Author: Daniel Indiviglio

Last Friday, we learned that the U.S. labor market added 162,000 jobs in March. This is the most authentic job growth seen since the recession began in 2007. The poor labor market is mostly responsible for the weakness in consumer confidence. Could the fact that it’s moving in the right direction be enough to restore sentiment on Main Street?

On one hand, you might not think so. Even though employment began to grow, we’re off to a small start. 162,000 jobs isn’t much, considering there are still 15 million unemployed, and far more underemployed. That 16.9% of underemployed Americans aren’t going to feel good about spending at higher levels yet.

On the other hand, though significant, 16.9% is still a small minority of Americans. What about the other 83.1% who are fully employed? Their spending has been curbed too in recent months due to perceived weakness in the U.S. economy. Might some authentic jobs growth be enough to get them spending again?

A new poll from Rasmussen suggests that it could be:

Following release of Friday’s official report on job creation, consumer and investor confidence jumped significantly and is now back to the levels that existed just before Lehman Brothers collapsed in the fall of 2008.

The Rasmussen Consumer Index, which measures the economic confidence of consumers on a daily basis, is up seven points since Friday morning to 85.3. Thirty-five percent (35%) of adults nationwide now believe the economy is improving. That’s up six points since the government reported that 162,000 new jobs were created last month. Still, a plurality of adults (45%) continue to believe the economy is getting worse.

Clearly, consumer confidence has a ways to go. But this is a pretty good start. That seven-point-jump works out to a 9% rise in the index. Imagine how much that might improve when the unemployment rate actually declines a few percentage points.

Of course, it will still be quite some time before we sees a significant drop in the unemployment rate. But the rise in sentiment is encouraging: the U.S. economy needs the American consumer to start spending again for a strong recovery. But incomes will also need to begin improving to ensure that the recovery can last, instead of just creating another credit bubble. Unfortunately, the unemployment report didn’t provide any good news on that front — average earnings actually fell by 0.1%.

In an op-ed column for the New York Times today, economist Paul Krugman argues that financial reform must be made “fool-resistant” by providing it with less reliance on regulators. In particular, he worries the systemic risk council could be too lax in creating strict enough rules to govern banks. Instead, he thinks the legislation should be more aggressive to create more specific, immutable rules.

Krugman begins by explaining that one of the major reasons for the financial crisis was too much leverage building up in the shadow banking system. He then writes:

The Dodd bill tries to fill this gaping hole in the system by letting federal regulators impose “strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.” It also gives regulators the power to seize troubled financial firms — and it requires that large, complex firms submit “funeral plans” that make it relatively easy to shut them down.

That’s all good. In effect, it gives shadow banking something like the regulatory regime we already have for conventional banking.

But what will actually be in those “strict rules” for capital, liquidity, and so on? The bill doesn’t say. Instead, everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.

He worries that the council simply won’t do the trick. He bases this on the fact that those who would have been on the council in 2005, including Federal Reserve Chairman Alan Greenspan, Secretary of Treasury John Snow and Comptroller of Currency John Dugan wouldn’t have changed a thing. It’s plausible that he’s right.

So why have a council of regulators responsible for these tasks? Because that’s what regulators are for. Think about the FDA. The “Nutrition Labeling and Education Act of 1990” had some specific requirements in place, but also:

Authorizes the Secretary of Health and Human Services to: (1) require certain information to be highlighted; (2) require additional nutrients to be included in the labeling; or (3) exempt nutrients from the labeling requirement.

What happens if a new medical study provides overwhelming evidence that some common mineral is highly beneficial to health? The regulator has discretionary power to highlight that nutrient on food labels. And the FDA is supposed to be a subject matter expert when it comes to nutrition, so its regulators would be able to use this authority properly.

Congress is the alternative. Krugman wants the House and Senate to legislate more details of financial reform, such as capital and liquidity requirements. This could be problematic for two reasons.

First, regulators have far more flexibility than Congress. Legislation takes time; politics can be difficult. Regulators, on the other hand, can change rules very quickly. In a sector as fast-paced as finance, speed is an important benefit.

Second, regulators understand their industry better than Congress does. If you had an economics question, who would you ask: the Senate Banking Committee or the proposed Financial Stability Oversight Council? I’d rather rely on the latter group, even if it’s imperfect. So when it comes to implementing the specifics of financial reform, I would trust a group of experts to get them right, not a group of politicians.

Of course, Krugman’s particular example does have some merit. It’s definitely possible that the specific group of regulators who would have sat on the Council in 2005 would not have acted. Indeed, they clearly didn’t do so on an individual basis, or we wouldn’t have had as deep a financial crisis on our hands a few years later.

But these regulators also didn’t have the benefit of a systemic risk council in place. Perhaps if they did, the input of other experts would have helped to lead them all to a different conclusion about the state of the financial system. While it’s tempting to believe that regulators would be political partisans blind to any and all logic, that’s a pretty cynical view. And there’s little reason to believe that Congress is any better.

More Americans signed contracts to buy homes in February, as the National Association of Realtors Pending Home Sales Index rose by an impressive 8.2%. That brings the index to 97.6, just below where it stood in December at 97.8. What’s caused February’s steep rise?

According to NAR, the home buyer credit’s April 30th expiration is a big part of the cause. Pending home sales are forward-looking. These sales haven’t actually been completed yet but signal more buyers in the market deciding to make a purchase. That’s why February home sales were quite weak, but pending sales were much stronger.

So what you’re likely seeing here is future demand being pulled forward by the credit, which is set to expire in November. To try to determine how much of the credit has to do with it, let’s look at what happened last fall. Here’s what the index looks like since December 2008:

As you can see, there was a steady rise until November, when it plummeted a drastic 14%. It ticked up slightly in December, but then fell again in January. The net result over that three month span was a decline of 20%. Here’s a graph looking at month-over-month change:

What we’re seeing in February should look somewhat similar to what we saw in September, as each month was two prior to the credit’s set expiration. Let’s consider the two charts together. In September, home sales rose by 4.6% — much lower than February’s big 8.2% gain. That could have something to do with how much higher the index was in August than January, 103 vs. 97.6. In February home buyers had much more ground to make up after that big 20% decline from the prior 3 month period.

The difference in the details of the home buying credit could also explain February’s giant increase. Prior to November, it only applied to first time buyers. The renewal, however, extended that and created a new, smaller credit for existing homeowners. So the pool of people who can now take advantage of the credit is much larger. Consequently, it makes sense that the demand it pulls forward would be even greater.

Like last fall, pending home sales will likely continue to rise in the months leading up to the credit’s expiration. So expect to see big numbers again in March and April. (November’s fell by so much in part because the credit was extended early in the month, so there was no longer any urgency to purchase a home for much of the month.) But if the rise is greater than it was last fall, expect to see an even deeper dive than from November through January. With both new and existing home buyers rushing to purchase through April, little demand will likely be left over for the remainder of 2009, unless the housing market’s recovery is steeper than expected.

This morning, business news pundits were lamenting that the market was closed on Friday, when the upbeat unemployment data for March was released. You may recall that it reported 162,000 new jobs were added to the U.S. economy last month. Of course, that news hasn’t changed over the weekend, but now the market has had time to digest the information, rather than quickly react to it. As a result, the Dow was up by about 26 points in the first half hour of trading. Yet some investing and business gurus were complaining that the market would have got a bigger bump had it been open on Friday. They shouldn’t be.

To wish for a quick, gut reaction instead of a calm, reflected-upon decision calls for irrational behavior. If the market would have gone up more initially than it did after investors had some additional time to actually think about the new information, then the additional bump would have been purely brainless exuberance. Market participants should applaud rational action, not yearn for stock prices to rise only to eventually fall when people realize the fundamentals don’t support the gain.

If the market is really rational, then any amount by which the market would have gone up on Friday would have just been shed in the days that followed. And if investors and traders became too cynical about the employment data over the weekend, and the market didn’t rise as much as it should have, then it will in the days that follow instead. Either way, the timing of when the market is open or closed shouldn’t ultimately matter.

If you think about what expectations were for Friday’s unemployment report, then the complaint about losing a big bump seems even stranger. The data, while largely positive, actually failed to meet expectations — the market believed the report would reflect 190,000 new jobs. Anyone who works in the equity market will tell you that it’s expectations that matter. Stock prices reflect market expectation, not fundamentals. Even if a million jobs had been created, the market wouldn’t rise if it expected two million: it would fall.

Any enormous bump in the stock market on Friday in response to the jobs data would have been irrationally driven. Equities have already rallied over the past year, even though the labor market continues to struggle. It has already figured in a recovery — possibly even a steeper recovery than we’ll actually see. A little restrained behavior on the part of investors due to fully digesting an economic report isn’t a bad thing.

These days, many Americans are considering foreclosure, whether by necessity or choice. Mortgage default and its alternatives can have varying effects on a borrower’s ability to secure credit in the future. Unfortunately, credit scoring tends to be a very mysterious black box, leaving many homeowners unsure what option is best for their credit. But a conversation with one of FICO’s principal scientists, Frederic Huynh, revealed some helpful information that could help struggling borrowers to understand how various decisions might affect their credit score.

Prime Borrowers Have More to Lose

It’s very difficult to make generalized statements about how actions would affect a broad cross-section of credit scores. But there is one truism that stands out: the higher the score, the bigger the impact of a negative event. The flipside, however, also holds true: the lower the score, the smaller the effect of a new blemish.

Reporting Matters

Whenever an event occurs that may affect your credit score, the servicer handling your account will notify the credit rating agencies. That goes for good and bad events. Yet, reporting is more an art than a science: not all servicers report the same actions in the same way. So what follows assumes that the servicer is reporting the event as indicated. This may not always be the case.

A Foreclosure By Any Other Name. . .

If you’re a homeowner having difficulty paying your mortgage, you may be considering going delinquent or defaulting. You know that would be bad for your credit record. What is your best alternative?

Vanilla Foreclosure

A bank foreclosing on a defaulted mortgage is a common path for struggling borrowers. This will have a negative effect on your credit score. FICO has said that this would result in a borrower with a 780 credit score see her score drop between 140 and 160 points. With a credit score of 680, the hit would be between 85 and 105 points. Yesterday, FICO said that in most cases at least 50 points would be lost due to foreclosure.

Deed-in-lieu

One alternative is a so-called “deed-in-lieu.” This alternative occurs when you willingly hand over your keys to the bank, so to avoid formal foreclosure proceedings. This might be logistically easier, but it’s not any better for your credit score. According to FICO, a deed-in-lieu would cause a similar drop in your credit score as foreclosure.

Short Sale

Short sale is also an option. A short sale occurs when you find someone to buy your home for less than the unpaid balance of your mortgage. The bank may approve this short sale, but it may still inform the credit agencies of your failure to pay. In that case, short sale would have a similar affect on your credit score as foreclosure, according to FICO.

Remember: reporting matters. If the servicer chooses not to report the short sale as a default, then your score will be unaffected. If it reports only the portion of the balance unpaid as defaulted, then that could also help, since bigger defaults cause more harm to a credit score. But if it reports the short sale as a default for the full mortgage balance, then your score will decline by as much as it would have through foreclosure.

Modification

You might think that modifying a mortgage would be better for your credit score than foreclosure, but according to FICO that’s not necessarily true. If the servicer indicates that the debt was modified to accommodate a new payment plan, then it would have a similar negative effect on your credit score as foreclosure.

Work With Uncle Sam

There is, however, an exception to that last point. Modification won’t affect your credit score if done through the government’s HAMP mortgage modification program. FICO has created a special code for these actions that indicate the loan was “modified under federal government plan.” Currently, this will not impact on your credit score. In the future, however, this luxury could change, if FICO determines that participation in the government plan strongly suggest future credit trouble.

Of course, if servicers don’t properly report your modification by using that special new code, then your score could still suffer. But according to the U.S. Treasury, participating servicers are required to report this code to the credit rating agencies.

Deferrals

The Obama administration also announced a new mortgage payment deferral program for unemployed Americans last week. How does this affect a borrower’s credit score? It doesn’t, according to FICO. An approved deferral is not treated as a negative credit event.

Second Liens

Second liens also plague many struggling homeowners. Here, there’s good news and bad news. The good news is that a second lien’s default has a marginal effect on your credit score compared to foreclosure, according to FICO. The bad news, however, is that it does have an effect.

3 Take-Aways

If you’re a struggling homeowner trying to determine which option would affect your credit score least adversely, there are three important points to remember. First, your best, safest, option is to keep paying. This is the only way you can ensure your credit score remains intact. Second, if you can’t pay, then try to work with the government’s foreclosure prevention program. At this point, a modification through that program will not impact your credit score, though that could change in the future. Finally, try to understand how your servicer will report whatever actions you are considering. Getting them to explain how different events will be reported might not be easy, but it’s certainly worth trying.

Netbook sales were down in the first quarter. That happens to coincide with the three months leading up to the Apple iPad’s release, which will hit stores Saturday. Is this correlation or causation? Some articles noting the decline in netbook sales suggest there’s a relationship between these two events, but differences in the target consumers for these devices suggest otherwise.

The argument takes the following form, as provided by Bloomberg:

Apple’s (AAPL) iPad is helping cool the computer industry’s netbook fever. Apple Chief Executive Steve Jobs has made no secret of his disdain for the popular, inexpensive mini-notebooks. “Netbooks aren’t better than anything. They’re just cheap laptops,” Jobs said at the Jan. 27 launch of the iPad tablet computer in San Francisco.

PC makers are starting to worry that consumers agree. The sales growth of netbooks, priced from $200 to $500 and resembling shrunk-down laptops, slowed markedly in the first quarter, according to market researcher IDC.

Yet, the devices are different in so many ways that it’s hard to see how anticipation of the iPad could be eating that much into netbook sales.

Price Disparity

The most obvious difference is price. As the excerpt above mentions, netbooks tend to be a few hundred dollars each, with $500 at the very top of the range. Yet, the iPad starts at $500. It isn’t competing on the same playing field as netbooks. Consumers prepared to spend $500 or more would more likely be purchasing a full-size laptop.

Different Strengths

The two gadgets also have mostly contrasting strengths:

Work

A netbook is much more functional for working on. Anyone who wants a small device for business travel that can handle spreadsheets, PowerPoint presentations or documents probably won’t find an iPad very appealing. A netbook, however, can accomplish that task.

E-reading

Yet, the iPad is better for e-reading than a netbook. Anyone looking for a device providing that capability probably isn’t in the market for a netbook anyway. They might be considering a Kindle or a nook.

Internet

Of course, there are some overlapping strengths, the most obvious of which is Internet surfing. Both accomplish this task well, though anyone intending on writing lengthy e-mails would probably prefer a netbook’s keyboard to the iPad’s on-screen keypad. Yet, there may be some consumers who would have bought a netbook for simple Internet capabilities that now turn to the iPad. Due to the price point disparity, however, that number isn’t likely large enough to explain a drastic decline in netbook sales growth.

Simply Buyer Fatigue

How big is that drop in sales growth? It’s huge. Bloomberg reports:

Netbook shipments to retailers from January through March are expected to grow 33.6% compared with a year ago, to 4.8 million units, IDC says. That’s significantly slower growth than in the first quarter of 2009, when netbook sales leapt 872%, to 3.6 million units.

Did someone out there expect netbook sales to grow at 872% forever? If so, then one day Asus and Acer would be the most powerful corporations in the world. That level of expansion just isn’t sustainable. The growth of netbooks is likely beginning to plateau. Netbooks have become so popular so quickly that they’re more likely just experiencing some buyer fatigue. 33.6% growth is still pretty solid, however.

There will certainly be people who buy the iPad, but there will also be others who continue to purchase netbooks. The target consumers groups for these two devices have a little overlap, but only a little. In its current form, the iPad shouldn’t severely limit the sales of netbooks.

Reports today indicate that Manhattan’s housing market is improving. Sales in the first quarter of 2010 were nearly double that for the same quarter in 2009. This gain followed unusually high sales in the fourth quarter. Realtors Prudential, Cochran Group, Halstead and Brown Harris Stevens all agree that prices were up as well in the first quarter compared to the fourth. Why is Manhattan doing so well while home sales in the rest of the U.S. continue to struggle?

Here are the reasons CNN/Money cites:

* Pent-up demand. The financial crisis in late 2008, when Wall Street banks like Lehman Brothers failed, put a stranglehold on sales. Not only did 30,000 well-paid workers lose their jobs, but the ones who retained their positions received lower cash bonuses than in years past. When the remaining banks got through the crisis, workers recovered their confidence.

* The rising stock market. Stocks in the S&P 500 returned a whopping 23% in 2009, restoring investors’ reserves and confidence.

* Homebuyer tax credit. The government’s tax credit induced people to buy and helped firm up the low end of the Manhattan market. It refunded up to $8,000 in taxes to first-time homebuyers and up to $6,500 to move-up buyers.

* Low mortgage rates. The national weekly average interest rate for a 30-year fixed rate loan never exceeded 5.09% during the quarter. That could have made homes affordable for many buyers.

Only the first point exclusively relates to Manhattan. The other three could benefit any town in the U.S. Yet, since the rest of the country’s housing market is not improving at the same pace as Manhattan, it’s not clear why these latter three points would have played a major role in its success.

Manhattan Bailed Out

The first point is, however, on the right track. But it should be made more broadly than just assuming more bankers are buying up more condos and co-ops. When the financial industry was bailed out by the U.S. government, it effectively bailed out all of Manhattan.

This argument is covered at length here. The financial industry makes up such a large part of Manhattan’s prosperity that when it improves, the rest of the region’s industries also do better. Lawyers make more money, boutiques see better sales, restaurants have higher receipts, etc. So the demand for housing increased throughout Manhattan when business on Wall Street improved.

Only The Rich Matter

Manhattan’s housing market is also strengthening because the rich have felt the recovery more than other classes. One reason for that relates to CNN/Money’s second point. Wealthy Americans generally have larger investment portfolios than others. So when the stock market does better, they benefit disproportionately. This is partially responsible for the increasing ranks of the millionaires club.

This benefits Manhattan’s real estate market in particular, because you have to be rich to participate. It’s hard to find a half decent studio apartment in Manhattan for less than $400,000. If you want a few bedrooms, you’re probably looking at seven-figures. So the borough’s sales are likely being driven by wealthy individuals residing there who can afford pricey apartments. Meanwhile, in other markets with fewer rich residents, buying remains weak.

Manhattan’s housing market success, while notable, doesn’t necessarily suggest a broader U.S. housing recovery is just around the corner. The city benefits from the specific set of circumstances described. For the rest of the nation’s real estate to recuperate, consumer sentiment must improve. That will likely require a substantial decline in unemployment.

American Enterprise Institute think tank scholar Peter Wallison published a compelling essay yesterday relating to firm resolution. Since the financial crisis, determining how to quickly and effectively manage the failure of a large firm has been an important goal of financial reform. Bankruptcy is a notoriously messy and drawn out legal process. Wallison offers a suggestion to make things a little easier: allow firms to choose the legal system of their resolution ahead of time.

In a perfect world, every country would have identical bankruptcy laws. Then, the process would contain little uncertainty and great clarity. But the world we live in is more complicated. In this quickly developing global market, jurisdictional disputes over which nation’s rules ought to apply could increase the time it takes for resolution. While that’s less than ideal in any situation, it’s particularly dangerous with the failure of a large firm, where a slower process will could create uncertainty that could lead to market instability.

Although Wallison wishes all countries could agree on universal bankruptcy rules, he knows that’s not realistic. So he suggests what he calls “Debtor Selection,” which would allow whatever firm is issuing debt to choose which nation’s bankruptcy rules will be followed in a failure event. It would kind of be like how U.S. firms choose their state of incorporation. The idea has quite a few very attractive characteristics, but one concern sticks out.

Eliminates Uncertainty

The first nice aspect of this idea is that it immediately eliminates a great deal of uncertainty that would otherwise cloud the bankruptcy process. The laws that must be followed are clear, based on whatever nation’s rules the firm decides to adhere to. This is especially good for investors, who can take this new variable into account when determining which firm’s debt is most attractive at a given yield.

It’s Fast

That clarity provides something extremely important for economic stability: speed. Without different countries bickering over which laws should be followed, proceedings should occur much more quickly. The market can then interpret the implications of the firm’s bankruptcy faster and more forward.

Fits With Current Reform Plans

In fact, the debtor selection concept could also fit in well with Washington’s work thus far on attempting to create a non-bank resolution authority. Doing so would include firms developing failure plans to facilitate the bankruptcy process. Wallison explains that a part of that plan should include which nation’s laws a firm’s resolution should follow:

In addition, if financial institutions are ultimately required to prepare some form of living will–a description of how they will be resolved in the event of insolvency–certainty about the applicable bankruptcy regime would be of great assistance in determining in advance how a resolution would proceed.

This matters a lot, because there’s some worry that big firms will have a great deal of trouble determining how to fail if being pulled in different directions by conflicting bankruptcy laws from the different nations where it does business.

The Market Mostly Regulates Itself

One criticism of debtor selection might be that firms could intentionally choose rules with some end in mind, like preserving more power for management instead of creditors in bankruptcy. Yet, so long as creditors are aware of the debtor’s selection, why would that matter? They can build that into the price they demand to purchase the firm’s debt. Less favorable terms for creditors will require firms to pay up for their borrowing.

The same applies to the resolution authority’s fund used to wind down firms. If the rules a firm wants to follow during failure would result in a more costly process, then the assessments on that firm would be greater than on a firm that chooses a less costly regime.

Should Apply to All — Not Just Large — Firms

Wallison makes an important point arguing that this proposal should apply to all firms:

A key question is whether the system should be limited to financial firms that are “systemically important.” There is no need for this limitation. Indeed, no one has any idea when a company is systemically important or what factors might make it so.

Whether large firms would derive some competitive advantage from living under a different set of resolution rules than smaller firms has been discussed here. Wallison’s point is even more general — it’s probably impossible to determine which firms are going to turn out to be systemically significant anyway. We might as well have the same rules across-the-board.

One Major Concern

Wallison’s debtor selection could allow firms to opt-out of a local resolution authority’s jurisdiction, through international treaties. That might create a problematic moral hazard. Big firms could just choose to live within the resolution regime of a nation with no regulator charged with conducting the orderly wind down of failing firms. Then, if a large firm fails, the nation in which it is headquartered — which may not be where the firm selected to be resolved — could be on the hook for a bailout if that its bankruptcy will result in a systemic threat.

Wallison responded to this criticism via e-mail:

It’s exactly the opposite. Choosing a regime that does not have a resolution authority reduces moral hazard. Moral hazard arises from the possibility that the govt will rescue the creditors.

He says the Dodd proposal would create such a bankruptcy regime. But a resolution authority doesn’t necessarily need ability to provide bailouts. Indeed, one shouldn’t be allowed do so. One could, instead, only have the power to wind down firms more efficiently and quickly, while taking measures to minimize market disruption by covering certain necessary costs involved in bankruptcy through a pre-paid resolution fund. The FDIC works in this way to resolve smaller banks.

The mere existence of one set of clear bankruptcy laws to be followed doesn’t eliminate the possibility that a firm’s failure could destabilize the economy. For example, even if AIG had chosen, say, Mexico as its resolution jurisdiction, the U.S. might have still felt the need to bail out the firm. There’s no guaranteeing the process would have happened quickly and cleanly enough under Mexico’s resolution regime to ensure economic stability without a bailout.

Unfortunately, the market wouldn’t punish such behavior: it would reward it. Investors would find value in the possibility of an implicit government guarantee due to a big firm choosing a bankruptcy regime with a weak bankruptcy regulator in place, incapable of conducting a quick, tidy resolution. Instead, it might be more reasonable to allow firms to choose any nation’s bankruptcy rules, but rely on a resolution authority where it is headquartered to actually conduct the bankruptcy process under those chosen laws.

In March, the U.S. labor market finally saw some tangible job growth, with 162,000 new jobs (seasonally adjusted), according to the Bureau of Labor Statistics. That’s the highest number of new jobs for a month in three years. This wasn’t enough to raise the unemployment rate, however, which remained steady at January and February’s rate of 9.7%. While great news, the job growth was weaker than consensus expectations, which predicted 190,000 more jobs.

Revisions are also good news. January’s jobs change switched from a loss of 26,000 to a gain of 14,000. February’s improved a bit as well from 36,000 estimated lost to just 14,000. So March’s six-digit job growth was still a significant reversal from February’s revised loss of 14,000. The number of unemployed Americans actually rose slightly, however, to 15.0 million from 14.9 million.

Let’s start with the number of jobs lost/gained over the past two years:

And here’s how the rate has changed:

That first chart shows just how significant the reversal in March was. This is the legitimate job growth economists have been waiting to see.

Scrolling through the report’s B-1 table industry detail, it’s clear that most sectors did well in March. Some of the shining industries continue to be the same, which include temporary workers, health care and education. Here are some highlights:

That first row shows new short-term federal government jobs due to the census. The chart also indicates some even industries that haven’t done well during the recession grew in March, including construction, manufacturing and hospitality. Some of the less fortunate industries included financial services with 21,000 fewer workers and information with 12,000 jobs lost.

For some more good news, March saw a large drop of 210,000 discouraged workers:

That’s a whopping 17% decline. This change in discouraged workers makes the rate of 9.7% look even better, because the total labor force statistic used to calculate it includes more Americans.

So why didn’t the rate change even though the economy saw more workers? Because it didn’t keep up with seasonal expectations. You can see this through the seasonably unadjusted unemployment rate declining from 10.4 to 10.2. Here’s the chart:

These lines should collide in April or shortly thereafter. If this trend continues, then the unadjusted rate will fall to meet the adjusted rate, which is certainly better than the alternative.

One of the few kernels of bad news was the number of long-term unemployed. They increased by 414,000 Americans. But meanwhile shorter durations declined:

It’s troubling that those unemployed for the longest don’t appear to be finding jobs.

The broadest measure of unemployment is also one of the few negative signs. The “U-6” measure, which includes unemployed, discouraged, marginally attached and those working part-time due to job market problems increased from 16.8% to 16.9%, seasonally adjusted. This statistic shows underemployed Americans. It’s disappointing that this number is getting worse instead of better.

In general, however, this month’s report indicates that the job market is definitely on the right path. March exhibited the most significant job growth the U.S. has seen since the same month in 2007. If this trend continues, then the unemployment rate should begin declining. Of course, the labor market needs more than just 162,000 jobs per month to make significant progress eating into the number of 15 million unemployed Americans.

Finally, readers who took yesterday’s unemployment poll did better than last month, when just 9% got the right rate. This time, 26% correctly predicted 9.7%. Well done! Here are those full results:

(Nav Image Credit: Seansie/flickr)

The New York Federal Reserve Bank released new details late yesterday about its Maiden Lane entities, which were created to remove the toxic assets from the balance sheets of Bear Sterns and AIG. The information was requested (.pdf) by Rep. Darrell Issa (R-CA), ranking member on the House Committee on Oversight and Government Reform. It reveals more about the assets that take up a lot of space on the Fed’s balance sheet. As a result, many outlets are reporting how ugly the Maiden Lane assets look. Of course, that’s not a surprise — they’re toxic assets. But I’m not yet convinced they’ll create extraordinary losses for the Fed.

As you might expect, some in the media jumped on the par values listed in the newly released detail for each facility — they’re far more than the market value shown on the Fed’s balance sheet. In fact, their market values range from 36 to 44 cents on the dollar. Here’s how Bloomberg reports it:

Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.

If this approach is generalized for all three facilities, the naïve response is: “Oh my! The Fed is going to lose more than 50% on these assets with a par value of over $165 billion!”

Purchased At A Deep Discount

But that’s not true. At all. First, it fails to take into account what the Fed actually paid for these assets. Here’s a chart that I created to help explain:

 

For those unfamiliar with the Maiden Lane transactions, here’s what went on. The Fed couldn’t just purchase these assets directly. As a work-around, it created some special purpose vehicles (SPVs) to buy them. It then lent them the money to do so. So even though the Fed doesn’t technically own these portfolios, it owns these portfolios.

As you can see, the loans provided by the Fed were at a deep discount compared to the current par values of the portfolios. The SPVs also received much smaller loans of $1 billion from JP Morgan for Maiden Lane I (through the Bear Sterns acquisition), $1 billion from AIG for Maiden Lane II and $5 billion from AIG for Maiden Lane III. It’s my understanding that these loans are subordinate to the Fed’s, which means JPM and AIG would bear any losses up to their investment amount before they hit the Fed. The Fed also gets almost all of all upside for Maiden Lane I and II, and two-thirds for III.

So even if the Fed decided to liquidate these portfolios right now and sell them in the market, its losses would be relatively small. The column above titled “Loss to Fed” explains those losses. $3.7 billion isn’t zero, but it’s certainly not the $100 billion difference between the assets’ par values and market values.

Market Vs. Hold-To-Maturity Values

But the Fed has no intention of liquidating this portfolio at market value. One of the nice things about being the Fed is that it can be extremely patient. So the Fed is selling off these assets gradually, when it makes sense, and retaining others to maturity in order to maximize profit. Most of these assets are still trading in the market at values well below their potential hold-to-maturity values. So the market values above don’t necessarily indicate how much will be lost. In fact, the Fed could end up turning a profit on these portfolios.

Of course, if things turn out worse than the market thinks, then the loss to the Fed could be even greater than current market values indicate. So it’s impossible to tell just how good or bad a deal this will end up being for the Fed. But considering the fact that the Fed’s exposure is limited to its $72.6 billion in loans used to purchase already deeply discounted assets, it’s hard to believe it will lose even tens of billions in the transaction, even though the assets certainly are very, very ugly.

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Will March be the first month of 2010 that we see employment growth? We’ll know tomorrow. Ever since November’s small blip of net job gains, hiring has failed to outweigh firing. In February, the U.S. economy lost 36,000 jobs, though the prevailing unemployment rate remained flat at January’s measure of 9.7%. How do you think the percentage changed in March? Vote below!

It won’t be easy to predict March unemployment. Many economists have been expecting the shrinking job losses to move positive in the early part of 2010, but so far that hasn’t been realized. We are also approaching the time of year when seasonally adjusted and unadjusted estimates begin to converge, meaning that either the adjusted rate will increase or the unadjusted rate will decline.

Expectations for March had been positive. But the month’s ADP employment data released (.pdf) yesterday dampened those hopes. It showed 23,000 jobs lost — a shock to economists who expected a gain of 40,000. March’s decline was almost equal to ADP’s February loss of 24,000 — which the report also revised down from 20,000.

Weekly jobless claims paint a slightly more optimistic picture, however. Reported this morning, the week ending March 27th saw 439,000 new requests for unemployment benefits. That’s 6,000 fewer than the week prior and the fewest in about a year and a half, according to Reuters. Continuing claims also declined by 6,000. This isn’t a huge change, but it’s a move in the right direction.

Unlike in February, there are no weather-related excuses for March. Snowstorms wouldn’t have prevented hiring. With the holidays well in the economy’s rear-view by the first quarter’s end, most firms planning on hiring in early 2010 should have done so by the end of March. So the month’s number is also more significant than those seen in January of February.

Actual job growth would be incredibly good news and could indicate that the U.S. economy is finally beginning to see a labor recovery. If more jobs were lost, however, that would just reinforce how painfully slow unemployment’s decline will be.

Last month, readers had a pretty weak showing at correctly guessing that the unemployment rate would remain flat at 9.7%. Only 9% got it right. Meanwhile a whopping 80% thought the rate would rise. What do you think happened in March?

Fannie Mae released its monthly summary (.pdf) for January yesterday. The news wasn’t good. “Seriously delinquent” mortgages — those with payments at least 90 days past due — increased again to 5.52%. Calculated Risk provides the following utterly disturbing chart:

To better see how the trend has changed recently, I used the Fannie report and zoomed in on this data since January 2009:

If you really want to strain to find some good news in this awful trend, then I guess you can say that the slope of this curve began flattening in December. But that’s really reaching. Severe delinquencies are still increasing. This shows that foreclosures are far from slowing; indeed, in the prime market, they should continue to increase according to this data.

I’ve written a few times that principal reductions are necessary to have any meaningful success fighting foreclosures. While this has been shown indirectly by the failing efforts of other means of modifying mortgages, it would be nice to see some historical data supporting this claim. As it turns out, University of Chicago professor Casey Mulligan identifies exactly that in a NY Times Economix post today. He uses a study on the Great Depression to show that with more skin in the game, consumers care much more about defaulting on their property and possessions.

Here’s the gist of his explanation, based on a 1999 study by UC Berkley Professor Martha Olney:

In the 1920s, it was common for families to purchase automobiles, refrigerators, stoves, and other consumer durables with “installment debt”: that is, they made a down payment of about one-third, took the item home immediately, and promised to make regular payments until the item was fully paid. If the borrower failed to make his payments — even the last one — the item he purchased could be repossessed and he would receive no refund of his prior payments.

In other words, absent the destruction of the item purchased, it was impossible to be “underwater” on the typical installment debt contract of those days, and thus there was no incentive to strategically default.

Professor Olney found that defaults on such contracts were rare in the early 1930s: “Despite the layoffs, the wage cuts, and the unprecedented prevalence of installment credit use, families with installment debt were avoiding default” (pp. 321-2).

Later in the Great Depression, the rules for repossessing consumer durables changed, and consumers had to be given a refund of part of the payments they made prior to default. The incentive to repay installment debt fell, and Professor Olney found delinquencies and defaults on installment debt to rise.

And of course, this makes perfect sense. When people have something to lose, they care more about losing it. Obviously, right? So Mulligan worries about the problem of strategic defaults — a term commonly used these days to explain foreclosures resulting from underwater homeowners deciding it’s pointless to pay a mortgage balance higher than their home’s value. He then points to the failed government mortgage modification efforts and says principal reduction — not affordability — should be used to ensure success in foreclosure prevention:

Many people who lost their jobs in the 1930s still made their debt payments, as long as they had an incentive to do. Today homeowners with negative equity have little financial incentive to make their payments. By focusing so much on “affordability,” the Obama adminstration’s latest policies do little to prevent strategic default, and should not be expected to alleviate the foreclosure crisis.

If I read this last Thursday, I would have agreed wholeheartedly. But, in fact, on Friday, the administration announced broad changes to their mortgage modification program which would stress principal write-downs. So either his piece was written last week but just posted today, or he missed that news.

But, in fact, Friday’s changes specifically address this concern. While affordability still matters, the administration is providing banks with a solid incentive to lean towards principal reduction, instead of just lowering interest rates or extending terms. If banks write down more mortgage principal, then that could, indeed, prevent more foreclosures. Even though many borrowers still won’t have positive equity for several years, being far less underwater could convince them that the house is worth keeping.

Writing about the politics of the Senate’s financial reform push on Sunday, I mentioned some of the major issues concerning Republicans. One of those is the possibility that consumer protection could be given priority over safety and soundness of the overall economy. I explained that Republicans want greater parity between a CFPA and systemic regulator:

For some tasks, the systemic risk council requires a two-thirds majority, which means it might be difficult for this regulator to assert itself over the CFPA if there’s some conflict. Republican might insist that consumer protection isn’t given priority over systemic safety and soundness.

The more I think about it, the harder it is for me to identify a situation where there would ever actually be an issue between consumer protection and prudential regulation. As a result I was delighted to see an article examining whether such a conflict could exist from “American Banker” yesterday. Senator Dodd’s (D-CT) Banking Committee staff liked it so much that they sent it around as an e-mail bulletin. So you can probably guess which side the piece argues in favor of: that no such conflict exists.

The article takes the form of posing this question to a number of industry experts, including a former Treasury official, NY Fed official and Comptroller of Currency John Dugan. All agree that such a conflict would be rare to nonexistent. It does, however, provide the following example from Dugan of such a possibility:

“One area that stands out is loan underwriting,” Dugan said in an e-mail. “For example, a consumer agency might think that down payments on house purchases should be limited to 5% to promote homeownership, while a safety and soundness regulator might believe a higher minimum could be needed to ensure lenders don’t make loans that won’t be repaid. Given the significant role that loose underwriting played in the financial crisis, I think it makes sense to provide an exemption from the consumer agency’s jurisdiction for credit standards.”

I find this a poor example, because I simply can’t fathom a CFPA putting a cap on down payments. Instead, I would imagine the opposite. During the housing bubble, consumers were harmed by wacky mortgage products, like option-adjustable rate mortgages. Those consisted of little or even negative equity where the payments increased after a specified period of time. That sounds great for consumers in terms of expanding credit — until you realize it the products will result in default more often than not. Of course, this is bad for both consumers and the broader economy. No conflict here.

A more realistic possibility comes from former OCC official Ray Natter:

“For example, from a consumer protection standpoint, you would want to give borrowers every opportunity to cure a default, and might mandate repeated ‘second chances’ to bring a loan up to date before repossessing the car or canceling a credit card,” he said. “That’s great for the consumer, but the bank is losing money, and these costs will be passed on to the entire economy through higher interest rates and fees.”

The article explains that a CFPA would not proactively seek to push for policy goals like this. I think that’s right, but even if it isn’t I’m completely unconvinced that such policies would threaten systemic risk. As indicated, banks would just be forced to make up that difference in earnings through such regulatory changes by charging higher interest rates and increasing fees. That, after all, is exactly what we saw with the recent credit card regulation — a response that doesn’t appear to have heightened systemic risk.

But maybe then the CFPA would respond by putting limits on those rates and fees? Banks would answer by curbing credit to riskier borrowers. The CFPA would then force them to give those borrowers credit anyway, etc. I guess if you imagine that the CFPA as a never-ending arch-nemesis of the banks, then you might worry about such scenarios, but I think (or hope anyway) that such worries are misguided.

I refuse to believe that consumer protection can’t coincide with responsible and profitable banking. There are banks out there that do not attempt to take advantage of consumers but still make money. It’s a pretty cynical view to assume otherwise. And ironically, the banking lobby is the loudest party citing this fear. Do it mean to suggest that banks can’t exist without taking advantage of consumers? I doubt it; thus, it shouldn’t be the case that a consumer advocate would make it impossible for banking to remain profitable.

So I still remain unconvinced that a conflict between consumer protection and prudential regulation is something to worry about. But, as always, I welcome plausible examples that demonstrate otherwise.

During the housing boom, the strategy of buying a house, fixing it up and selling it for a profit, nicknamed “house flipping,” became incredibly popular. It flourished because real estate prices were rising so quickly. Often, even without any renovation, the homes could have sold for more a few months later, just due to high appreciation rates. Of course, once home prices began suffering, flipping did as well. It’s pretty hard to flip a house when its market value is declining.

But an article today from Bloomberg suggests that the craze may be back. Foreclosure auction deals are bringing flippers back to the market, hoping to make a quick buck by buying a dilapidated defaulted property, fixing it up, and selling it for more. Could it work in this environment? I’m skeptical.

Here’s Bloomberg reporting:

Homes with punctured walls and missing appliances draw multiple offers from professional investors at auctions in foreclosure-ridden states such as Arizona, California, Florida and Nevada. Competition is so stiff that experienced flippers such as Sergio Rodriguez and Brian Bogenn look back with nostalgia at last year, when they turned over 48 residences in the Phoenix area.

Interestingly, the markets where foreclosure deals are the most attractive might also be the same where it’s hardest to sell a flipped house since there’s so much housing inventory available.

Bloomberg turns to “Flip This House” TV show creator Richard Davis to explain flipping’s resurgence:

Davis, now chief executive officer of Charleston, South Carolina-based Trademark Properties, said he has fixed and sold 25 properties since returning to the business in October and is filming a new series about multimillion-dollar homes built during the boom that he is buying, repairing and selling for half their original price.

“The professionals will make more money in a down market than they ever made during the boom,” Davis said.

I can definitely see how flipping could make sense when it comes to higher end properties, since the rich are recovering fairly well from the recession. There could be some demand for deals for that segment of the population, but I have trouble believing that average Americans are exhibiting enough demand to make flipping pay off.

Think about flipping a moderately priced home in a market like Florida. Imagine you buy a home at auction for $100,000 that was once worth $200,000. It’s a dump, so you renovate it, at the cost of $10,000 to $20,000. You would then hope to sell it for more. But meanwhile, dozens of similar foreclosures become available at auction each month at similar prices. Bear in mind that few buyers are even in the market for a home, and those few are searching for ultra-affordable deals in this economic environment. I just don’t see them paying a premium for a home that they could renovate gradually over the next several years as the economy improves.

So flipping homes in this environment seems like a dangerous game. The housing market remains very fragile. Foreclosures are still high, and the government’s home buyer credit might have already brought forward most of what little demand there was. So these flippers could be faced with having to hold onto these homes until foreclosures significantly lessen in number and/or unemployment declines significantly to help build consumer confidence. Neither outcome is likely this year.

Certainly, some flippers will be savvy or lucky enough to stumble upon will buyers here and there. But this is hardly an environment where anyone with a little home improvement expertise should begin buying homes again hoping to make a quick buck. At best, professionals could see some success. But even there, a great deal of uncertainty continues to cloud the market.

Today marks the end of the Federal Reserve’s $1.25 trillion mortgage security shopping spree. There has been a broad spectrum of opinion on what this means for mortgage rates, and ultimately, the mortgage market. Which argument is more compelling?

Mortgage Rates Will Rise

Late last year, the predominant view was that mortgage rates would increase significantly once the Fed removed its support of mortgage bonds. I explained why in posts from November and December. The general idea is this: if there’s no one to pick up the slack on buying mortgage securities once the Fed stops, then banks won’t have as easy a time obtaining funding for originating more mortgages. That would drive up mortgage interest rates, since they would probably have to rely on investors, who are still wary about mortgage-backed securities (MBS) after getting burned during the housing boom and will demand a lofty premium for the perceived risk and uncertainty.

So if the private market can’t step in to make up the Fed’s buying, then mortgage interest rates should rise. If the Fed decides to begin selling some of the mortgage securities it purchased during its buying binge, that could make matters worse. More than $1 trillion in MBS could flood market supply, making new issuance more difficult.

Mortgage Rates Will Be Unaffected

Yet, recently, the prevailing view has changed. Back in February government-sponsored entitles Fannie Mae and Freddie Mac announced that they’d be buying back close to $200 billion in bonds backing delinquent mortgages from investors. Once investors get that cash, they may reinvest it in the mortgage market. If they do, then this would temporarily increase demand for agency-backed securities as the Fed exits, keeping mortgage rates down.

Even though the MBS market isn’t expected to revisit its 2006 heights anytime soon, I have heard rumblings of some small deals being privately placed. But even if the market does pick back up, I have to believe that the yield demanded by investors will be higher than what the Fed was willing to pay. If that’s the case, it could still cause mortgage interest rates to rise a bit. But for bonds guaranteed by Fannie and Freddie, given their explicit government guarantee, investors may feel they have little to worry about.

As for the possibility that Fed begins selling its mortgage securities, I’d be pretty surprised if that happened anytime soon. So the supply will mostly consist of just new issues and whatever investors are trying to get rid of in the secondary market, for now.

So Which Will It Be?

It’s hard to tell, but I’m leaning towards the latter view. Wall Street’s seemingly relaxed attitude about the economy continues to surprise me, though I worry it’s driven more by naïve optimism than realism. But either way, if that sense of safety drives investors to feel better about mortgage securities again, then perhaps mortgage rates will be mostly unaffected, in general. I would suspect, however, that rates for borrowers who don’t have perfect credit will be high, since those mortgages will be very hard to sell to investors.

Finally, it should be noted that, after April, demand for new mortgages could be very, very low — even lower than it was in February. So a whole lot of investor demand might not be necessary to support the market. This also suggests that rates could remain low, if even a weak investor appetite can outweigh the supply of new mortgage originations packaged into securities.

One aspect of Friday’s announcement about changes with the Treasury’s mortgage modification program (HAMP) involves the Federal Housing Authority (FHA). Some critics, including me, worried that getting the FHA involved could prove dangerous. Would taxpayers now be on the hook to guarantee any mortgage modified to prevent foreclosure? Luckily, it appears not. At least, not yet.

Here was my worry from Thursday night, when the broad strokes of Friday’s announcement leaked:

The Post also says that the Federal Housing Administration (FHA) will be involved. I’m a little unclear why. It could be that the Treasury hopes to encourage lenders to take part in these new initiatives by slapping a government guarantee on the modified mortgages through the FHA.

That, of course, would likely lead to very high losses for the FHA as these mortgages re-defaults. It would essentially act as a giant transfer payment from taxpayers to banks.

Luckily, that’s not what’s happening here, despite what those worried about the FHA’s new involvement might think. In fact, all that has changed is that troubled FHA-backed loans will now be eligible for HAMP modifications. Of course, this won’t cost taxpayers any more than foreclosure would have. Indeed, it may cost less, if the modifications work.

The fact sheet (.pdf) is pretty clear on this. But a Treasury spokesperson also confirmed my interpretation yesterday saying:

The only change on this front is that HAMP has been expanding to include homeowners with FHA loans. So TARP funded incentives will now be available to borrowers and servicers whose loans are modified under the FHA-HAMP guidelines. These will continue to be FHA insured.

This does not open up FHA guarantees to newly modified loans under HAMP that are held by banks. That would be far more costly to taxpayers. If this changes, I’ll be among the first to criticize it.

But as of now, this change seems pretty benign at worst and quite smart at best. Frankly, I’m a little surprised FHA loans wouldn’t have been HAMP eligible in the first place. I don’t really see any reason why they would have been excluded from the program. It makes sense to want to minimize the loss to taxpayers on FHA loans, an end HAMP can help to accomplish.

Yesterday, I addressed the concern that the financial reform legislation floating around Congress doesn’t do enough to create higher capital requirements for banks. I explained that it does require new limits be set, but that specific rules are more appropriate for regulators to address in a global discussion. We will likely see more tangible rules for higher capital requirements over the next few years, once global regulators sort out reasonable changes. But what if banks’ capital requirements were much, much higher — what if they were required to hold 100% reserves against demand deposits?

Andrew Ross Sorkin makes a similar argument to mine from yesterday about capital requirements in his New York Times column today. Of course, I didn’t have the pleasure of discussing capital requirements over cookies with Treasury Secretary Timothy Geithner like he did. Towards the end of the article, he brings up the 100% reserves against demand deposits idea, only to quickly dismiss it without any analysis.

Harvard economist Greg Mankiw suggested the idea picked up by Sorkin. For those unfamiliar with the term, demand deposits are very liquid depository accounts. Think most checking and savings accounts. Here’s the blog post by Mankiw Sorkin refers to:

Indeed, I think it is possible to imagine a bank with almost no leverage at all. Suppose we were to require banks to hold 100 percent reserves against demand deposits. And suppose that all bank loans had to be financed 100 percent with bank capital. A bank would, in essence, be a marriage of a super-safe money market mutual fund with an unlevered finance company. (This system is, I believe, similar to what is sometimes called “narrow banking.”) It seems to me that a banking system operating under such strict regulations could well perform the crucial economic function of financial intermediation. No leverage would be required.

One thing such a system would do is forgo the “maturity transformation” function of the current financial system. That is, many banks and other intermediaries now borrow short and lend long. The issue I am wrestling with is whether this maturity transformation is a crucial feature of a successful financial system. The resulting maturity mismatch seems to be a central element of banking panics and financial crises. The open question in my mind is what value it has and whether the benefits of our current highly leveraged financial system exceed the all-too-obvious costs.

This isn’t as crazy an idea as it seems. As Mankiw mentions in the second paragraph, banks have developed a dangerous habit of lending money in the long term, but borrowing to fund that lending in the short-term. That can cause banks to fail in a credit crunch if they can’t turn over their debt. I can’t think of any reason why this “maturity transformation” is necessary. (But if you can, comment away!)

Now, it may appear that if banks were required to retain so much capital, they might have more trouble lending. That’s probably true — credit wouldn’t flow as freely. But remember: they would only retain 100% of capital on demand deposits, not other types of accounts. And if there’s a sufficiently strong demand for lending beyond that, then what borrowers are willing to pay should match up with what the capital markets are willing to invest. And that’s where securitization should come in. Any loans fully securitized, and consequently owned by investors, would not require additional capital to be held by banks. They would be fully funded by the capital markets.

Of course, this is all probably an exercise in theory. Most bank executives would have a heart attack if you told them they needed to retain 100% of their demand deposits. It would certainly curb their profits, but if securitization picked up the slack, it wouldn’t necessarily wipe out their lending. Indeed, this proposal could even rein in lending appropriately, as credit was far too easy over the past decade or so leading up to the crisis. Such a transformation would take quite a few years, however, as it would be an extraordinary adjustment for banks.

Nissan announced the price for its new electric car, the Leaf, today. It will only cost around $25,000, after a $7,500 government rebate. That’s significantly cheaper than early reports indicated for the price of the plug-in Chevy Volt hybrid — $32,500 after rebate. Does that mean Nissan will win the electric car war? Not necessarily, but perhaps.

Volt’s Price Isn’t Finalized

First, it should be noted that the Chevy Volt may turn out to cost buyers less than the $32,500 initially reported. Some rumblings since then have indicated that GM may be trying to get the price down. But that might not be easy, since it appears that Nissan’s cheaper version might be due to superior technology the automaker developed. The Washington Post says:

The relative affordability of the announced price surprised some industry observers. Nissan officials say that breakthroughs in research on batteries, combined with a $7,500 federal tax credit for the battery-powered cars, has enabled the company to make the cars available at that price.

So unless GM has the same research, the Volt might not escape a higher price tag.

The Leaf Isn’t A Volt

To be fair, these vehicles are not the same. The Leaf is a purely electric car that runs on its battery alone. The Volt is a plug-in hybrid, so the gasoline power kicks in when you run out of charge. That provides the Volt with an advantage. After 100 miles in the Leaf, you must find a charging station. The Volt’s battery only lasts 40 miles, but it can still drive much further after one charge. In fact, GM claims that the Volt can rack up hundreds of miles on a single charge, as the gasoline power will recharge the battery en route.

Also notable is that the Leaf would require a special charging dock, which costs around $2,200 — though a federal tax credit will also cover half of that. The Volt, however, can be plugged into a standard outlet.

Of course, the Leaf can boast zero tailpipe* emissions, but the Volt cannot.

Still, Affordability Matters

The Leaf will be available in some markets as soon as December. That’s around the same time the Volt will hit the streets. At that time, the U.S. economy is still expected to still have pretty high unemployment and consumers will probably still be apprehensive about spending a lot on a new vehicle. So the Leaf’s cheaper price tag could go a long way in giving Nissan a distinct advantage.

Think about the monthly payment for each. At the after-rebate prices listed above, with a 5-year loan and a 6% interest rate, the Volt would cost $628 per month. The Leaf’s payment would be just $500 (including charging station). The Leaf also goes further on one battery charge, so its energy costs would likely be cheaper, since Volt owners would have to rely on gas whenever they drive more than 40 miles.

Leaf vs. Corolla

When the Volt news broke back in August, I explained why that price was still too high to be affordable for most Americans, even if you figure in the fuel cost savings. Let’s do a similar analysis for the Leaf, compared to a Corolla. According to Nissan, the Leaf would get around 100 miles per charge, which should cost “less than $3.” Since that’s also about the current price of gas, we just need to consider the Corolla’s gas mileage — about 30.5 mpg (the average of its city and highway rates) — and its $15,450 price.

Under those assumptions (and including the after-rebate charging station cost), the Leaf’s break-even compared to the Corolla for total price, including power, comes after driving around 155,000 miles. For the Volt, that jumps to around 200,000 miles, given its reported 230 mpg estimate and assumed price of around $32,500 after rebate. Of course, both those estimates assume that gas doesn’t increase in price more than electric power, which may or may not be true. If that happens, then fewer miles would need to be driven to make their purchases more cost-effective.

So for consumers who can stomach the 100-mile limit between charges, I think the Leaf should do quite well. Of course, wealthier Americans looking for a green vehicle might be willing to pay a higher price tag for the convenience that the Volt will provide through its hybrid flavor.

For the record: Nissan has been running a prominent ad for LEAF on this site.

*Another note: I added the word “tailpipe” here after receiving a few e-mails from readers who find this distinction important. Of course, the process for creating electricity for homes involves emissions, but the vehicle itself does not create emissions by burning gasoline. I never meant to suggest otherwise, but thought this fact was already generally understood. Sorry for any confusion.

The good news: in March consumers were more confident. The bad news: only a little more confident. Still, that’s a big reversal from the plummet we saw in February to a 27-year low. Some, but not all, of that drop has been recovered, according to the Conference Board.

Here’s the hilariously tiny chart from the Conference Board showing the index since July:

If I squint, it looks like we’re slightly above November’s index reading, but slightly below December’s. So, again, this month’s gain was significant, but doesn’t nearly place us back on the upward trend that appeared to be forming from October through January. The news is positive for all aspects of confidence though, according to the Conference Board:

The Conference Board Consumer Confidence Index®, which had decreased in February, rebounded in March. The Index now stands at 52.5 (1985=100), up from 46.4 in February. The Present Situation Index increased to 26.0 from 21.7. The Expectations Index improved to 70.2 from 62.9 last month.

The 52.5 index reading also beat economists’ estimates of 51. Other statistics the company tracks are also improved.

This pairs rather interestingly with yesterday’s income, spending and savings data released from the Commerce Department. There, spending increased by an annualized rate of 0.3%, which the market celebrated — even though it was a smaller rise than the 0.4% increase in January. It probably expected much worse. Income, however, was flat in February, after increasing by 0.3% in January. So most of that spending was in lieu of savings, which declined by 9.3%.

If consumer confidence really does correlate to spending, then that implies we’ll see an even larger increase in March. Remember, spending was up more in February than in January, despite a dive in sentiment. So March spending could potentially be way up. Of course, without a comparable pop in income that additional spending will be at the expense of saving. That would be a positive short-term result for the economic recovery, but a negative long-term consequence, since many have been hoping that a newfound fiscal responsibility would be an enduring outcome of the recession.

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