Talk Back

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

President Barack Obama is shameless to cite J.P. Morgan Chase & Co.’s (JPM) $3 billion trading loss as evidence banks need more regulation. More accurately, both may need more of a conscience, and the debacle raises serious questions about incompetence and corruption at the Federal Reserve, Treasury’s Comptroller of the Currency and the Obama White House.

Those two agencies already have 110 regulators imbedded in J.P. Morgan–not just visiting occasionally to check the books but domiciled inside. Yet, the Chief Investment Office, which is responsible for the London Whale’s ill-fated trades and manages nearly $400 billion, had not a single regulator inside its unit.

Senior J.P. Morgan executives convinced federal officials the CIO was merely hedging, managing cash and taking no significant risks, and naively, federal regulators believed them or were bullied into turning a blind eye.

It turns out, the unit was also taking equity positions in distressed firms, including the publisher of Ebony, which is headed by former Obama White House official Desiree Rogers.

Investing in distressed firms is work for private equity and hedge funds, not banks insured by the Federal Deposit Insurance Corp. It’s analogous to Grandma cashing in her CDs to play the slot in Las Vegas.

More importantly, those bets raise questions about whether senior bank officials lied to the regulators, and political influence in Morgan investments and the self interest of Obama White House Officials.

Senior Morgan officials can and do go over the heads of resident regulators to their bosses at the New York Fed and in Washington to deny on-site regulator’s requests for information and often succeed. In addition to revelations about Desiree Rogers, Barack and Michelle Obama have between $500 and $1 million invested in a J.P. Morgan “private client” account. Continue reading…

 These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

J.P. Morgan Chase & Co.’s (JPM) $2 billion loss from betting on corporate bonds will embolden advocates of the Volcker Rule–a provision of the 2010 Dodd-Frank law that will prohibit banks from trading on their own account. Unfortunately for federal regulators, trading in securities is essential to modern banking, and busting up the big Wall Street financial houses may be the only way to better ensure financial stability.

The Glass Steagall Act of 1933 separated commercial banking–taking deposits and making loans to finance businesses, homes and the like–from investment banking–selling stocks, bonds and other securities, and making markets for investors to buy and sell those assets quickly. That separation was repealed during the final years of the Clinton Administration, and Wall Street institutions like J.P. Morgan now perform both roles.

Modern commercial banking simply won’t tolerate such an absolute separation, because banks cannot finance all the demand for loans from deposits. In recent decades, too many savers have found they can earn higher returns than at the bank by investing in money market funds, bond funds and directly buying bonds. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Rick Santorum’s assertion that President Barack Obama’s agenda is not about the quality of life or jobs but “some phony ideal. Some phony theology” may not be an appropriate characterization of his religious views. However, it is an accurate description of what is wrong with the hard left in American politics, and the thinking that drives domestic policy in the Obama administration.

Too often liberal policies are based more on faith than reason–often those are premised on assertions having little foundation in facts or modern economics. Consequently, the president advocates or imposes solutions that make the nation’s problems worse, and when confronted with disappointing results he often tells us what he believes, without offering the data and logic that brought him to those conclusions.

Regarding the financial crisis, the president assigns blame to the lack of regulation. The facts are banks got into trouble making loans on real estate assigned inflated values to borrowers who could not repay. Loans were bundled into bonds and sold to investors. When not enough unwitting fools bought bonds, the big Wall Street banks put unsold securities into offshore special investment vehicles (SIVs), whose potential losses were not supposed to be a claim on bank capital. Other firms, like American International Group Inc., sold insurance to against potential losses on bonds without sufficient assets to back up that protection. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Stocks are dropping like stones tossed into a summer lake, and the economy dances along the precipice of a second recession.

The U.S. economy is imploding thanks to incompetence in Washington and arrogance on Wall Street. President Obama is hardly the victim of his predecessor’s mistakes as much as his own decisions.

The Great Recession was caused by an imbalance of demand between the United States and Western Europe, on the one hand, and China and other Asian economies, on the other. The latter maintain rigged and undervalued currencies–essentially, they restrict conversion of their currencies into dollars and regularly purchase U.S. dollars to keep their currencies and exports cheap in Western markets. They also impose all manner of high tariffs and restrictions on Western exports into their markets.

During the Bush years, the U.S. trade deficit more than doubled to 5% of GDP, thanks to growing imports from China and expensive oil. When dollars earned by producing goods in the United States go abroad to purchase imports but do not return to purchase exports, either inventories build and layoffs result, or Americans must consume more than they produce. Continue reading…

(These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission.)

Federal finances are in shambles, and Americans should be amused if not disgusted by the explanations and solutions both political parties offer.

President Obama’s budget plan issued in February projects a $1.6 trillion deficit for 2011 and a cumulative shortfall of $11 trillion through 2021.

Things may get worse, as additional revenue and cost savings from health care reforms don’t materialize and the 4% growth assumed by the president’s budget for the next four years proves Pollyanna.

Time and again, Obama and House Democratic leader Nancy Pelosi have demagogued the problem, blaming two wars and tax cuts instigated by President Bush and the Great Recession.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

President Barack Obama’s State of the Union address and Rep. Paul Ryan’s Republican response offered few new ideas and weren’t forthright about what needs to be done to get America thriving again.

The November elections plainly established voters want less government and a focus on jobs, and they don’t believe Americans have to choose between the two.

President Obama proposed freezing domestic discretionary spending to reduce the deficit by $400 billion over 10 years, but he offered no substantive changes to Medicaid, Medicare, Social Security and other entitlements. That simply doesn’t cut it.

In 2007, the year before the recession, government spending was $2.7 trillion–less than 20% of gross domestic product–and the deficit was a manageable $161 billion. In 2011, with the economy recovered, spending will top $3.8 trillion–more than 25% of GDP–and the deficit will be about $1.4 trillion

Simply, the Democrats took control of the Congress in 2007 and used the recession as cover to permanently increase spending on the regulatory bureaucracy, entitlements and industrial policies by $1.1 trillion, and the leading edge of the Baby Boomers has begun to tax the Social Security and Medicare trust funds.

Now, the president proposes to address about 40% of the gap over the next decade. Essentially, he is laying a trap–daring Republicans to solve runaway health-care costs and Social Security, knowing how Americans react to the bearers of bad news.

Continue reading…

(Following are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission.)

With the new tax cuts, rating agencies should downgrade U.S. government debt to junk.

Economists, pundits and politicians had little choice but to endorse the tax deal between President Barack Obama and congressional Republicans because snapping back to pre-Bush tax rates would crush the economic recovery. But Washington exhibited not even the shadow of self-restraint and cut taxes far beyond what is needed or smart.

Newly emboldened Republicans demanded all the Bush tax cuts be extended. Obama argued the country couldn’t afford those for families in the highest tax brackets, but failed to apply such reasoning to temporary benefits bestowed on Democratic constituencies by his 2009 stimulus program.

Instead of compromising, with each side getting half of what it wanted, Washington feasted; everyone got everything they wanted and more. Business got its R&D tax credit and a temporary tax holiday on new investments. The wealthy got Bush-era tax rates and even lower rates through temporary elimination of income-triggered phaseouts on deductions and personal exemptions. The poor and middle class got a temporary 33% cut in Social Security taxes.

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These are the personal views of Thomas Lam, group chief economist at OSK Group/DMG & Partners:

The improvement in bank lending is crucial in fostering a healthy and sustainable economic recovery. A simple correlation between the growth in real GDP and real bank lending is close to 70%, with GDP typically leading the latter by a couple of quarters.

The sluggish bottoming out in real bank-lending growth following the business cycle trough in the second quarter of 2009 seems comparable to the 1990-91 episode; however, the extent of the recent contraction mirrors the 1973-75 period.

The dynamics of bank lending are extremely complicated, especially following a negative financial-led adjustment. Loose monetary policy per se does not necessarily promote bank lending. Capital availability and the regulatory environment could actually play a bigger role in influencing lending.

Both supply and demand conditions affect the extent of bank lending. A healthy recovery in lending requires an increase in the willingness of banks to extend credit combined with strong demand for loans.

Continue reading…

A reader comments on the housing market and economy in the U.S.:

Our country is facing a wonderful opportunity to stabilize the housing market and to return the U.S. economy back onto a growth pattern.

In fall 2008, I sent a Talk Back comment on my solution to stabilizing the U.S. housing market’s precipitous decline, which Dow Jones Newswires graciously ran. Generally it suggested a simple but effective way to stabilize home prices and, in turn, the U.S. economy by converting most current outstanding primary-residence mortgages to a 15-, 23- or 30-year mortgage at a rate of 4 1/4%, 4 1/2% or 4 7/8%, respectively, at the mortgagor’s option.

Additionally all of these mortgages would have a covenant attached that would allow every one of them to be assumable once, meaning that the outstanding mortgage balance and its terms could be transferred from the current owner of a property to a new qualified buyer. The logic for attaching the assumption clause was that by making the mortgages assumable the home-finance system becomes impregnated with mortgage funding that for the next several years could significantly replace the collapsed private-issuance mortgage-backed securities market and could compensate for the unwillingness of banks to originate and retain loans for their own balance sheets.

It simply enables the already-provided and -lent funds to remain in the market independent of the MBS market and banks’ willingness to participate.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The Bush tax cuts were a huge success, and failing to extend them for all Americans–not just families earning less than $250,000, as President Barack Obama proposes–would be a terrible mistake.

Contrary to current White House propaganda, President George W. Bush achieved a lot of growth prior to the financial crisis, and lower taxes for all helped. The Bush prosperity was the byproduct of several multidecade policy trends that freed markets and empowered individuals to innovate and create wealth.

Freer trade championed by presidents since John F. Kennedy, and deregulation (begun by Jimmy Carter with the airlines) were critical to this trend. Also key was reducing excessively high tax rates on upper-income Americans, initiated by Ronald Reagan, somewhat interrupted by Bill Clinton, and reinstated by Bush.

Economists recognize highly productive people, if taxed punitively, create less wealth in the U.S. through arcane tax planning or simply move investments offshore. Higher taxes for high-income families would raise rates on fully half of the income earned by proprietorships and leave those small and medium-sized business with less to invest in creating new jobs.

Continue reading…