Nov112015
Will Janet Yellen capitulate to greedy bankers and raise interest rates?
The only reason interest rates will rise any time soon is because bankers lobby Janet Yellen for a bad policy that increases banking profits.
Mainstream economists exhibit the same strange herd behavior that prompts most investors and economic forecasters to completely miss important developments. Throughout most of 2015, this motley crew predicted first an increase in June, then in July, then in September, then in October, and now for December. Each time they’ve been more certain in their predictions, culminating in an 80% chance of rising rates in October, and each time, they were “surprised” by the federal reserve’s inaction.
Back in February of 2015 I said the federal reserve will not raise rates in 2015. When the US dollar rallied at the end of 2014, it caused declining export employment and weakened the economy. It had the same effect as raising interest rates in cooling the economy, making a rate hike unnecessary.
The only reasons the federal reserve should raise interest rates is a decline in currency value, crashing bond prices, or high inflation; since we have none of those, we have no reason for a rate increase.
The federal reserve is not a proactive entity. They will not raise rates until forced to do so reactively, and nothing in the current economic circumstances suggests any reaction is necessary. Most influential economists, right or wrong, warn against any change in economic policy that might derail the economic expansion.
So why do we have this persistent talk about raising rates? And why are we seeing stories planted in the mainstream media designed to make higher rates sound like a good thing?
Because bankers want rate hikes.
Fed Stance Squeezes Bank Profits
By JOHN CARNEY, Updated Sept. 21, 2015
… it is now more likely that net-interest income and margins will remain flat, or possibly even decline further, in coming months. …
The primary driver of falling net-interest income has been a squeeze on net-interest margins, the difference between what a bank pays for deposits and the yield on its loans. The unusually long period of ultralow rates has compressed margins by more than 27% since 2010. …
As a result, bank profits can shrink even if firms grow lending and market share. At some point, you just can’t make it up on volume.
So the hope was that a rise in the Fed Funds target rate this year would mark the start of an easing of pressure on margins.
When interest rates fall, at first bank margins widen because they immediately reduce what they pay depositors, but it takes time for competition to force down what they can charge. When interest rates hit zero, they can’t pay depositors any less (at least not yet), so competition finally squeezes their margins until they hardly make any money at all.
Why Bankers Want Rate Hikes
Paul Krugman, OCTOBER 2, 2015 10:08 AM
I’ve been arguing that a major source of the urge to hike interest rates despite low inflation is the self-interest of bankers, whose profits suffer in a low-rate environment. Right on cue, the BIS has a new paper documenting that relationship. The key argument:
The “retail deposits endowment effect” derives from the fact that bank deposits are typically priced as a markdown on market rates, typically reflecting some form of oligopolistic power and transaction services. If the markdown becomes smaller as interest rates decline, then monetary policy tightening will increase net interest income. The endowment effect was a big source of profits at high inflation rates and when competition within the banking sector and between banks and non-banks was very limited, such as in many countries in the late 1970s. It has again become quite prominent, but operating in reverse, post-crisis, as interest rates have become extraordinarily low: as the deposit rate cannot fall below zero, at least to any significant extent, the markdown is compressed when the policy rate is reduced to very low levels.
So whenever you see a story touting how great it will be when interest rates go up, keep in mind that the story is a plant by the major banks running a propaganda campaign to lobby public opinion.
How a Fed Rate Hike Could Actually Stimulate the U.S. Economy
Luke Kawa, October 26, 2015
“The reason [the Fed] should have raised rates in September and the reason, failing that, that it should do so this month isn’t that the economy can handle the pain but rather that it could do with the help,” David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a recent research note.
Spoken by a devoted industry shill. Notice they left off the “Chase” from the title of the company he works for. JPMorgan Asset Management is a subsidiary of JPMorgan Chase Bank. The line of reasoning this analyst pursues here is so laughable, if it weren’t from a biased industry shill, it would be truly embarrassing. At it stands, it only represents a loss of soul from the empty suit that wrote it on behalf of his self-serving company.
The consensus view, steeped in decades of economic thought, maintains that higher rates encourage saving instead of spending by households and raises the cost of capital for businesses, weakening current demand. Higher interest rates could also be a negative for asset values, as income generated would be subject to a higher discount rate.The ensuing negative wealth effect would be a drag on consumption. An increase in interest rates is also typically accompanied by a rise in the U.S. dollar, which crimps competitiveness and weighs on production in the tradable goods sectors.
The negative wealth effect will be a drag on the economy, and since the dollar already went up and hurt the export economy, raising rates now will simply make problems worse, not improve the economy.
But in practice, the effects of liftoff might well be different this time, some analysts contend.
For households and corporations, nonprice factors like credit ratings or a lender’s regulatory requirements are the far bigger constraints on activity than the cost of carrying debt, and a pickup in interest rates would help alleviate some of these impediments.
What? Credit requirements have no correlation with interest rates. Credit requirements don’t suddenly get relaxed if rates go up. Why would they?
Kelly notes that aspiring homeowners have to meet three criteria to qualify for a mortgage: sufficient savings for a down payment, an acceptable credit score, and proof that they can make their monthly payments. That final component is the most susceptible to rise along with interest rates, but is also “by far the easiest of those hurdles to surmount,” he wrote.
What? When a housing market has inflated to the limit of affordability — which is where we are today — then any increase in borrowing costs lowers affordability, and with a hard cap at 43% DTI, this hurdle is impossible to overcome. What he is saying here is complete nonsense.
In fact, higher interest rates might actually add fuel to, rather than cool, the housing market.
Joe LaVorgna, chief U.S. economist at Deutsche Bank, observes that higher interest rates would be positive for banks’ net interest margins, thereby inducing them to loosen the lending spigots.
There is a grain of truth here. I wrote back in 2013 that To lure private capital to the mortgage market, interest rates must rise. However, that was an argument about rising the return on mortgages relative to competing investment alternatives to compensate for the risk. It was not a plea to raise margins to increase profitability at the banks, which is what he suggests here.
“Debt service is not the problem for people who want to take out a mortgage,” he said. “Lower rates and a flatter curve aren’t going to help the housing market too much if you can’t get a mortgage because standards are still too tight.”
Complete and utter bullshit.
Raising rates prices out qualified borrowers. Lenders can lower the qualification standards back to the non-existent levels of the housing bubble, and it won’t increase demand if these hordes of borrowers can’t finance the prices sellers must obtain to liquidate their cloud inventory mortgage obligations.
For households, this sequence of ultralow rates for an extended period followed by a modest bump higher enables them to have their cake and eat it, too. …
I hope statements like that one set off your bullshit detector. That’s a doozy.
There is only one somewhat-convincing argument in favor of raising rates to stimulate the economy.
“There’s roughly $10 trillion in the banking system that’s earning zero,” added LaVorgna.
From the beginning of the zero interest rate policy at the federal reserve, I argued that they were stealing money from seniors on fixed incomes. If interest rates go up, and depositors start obtaining interest income again, much of that interest income would flow back into the economy to purchase goods and services, stimulating economic growth. Unfortunately, this good argument was not mentioned among the spew in the featured article.
The bottom line is that now is a poor time to raise interest rates. Until we see wage growth and inflation, the federal reserve should do nothing.
1937-1938 recession
Economists live in fear of a repeat of the 1937-1938 recession. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 percent and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.
Keynesian economists assign blame to cuts in federal spending and increases in taxes at the insistence of the US Treasury. Historian Robert C. Goldston also noted that two vital New Deal job programs, the Public Works Administration and Works Progress Administration, experienced drastic cuts in the budget which Roosevelt signed into law for the 1937-1938 fiscal year. Monetarists, such as Milton Friedman, assign blame to the Federal Reserve’s tightening of the money supply in 1936 and 1937.
Not everyone agrees with the Keynesian interpretations of the causes of the recession, but most people empowered to make decisions in Washington do, so it’s unlikely they will risk a repeat of the 1937-1938 recession if the price is only a little inflation.
I believe the federal reserve will allow inflation to grow large and go on for longer than most anticipate, particularly most mainstream economists who embarrassed themselves with their poor predictions on federal reserve policy in 2015.
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Ask the Economist: The Fed Raising Rates Will Likely Not Immediately Affect Housing
What can we expect from the December FOMC meeting?
If you look back to their most recent statement in October, it seemed like the FOMC was priming markets for a liftoff in December. … unless something unforeseen occurs, I think it’s a pretty good bet that the Fed is going to raise rates in December.
[It’s a pretty good bet that he will be wrong.]
If a liftoff occurs in December, what will the housing industry look like in 2016?
I don’t think you’re going to see too severe of an impact on housing right away. Of course, when the Fed raises rates, it’s going to impact the lower end of the yield curve more immediately than the longer end. I’m not sure you’re going to see an immediate impact on mortgage rates.
[Since lenders are already complaining about tight margins, and since lenders borrow short to lend long, raising the short-term rate should have an immediate impact on long-term rates and directly impact housing.]
Going forward, I think overall consumers are in a really good spot. Households deleveraged during the crisis, they’ve got strong balance sheets, consumer confidence is high, we’re starting to see signs of potential wage growth (a 9 cent increase in October’s employment summary), and that’s only going to help. The concern that I have for housing is that supply is pretty tight right now, and I still think credit is fairly tight, especially for everyone but the highest quality applicants.
[Apparently, he knows how to regurgitate the failed memes of other economists.]
Goldman Sachs Sees 60% Chance U.S. Expansion Lives to See Ten
Seventy six months after emerging from the longest recession since the Great Depression era, the U.S. economy’s upswing is now the fifth longest of 34 since 1900 and almost twice the length of the average.
It has defied “double dip” warnings by seeing off external threats including Europe’s debt crisis and the recent China-led slowdown in emerging markets as well as home-grown risks including double-digit unemployment, a government shutdown and repeated cold snaps.
The upbeat analysis released late on Monday by Goldman Sachs Group Inc. is that it has longer to run. Indeed there is a 60 percent chance that it will reach the 10-year mark and rival the record of the 1990s, according to economist Zach Pandl’s analysis of 355 expansions across 14 economies since 1850.
“Although there are clearly some risks to the U.S. economy — especially from developments abroad — we do not expect the expansion to expire of old age,” he said.
Interesting advertorial from the guy peddling down payment insurance.
Four reasons why 2016 is a good time to buy a home
With 2016 fast approaching, now is the time for renters to get off the sidelines, start organizing their finances and take on the excitement of homeownership.
But given the recent history of the housing market and Americans’ increasing need to stay mobile, it is understandable that it can be nerve-wracking to invest your hard-earned money in a home.
However, unlike years past, all key economic indicators are ripe and there are two major changes to the mortgage process that help make 2016 a good year to buy a home.
1. Rental rates continue to rise
With the on-going low supply and high demand of rental units, rental rates are continuing to rise. In the last 12 months, 88% of property managers have raised their rent prices. And there is no sign of that stopping given that 68% of property managers predict their rental rates will rise again in 2016.
2. Interest rates are historically low
Freddie Mac’s latest survey of lenders shows little change in the 30-year fixed-rate mortgages, which averaged at 3.89% for the month of September compared to 4.16% a year ago. Low interest rates make home buying more affordable.
3. Clear mortgage terms
The recent TRID announcement has mandated clearer terms at the closing table. For first-time homebuyers, this is a huge benefit because it will ensure there are no surprises at the closing table. These clear terms will help homebuyers better understand both their financial commitment and what is expected of them.
4. Down payment protection will be available
Writing a check for a down payment on a home is often one of the largest investments someone will make. Down payment protection is a new option that can give modern homebuyers the flexibility they need to more confidently and securely buy a home. When homebuyers put less than 20% down at closing, this kind of coverage protects their down payment just like private mortgage insurance protects the bank.
Given that the average employee tenure in the U.S. is 4.6 years overall, and 3 years for millennials, it’s understandable that the modern homebuyer may be nervous to commit to living in one location for an extended period of time.
However, the current state of the market and these major mortgage changes will help to ensure that when life happens, the homebuyer won’t be completely out of luck when it comes to protecting their nest egg.
This is weird… “Down payment insurance.” Really? The insurance industry altogether is such a scam. I had to pull my hair out just trying to balance and find life insurance that adequately balance risk vs. reward vs. likelihood of occurrence. Naturally things like property and auto insurance are understandable since bleep happens to property, houses and cars often. But down payment insurance? They only make money by preying on people’s fears. Read the details of what this guy’s company provides. You can only cash in anything if you sell your home at a loss after 2 years, and only up to 7 years after your purchase date.
If you can actually afford to pay 20% down on a house, and qualify for a loan– then have a life situation that forces you to sell and move “at a loss”, then isn’t the new home you’ll need to purchase in your new job market also going to be lower? Hmm…
Isn’t that the reason blackjack game offers “insurance” if the dealer shows an Ace? Because it’s a sucker’s bet that only benefits the house.
Fannie Mae, Freddie Mac Continue Aggressive Campaign to Sell Non-Performing Loans
GSE avoid foreclosure by selling the notes to others to do their dirty work
It is not yet midway through the week, and the GSEs have already had a busy week with their aggressive campaign to excise deeply delinquent, non-performing loans (NPLs) from their respective single-family residential mortgage investment portfolios.
Fannie Mae announced the winners in its third NPL sale on Tuesday, and on Monday Freddie Mac announced its eighth NPL transaction of 2015. Both transactions total approximately $1.2 billion in unpaid principal balance (UPB).
“The non-performing loans included in this sale are severely delinquent and despite our ongoing efforts to offer loss mitigation on these loans, they remain non-performing,” said Joy Cianci, Fannie Mae’s SVP for Credit Portfolio Management. “We are offering non-performing loan sales to investors and their servicers who can help borrowers avoid foreclosure wherever possible by applying a wider range of loss mitigation options than we have available.”
Next year ‘tough’ for China economy
Alibaba founder Jack Ma said Wednesday the coming year could be rocky for China as the country presses a crackdown on excessive spending by government employees and continues its economic transition.
“I believe the next five to 15 months will be a tough time for China for various reasons, of course, one, the anti-corruption will definitely have some effect,” Ma said in an interview on CNBC’s “Squawk on the Street.”
Ma does not see a significant decline in China during that time, adding that the government’s 7 percent growth target is still reachable. But even growth of 5 to 6 percent is enough so long as the country invests in the right places and producers focus on quality over quantity.
Why ‘trickle-down’ is bad news for renters
Renters in all price brackets are being handed rent increases, but those at the bottom-end of the housing market are getting hit hardest.
“Rent inflation is consistently higher for lower-cost housing units than it is for higher-cost units,” Jonathan McCarthy and Richard Peach, researchers at the Federal Reserve Bank of New York’s research and statistics group, said in a recent blog posting.
The researchers examined data from the American Housing Survey’s (AHS) national samples for 1989-2013 to estimate inflation rates for rents and utilities, and found “trickle-down” housing may bear the brunt of the blame for socking low-cost renters with proportionally larger rent rises.
EL NIÑO: Concern for the homeless on the rise when wet winter arrives
Pete Strother has a plan.
If El Niño turns out to be the monster it is forecast to be, the shirtless, tattooed man with four chains around his neck intends to abandon the camp he shares with a girlfriend and several other friends a mere 60 feet from the Santa Ana River.
He’ll hike to higher ground, he says.
During a visit Monday to their sandy camp in the shadow of Riverside’s Mount Rubidoux, Strother, 40, said he has scouted a couple of suitable alternative sites should fierce rain arrive.
“If it does,” he said, “it does.”
As loose as Strother’s strategy appears, officials fear most Inland homeless people have no plan at all. The long-range forecast for an exceptionally wet winter – a prediction that climate experts now say has a 95 percent chance of coming true – has local government officials worried.
They are hoping that people living in river beds, creeks and storm-runoff channels across Inland Southern California will relocate to safer places before it starts raining in earnest.
In recent weeks, city officials have been fanning out throughout the region to warn campers of the danger the El Niño weather phenomenon poses, potentially transforming tranquil waterways that trickle through communities most of the time into deadly, raging floods.
The real reason the Fed is eager to raise interest rates now
Americans are borrowing big again.
The Federal Reserve’s credit numbers showed American consumers borrowed at an all-time record of $28.9 billion in September, besting the previous high-water mark set in November 2001.
The surge wasn’t driven by mortgage lending, but by an ongoing rise in non-revolving credit—essentially car and student loans, which surged by more than $22 billion. Revolving debt—mainly credit-card debt—also increased, by $6.7 billion.
But the strong rise in consumer borrowing also seems to shed a new light on the Fed’s recent push to raise interest rates before the end of the year.
After all, borrowing numbers like this suggest America’s consumers are getting ready to party. And that’s precisely when the Fed is supposed to take the punch bowl away.
“Debt service is not the problem for people who want to take out a mortgage,” he said. “Lower rates and a flatter curve aren’t going to help the housing market too much if you can’t get a mortgage because standards are still too tight.”
May what they are saying is that debt service won’t be an issue for buyers because rising rates will cause prices to fall.
If you’re a bank (God forbid), would you rather be paid 4% on a $1M loan or 8% on two $500k loans, all things being equal? Once the bad loans are finally foreclosed on, falling housing prices won’t be as disagreeable to bankers. Especially if falling prices = rising profits.
I would buy that argument if banks were in a position to accept falling house prices. They aren’t yet. I think they believe they can make 2 $1M loans at 6% just as easily as they can make one loan today at 4% through the magic of raising rates.
Falling house prices would make for rising bank profits if the cost of ownership from the mortgage were allowed to rise, and if everyone kept paying their mortgages.
What the banks desperately need is a populace with higher wages. If people can only put 43% of their wage income toward debt service if they plan to buy a house, banks should want that 43% to grow as quickly as possible.
“I think they believe they can make 2 $1M loans at 6% just as easily as they can make one loan today at 4% through the magic of raising rates.”
The banks don’t need the Federal Reserve to raise rates in order to start charging 6% interest on loans, they need buyers to be able to afford the higher debt service, regardless.
Typical scenarios:
1. Rates ↑ Wages ↑↑ Prices ↑
2. Rates ↑↑ Wages ↑ Prices ↓
3. Rates ↑↑ Wages ↔ Prices ↓↓
4. Rates ↑↑ Wages ↓ Prices ↓↓↓
5. Rates ↔ Wages ↑ Prices ↑ (current market)
6. Rates ↓ Wages ↑ Prices ↑↑
7. Rates ↓↓ Wages ↔ Prices ↑↑
8. Rates ↓↓ Wages ↑↑ Prices ↑↑↑↑ (housing bubble)
9. Rates ↑↑ Wages ↓↓ Prices ↓↓↓↓ (housing bust)
10.Rates ↑ Wages ↑ Prices ↔ (bank’s desired scenario)
Since banks mark-to-model and not to market, scenarios 1, 2 or 10 would be acceptable. Scenario 10 is ideal, but scenario 2 would be good for bank profits at the expense of valuation. As long as wages are rising, defaults won’t rise much.
Thanks for your diagram. It is very helpful.
I think most real estate pundits believe #1 will happen, but I don’t see wages rising that far that fast.
I think #2 is a very realistic possibility, but it will be accompanied by very low sales volumes, a lot of complaints by realtors, and intensified lobbying to reduce standards.
I think #10 is the most likely outcome, or perhaps something between #1 and #10.
I also think #5, the status quo will be maintained a while longer, perhaps into next year’s prime homebuying season.
Formula is Prices = Wages – Rates
↑ +1
↑↑ +2
↓ -1
↓↓ -2
↔ 0
Just pay attention to the sign convention.
Russ:
Useful chart.. Thanks for posting.
Really helps visualize and summarize a lot of pro/con arguments that have been posted over the years.
Yes, I may reproduce that for a post. It is a very concise explanation of the various scenarios people have come up with.
Cool chart on interest rates and inflation:
http://www.ritholtz.com/blog/wp-content/uploads/2015/10/rates-and-inflation.png
I’ll speculate that the FOMC might just raise the Fed Funds target in December, but they’ll provide a very dovish statement on just how distant the next increase could be.
And they may only raise it an 1/8th of a percent which would still be within their current target range. It would by a symbolic raise only.
The problem I see with 1/8th is that it projects weakness and uncertainty. Also, such a small change isn’t likely to tell you anything. As you point out, it’s within their current range, so any market perturbations resulting from the change would be lost in the noise. Nothing would be learned from an 1/8th change, with the added benefit of looking indecisive and ineffective. Might as well stay the course.
Raising an 1/8 does have symbolic value. They can show their willingness to raise rates without actually doing any harm. It’s like the announcement that caused the taper tantrum. It could be a way to gauge the market reaction without actually changing the fundamentals. But as you noted, it could be perceived the other way as well.
If the Fed floats a trial balloon in December, I wouldn’t expect another increase until June. They will want the increase to be absorbed and have some data back on the impact before they raise again. Since a December hike would be a bit preemptive, anyway, a longer timeframe before the next hike could be expected.
The December increase hinges on the next jobs report. Similarly strong job creation in November, with unemployment dropping to 4.8% unemployment, and the Fed raises the target 25bps. If unemployment stays at 5%, and job creation is below 200k, then the Fed might rightly conclude that October was an outlier.
Job creation above 300k and a hike is more or less a done deal, especially if wage growth picks up. The Fed will raise rates not because it should, but because it can. Despite its independence, the Fed needs the political cover that low unemployment provides. Banks want first-access to the economic recovery. Banks “share” in the recovery by raising rates. Render unto Caesar that which is Caesar’s.
Savers would also receive a little more juice on their deposits IF the banks planned to pass on some of the higher rates to them. However, since there is still an excess-liquidity crisis, I doubt that banks will have to pay much to acquire lending capital. I expect banks to continue to shaft depositors.
“Job creation above 300k and a hike is more or less a done deal, especially if wage growth picks up.”
I’ll agree with that statement. Whether they need to or want to, they will have a strong data point to justify their move if this happens. Given the large amount of seasonal employment in December, we may get 300K jobs, but since so many of those are low paying, I doubt we see significant wage growth. Perhaps by March we will see if wage growth is picking up. If we have a strong first quarter, I could see an April rate hike, but not before.
Major investment broker says housing market’s past its peak
The storm clouds are gathering even as deals chug along.
One major investment broker, on condition of anonymity, confided, “I’m telling clients — and not making public — that we think we are past the peak and they should get realistic and drop the price, take the bid and move on.”
There are thousands of pricey, available residential condo units, and he pointed to Gary Barnett’s decision to market a group of rental units at One57 through Eastdil Secured at a large discount as a move that will send shivers through the market. “If one developer does it, will others?” he wondered.
The Republicans
The trouble with being right
http://www.economist.com/news/united-states/21677983-year-out-election-gop-looks-simultaneously-chaotic-and-enormously
A year out from the election, the GOP looks simultaneously chaotic and enormously successful
ASKED to name his biggest political success, over a curry in the congressional chamber where he works, sleeps and plots the downfall of his party bosses, Mick Mulvaney, a Republican member of the House of Representatives from South Carolina, is briefly stumped. There have been so many. The House Freedom Caucus he helped launch has made a lot of noise in recent months. That is in itself an achievement for a group of little-known congressmen, mostly elected in a flood of anti-establishment feeling in 2010, with a mission, says the Caucus’s chairman, Jim Jordan, seated opposite, with curry, to “fight for the countless number of Americans who think this place has forgotten them.”
That mainly means fighting to stop the House Republican leadership negotiating with Barack Obama, whom many Caucus members consider to be a power-hungry socialist. They have therefore taken uncompromising positions on trade, public spending, abortion and other issues, at times depriving the House Republicans of their majority. The Caucus’s willingness to create a budget crisis, in September, forced the then Speaker, John Boehner, to seek Democratic help to stop the government running out of money, a humiliation that cost him his job. That was the Caucus’s biggest scalp; also a warning to Mitch McConnell, the party’s leader in the Senate. “Mitch is next,” says Mr Mulvaney.
Most of the 246 Republicans in the House are more interested in governing—yet not immune to the sort of grandstanding, on spending, welfare and other neuralgic right-wing issues, that the Caucus is dedicated to. “Too often we make every vote a vote about principle, which makes it harder for us to pursue our agenda,” says Mike Fitzpatrick, a moderate Republican congressman from Pennsylvania. Indeed, the worrying truth for Republicans is that the Caucus is less an outlier in their party than a caricature of it. Its members’ intolerance, apparent indifference to the vulnerable and relentless negativity are qualities that Americans, especially women and ethnic minorities, increasingly associate with Republicans at large.
According to a recent survey by the Pew Research Centre, 60% of Americans, and a third of Republicans, have an unfavourable view of the party. Compared with the Democrats, it is considered by double-digit margins to hold extreme views and be unconcerned about “the needs of people like me”. To compensate, Republicans would at least expect to score well on economic management, which they pride themselves on; most Americans preferred the Democrats on that, too. A year before a presidential election, in which the Grand Old Party must expand its base to have any chance of keeping pace with demographic change, those are horrible numbers.
The primary is not improving matters. One front-runner, Donald Trump, wants to wall off Mexico. Another, Ben Carson, has a tax plan that entails a 30% cut in the size of the government. And if such right-wing posturing makes it hard for more reasonable candidates to remain so, the Republican mainstream, currently led in the primary by Marco Rubio (pictured) and in the House by Mr Boehner’s successor, Paul Ryan, a representative from Wisconsin, is anyway immoderate. Mr Rubio, a 44-year-old senator from Florida, proposes tax cuts that by one estimate could increase the deficit by $12 trillion over a decade. Both would repeal Mr Obama’s health-care reform without promising a reassuring alternative to the 17.6m Americans it has provided with insurance. “I think it’s funny that people talk of Marco Rubio and Paul Ryan as mainstream Republicans,” smiles Mr Jordan. “They’re the classic class of 2010, like most of the Freedom Caucus.”
To end their damaging purity contest, the Republicans need to understand what is fuelling it. That starts with a relentless drive to differentiate the party from the Democrats, whose erstwhile obsessing over ideology has given way to pragmatism. “At some point, people will say what’s the difference between Republicans and Democrats, and it can’t just be abortion,” says Mr Mulvaney.
Yet the change that has come over their opponents is something Republicans should celebrate, not fight. Whatever Bernie Sanders, Hillary Clinton’s socialist challenger in the Democratic race, might say, the victory of Reaganite economic policy in the 1980s was complete. That was plain in the following decade when Bill Clinton declared the era of big government to be over. Yet instead of revelling in Reagan’s economic legacy, many Republicans hardly recognise it. They misremember the Reagan years as a time of inexorable tax, deficit and spending cuts (the Gipper at various times raised all three) and mischaracterise everything that has followed as a retreat from that imagined perfection. This is a path that leads to the vast, unfunded tax cuts almost all the Republican primary candidates are now promising, as they vie to be what their party craves: the second coming of something that never actually existed.
George W. Bush’s early stab at compassionate conservatism was an effort to restore moderation. It didn’t go well. Mired in profligate wars and bank bail-outs, his presidency ended as a recruiting sergeant for the caustic right. “I got into politics because of George W. Bush,” says Mr Mulvaney. “We expected him to be like Reagan, but what did we get? No Child Left Behind, Medicare Part D, compassionate conservatism—just spending more and more.”
Then, in 2009, came an $830 billion stimulus package, signed off by a black, left-leaning Democrat president. It, and almost everything Mr Obama has done since, has driven the right wild. This sometimes manifests itself as a virulent antipathy to welfarism, which many Republicans, unfairly to a degree, associate with black Americans. Asked how he would woo black voters, Jeb Bush, a former governor of Florida and one of the more moderate candidates in the primary, said he would offer them aspiration, not, as the Democrats do, a promise to: “Get in line, and we’ll take care of you with free stuff.” Black Americans are not, as it happens, all welfare claimants. But because they are much likelier to vote for the Democrats, whom Republicans traduce as the party of scroungers, this is another half-truth that polarisation has reinforced.
Working themselves into a lather over Mr Obama and free stuff has not made the Republicans more liked. Nor has it helped them fill the hole where a credible, centre-right, socio-economic policy should be; Mr Rubio, to his credit, has some suggestions—including decentralising welfare programmes and topping up low wages with a bigger state subsidy—but he is untypical. The third televised Republican primary debate, on October 28th, was supposedly about economic policy; almost none was discussed except tax cuts.
The impression is of a party so accustomed to carping that it has forgotten how to govern. Yet in the states the Republicans are in rude form. They occupy 32 governors’ mansions and control both houses in 31 state legislatures, having secured an extra 900 seats since Mr Obama became president. In Michigan, Indiana, Wisconsin, Iowa and elsewhere, Republican governors have balanced budgets with hard-headed, but sometimes innovative, policies. “I’m not a very partisan person,” says Iowa’s veteran governor, Terry Branstad. “I’m like many Republican governors.”
This divergence, between antagonism in Washington and pragmatism closer to home, may be less paradoxical than it seems. “In America, small state conservatism is about localism,” says Frank Luntz, a Republican pollster. By extension, Washington has become for many conservatives a bogey and irrelevance: “When you send someone to DC, you say screw you. When you elect someone to run your state, you want your trash to be collected.”
An alternative view is that the party’s success in state and congressional elections has convinced those Republicans still interested in winning national power that the need for reform is less urgent than it is. A post mortem by the Republican National Committee into Mitt Romney’s defeat in the 2012 presidential election found that the party was widely viewed as “scary”, “stuffy” and “out-of-touch”. But then, in a wave of anti-establishment rage, it swept the mid-terms in 2014, and whatever impetus for reform existed was lost.
Can it be regained before next year’s presidential election? It is otherwise hard to see how the party can carry out the necessary expansion of its base. In 2012 Mr Romney hoovered up the white vote, but lost because he won support from only 27% of Hispanics, the fastest-growing electoral group. To win next year, his successor will need to get around 40% of the wary Hispanic vote, reckons Mr Rubio’s pollster, Whit Ayres.
That would require the party not only to stop bashing immigrants, but also allay the wider concerns about its motives, indiscipline and intemperance. It is not only Mr Trump’s excesses that are hurting it. Political parties, like people, tend to get the reputations they deserve, and the Grand Old Party’s may yet shut it out of the White House next year.
What does this article have to do with real estate?
Directly? Not much. But politics affect housing.
“According to a recent survey by the Pew Research Centre, 60% of Americans, and a third of Republicans, have an unfavourable view of the party.”
Looks like the conservatives are slowly starting to realize the incumbent powers of the party are a bunch of clowns. Unfortunately the democratic voters are still to ignorant to realize the same.
“To compensate, Republicans would at least expect to score well on economic management, which they pride themselves on; most Americans preferred the Democrats on that, too.”
It’s not surprising the majority of voters wants government handouts and largess since they are not the ones who will pay for it. It’s always nice to get free money from other people.
I think it goes deeper than just getting free handouts. The last good economy we had was under Bill Clinton. Statistically, the economy does far better under Democrats than Republicans (http://www.forbes.com/sites/adamhartung/2012/10/10/want-a-better-economy-history-says-vote-democrat/). It’s unclear why some people believe Republicans do better, but that’s the meme Republicans keep pushing.
The only consistent theme among Republican candidates is to cut taxes on the wealthy. It’s not surprising the majority of high wage earners want to pay less in taxes. It’s always nice to pay less and still get the services through deficit financing.
Republicans need to come up with some new ideas other than to give the rich more money and run up a deficit. So far, I haven’t seen these new ideas or moderate, electable candidates floating to the surface. From what I’m observing, the Republicans are headed toward a landslide loss in the general election for President. However, despite their incredibly low approval ratings, I think they will maintain their control of Congress and ensure 4 to 8 years of continued gridlock, punctuated by periods of grandstanding and needless brinkmanship.
“Statistically, the economy does far better under Democrats than Republicans”
I wonder if that’s due to their administration or their predecessor’s. An argument can be made that Republicans spend the first four years of their administration fixing the problems they inherited, and the next four setting the table for their successor. Clinton signed GLBA right before he left office.
“The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999 and commonly pronounced ″glibba″, (Pub.L. 106–102, 113 Stat. 1338, enacted November 12, 1999) is an act of the 106th United States Congress (1999–2001). It repealed part of the Glass–Steagall Act of 1933, removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. With the bipartisan passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate. Furthermore, it failed to give to the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies.[1] The legislation was signed into law by President Bill Clinton.
A year before the law was passed, Citicorp, a commercial bank holding company, merged with the insurance company Travelers Group in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica, and Travelers. Because this merger was a violation of the Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a temporary waiver in September 1998.[2] Less than a year later, GLBA was passed to legalize these types of mergers on a permanent basis. The law also repealed Glass–Steagall’s conflict of interest prohibitions “against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank”.
Statistically, the economy does far better under Democrats than Republicans
Statistically, the economy does better under presidents that lower taxes and it does worse under those that increase taxes.
As evidence, I submit this chart of tax policy for income, corporate, and capital gains:
http://www.ritholtz.com/blog/2011/04/us-tax-rates-1916-2010/
Taxes went down under Democrats Truman, Kennedy/Johnson, Carter, and Clinton.
Taxes increased under Republicans Eisenhower, Nixon/Ford, and Bush Sr.
I attribute this counter intuitive behavior to the fact that Democrats usually inherited a peacetime economy and had the luxury of lowering taxes, whereas Republicans inherited wartime economies and had to increase taxes to pay the bills.
The only Republican to majorly cut taxes was Reagan (he didn’t inherit a war). His tax cuts led to the best economic record of any Republican.
With Bush Jr. the roles reversed…
He lowered taxes and started two major wars, and Obama increased taxes to help pay for those wars. The economy was mostly prosperous under Bush’s first 7 years, but went horribly wrong in his final year.
Obama, the first Democrat with net tax increases, has had the worst economic record of any Democrat.
So much of the presidential election comes down to personality though.
Wouldn’t you agree that Trump beats both Hillary and Sanders out of the water on that?
At the end of the day most people will vote for the person they would rather have a beer with.
I try to keep a majority of the comments on real estate, but I encourage anyone to post interesting articles.
I read this whole piece, and I was never quite sure where it was going or what the writer’s point was.
I believe the extremists on the Republican Right have made a mockery of the Republican party. The current crop of candidates represent the worst and dullest rather than the best and brightest of the Republican party. They all have to say such crazy crap to win the nomination, it’s nearly impossible to take any of them seriously.
I quipped to a co-worker the other day that I find Donald Trump entertaining, and I imagine that’s what draws his supporters. He replied that Jerry Lewis was entertaining, but I wouldn’t vote for him for President.
The current crew of candidates looks like the Rat Pack, and we are all the audience to a Las Vegas night show.
“The current crew of candidates looks like the Rat Pack, and we are all the audience to a Las Vegas night show.”
Yup we are pretty much watching a variety show.
I think we are missing the point of interest rate manipulation. The point of low interest rates is to ease the pain of having to pay to raise capital in an injured economy and to entice people to take a chance to produce goods and services.
The idea being the first new goods and services out of a recession are going to be the best ideas you have had shelved but were impractical due to a weak economy. Once the economy has begun to recover, the best ideas for capital have already been executed or are in planning, and the second, third, and fourth tier ideas are being floated. If we leave interest rates low then we are encouraging taking chances on these ideas.
Most of these ideas will be really bad ideas and should never be executed. It’s exactly this “overheating” of the economy that stimulates the boom and bust economy. These forces already have inertia, but if you leave interest rates low, they get heightened (overheat goes to long creating longer recession, recession creates fear leading to longer recession).
E.g. The cheap cost of mortgage (low price to borrow money) has made it so it is (or at least was) possible to leverage the money owed on a loan for profit as opposed to being a cost (a huge capital no no if we are talking about the efficient use of capital). That means you are making money by simply borrowing money and sitting on it by buying housing. The money is going into the existing housing stock (due to cheap loans and run ups in prices) in hope of achieving the leveraging effect of outpacing profit over borrowing cost (which is too low for the considerable risk being generated by the huge potential energy of a bubble market crash). Where the money is needed in the economy is for that money to go to the construction of new housing stock to house the increases in population and rebuild detreating/outdated/and wrongly designed for the 21st century housing stock.
Instead it is going to existing homes creating an economic inefficiency that will inevitably lead to recession.
Forcing higher margin profits (like building new houses) and taking on more risk (higher risk, higher reward) through higher interest rates is absolutely necessary for the market to correctly allocate capital. Since the need for the command economy (recession) has been turned (there is no more recession), it is time for rates to come back to market forces.
What I don’t understand in our command economy “Fed” system is how the Fed allows rates turn to market. In my opinion, this is exactly what needs to happen, and then, the rates should not be manipulated until we are facing the next recession. We cannot have a command economy when we don’t know the market forces (which is now). It’s obvious that we are creating bubbles (see the Los Angeles housing bubble) with low rates and time to let market forces find the most profitable use of capital.
The fact that we know of this bubble, means there are other bubbles that we don’t see (like the tip of an iceberg). Even with the most efficient way of allocating capital, even the market will ultimately fail, and the next recession will begin, but capital will flow more efficiently through the billions of intricate transitions than one giant broad stroke of the Fed. It’s time to end the Fed market manipulations. So what are the leading indicators that should set the Federal Funds rate?
These need to be based upon market conditions. This is the question that needs to be answered, not “does the rate need to go up or down”. If you have to write in the “opinion” section and use “economist” to determine how you manipulate market forces, you are screwed. Don’t rely on it, it is not reliable.
It amazes me that we have not replaced the Fed and even our Wall Street financiers with data and algorithms making decisions based upon that data. While Silicon Valley pursues ridiculous text messaging, electronic greeting cards, personal billboards, and re-packaging the smart phone (great invention, just talking about marginal changes being made with no real tech advances); these real world problems are out there to be solved by greatly improving the efficiency of capital flow, and putting to use these financiers’ efforts to actually creating value instead of just pocketing it (maybe that’s what we get for putting 19 year olds in charge of billions in capital).
At any rate, the Fed needs to set out the exact leading data it is going to follow in setting the rates and the market can than instantly know where everything is going and allow real time data and better decide on capital allocations. Right now there is also practically no consequence for overheating the economy and creating a worse recession by those who are in power. This watching the Fed crap is ridiculous and a drag on the economy. Wherever we see waste and inefficiency we need to eliminate it or the recession will be that much worse.
[…] week I wrote about interest rates. In the post Will Janet Yellen capitulate to greedy bankers and raise interest rates?, I lampooned a poorly reasoned heap of manure published by a Chase Bank lackey. The central thesis […]
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