December 21, 2024

Extended Unemployment Benefits Make Little Sense

September 2, 2009 by 18 Comments

Do Extended Benefits Reduce Job Seeker’s Motivation?

Excluding the depression of the 1930’s we are fast approaching a new official high in unemployment.  During the depths of the last worst recession of 1981, unemployment exceeded 10% vs 9.4% today.  If we include marginally attached and involuntarily part time workers in the unemployment numbers, the current unemployment rate exceeds 16%.

In response to the high level of unemployment and the difficulty of obtaining employment, Congress has enacted legislation that allows the unemployed in 24 states to collect up to 79 weeks of unemployment benefits.   The other states allow unemployment benefits  from 46 to 72 weeks.  In more normal economic times, the limit on unemployment benefits was usually up to 26 weeks.

Washington legislators are now proposing another extension of benefits for up to another 13 weeks that would cost up to $70 billion.  The additional extension of benefits was prompted by the fact that up to 1.5 million unemployed Americans would soon be losing their unemployment checks as they reach the current payment limits.

In addition, the duration of unemployment has reached new highs not seen since record keeping began.

Duration of Unemployment

Given the unprecedented level of unemployment, the duration of unemployment and well reasoned arguments on why unemployment will continue to increase, the entire concept of unemployment benefits should be reconsidered.

Should Unemployment Benefits Be “Free”?  –  Some Alternatives

  • Is the constant extension of unemployment benefits reducing the motivation of the unemployed to seek new employment?   In the past year I have tried to hire unemployed people for an entry level position in which the starting pay was comparable to or slightly above the level of unemployment benefits the job seeker was currently receiving.  In almost every instance, the job seeker declined the job offer, preferring instead to postpone employment until benefits ran out.  I have also heard this same story from other people.  To maintain unemployment benefits, many states require that a benefit recipient contact a certain number of employers per week to seek work – how many of the unemployed merely go through the routine of seeking employment to maintain benefit payments?
  • Should the economy weaken further and job losses continue, does it make sense for Congress to constantly extend costly unemployment benefits with zero obligation from the recipient?  Bill Clinton reformed welfare by requiring benefit recipients to work.  Why not do the same with the unemployed who are receiving benefits?   Many charities, local governments, hospitals and companies  could employ additional manpower in a variety of productive endeavors.   The unemployment benefits would still be paid by the government, but the benefits would have to be earned.  From a self worth perspective, getting engaged back into the real world would benefit the unemployed as well – sure beats watching television all day.
  • Instead of spending hundreds of billions on unemployment benefits and getting nothing in return, the government could establish job training programs or put the unemployed to work on infrastructure projects that the country sorely needs.  This was done in the 1930’s with the Works Progress Administration (WPA) and the country still benefits to this day from the roads, bridges, dams and buildings that were constructed.   The preferred way to do this would be for government bureaucrats to get out of the way and contract projects to private industry.  Paying people to do nothing accomplishes nothing.

Ideally, the economy recovers and private industry rehires many of the unemployed.  Realistically, the country may face continued massive job losses or at best a slow recovery where the unemployment rate remains in the 10% plus range for an extended period of time.   Maintaining an army of paid and unemployed workers to sit idle makes no sense.

More on this topic

When The Laid-Off Are Better Off

Would it surprise you to learn that survivors can suffer just as much, if not more, than colleagues who get laid off?  “How much better off the laid-off were was stunning and shocking to us,” says Sarah Moore, a University of Puget Sound industrial psychology professor who is one of the book’s four authors. “So much of the literature talks about how dreadful unemployment is.”

Filed Under: Economy, Government spending, Have Nots, Jobs, Layoffs, Regulatory Reform, Unemployment Tagged With: ,

The FDIC Deposit Insurance Fund (DIF) – A Risky Game Of Confidence

August 27, 2009 by 1 Comment

FDIC Rightly Worries About Public Confidence

Due to the large number of bank failures during 2009 the FDIC Deposit Insurance Fund (DIF) has fallen to the lowest level since March 1993.  Numerous headlines are screaming that the FDIC is bankrupt and that the DIF fund is depleted.  Considering the perilous financial condition of the banking industry and the possibility of perhaps another 1,000 or more bank closings, the FDIC is probably not capable of fulfilling its mission without substantial loans from the US Treasury.  (The last time this happened was in the early 1990s during the savings and loan crisis when the FDIC had to borrow $15 billion from the US Treasury.)  This does not mean, however, that the upcoming FDIC  Quarterly Banking Profile will report a negative balance in the DIF.

The FDIC has made it clear that they consider it important to maintain a positive DIF number to avoid causing a lack of confidence in the banking system by the public.

The FDIC believes that it is important that the fund not decline to a level that could undermine public confidence in federal deposit insurance. A fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.

In addition, the FDIC has increased assessments on FDIC insured institutions to replenish the DIF fund and predicted that the DIF would remain positive in 2009.

May 22, 2009 – With the special assessment adopted today, the FDIC projects that the DIF will remain low but positive through 2009 and then begin to rise in 2010. However, Chairman Bair also cautioned that given the inherent uncertainty in these projections and the importance of maintaining a positive fund balance and reserve ratio, “it is probable that an additional special assessment will be necessary in the fourth quarter, although the amount of such a special assessment is uncertain.”

Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.  The FDIC views the Treasury line of credit as available to cover unforeseen losses, not as a source of financing projected losses.

The DIF Shell Game

So how does the FDIC manage to report a positive DIF when the March 31, 2009 balance was $13 billion and estimated FDIC losses on bank closing since March 31 total $19.3 billion?  Determining the DIF balance is not a matter of simply subtracting the banking failure losses from the DIF fund.  The FDIC uses accrual accounting to establish reserves against the DIF fund for estimated future losses.

For example, during 2008 the FDIC heavily reserved for anticipated future banking failures in 2009.  The FDIC established provisions for losses of $41.8 billion compared to actual losses on 2008 bank closings of $17.9 billion.  The reserve fund at March 31 had a balance of $28.5 billion against which the FDIC year to date losses since March 31 of $19.3 billion could be charged.  This would still leave the FDIC a reserve balance for future banking failures of $9.2 billion.

In addition, the FDIC has imposed large assessment on FDIC insured banks to replenish the DIF fund.   The assessments earned by the FDIC have increased steadily throughout 2008 as the banking crisis unfolded.   In the first quarter of 2009, the FDIC collected assessments of $2.6 billion to rebuild the DIF fund.  This compares to total assessments for all of 2008 of $2.965 billion and only $643 million in 2007.

In summary, if the FDIC offsets its losses against previously established reserves,  and collects an additional $3 billion in assessments, the FDIC could actually report an increase in the DIF fund to approximately $16 billion.   My guess is that the FDIC will only use a portion of the reserve balance, and report a DIF positive balance in the range of $10 to $13 billion when the Quarterly Banking Profile is released.   It’s all about confidence and an uneducated stupid public – the DIF balance of around $20 billion allegedly “protects” over $6 trillion in deposits! The only thing that would expose this “confidence game” is if the financial results for the banking industry come in much worse than the last quarter.  Stay tuned.

DIF

DIF

Disclosures:  None

Filed Under: Banking Industry, Confidence, DIF Fund, FDIC, Problem banks, Regulatory Reform Tagged With: ,

Dear Congress – Thanks For Doubling My Credit Card Interest Rate

August 26, 2009 by Leave a Comment

Congress Takes Bow For Credit Card Act of 2009

The Credit Card Act of 2009 was intended to curb certain practices of the credit card industry that were deemed abusive to consumers.  With a great deal of public fanfare, Congress passed legislation that provided the following benefits to credit card holders:

  • Credit card bills would be mailed at least 21 days before the payment due date
  • Customers would be given a 45 day advance notice of contract changes
  • An increase of the interest rate could be rejected by consumers who would then be required to cancel their card and pay off any existing balance within 5 years, possibly with a much higher minimum monthly payment
  • Payments would have to be applied to that portion of debt with the highest interest rate
  • Interest rates could not be raised on existing balances unless the borrower was more than 60 days delinquent
  • Prohibited “universal default” provisions and double cycle billing
  • Better disclosure of fees, card rules and interest costs

Senator Dodd of Connecticut, Chairman of the Senate Banking Committee, stated that “The new rules of the road established by the Credit Card Act will shield credit cardholders from widespread abusive practices”.   Whether or not the Senator (who faced an ethics probe relating to the special low rate mortgage he received from Countrywide) actually succeeded in providing any real benefits  to credit card holders remains questionable.

Credit Card Industry Response To Credit Card “Protection” Act

The credit card industry is not based on philanthropy – they seek profits and  have been exceptionally proficient in doing so historically.   Faced with huge losses from defaulting customers and the prospect of legislated profit limitations, the credit card industry reacted to these threats with the following changes:

  • Reduced or eliminated fixed rate credit cards; when interest rates increase, card rates will increase commensurately
  • Instituted annual fees, higher balance transfer fees, international transaction fees, higher cash advance fees, reduced award programs, slashed credit limits, canceled over $500 billion dollars in credit lines, summarily closed accounts deemed risky, raised monthly minimum payments and imposed strict standards for new credit cards
  • Increased interest rates by as much as 10 percentage points or more across the board, regardless of credit or payment history.  Unable to adequately assess risk or price accordingly, every credit card holder was assumed to be a potential default and charged accordingly – See Capital One Can’t Identify Their Low Risk Customers.

I have heard countless cases of people telling me that their card rates have been raised to 20% to 28% for purchases and cash advances.  Personally speaking, virtually every credit card I have has had the interest  rate increased substantially, with Capital One taking first prize by going from 8% to 17.9% on purchase balances.

Ironically, my General Motors credit card has actually dropped the interest rate from 14.15% in 2006 to a “low” 9.9% currently.  I assume that the low rate from General Motors has something to do with the fact that GM has an unlimited credit line with the US Treasury and does not have to worry about silly things like making a profit.

Why The Credit Card Companies Are The Biggest Winners Under The Credit Card Act Of 2009

What was supposed to be a major consumer protection act has turned into a future profit bonanza for the credit card companies.  Many credit card customers may go under financially but the credit card companies will do just fine, judging by the price performance of their shares and their actions taken cited above.  The credit card industry has adjusted their business model to the new reality and will prosper.

While the S&P 500 has increased by 52% since March of this year, the stocks of credit card companies have performed dramatically better.   Since March 2009 the stocks of companies such as American Express and Capital One have tripled in value even as write-offs of credit card debt hover in the 10% range and new restrictions on credit card companies become law.

“I Am From The Government And I Am Here To Help”

After bailing out the banking industry, our government (perhaps inadvertently) managed to provide even more help to the credit card industry.   Thanks for trying to help Congress – I feel much better now that I am paying 18% instead of 8%.

COF

COF

AXP

AXP

Disclosures: None

Filed Under: American Express, Capital One, Congress, Credit Cards, Interest Rates, Regulatory Reform Tagged With: ,

Does Tim Geithner Need A Stress Test?

August 5, 2009 by 2 Comments

Geithner Goes Over The Edge

Is the stress of running running the Treasury and trying to figure out how to borrow almost $2 trillion dollars starting to take a toll on the Treasury Secretary?

On Friday, Treasury Secretary Geithner lashed out at top federal regulators in an expletive filled tirade.  Mr Geithner’s rage seemed to be based on his perception that the FDIC, the Federal Reserve, the SEC and other government agencies had not blindly endorsed the Obama administration’s demands regarding financial regulatory reform.

WASHINGTON — Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting.

The proposed regulatory revamp is one of President Barack Obama’s top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.

Mr. Geithner told the regulators Friday that “enough is enough,” said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.

Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Friday’s roughly hourlong meeting was described as unusual, not only because of Mr. Geithner’s repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

In addition to Mr. Bernanke, Ms. Bair and Ms. Schapiro, other attendees at Friday’s meeting were: Fed Governor Daniel Tarullo, Comptroller of the Currency John Dugan, Commodity Futures Trading Commission Chairman Gary Gensler and Office of Thrift Supervision Acting Director John Bowman.

Achtung! Mr. Geithner, exactly what country do you think you are working for?  Does our government no longer believer in the principles of  “checks and balances”, compromises and democratic free debate?   Shocked high level government officials who attended the meeting had no comments for the press on their meeting with Mr. Geithner.

Two days later, Mr Geithner gave another remarkable performance when he broke the holiest rule of politics and told the truth about the need for a broad based tax hike on the middle class.

Treasury Secretary Timothy Geithner said Sunday that signs are emerging that the economy is starting to turn around, but he cited private economists’ predictions that unemployment rates wouldn’t start to fall until the second half of next year. He also suggested that the current budget deficit was unsustainable, and both he and Lawrence Summers, the White House’s top economic adviser, declined to rule out future tax increases.

Asked whether President Barack Obama could keep his campaign pledge to hold down taxes for those earning less than $250,000 a year, Mr. Geithner didn’t respond directly.

“We can’t make those judgments yet about what exactly it’s going to take” to reduce the deficit, he said on ABC News’s “This Week.” “People have to understand that we have to bring those deficits down.”

The Congressional Budget Office has projected that the federal budget deficit would hit $1.8 trillion for the current fiscal year ending Sept. 30.

One can only wonder about how severe a thrashing Mr Geithner must have taken from the President for publicly admitting that the campaign promise to tax only the rich was soon to become just another broken promise.   Or was the Geithner performance done at the behest of his boss to lay the necessary groundwork for the inevitable tax increase coming for the middle class?  Either way, based on the Treasury Secretary’s behavior over the past week, the logical question is “should Geithner be stress tested”?

Filed Under: Geithner, Regulatory Reform, Stimulus Plan Tagged With: ,

Payday Lenders – Predators or Saviors?

July 14, 2009 by 2 Comments

Payday Lenders Serve The Financially Inept

One of the fastest growing lending businesses in the country has been “payday lending”.  Without the hassle of a credit check or application, a payday lender will give an employee a cash advance to carry him over to his next paycheck.  There has been huge consumer demand for payday loans as reflected by the growth of  payday storefronts to 25,000 today from zero in 1990.  Convenient locations and quick easy cash entice consumers to take a one week loan on a $300 paycheck for a $50 fee.

Payday lenders argue that the credit losses, overhead costs and the complexity of  administering millions of small loans require them to charge high fees to stay in business.   When Pennsylvania capped interest based fees on payday loans, the payday lenders disappeared from the State.

Responsible Lending.org has characterized payday lending as predatory and forcing borrowers into a vicious cycle where each loan is paid off with another loan resulting in huge fees to the borrower.  Effective annual interest rates can exceed 800%.

A full three quarters of loan volume of the payday lending industry is generated by borrowers who, after meeting the short-term due date of the loan, must re-borrow before their next pay period

Repeat borrowing of what is marketed as a short-term loan of a few hundred dollars has long been documented, but this report verifies for the first time how quickly most payday lending customers must turn around and re-borrow after paying off their previous loan.

Payday lenders generate loan volume by making a payday loan due in full on payday and charging a sizeable fee—now nearly $60 for an average $350 loan. This virtually guarantees that low-income customers will experience a shortfall before their next paycheck and need to come right back in the store to take a new loan. This churning accounts for 76 percent of total loan volume, and for $20 billion of the industry’s $27 billion in annual loan originations.

Payday lenders argue that they are lenders of last resort and provide vital credit that cannot be obtained elsewhere.  If payday lenders cease operating, how would those who had relied on the payday loan get by?

North Carolina provides an example of how consumers fared after payday lending was closed in 2006.   Here are the results of a study done by the Center for Community Capital:

Researchers concluded that the absence of storefront payday lending had no significant impact on the availability of credit for households in North Carolina.  The vast majority of households surveyed reported being unaffected by the end of payday lending.  Households reported using an array of options to manage financial shortfalls, and few are impacted by the absence of a single option  – in this case, payday lending.

More than twice as many former payday borrowers reported that the absence of payday lending has had a positive rather than negative effect on their household.

Payday borrowers gave first-hand accounts of how payday loans are easy to get into but a struggle to get out of.

Nearly nine out of ten households surveyed think that payday lending is a bad thing.

As was the case with aggressive no income and sub prime mortgage lending, many people will borrow money despite onerous fees and high rates.   Financially desperate consumers giving up 15% of their next paycheck to have money a week early are clearly not helping their financial situation.  The government cannot prevent people from making foolish financial decisions, but in the case of payday lending,  tougher regulation seems necessary to protect the financially inept.

Ironically, despite the high fees charged by payday lenders,  it turns out that investors fared no better than the payday borrowers.  Earnings have generally been trending downwards and stock prices have declined significantly.  New State or Federal fee restrictions on the payday lending industry would crush loan growth and profits.  Investors in QCCO and AEA are likely to face continued disappointing returns.

qcco

aea

Disclosures:  No positions.

Filed Under: Interest Rates, Payday lenders, Regulatory Reform, Saving Money Tagged With: ,

Regulatory Reform Implies Cause and Solution To Financial Meltdown The Same

June 22, 2009 by Leave a Comment

The Federal Reserve failed miserably in preventing the meltdown of the American financial system.  Worse yet, the Fed’s loose credit and monetary policies and failure to properly regulate the financial system was arguably one of the biggest causes of the financial meltdown.  Now, based on the Fed’s sterling record of failure, Washington’s answer is to give absolute power to the Fed – what are these nitwits in Washington thinking?

Back in the U.S.S.A. – Peter Schiff

Harry Browne, the former Libertarian Party candidate for president, used to say: “the government is great at breaking your leg, handing you a crutch, and saying ‘You see, without me you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed this week by the Obama Administration.

In seeking to undo the damage inflicted over the past decade by misguided government policies, the new regulatory regime would ensure that the problems underlying our financial system will only get worse.

The underlying problem is that the excessive risk taking which brought about the crisis was not market-driven, but a direct consequence of government interference with risk-inhibiting market forces. Rather than learning from its mistakes and allowing market forces to once again control risks and efficiently allocate resources, the government is merely repeating its mistakes on a grander scale – thereby sowing the seeds for an even greater crisis in the future.

Obama proposes to entrust the critical job of “systemic risk regulator” to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA.

Given the Federal Reserve’s disastrous monetary policy over the past decade, any attempt to expand the Fed’s role should be vigorously opposed. Through decades of short-sighted interest rate decisions, the Fed has proven time and again that it is only able to close the barn door after the entire herd has escaped. If setting interest rates had been left to the free market, none of the excesses we have seen in the credit market would have been remotely possible.

The perverse result will be that our government and the Fed gain more power as a direct result of their own incompetence.

With the transition now fully under way, I propose we end the pretense and rename our country: “The United Socialist States of America.” In fact, given all the czars already in Washington, we might as well go with the Russian theme completely: appoint a Politburo, move into dilapidated housing blocks, and parade our missiles in the streets. On the bright side, there’s always the borscht.

ship-of-fools-titanic2Courtesy: The Liberty Voice

Washington constantly employs the same failed tactics to a problem and expects different results and only those outside of Washington understand the implications of such thinking.  Instead of expanding Federal Reserve powers, serious thought should be given to severely restricting the Fed’s ability to destroy what’s left of the American free enterprise system.

More on this topic:

What The Fed Chairman Said At The Onset Of The Credit Bubble

Filed Under: Congress, Federal Reserve, Regulatory Reform Tagged With: ,