Author: Daniel Indiviglio

Back in December, I wrote about what appeared to be a growing asset bubble in China, particularly affecting real estate prices. The New York Times has an article today to keep the debate going about whether the developing economy is overheating, or just experiencing incredible growth. After all, it’s not a bubble if the increasing values are justified. This speaks to a broader question: how does one spot an asset bubbles to begin with?

I’ve written about the difficulty bubbles pose before. They may be completely unavoidable. Even if you can manage to spot one, it’s pretty hard to prevent their inevitable inflation. In the case of China, government authorities have begun taking measures to try to slow down asset appreciation. But such action is only warranted if you can be reasonably sure that there is a bubble. How do you know?

There are a few ways of doing this. I think the best way is to try to determine the cause for the asset’s appreciation. Let’s use the U.S.’s recent real estate bubble as an example, since it’s so fresh in our minds. What caused housing prices to increase?

Actually, let’s back up a little. What are some things that could cause housing prices to increase? One might be a prevailing change in investing philosophy. If some economic shock caused people to abandon the stock market and shift their savings from equity to real estate, then that would cause stock prices to decline, but real estate prices to go up. If that change is permanent, then it would be a legitimate increase, since it’s based on cash reallocation. This wasn’t the case in the U.S. Although some investors turned increasingly to real estate during the bubble, other asset markets soared as well.

Another potential cause would be legitimate economic growth. For example, if a nation’s economy is soaring, then its people will be able to buy more stuff. When demand increases, price follows. In fact, residential real estate’s dependence on consumer demand separates it from most other assets. Gold, for example, is not as directly dependent on the health of the average American’s wallet.

Going back to the U.S. housing bubble, it’s pretty clear that personal income growth couldn’t justify the new housing prices. Using data from the Bureau of Economic Analysis, I calculated that from 2001 through 2006 (the peak of the bubble), personal incomes increased by 30%. That’s not bad, but it’s also no where near the rise we saw in home prices, which increased by 77% over the same period, according to the S&P Case-Shiller Composite-20 Index. If, over that time period, housing prices had increased by around 30%, then that appreciation might have been more justifiable through income growth. That’s not what happened.

If people weren’t making more money, how were they buying more expensive homes? Credit also lends itself to creating housing bubbles. For example, if home purchases required 100% cash, then inflating a widespread housing bubble would have been a lot more difficult. People just wouldn’t have been able to afford to buy more houses beyond their means, even if they wanted to. As a result, more relaxed lending standards are another warning sign that a bubble might be forming.

Moving back to the China question, it’s pretty hard to tell for sure if it’s in the midst of a dangerous real estate bubble. But if its asset prices are increasing far more than its personal incomes and lending standards have been significantly relaxed, then it could in for some trouble. Of course, the struggle with macroeconomics is that there are so many variables to consider, so just taking a few into account is an overly simplistic approach, but it’s a start. Other characteristics of its economy would also need to be taken into consideration to get a more robust aggregate view.

This week, Microsoft’s Vice President of Trustworthy Computing, Scott Charney, argued that an Internet tax may be a good solution for paying for cybersecurity. Since then, net neutrality advocates and Microsoft critics have called this a terrible idea. They argue that software designers themselves should pay for their own security measures and worry such a tax would reduce Internet usage, and consequently, information availability. I don’t think that an Internet tax is quite as insane an idea as opponents would suggest, however. It could work.

First, the problem is worth explaining. Economics would consider cybersecurity a “public good.” That means its consumption does not reduce its availability to others and no one would be excluded from enjoying it. One obvious similar example would be national security. All citizens enjoy its benefits without reducing its availability.

How do we pay for national security? Through taxes. The problem with public goods is that there isn’t really a market for them. Since everyone benefits from their existence, no particular consumers are willing to buy them. As a result, no producers would be able to create a profitable business selling them. That’s why the government often steps in to create this market: if they force all people to pay a share, then the market can exist.

In a similar way, the government could create a tax for cybersecurity. A general tax would be another option to consider, if people are worried about the disincentive from using the Internet created by a tax specific to its usage. Yet, shouldn’t taxes be aligned to benefit? Let’s say there’s an Amish person who does not use the Internet. Why should he pay the tax so that those who do use the Internet to benefit? Moreover, if I use the Internet more than the average person, shouldn’t I pay more for the security I get? The probability of identity theft or virus infection increases through accessing more websites and making more online purchases.

So criticisms like this (from a discussion in Computer World) don’t make much sense to me:

“The idea of a general Net tax is a horrible idea,” said John Pescatore, Gartner’s security analyst. “Why not a tax on all retail goods for a standard antishoplifting service all merchants would have to use?”

This analogy is a little strange, since with cybersecurity the users benefit, not the web sites or software companies, while with shoplifting the merchants get the benefit, not the customers. So let me try to think of a better example where those paying for the tax actually benefit. How’s this: why not tax all airline tickets to pay for a minimum standard security service all airports would have to use?

In fact, this is exactly what we have today. It’s called the September 11 Security Fee. That was instituted to pay for the ramped up airport security measures in response to the terrorist attacks. It consists of $2.50 per flight. In this case, others may also benefit from the security, like those working in buildings that now won’t be flown into by terrorists. But (assuming the security measures actually work) the benefit to fliers is particularly clear and direct. Moreover, these fees were created to only cover airport-specific expenditures. The U.S. government obviously does a lot more homeland security than just hiring TSA workers and buying x-ray machines. The other stuff is paid through general tax revenue.

Most opponents of a tax would say that software companies should be responsible for paying, since it’s their responsibility to develop a safe product. Indeed, some criticize Microsoft for advocating a tax as an excuse to spend less of their own money developing safer software. But it really doesn’t matter: if software designers pay, then they’ll just pass that cost to consumers anyway.

Yet, a tax would ensure that consumers don’t suffer from software companies who are tempted to cut corners and spend less on cybersecurity than they should, so to sell a cheaper product. Sure, it will make Internet usage more expensive, but it should. Those who benefit from this cybersecurutiy should be responsible for its price tag.

Fannie Mae and Freddie Mac are poised to push $21 billion in troubled mortgages back to the banks who originated them. Bloomberg reports that this could result in losses up to $7 billion, according to an Oppenheimer & Co. estimate. While I’m generally pretty critical of Fannie and Freddie, this move is justified and utterly sensible.

While this is a very sizable pool of mortgages, the action isn’t unprecedented. Last year, banks incurred about $5 billion in losses from what Fannie and Freddie put back to them. Bloomberg explains why these mortgages are being forced back to the banks:

Banks that sell mortgages to Fannie Mae and Freddie Mac have to provide “representations and warranties” assuring that the loans conformed to the agencies’ standards. With more loans going bad, the agencies are demanding that banks turn over loan files, so they can scour the records for missing documentation, inaccurate data and fraud.

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

Basically, banks sometimes sell Fannie and Freddie mortgages that didn’t conform to the standards necessary for their purchase. When the agencies realize this, they can retroactively refuse the sale or guarantee. And they should: either banks accepted fraudulent information, did lax due diligence or failed to obtain the necessary documentation. The agencies shouldn’t be paying for banks’ negligence.

Since taxpayers now own Fannie and Freddie, it’s more important than ever that they not accept loans that never conformed to their standards. After all, their losses are high enough for the loans that did conform without having to incur more from loans that they never should have purchased in the first place. While it’s bad for banks, lower losses for Fannie and Freddie means fewer taxpayer dollars needed to prop up the agencies.

Of course, this does raise an interesting question: why don’t the agencies take a little more time to ensure that loans actually do conform before taking them on? In fact, the process is quite quick for banks to get loans funded. Clearly, it’s a little too quick. There must be times when nonconforming loans slip through, undetected by the agencies even after losses have been declared — this $21 billion are just those they caught. And $21 billion dollars of mortgages isn’t exactly negligible. More rigorous conformity verification should be sought to prevent these loans from getting through in the first place.

Last month, the national unemployment rate was unchanged at its rate of 9.7% in January, according to the Bureau of Labor Statistics. That beat consensus expectations, which expected a slight rise to 9.8%. The U.S. lost 36,000 jobs in February, 32,000 fewer than the 68,000 economists expected. This was, however, a little worse than January when the U.S. only lost 26,000 jobs (revised up from 20,000). This month’s additional jobs lost increased the total number of unemployed slightly to 14.9 million Americans. Let’s dig into the numbers.

Here’s some historical unemployment rate movement, via BLS:

And the number of jobs lost/gained:

As you can see, the increase in lost jobs is a very slight one. Again, this appears to indicate some stability is taking hold, which should bring actual job growth soon.

One strange thing about February was the weather. Snow may have affected hiring. Here’s what BLS says about the way the weather may have skewed the statistics:

In the household survey, the reference period was the calendar week of February 7-13. People who miss work for weather-related events are counted as employed whether or not they are paid for the time off.

This appears to indicate that the weather shouldn’t have had much effect. If anything, I think it could have delayed some hiring. But temporary jobs were also created by the weather for the snow removal. So it’s hard to say just how large an effect the weather might have had, but I don’t believe it could have been that significant.

On an industry basis, construction continues to suffer, losing another 64,000 jobs. Last month, retail added 42,000 jobs, but this month growth was flat. Health care continued to add jobs with an additional 20,400. Finally, temporary jobs continued to increase, with 48,000 more. As mentioned before, temp jobs lead employment recovery, so their continued growth is a positive sign.

Today’s news is slightly better for other measures as well. Up to now, I’ve been writing about seasonally-adjusted statistics. If you don’t adjust, then the results are a tad better. In February, the unadjusted unemployment rate declined to 10.4% from 10.6% in January. Here’s the movement:

I would expect the variance between these two curves to continue to shrink over the next few months. It’s notable that the unadjusted rate is declining to meet the adjusted rate. That’s different from what happened last year at this time, when the adjusted rate rose to meet the unadjusted rate. The movement this year is definitely better. It indicates that the labor market may be on the verge of seeing real job growth.

Also slightly positive news is unemployment duration:

The green line for February is now mostly below the red line for January. For the longest duration of more than 27 weeks, the decline of 180,000 is particularly notable. If the unemployed aren’t staying jobless for as long, then that’s a very good sign.

Yet, it’s only truly positive if those Americans are actually finding jobs instead of just giving up. The discouraged worker numbers don’t help reinforce that hope:

This continues to be the most disappointing data in the report. There were more than 1.2 million discouraged workers in February. That’s a 50% increase since October — in just four months. These workers aren’t reflected in the 9.7%, so when they re-enter the work force that will make it harder for the rate to decline.

As for measures of underemployment, they’re still bad but slightly better on an unadjusted basis. The broadest statistic — total unemployed, plus discouraged, marginally attached and those working part time but would like full time work — was at 17.9% in February, down slightly from 18.0% in January.

It’s hard to make any strong statements about what February’s data tells us. It’s questionable to begin with, given the irregular weather. We continue to see some job losses, but a relatively small number. Broader measures are also still quite ugly, and the steady growth of discouraged workers is particularly troubling. But there are signs that job growth isn’t far off. Until we see consistent positive numbers, however, it’s hard to get excited about these reports.

Finally, readers who took yesterday’s unemployment poll did a little better than last month, when a meager 2% got the right rate. This time, 9% correctly predicted 9.7%. Yet, the majority of voters — 46% — thought the rate would increase to 10.0% or more. Pessimists! Here are those full results:

(Image Credit: Seansie/flickr)

I wouldn’t normally think it’s necessary to explain that financial products and defective cars are very different things, but a new comic from the Center of Responsible Lending makes me feel the need to do so. It intends to humorously argue for the creation of a Consumer Financial Protection Agency (“CFPA”). The comic imagines, “If Anti-CFPA Folks Ran Toyota Today.” It then has several amusing slides that seek to compare faulty cars to consumer products. Unfortunately the analogy doesn’t work.

I can’t include the entire comic in this post, so check it out here if you want. But a few of the slides’ speech bubbles are below:

No one made the people buy these cars — folks need to take personal responsibility for their decisions!

Fixing these cars will raise the price of cars in the future, and hurt deserving drivers!

Most of the cars on the road don’t have accelerator problems, so let’s not overreact!

Car buyers should be better educated about how car engines work!

Etc.

The idea is that financial products, like cars, can be dangerous, and regulators should exist to make consumer financial products safe, just like automobiles.

But Toyota’s debacle is clearly different from, say, the subprime mortgage crisis. The Toyota cars did not operate as they were meant to. They were defective. No amount of consumer understanding or information about those cars could have prevented this.

Compare that to consumer financial products — quite the opposite is true. The products performed perfectly well. If all borrowers had been able to afford their subprime mortgages, for example, then everything would have been fine. Of course, they couldn’t, so bad things happened. But the defect wasn’t in the product: it was in the buyer. Or more appropriately, it was in the buyer’s understanding of the product.

Better disclosure might have helped with subprime loans, for example. If people had understood that their payments could increase dramatically or that real estate prices could decline, then there may have been fewer of the loans made. If you want to draw a good comparison, then imagine if Toyota had disclosed that there was an accelerator problem before selling the cars. Clearly, that’s all the consumers would need to know to avoid the problem, and the autos. Would you have much sympathy for anyone who then knowingly purchased one?

But you don’t need a consumer financial protection agency to strengthen and/or simplify disclosure. That’s easy for a current regulator to require. A CFPA’s purpose would be to limit how products work and sometimes the products themselves.

Let’s run with the auto example. Perhaps a consumer protection agency for autos would have outlawed SUVs some years ago, because they have a tendency to roll during accidents. Perhaps they would have regulated that the maximum speed car can go is 50 mph, because if you go faster than that, then the likelihood of a fatal accident increases.

And just like how non-defective cars can be dangerous if used improperly, so can sound consumer products. Drag racing Volvos can be dangerous; similarly, the overuse of credit cards can be hazardous.

Those who are against the CFPA aren’t against consumers understanding the products they’re buying: they’re against over-regulating the financial products market and limiting product offerings. This has nothing to do with defective products — they would obviously already be illegal. That’s like if a bank had a mortgage that accidentally charged you the wrong amount of money each month, compared to what the promissory note dictates. Better disclosure of and education about financial products would provide consumers with the ability to make sound decisions regarding financial products, just like they do with non-defective cars.

(h/t: Baseline Scenario)

Yes, they both enjoy summering in Hamptons. But that’s not what I’m referring to. According to an article in the New York Times today, Hollywood actors are beginning to get a taste of something that Wall Streeters are also increasingly being force to accept: deferred compensation. Upfront salaries are being minimized, while performance based pay is making up the lion’s share of total compensation. And this is a good practice for actors for the same reason it makes better bankers: results matter.

First, here’s the gist of the Times’ story:

Movie stars, who not so long ago vied to make $20 million or even $25 million a picture, have seen their upfront salaries shrink in the last several years as DVD sales fell, star-driven vehicles stumbled at the box office and studios grew increasingly tightfisted.

How bad is it?

Pretty bad.

Most of the three-dozen or so top-billed actors in the 10 films up for best picture in this Sunday’s Academy Awards ceremony, including blockbusters like “Up” and “Avatar,” appear to have received relatively minuscule upfront payments for their work.

Specifically:

Once upon a time, the biggest stars were rewarded with deals that paid them a percentage of so-called first-dollar gross receipts; that is, they began sharing in the profits from the first ticket sale, not waiting until the studio turned a profit. Now studios often insist that even top stars forgo large advance payments in return for a share of the profits after a studio has recouped its cash investment.

That sounds vaguely familiar, doesn’t it? Sort of like if a banker created a security, but his compensation relied on the long-term profit that resulted? Why, that’s almost exactly what’s being recommended these days for Wall Street. Regulators and shareholders are beginning to demand that banker pay involve a larger portion of performance-based revenue, often in company stock. And if a deal goes sour, then that pay may even be clawed back by the bank.

Of course, in Hollywood, there’s no such thing as a movie losing money it’s already made. A box-office dollar received can’t be later lost. So there’s no claw back provision necessary in Hollywood like on Wall Street, but the idea that compensation should be based mostly on how much total profit is made off a product is the same.

And it should be: in both industries the individuals in question play with other people’s money. If it’s a banker, then investors, clients and shareholders put up the cash. If it’s a movie star, then some production company or financier invests in the film.

Deferred compensation is good from a movie-lover’s perspective too. I am always so frustrated when I see a big movie star do an terrible movie because the pay is good. I’m even more annoyed if I accidentally go see it, based on that actor’s presence. While there are numerous such examples, a perfect one is Adam Sandler’s “Little Nicky.” Arguably Sandler’s worst movie, it has the box office record to match. According to Box Office Mojo, it grossed $58 million worldwide, but had a production budget of $85 million. For those with no calculator handy, that’s a loss of $27 million. Ouch. But Sandler was paid $20 million, according to the Internet Movie Database. He might as well have made a synthetic collateralized debt obligation referencing subprime mortgages.

Since Sandler would be paid handsomely whether the movie did well or not, he did not have to care much if the movie was a success. He was already a well-established comedian by then. A dud here and there wouldn’t really hurt him. So why not collect a cool $20 million even if the movie fails? Yet, if his compensation was mostly back-loaded, dependent on performance, he would have had a greater incentive to think twice about signing onto such an awful script.

Ultimately, more deferred pay shouldn’t really hurt actors: they’ll just have to care about the movies they make. If they produce a stinker, their paycheck will feel the pain. That’s the same paradigm that we want bankers and traders to face. Why not hold actors to the same standard?

Another new month means another monthly unemployment reading tomorrow. Last month, we saw the official unemployment rate decline to 9.7% from 10.0% in December. At this point, tomorrow’s reading is set to be a very strange one. All kinds of odd effects from seasonality to snow storms to labor productivity might have affected hiring in February. That just makes it all the more difficult to figure out what tomorrow’s data will show. But as usual, we’d like to give readers a shot at guessing what they think it will be.

But before voting, consider a few things. First, it’s true that last month, the official employment rate did decline. Yet, as my analysis showed, the news wasn’t as good if you ignore seasonality and consider broader measures of underemployment including discouraged and part-time workers. Then, the rate jumped up 18%.

As far as seasonality is concerned, a chart I used last month comparing seasonally adjusted and unadjusted data showed that the variance widens in January. That distance shrunk slightly between the two curves in February last year, meaning that more of the seasonal correction disappeared and the adjusted unemployment rate increased accordingly. So that could drive unemployment a bit higher.

Also notable were the snowstorms. They might have made unemployment worse, since businesses couldn’t hire as quickly due to weather. Yet, this might have created some part-time jobs for snow shoveling, so this could affect the broader underemployed rate more than the headline unemployment rate.

Other measures of unemployment for February have been optimistic, but not indicative of job growth just yet. Yesterday, ADP reported (.pdf) 20,000 jobs lost in February. That’s the smallest decline since February 2008. Due to the way it derives that number, however, the bad weather has no effect. Today, we learned that the Department of Labor’s weekly jobless numbers got a little better in the week ending Feb. 26th, with initial claims declining by 29,000 versus the prior week. That was after initial claims increased by 56,000 from the weeks ending Feb. 5th through Feb 19th.

There’s some doubt to how meaningful tomorrow’s number will be, due to all the strange circumstances surrounding February. But it will be highly analyzed nonetheless. Last month, respondents to our poll did incredibly poorly — a mere 2% correctly guessed that the rate would drop to 9.7%. Let’s try to do better this month:

Labor productivity grew by another 6.9%, while labor costs fell by 5.9% in the fourth quarter, according to the Bureau of Labor Statistics. With output increasing but unemployment still high, this news shouldn’t be shocking. But it does provide some indication that employers may be at a breaking point in terms of how much effort they can squeeze out of workers. What does today’s data mean for employment?

Labor Productivity

BLS measures labor productivity simply as output divided by hours worked. Historically, productivity has increased more often than not. So the fact that it’s increasing is usually generally seen as a good sign: more productive workers are good for an economy. But in a recession, it increases further for another reason — employers are demanding nearly the same amount of output from fewer workers. Here’s a chart showing labor productivity since 1947, as far as BLS’s data goes back:

I created this graph by doing a ratio of BLS’s indices of labor output and hours worked. As you can see, it’s a relatively steady upward trend. But since the start of 2009, the slope of the curve has become quite steep. In fact, the rise in productivity in 2009 was the largest for a year since 1965.

So the bad news is that employers are getting more work out of fewer workers, rather than hiring. But the good news is that this behavior can only be sustained for so long. There are limits to how productive workers can be, so eventually employers will have no choice but to hire more as output continues to increase. Here’s another graph I made that shows unemployment and quarterly productivity growth since 1970:

You can see that the peaks in unemployment tend to coincide with the peaks in productivity. And it’s pretty hard to see any unemployment peaks that don’t also begin to decline as the productivity growth declines. Since productivity growth was less in Q4 than Q3, I would see this as a good sign for unemployment, based on this chart.

Labor Costs

BLS defines labor costs as the ratio of hourly compensation to labor productivity. So another sort of obvious phenomenon is that labor costs will decline for employers when productivity is increasing. In fact, they’ve decreased dramatically since the start of 2009. This chart shows labor costs with the index starting at 1 in 1947:

That recent recession caused the most dramatic decline in labor costs shown for a year in 2009 — they declined by 17.3%. Again, that’s the biggest decline in labor costs for a year since 1947. The good news here is that lower labor costs should make it easier to hire. As you can see, they’re now back at 2006 levels.

So today’s data is sort of bittersweet. Even though employers are managing to increase output without hiring, they can probably only do that for so long. And if history is any indication, some real employment growth shouldn’t be too far off.

(Image Credit: Wikimedia Commons) 

President Obama may be sending a draft of the so-called “Volcker Rule” to Congress as early as today, according to Bloomberg. That’s the proposal which would prevent banks from proprietary trading and limit their liability exposure. Although the Treasury wouldn’t comment officially to Bloomberg, it received a summary from a Treasury source to accompany the legislation that the President will urge lawmakers to adopt. While interesting to note, I think it’s mostly political posturing, as I would be shocked if the proposal made its way back to President Obama’s desk for his signature.

Bloomberg says:

Obama will ask lawmakers to bar banks from trading solely for their own profit and limit company size by expanding a 10 percent cap on deposit share to include other funding sources, according to a draft summary obtained by Bloomberg News. It also would tighten supervision and capital and liquidity requirements on non-bank companies engaged in proprietary trading, according to the summary.

Lawmakers, however, will probably mostly ignore the proposal. The trouble the Senate is having getting any financial regulation done is very well-known at this point. The possibility that Banking Committee members would derail the progress they’ve made by adding in these very controversial changes is pretty unlikely. Of course, anything as contentious as the Volcker Rule will have a much better chance of becoming law if wrapped up in a big bill, so the likelihood of its passing separately after broader legislation is adopted seems even minuter.

But this does put the onus on Congressional Democrats to act. I’ll be curious to see how they respond. We’ve already heard Sen. Dodd’s annoyance with the President mucking up the reform effort with this proposal. So this draft may just be left on a shelf in the Capitol somewhere to collect dust. While the President could demand that any final legislation contain the proposal as a prerequisite for his signature, I think that’s too strong a stance to maintain. This is, after all, politics. Less aggressive regulation would be better than nothing.

A few times last year, I wondered whether the financial crisis might also dictate the end of prosperity for New York City. While I still worry that the city’s glory days are in the past, it has clearly escaped collapse thanks to the Wall Street bailout. The New York Times has an article today that explains just how big a role the bailout likely played. In fact, the recession for the city is now expected to be much less severe than thought — and relatively benign when compared with what the rest of the U.S. is going through.

Here’s a chart from the article that compares the effect of this and some past recessions on New York City and the rest of the U.S.:

The Times explains how much milder the recession is thought to by turning to Moody’s economist Mark Zandi and Mayor Bloomberg:

Mr. Zandi said he expected the job losses in the metropolitan area to end within a couple of months and to amount to less than 4 percent of the region’s total employment at the peak of the last boom. By contrast, the nation lost more than 6 percent of its jobs over the last two years.

City officials agree. Mayor Michael R. Bloomberg and his lieutenants have been telling audiences that the recession will cost the city 100,000 fewer jobs than they had forecast a year ago.

Considering that the financial sector, which led the recession, was heavily concentrated in New York City that’s a pretty impressive feat. But since the government put an enormous amount of money and numerous emergency measures in place to stabilize Wall Street, this makes sense:

Economists say the hundreds of billions in loans and aid the federal government pumped into the city’s banks fueled a quick reversal of Wall Street’s fortunes. That turnaround saved thousands of high-paying jobs and the controversial bonuses that go with them, averting a sharper drop in tax collections and consumer spending that would have brought more layoffs. “A lot of us had expected there would be 60,000 or 70,000 jobs lost directly in the financial services sector,” said James Parrott, an economist with the Fiscal Policy Institute.

“Then there would have been a spillover effect,” he said, referring to the widely accepted idea that each job on Wall Street supports two others in and around the city.

One way in which the city clearly benefits is directly from the spending and taxes of those in the financial industry. I’ve noted this before. But the indirect results are also significant. If Wall Street had laid of thousands more, some would have left the industry and city, causing real estate there to further worsen and more shops and restaurants to close.

But it appears that New York City isn’t losing it’s mojo in finance. Although the threat of the government cracking down through regulation appeared pretty serious in early 2009, a year later bankers are likely far less worried. Financial reform is struggling in Congress, and whatever ultimately gets passed will probably be watered down compared to what was initially expected. Meanwhile other nations aren’t as shy about banker bashing. As a result, New York City will likely remain one of the top financial centers in the world.

And believe it or not, banks are hiring again. I had a recruiter contact me the other day with several banking jobs he’s trying to fill in securitization — one of the last subsectors in finance I expected to recover. (Apparently he was unaware that I decided to become a journalist and forgo one of the zeros on the end of my compensation.) With Wall Street reaping huge profits again, jobs are no longer in jeopardy and some financial firms are expanding.

Of course, the story is still being written: financial regulation is pending. And while it might not be quite as strict as it would have been if Congress had given it a higher priority than health care, it could still have an impact. But if one of the clearest lessons from my days of banking was that finance is all about endurance. If anyone has the survival instinct, it’s Wall Streeters.

House Financial Services Chairman Barney Frank (D-MA) said today that he will not support placing a new Consumer Financial Protection Agency (CFPA) in the Federal Reserve. Yesterday, sources indicated that Senate Banking Committee members had reached a compromise to do exactly that. Frank’s statement makes clear that he’s not on board. His blessing matters.

First, it’s important to note that the House version of financial regulation would create the CFPA as a new stand-alone agency. The provision barely passed, but it was ultimately included in the bill. Frank says that he still prefers a new agency to be assigned the task of consumer financial protection, though he would also support the Treasury being given this authority. According to the press release, he won’t support putting the agency in the Fed because:

My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.

I actually sort of agree. I’m not too keen on the idea of a CFPA. But if you want to bother establishing one, then it probably won’t do much good to put it in an existing bank regulator. Regulators allegiance is to banks, not the consumers.

As Frank says, the Fed, in particular, already has a function to protect consumers. As its website explains:

Another area of Board responsibility is the development and administration of regulations that implement major federal laws governing consumer credit such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act [see Consumer Information and Community Development].

Yet history has shown that the Fed tends to be more reactive than proactive when it comes to consumer protection. Democrats in Congress would also likely argue that the Fed gives banks the benefit of the doubt over consumers. A perfect example is the recent credit card regulation changes. The Fed had scheduled most of the same rules to take effect months later, but Congress passed legislation to speed things up. The time difference stems from banks convincing Fed officials they needed more time to implement the changes.

Frank’s disapproval here probably spells the death of the concept of a CFPA being housed in the Fed. He really does wield the power to kill a concept if he pleases. Obviously, he won’t do so at the risk of not having any financial regulation at all, but I think he could very well force the Senate to rethink this approach. If I had to guess, I’d bet that we’ll end up with the CFPA as a part of the Treasury or FDIC.

Is there some possibility that the CFPA could fail altogether? Sure. But Frank makes clear today that he won’t let that happen easily. He just needs to sway the Senate to see things his way.

But apparently Frank isn’t the only one stressing the importance of a CFPA. A new “Funny Or Die” sketch shows that he also has some prominent comedians on his side (h/t WSJ’s Real Time Economics):

(Image Source: Wikimedia Commons)

Dallas Federal Reserve Bank President Richard Fisher said today that he would advocate a plan to break up large firms that pose a systemic risk to the economy. While many policymakers in Washington believe that regulation needs to ensure that firms can fail, far fewer are willing to break them up to accomplish that end. Since there’s still some possibility that the Fed will end up the systemic risk regulator, it matters if its leaders come out in support of breaking up too big to fail firms. Unfortunately, Fisher joins only a small minority of leaders at the Fed who support splitting up such firms.

Here’s what Fisher said, via the Wall Street Journal:

“Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size–more manageable for both the executives of these institutions and their regulatory supervisors,” Fisher said, adding that he’d also support unilateral action by the U.S. on this matter.

“I think the disagreeable but sound thing to do regarding institutions that are TBTF is to dismantle them over time into institutions that can be prudently managed and regulated across borders,” he said. “And this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis.”

Fisher admits that he’s the exception, as most at the Fed think breaking up firms is too extreme a measure. But he isn’t alone. Kansas City Fed President Tom Hoenig has also come out in support of breaking up dangerously large firms in the past. So the chorus is still quiet, but growing.

If the rest of the leadership at the Fed came out in support of breaking up firms deemed too big to fail, then I would have a far easier time supporting its getting the role of systemic risk regulator. If its directive is to make sure firms don’t grow too large, break them up if they already are and prevent mergers when systemically risky firms might be created, then I would be less worried about its other conflicts of interest. Of course, Congress would also have to give the Fed its blessing to have that power.

Could this happen? The House version of financial regulation that passed does contain some language providing break up authority. The Senate’s original version did too. But it’s unclear at this time whether whatever bill that the Senate finally comes up with will still contain this authority. Given the challenge Banking Committee Chairman Christopher Dodd (D-CT) faces in getting anything controversial in there, I kind of doubt we’ll see break up authority included.

And that’s a problem. Even though larger firms could create failure plans to detail how they would be wound down by a resolution authority if they ran into trouble, there’s no guarantee these plans would actually work. It sounds great in theory, but only in theory. Until the economy enters another financial crisis, it’s impossible to know if these failure plans will really hold up when the economic landscape looks very different.

Breaking up systemically risky firms is the most direct way to address the too big to fail problem. It would be messy, but it’s also the only way we can have some certainty that firms can collapse without taking the entire economy down with them. It’s nice to see another Fed president join the cause, but unless others follow, it might not much matter.

Michael Carpenter, CEO of embattled lender GMAC, was paid $1.2 million for six weeks of work last year. On an annualized basis, this amounts to around $9.5 million. That’s pretty nice pay for the CEO of a firm that’s majority owned by the U.S. government — almost equivalent to Goldman Sachs CEO Lloyd Blankfein’s $9.6 million compensation for 2009. Should we be outraged?

On one hand, it’s a little early to judge just how good a job Carpenter will do in turning around GMAC. Sure, it had a pitiful 2009, but he had only been on the job for those last six weeks of the year. Given that the firm was one of the most troubled to receive federal funds, he has quite a task ahead of him. If he does, somehow, manage to bring GMAC back to profitability and repay the $17.3 billion bailout, then he may be worth it.

Above I said that Carpenter’s annualized pay compares similarly to that of the Goldman Sachs CEO. I mentioned that because several sources, including the New York Times, Financial Times and Bloomberg, all highlight that fact. But I think it’s a little disingenuous to compare his pay to that of the Goldman CEO. Blankfein made far less money than he would have if his pay wasn’t a public relations disaster waiting to happen. If nobody in Washington or the press cared about Goldman, his compensation would easily have been several times greater.

What I find most surprising about Carpenter’s pay is that the Obama administration’s Special Master of Compensation, Kenneth Feinberg, approved it. He’d have had to, since GMAC hasn’t paid back its bailout. Bloomberg quotes a spokeswoman from the pay czar’s office:

“His compensation was determined by the special master and reflects his experience leading other large complex financial- services organizations,” spokeswoman Gina Proia said in an interview. “Mike has joined GMAC at a critical time in turning around the operation.”

I get that Feinberg thinks Carpenter’s role is important, but that’s still a pretty enormous pay figure for a bailout firm’s CEO. From what I had read about Feinberg, I didn’t think he was so willing to allow such lofty compensation.

But what this really signals is that the government has no intention of allowing GMAC to fail. The pay it’s providing to Carpenter isn’t designed for someone who can quietly wind down a firm: it’s for a savior. And that’s a shame, because as I’ve said before, there’s little reason why GMAC should have been saved in the first place. Instead of being allowed to fail, it continues to hemorrhage cash, losing billions of dollars each quarter of 2009 and requiring an unprecedented third bailout late last year. The government is clearly intent on throwing whatever money it takes at GMAC to keep the firm afloat, and excessive pay for its new CEO is just the latest target for taxpayer cash.

On the Atlantic Business Channel, we’ve stated on multiple occasions that we weren’t just experiencing a recession, but a mancession. Well, the Federal Reserve took a stab at explaining why men fared so much worse than women during the recession. Its findings probably aren’t a shock: industries dominated by men were worst hit — especially construction. Unfortunately, men will likely to continue to struggle more than women to find jobs during the recovery.

First, here’s a chart the Fed provides that demonstrates just how deep a mancession it really was:

The Fed writes:

A breakdown of the employment figures shows that men have been affected more adversely than women during the 2007 downturn. Between December 2007 and October 2009, nonfarm payroll employment fell 5.8 million for men but dropped only 2.5 million for women. While male and female unemployment rates were roughly equal at the start of this period–5.1 percent and 4.9 percent, respectively–they have since diverged markedly. In August 2009, the unemployment rate for men stood at 11.0 percent while that for women was 8.3 percent–a 2.7 percentage point difference that constitutes the largest unemployment gender gap in the postwar era. Although the gap has closed in recent months, it still persists at a very high level in relation to historical standards.

The answer why is pretty easily explained by the following chart:

I would draw your attention to the categories of construction and manufacturing above. Both employ more men than women. You can see just how drastic the hit construction was for men. For manufacturing, in fact, a slightly larger portion of women lost their jobs, but it’s still a male dominated industry, so their sheer number of job losses was greater for men. The report says that within goods producing sectors men lost 2.9 million jobs, while women lost only 765,000.

The study continues by pointing out that some industries with heavier concentrations of women fared relatively well. Education and health services are the standouts there. In fact, actual job growth was seen in these industries. That also gave jobless women an advantage over unemployed men at getting some of the few jobs available.

From the chart above, however, I do notice a few oddities. First, despite the fact that financial services and manufacturing are male dominated, though slight, they still saw a larger percentage drop in women than in men. I would have thought such industries would have preferred firing more men, so to keep the gender proportions less lopsided. But natural resources and mining saw the opposite. There, somehow, more women managed to find employment while 9.7% of men lost their jobs.

One thing is clear: men will continue to have a more difficult time finding employment during the recovery than women, given the industries each gender tends to dominate. Construction, in particular, will likely be a major struggle, while education and health services should endure.

(Image Credit: Cliff1066/flickr)

Gallup published a fascinating poll yesterday indicating that a whopping seven in 10 Americans believe their job is ideal for them. That’s not saying they tolerate their job, think it’s worth the money or feel vaguely satisfied — they think it’s ideal. I find this a little hard to believe: do that many Americans really feel their job is essentially perfect for them?

First, I must admit that my cynicism about this poll doesn’t line up with what my own current response would be to the question. In fact, I would be among that 70%, but it wasn’t always that way. Indeed, working at the Atlantic is the first time I’d have ever been one of those seven in 10 Americans. I tolerated my past jobs and thought the money was pretty good, but never felt like I was challenged with or passionate about what I did. So I thought it was pretty fantastic luck to finally have a job I found ideal, but this poll suggests that I merely joined the vast majority, not a select few.

Here’s the breakdown, according to Gallup:

My first observation is that there isn’t any room for shades of grey: you either think your job is ideal or you don’t. So it could be that some of the respondents just treated this as a measure of job satisfaction, which I would argue is a far weaker standard. It’s one thing to be satisfied with your job, but it’s a much stronger statement to consider it ideal for you.

What does it take for a job to be ideal? That would differ by respondent as well. For example, I think my job is ideal from a doing-what-I-love perspective, yet I wouldn’t mind if my pay was, say, double. But since I’m not that money-driven, compensation doesn’t factor much into my calculus of ideal. I suspect, however, most people that work on Wall Street, for example, would have very different criteria.

Speaking of pay, one amusing finding is that the more money you make, the more ideal you find your job:

There’s definitely a correlation here. You could argue that better paying jobs often demand more responsibility, and hence, are more rewarding. But tell that to a teacher or social worker — there are definitely jobs where people can make a big impact on the world but collect a small paycheck. So I think that pay probably does factor into most people’s calculation of how ideal they find their job, but it certainly isn’t the only factor. This above chart could also imply that those who gravitate towards higher paying jobs give compensation a greater emphasis in calculating how ideal they find their job.

I should also note that the poll was only asked of those who are currently employed. So the high idealism could be related to a mere thankfulness for still having a job when nearly one in five these days are underemployed. Compared to no income at all, even a job that you didn’t used to love begins to look pretty great.

Just for fun, let’s compare our readers’ responses to what Gallup found. Do you believe your job is ideal? Answer below (but please, only respond if you are employed)!

 

On Saturday, I wrote a post containing some ideas to make principal reductions more palatable to banks. Right now, banks want nothing to do with them, mostly because they don’t want to declare big, immediate losses. I’ve subsequently gotten several comments and e-mails about what I proposed. I want to clear a few things up.

First, if you haven’t read my post from Saturday, then I urge you to do so before continuing here. Much of what I say below assumes you know what I suggested.

To begin, I did not mean to propose that the government should necessarily force banks to undergo principal reductions, or that taxpayers should pay for the banks’ losses in doing so. On the contrary: my suggestions were meant to explore ways in which lenders could make principal reductions work on their own terms, not by being strong-armed by the government or relying on taxpayer support. In fact, the only part of my post involving the government’s involvement was if regulators were to allow banks to space the losses from principal reductions over several years. But that would just serve to eliminate the severity of an immediate loss as a motivation for banks to foreclose.

So let’s put the government’s influence aside for a moment and think about voluntary principal reductions from the bank’s point of view. With regard to defaulted underwater borrowers, it has two options: foreclose or modify the mortgage. Experience has shown that borrowers are less likely to be interested in a modification if it leaves them well underwater. So in this market, a principal reduction would almost certainly help the chances that a modification would work. Let’s consider the scenarios in the example I used on Saturday. Here are the assumptions:

Original Mortgage: $300,000 (for simplicity, the borrower still owes that amount; it was interest-only until default)
Original Interest Rate: 7%
Current Payment: $2,000
Borrower Can Afford: $1,430
Current Appraisal Value Of Home: $215,000 (28% decline)

Scenario 1: Foreclosure

Here, it’s pretty likely that the bank will lose somewhere in the ballpark of that entire 28%. If the bank gets the appraisal value of the home at auction, then that would be quite lucky. It may try to get the borrower to pay back some of that difference if it was a recourse loan, but even in those situations I’m hearing that borrowers are being settled with for pennies on the dollar, i.e. the recovery amount is tiny. And that also doesn’t take other administrative costs for foreclosure into account. So let’s say the loss here is approximately $85,000. I think that’s optimistic.

Scenario 2: Principal Reduction

Now, let’s say the bank reduces the borrower’s principal to $215,000, but bases the interest rate on what he is able to pay — $1,430 per month, which leaves it at 7% for a 30-year mortgage (may need a few years extension to get the new term to 30 years, fine). That’s likely higher than whatever interest rate it would get in the market right now, given prevailing mortgage interest rates. If those rates were around 5%, then that would be the same as a $266,500 loan. In other words, the bank would ultimately lose $51,500 more by foreclosing instead of a principal reduction. This, of course, assumes that the borrower isn’t allowed to refinance, as I explained in my earlier post. Even if the borrower sells shortly thereafter for around the appraised value, the bank would still be in approximately the same position as it would have been through auction, but probably a little better off.

As you can see, the government played no part in the principal reduction scenario. Here, it would be in the bank’s best interest to reduce principal. As mentioned, however, the bank may have to declare a loss on the principal, and that’s where the government may come in — by allowing banks to space losses over several years, they don’t have the same incentive to foreclose their defaulted portfolio over that same time period so to space out losses. The government would not use any taxpayer money either.

Now don’t get me wrong: this won’t work in all cases. There are some borrowers who will not even be able to pay if their principal is reduced to the new market value for their home. Foreclosure is their only option. But I am also sure that there are some cases where this could work. And the housing market will stabilize a lot more quickly if the foreclosure inventory shrinks. That outcome would benefit everyone — not just banks and underwater borrowers.

 

Today, we learn that AIG will sell its Asian life insurance arm for $35.5 billion to Prudential. This appears to be pretty great news for taxpayers. The sale moves the firm a little bit closer to actually being able to repay its massive $180 billion bailout. Or does it?

On one hand, AIG is $35.5 billion richer. It could use those proceeds to repay a sizable chunk of its bailout. That’s great, right? Bloomberg thinks so:

The sum raised in the sale would exceed the total of more than 20 other deals announced by AIG since its 2008 rescue.

The agreement is “very good news for AIG and a major step toward quickly repaying U.S. taxpayers at a time when, in our view, the company appeared resigned to carrying out a time- consuming IPO,” said Emmanuelle Cales, an analyst at Societe Generale SA.

I’m not as convinced. Asia is likely one of the best bets for growth in the years to come. Through this sale, AIG surrenders any potential revenue that the unit might have achieved. That income could also, of course, have been used to repay the bailout, though it would have trickled in more slowly than the unit’s sale. Indeed, profits could exceed the sale price over the course of the next several years. The sale is only a good deal for taxpayers if the present value of all future revenues that the unit could have produced was less than or equal to $35.5 billion.

This move might also speak to the question of the future of AIG. If it’s shedding its profitable business lines, then the firm is just winding down. And if that’s the case, then its hope of repaying the bailout will be dependent on how fair the prices are it gets for the sum of its parts. Alternatively, if the firm hoped to continue to operate, then the bailout could be repaid over some number of years — as long as it takes.

I’m not sure which approach is a more likely means of taxpayers getting their money back. If the damage to AIG’s brand is too great for the firm to continue, then it might as well close up shop and sell off units as quickly and effectively as possible. I just worry that, even if it successfully sells every division, it wouldn’t get near the $180 billion amount it owes.

But if the firm could continue to function well for years to come and rebuild its business, then I think that would be a much more likely route to getting taxpayers their money back in full. That’s why, despite the seeming success of the Asian division sale, I worry it indicates that AIG will just rely on selling itself piece-by-piece for the best prices it can get. This alternative could lead to a pretty big taxpayer loss on the bailout.

Prior to the financial crisis, few outside of Wall Street knew what Credit Default Swaps (CDS) were. But AIG’s collapse and subsequent bailout made the once-obscure derivatives famous: the insurer needed taxpayer money to cover billions of dollars of its CDS exposure. Ever since, their presence in finance has been questioned. In an article from the New York Times yesterday, Gretchen Morgenson appears to argue they should be outlawed — or their creation heavily restrained. This raises an important question: should regulators reform CDS, leave them alone or kill them altogether?

First, for anyone reading who doesn’t know what a credit default swap is, let me quickly explain. Let’s say your spouse wanted to buy a life insurance policy so that, if you die, your family will be protected. Now, imagine you’re a corporate bond. That life insurance policy would be called a credit default swap. An investor can buy CDS to protect against the failure of a bond, and consequently, the firm who issued it. And she can trade that life insurance policy so it could pay out to whoever owns it. That’s CDS in a nutshell.

I think it’s pretty easy to dismiss the “leave them alone” option. AIG and others have proven that pretty easily. Gone unregulated, firms can develop enormous exposures without the capital adequacy to back them. If interconnectedness is significant, then bailouts inevitably follow.

So should we eliminate CDS or fix the market? That depends on whether they can be regulated in such a way that they become safer. I think they can.

Morgenson quotes Brookings scholar Martin Mayer saying:

“This is an insurance instrument and it must be regulated on an insurance basis with minimum reserves, instead of making deals that don’t even have maintenance margin on them,” he said.

Absolutely. I couldn’t agree more. Any firm that issues CDS must meet relatively conservative capital requirements to back that exposure. That’s where AIG went wrong. He continues:

“And I think it is an instrument that insured depositories ought not to be allowed to hold or trade.”

Here, he loses me. If I buy a credit default swap to protect an investment, then my potential loss is limited to what I paid for the contract. If the security performs well, then it becomes worthless. I don’t owe anyone anything, I just lose the money I spent on the insurance. How is it harmful if an insured depository institution, or anyone else for that matter, holds or trades CDS? So long as their issuer can cover any payouts, then there’s nothing to worry about.

With one caveat: I would also add liability exposure concentration limits for issuers of CDS and other derivatives. For example, you don’t want any one firm to have an incredibly large exposure to one segment of the market. That could create interconnectedness issues. If residential real estate collapses, for example, one firm might not be able to pay out incredibly large sums to a huge portion of the market that holds insurance on residential real estate assets. Even with capital requirements place, such a predicament could lead to its failure and over-connectedness. If these losses were spread over many issuers, then the likelihood of those firms being able to sustain losses increases substantially. The need for a bailout would also be far less likely. This speaks to the second, less controversial, part of the so-called “Volcker Rule.”

Really, CDS are a very positive financial innovation for investors who want to hedge their securities portfolios. And as long as they’re properly regulated, I can’t see any reason why they would be so harmful: as market demand for the CDS on a particular security increases, so does the cost of creating more for issuers, if they are required to hold capital to cover their exposure. So the market is already self-limiting if that reform takes effect. Firms aren’t going to write more CDS contracts if it becomes too expensive for them to do so. Moreover, limiting firms’ concentration will further prevent the possibility that too much CDS is written.

Federal Reserve Vice Chairman Donald L. Kohn announced today that he will retire when his term expires in June. As the second-most powerful U.S. central banker that’s pretty big news. But how significant is the move for U.S. monetary policy?

The average American — and I’d guess most people reading this — probably never heard of Donald Kohn. Even though he has an incredibly prominent role at the Fed, vice chairman isn’t nearly as public a figure as Chairman. But it’s hard to exaggerate how important a part he has played in U.S. monetary policy over the past few years. As the #2 man, his opinion matters a lot. Only Chairman Bernanke himself has had a bigger impact.

So why is Kohn retiring? Well, he’s 67 and has worked for the Federal Reserve in some capacity since 1970. It’s pretty easy to see that he’s probably ready for a well-deserved break. And the past few years have likely been particularly stressful, for obvious reasons.

Kohn’s retirement is a major development for the Obama administration. Even though his term is up in June, the administration now doesn’t need to worry about reappointment: it can just begin the search for a new board member. And the President will also be appointing a new vice chair. The question is whether he’ll opt to promote from within, or give the job to his new appointee.

How big a change will a new vice chairman have on monetary policy? That depends who the President picks. If he chooses an inflation hawk like current Kansas City Fed President Tom Hoenig, then that could influence swifter monetary tightening. If I had to guess though, I would say that the administration will likely focus on someone that would further its regulatory goals. I also suspect it wouldn’t be someone terribly high profile like Larry Summers, who might not like answering to Bernanke. But this definitely gives the Obama administration the opportunity to have a greater voice in Fed policy, which it likely feels shorted on due to the pressure it felt to reappoint Bernanke.

If you have any thoughts on a good or likely choice for the new vice chairman, feel free to comment below!

Americans spent more and saved less in January, says the Bureau of Economic Analysis. Consumer spending increased by 0.5% during the month, while saving declined by 22%. Why did saving plummet? One reason was that personal income increased at a slower rate than spending, at just 0.1%. In fact, disposable personal income declined, by 0.4%. The economic consequences of this data are mixed.

First, why did disposable income decline while overall income increased slightly? I spoke to the BEA to get some clarification. This phenomenon was primarily caused by more taxes. Individuals effectively paid more in taxes due mostly to fewer tax refunds this year. Personal current taxes increased by $59 billion, while personal income only increased by $11 billion. That resulted in a net decline in disposable income of $48 billion. This tax increase is an annual adjustment, so it made for a large month-over-month increase that will result in new base level in the months to come. Personal income will have to overcome this increase in taxes before we see positive disposable income growth in 2010.

Meanwhile, the 0.5% increase in spending was higher than December’s 0.3% increase, but matched the increases for October and November. Does this indicate a more optimistic consumer?

It’s hard to tell. Interestingly, of the $52 billion more in consumer spending, it was almost entirely (99%) on nondurable goods and services. That means consumers are generally spending on smaller-ticket items. I see this as mixed in terms of confidence. Consumers might still be wary about making big purchases, but buying more nondurables could imply greater discretionary spending.

Given that disposable income declined while consumption increased, it’s pretty easy to understand why savings declined. If people are spending a greater portion of their income, then they’re saving less. The decline was a whopping $101 billion month-over-month. January had the lowest rate of savings since 2008, according to the Wall Street Journal.

Is this good or bad news? It depends on your perspective. If you believe that consumers need to spend more in order to heat up economic growth, then you probably like today’s data. Consumer spending makes up around 70% of the U.S. economy, so unless spending recovers, the broader economy will have a hard time.

Yet, if you think Americans save too little, then you might be disturbed to see spending ramped up while disposable income declined. Still the savings rate remains positive at 3.3% of personal income, so at this time Americans aren’t relying on credit on an aggregate basis to spend more.

(Image Credit: iChaz/flickr)