYT “UpShot” Blog by David Leonhardt:
American workers have been receiving meager pay increases for so long now that it’s reasonable to talk in sweeping terms about the trend. It is the great wage slowdown of the 21st century.
The typical American family makes less than the typical family did 15 years ago, a statement that hadn’t previously been true since the Great Depression. Even as the unemployment rate has fallen in the last few years, wage growth has remained mediocre. Last week’s jobs report offered the latest evidence: The jobless rate fell below 6 percent, yet hourly pay has risen just 2 percent over the last year, not much faster than inflation. The combination has puzzled economists and frustrated workers.
Of course, there is a long history of pessimistic predictions about dark new economic eras, and those predictions are generally wrong. But things have been disappointing for long enough now that we should take the pessimistic case seriously. In some fundamental way, the economy seems broken.
I probably don’t need to persuade most readers of this view, so the better way to think about the issue may be to consider the optimistic case. And last week, in his most substantive speech on domestic policy in months, President Obama laid out that case.
From NYT “TheUpshot” Blog August 31 by Steven Greenhouse:
Temps aren’t just employees who sort mail and answer the boss’s phone.
The work of temping has changed vastly — today 42 percent of temporary workers labor in light industry or warehouses. And there are more of them. The number of workers employed through temp agencies has climbed to a new high — 2.87 million, according to the Bureau of Labor Statistics, and they represent a record share of the nation’s work force, 2 percent.
Labor groups fret that the trend signals the decline of full-time and permanent jobs with good benefits. But what is happening with temp employment is no sharp break with the past.
Temp employment has traditionally followed the business cycle, though in an exaggerated way. Temps are disproportionately thrown out of work when there is a slowdown, but when the economy starts to pick up — with businesses still wary of committing to making permanent hires — they disproportionately hire temps.
More than five years into a recovery marked by halting growth, many businesses are still adding temp jobs rather than permanent ones. “This is a reflection of business uncertainty, that businesses need to be more responsive, and part of that is keeping their work force flexible,” said Steven Berchem, the chief operating officer of the American Staffing Association.
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.
President Obama’s State of the Union Address last week highlighted a number of themes that focused on creating more opportunities for working Americans by streamlining the tax code, providing financial support for small business innovation, and making older industries like auto manufacturing and newer industries like vaccine manufacturing more competitive in the global economy.
Underlying all this was a promise to get the country back on track after it went off the rails in 2008 from a financial collapse that was precipitated by poor financial oversight, risky investment, and gross mismanagement of the nation’s financial and banking sectors. Obama claimed that the recession was making several trends worse, including growing income inequality between the wealthy and the rest of Americans. Although the President called on Congress to end its politics of obstruction and act to reform a sluggish economic recovery, he indicated that he didn’t expect much from the Republican Party, and he would move ahead without them wherever executive orders could be made on these issues in place of substantial legislation.
Here is an excerpt of Obama’s SOTU 2014 that focuses on the theme of economic recovery and fairness:
And in the coming months — (applause) — in the coming months, let’s see where else we can make progress together. Let’s make this a year of action. That’s what most Americans want, for all of us in this chamber to focus on their lives, their hopes, their aspirations. And what I believe unites the people of this nation, regardless of race or region or party, young or old, rich or poor, is the simple, profound belief in opportunity for all, the notion that if you work hard and take responsibility, you can get ahead in America. (Applause.)
Now, let’s face it: That belief has suffered some serious blows. Over more than three decades, even before the Great Recession hit, massive shifts in technology and global competition had eliminated a lot of good, middle-class jobs, and weakened the economic foundations that families depend on.
Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by; let alone to get ahead. And too many still aren’t working at all.
This last year was a record one for fines and financial settlements levied against corporations for breaking laws and wreaking havoc on the economy, especially banks and other financial institutions primarily responsible for creating the Great Recession.
The question is whether forcing corporations to pay changes their bad behavior.
Watch this New York Times video that reviews three examples of businesses behaving badly because they view such fines and settlements as the cost of doing business.
The question is whether more severe penalties, including jail time for executives who are responsible for the behavior of their corporations, can incentivize them to follow the law.
After all, corporations are citizens, and when citizens commit felonies, they often lose their rights. Perhaps we need legislation so that corporations that break the law lose their rights as well.
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.
Update: Thursday, August 9. Today Fannie Mae announced a quarterly profit of $10 billion and projected profits for the foreseeable future. When this dividend is paid, Fannie will have repaid approximately $105 billion of $116 billion it received from taxpayer bailout.
The latest quarterly gain followed a record $58.7 billion net income in the first quarter, when Fannie capitalized on tax benefits it had saved from its losses on loans during the crisis. It paid a first-quarter dividend of $59.4 billion to the Treasury.
In a major policy speech yesterday President Obama announced plans to reshape federal rules for 30-year fixed mortgages. The idea is to preserve the policy goal of getting American workers and their families into affordable home loans, but in practice this has played out with troubling consequences.
Obama’s speech comes on the heels of news that Freddie Mac, the country’s largest home loan lending institution along with Fannie Mae, reported a $5 billion net profit in the second quarter, compared with $3 billion from the same period last year. The earnings will offset all losses from mortgage defaults, which continue to be a problem for the housing sector, banks, and consumers.
The federal bail out Freddie Mac and Fannie Mae during the financial crisis in 2008 amounted to $187 billion, but since a housing recovery started percolating last year both institutions have again become profitable. Roughly, they have paid back roughly $136 billion of government loans, which is helping to make the budget deficit this year the smallest since Obama took office.
In his speech yesterday the President proposed overhauling the home loan system, including the elimination of Freddie Mac and Fannie Mae from the mortgage guarantee business. Obama claimed taxpayers should not be in the position of “holding the bag” for the risky business strategies of such giant financial institutions. However, President Obama did not clarify the rationale of the goal to preserve the 30-year home loan, a financial instrument that does not appear in other industrialized countries.
One problem with the long-term strategy of home ownership is that the size and cost of owning property has increased while income has stagnated for those working individuals and families who need such long-term loans. Another problem is that banks and lending institutions still have no regulations that prohibit them from using mortgage guarantees in risky financial investments, including derivatives trading, which led to the sub-prime mortgage crisis and, by extension, the financial collapse of the economy. The preservation of this policy goal under the same economic circumstances therefore means a future catastrophe for lenders and borrowers alike. Why finance a 30-year home loan on a mortgage that consumers cannot afford, when it remains a risky investment strategy?
There is an interesting article in today’s New York Times by Adam Davidson of NPR’s “Planet Money” that explores both sides of the economic spectrum about whether more or less regulation is an essential lesson we have failed to learn from the Great Recession. Below is an excerpt:
Five years ago this month, before Lehman Brothers imploded and the global economy lurched to a halt, Fannie Mae issued a report that encapsulated the financial system’s biggest problem. The mortgage-finance company, which was wobbling on account of rising defaults, tried to reassure investors that it had $47 billion in capital, which was considerably more than the $30 million required by law. At the time, the report’s authors seemed to fear that some investors might think Fannie was too cautious. In any event, a month later, that protection seemed like a joke. Fannie may have conformed to the rules, but the rules didn’t conform to reality. The lender and its brother company, Freddie Mac, were declared insolvent and handed over to the U.S. government.
Remarkably, five years after the crisis, the health of the financial industry is just as hard to determine. A major bank or financial institution could meet every single regulatory requirement yet still be at risk of collapse, and few of us would even know it. Despite endless calls for change, many of the economists I’ve spoken with have lamented that the reports that banks issue about their finances remain all but useless. The sprawling Dodd-Frank Act, which rewrote banking regulation in 2010, didn’t resolve things so much as inaugurate a process of endless rules-writing by regulators. Meanwhile, the European Union is in the early stages of figuring out how it will change the way it regulates banks; and the gargantuan issue of coordinating regulations across borders has only barely begun. All of these regulatory decisions are complicated, in part, by a vast army of financial-industry lobbyists that overwhelms the relatively few consumer advocates.
Economists have also been locked in their own long-running arguments about how to make the banking industry safer. These disagreements, which are generally split between the left and the right, can have the certainty and anger of religious wars: the right accuses the left of hobbling banks and undermining prosperity; the left counters that the relatively lax regulation advocated by the right will lead to a corrupt oligarchy. But there actually is consensus on one of the most important issues. Paul Schultz, director of the Center for the Study of Financial Regulation at the University of Notre Dame, led a project that brought together scholars of financial regulation from the left, the right and the center to figure out what caused the financial crisis and how to prevent a sequel. They couldn’t agree on anything, he told me. But a great majority favored higher equity requirements, which is bankerspeak for the notion that banks shouldn’t be allowed to borrow so much.