Warning: The (Federal) Debt, Deficits Are HERE!

[macrockett]

www.suntimes.com/news/commentary/1951802,CST-EDT-edit22.article#

State can no longer leave colleges in 'crisis mode'
Comments

December 22, 2009

More than a century ago, Illinois Gov. John Altgeld talked about making Illinois' higher education a beacon "that will hold aloft the flame of American civilization so that all people in the world may be blessed by its light."

Altgeld was talking about the University of Illinois at Urbana-Champaign, but he was also a friend to the state's other universities. Tour any of the older campuses today and you will see a majestic stone building -- often named Altgeld Hall -- that is his legacy.

But in recent years, the state has repeatedly cut back on the fuel for Altgeld's beacons, threatening to diminish their light. And now university officials worry that it is the state's entire higher education system that may go up in flames.

After seven years of steadily cutting the higher education budget, the state on July 1 stopped regular payments altogether. And while there used to be a capital bill every year to pay for new facilities, this year's was the first capital bill for university facilities in about 10 years, and much of that money has not been released to the universities.

Here are some of the numbers: The state is in arrears $445 million to the University of Illinois system, $125 million to Southern Illinois University, $37 million to Northern Illinois University and $28 million to Western Illinois University. The state's other universities are in similar straits.

As a short-term solution, the universities have imposed hiring freezes, used up reserves and delayed paying vendors. They are considering furloughs and layoffs. At WIU, President Al Goldfarb said the school has even postponed repairing an elevator in the university's library to help save enough money to meet the payroll.

"All of the state's universities are in crisis mode right now," said SIU President Glenn Poshard.

If you're in a crisis mode, you can't worry about keeping the beacons burning brightly. You're lucky to keep them going at all. And officials at Illinois' universities aren't entirely confident they will be able to do that.

With tuition money coming in for the new semester, the universities probably can get though January and February. It's what comes next that worries them.

At a recent meeting, "almost all of the [university] presidents got up and said that March is the falling-off point," Poshard said.

Of course, the state isn't just being stingy. The reason the universities aren't getting their money is because the state doesn't have it. The budget the state passed in July doesn't begin to pay off the state's huge debt.

The repeated cutting of the state's higher education budget illustrates how the state has quietly shifted priorities. As health care and prisons have taken a bigger share, higher education has had to make do with less.

To close the gap, public universities have raised tuition. Since 2000, tuition at many state universities has more than doubled. This year, the Sun-Times reported that over the last decade, schools increased tuition by totals ranging from 130 percent at NIU to 216 percent at Chicago State. (A law prohibiting tuition hikes after a student enrolls skews those percentages somewhat.) Mandatory fees went up by between 90 percent at Eastern Illinois University to 838 percent at Governors State.

Public higher education has long been valued as a way for the next generation to become better and more productive citizens, helping the whole nation to move ahead. But these kinds of increases are putting college out of reach for many students and their families.

Candidates for state office are talking about budget issues right now ahead of the Feb. 2 primary election, and the Legislature soon will be grappling with the hard numbers.

But among the competing interests for the state's money, higher education can't be left in the dark again. It's important to keep those beacons burning.

[macrockett]

online.wsj.com/article/SB126168307200704747.html#printMode


DECEMBER 28, 2009

U.S. Move to Cover Fannie, Freddie Losses Stirs Controversy

By JAMES R. HAGERTY and JESSICA HOLZER

The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday.

The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.

Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.

"The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed "to prevent the general public from taking note."

Treasury officials couldn't be reached for comment Friday.

So far, Treasury has provided $60 billion of capital to Fannie and $51 billion to Freddie. Mahesh Swaminathan, a senior mortgage analyst at Credit Suisse in New York, said he didn't believe Fannie and Freddie would need more than $200 billion apiece from the Treasury. But he and other analysts have said the market would find a larger commitment from the Treasury reassuring.

In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.

The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.

Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government's role in the companies.

The Treasury reiterated administration plans for a "preliminary report" on the government's future role in the mortgage market around the time the federal budget proposal is released in February.

The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies.

The FHFA said compensation for executive officers of the companies in 2009, on average, is down 40% from the pay levels before the conservatorship.

Under the conservatorship, top officers of Fannie and Freddie take their cues from the Treasury and regulators on all major decisions, current and former executives say. The government has made foreclosure-prevention efforts its top priority.

The pay packages for top officers are entirely in cash; company shares have been trading on the New York Stock Exchange at less than $2 apiece, and it isn't clear when the companies will to profitability or whether common shares will have any value in the long term.

For the CEOs, annual compensation consists of a base salary of $900,000, deferred base salary of $3.1 million and incentive pay of as much as $2 million.

When Mr. Haldeman was hired by Freddie in July, the company set his base pay at $900,000 and said his additional "incentive" pay would depend on a decision by the regulator.

At Fannie, Mr. Williams was chief operating officer until he was promoted in April to CEO. As COO, his base salary was $676,000. He also had annual deferred pay of $2.3 million and a long-term incentive award of as much as $1.5 million.

Under the new packages, Fannie will pay as much as about $3.6 million annually to David M. Johnson, chief financial officer; $2.4 million to Kenneth Bacon, who heads a unit that finances apartment buildings; $2.8 million to David Benson, capital markets chief; $2.2 million to David Hisey, deputy chief financial officer; $3 million to Timothy Mayopoulos, general counsel; and $2.8 million to Kenneth Phelan, chief risk officer.

At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.

The pay deals also drew fire. With unemployment near 10%, "to be handing out $6 million bonuses to essentially federal employees is unconscionable," said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie.

He also criticized the administration for approving the compensation without settling on a plan to remove taxpayer supports: "To be doing that with no plan in place is just unconscionable."

The FHFA said that Fannie and Freddie "must attract and retain the talent needed" for their vital role in the mortgage market.

Write to James R. Hagerty at [e-mail] and Jessica Holzer at [e-mail]

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As of Sept 2009, FNM and FRE held approximate 57% of all loans. In addition, GNME and FHA insured another 25% of all loans. We the taxpayers are exposed to over 80% of the housing market. See the below PDF

www.freddiemac.com/speeches/pdf/DARE%20conference%20october%206%20-%20FINAL.pdf

Why pay the executive of FNM and FRE $6M when they essentially implement policy of the Treasury, as noted in the highlighted and underlined paragraph above? Does that make any sense?

Also what about this guy? www.chicagotribune.com/news/politics/obama/chi-rahm-emanuel-profit-26-mar26,0,5682373.story Emanuel has an uncanny ability to make money in the most unlikely places; first as an investment banker in the Excelon purchase of ComEd, even though he has no previous investment banking experience; then as a director of FRE while they were in the process of manipulating the books (of course he know nothing about that).

[macrockett]

Related to the above article on FNM and FRE, is the Federal Reserve Balance Sheet. Aside from the unlimited exposure noted above, the Federal Reserve also has exposure as well to the tune of about $1.8T noted below (see first highlighted paragraph).

Also see www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm and select the chart "Selected Assets of the Federal Reserve

We the taxpayers are, as they say, "all in" when it comes to residential real estate. Most of the homes that have changed hands in the last year, the "sales" that you hear about, are primarily foreclosure sales at the lower end, under $200k on average. We can only hope that sales in the $400-800k level pick up in 2010, since our government has made a big bet on our behalf.

www.newyorkfed.org/newsevents/speeches/2009/sac091202.html

The Fed's Expanded Balance Sheet
December 2, 2009


Brian P. Sack, Executive Vice President

Remarks at the Money Marketeers of New York University, New York City

As financial markets seized up last year and the economy sank to deeply negative growth rates, the Federal Reserve aggressively deployed a wide range of policy tools. It not only cut the federal funds rate all the way to its effective lower bound, but it turned to so-called unconventional monetary policy measures to stabilize the financial system and stimulate the economy.

These measures had dramatic implications for the Fed’s balance sheet. Back in mid-2007, the Fed held a simple portfolio that included outright holdings of about $800 billion of Treasury securities and relatively little else. As the use of unconventional policies intensified in the fall of last year, the balance sheet expanded quickly and included a broad array of assets and facilities. As one sign of this expansion, the statistical release summarizing the balance sheet, the H.4.1 release, expanded from four pages to twelve. The balance sheet today stands at around $2.25 trillion, several times the size it was before the financial crisis.

As suggested by that massive increase, the Fed’s balance sheet has moved to the forefront of its policy efforts. Accordingly, to understand the policy choices that lie ahead for the Federal Reserve, one has to understand how the balance sheet got to where it is and what effects it has had on financial markets. That will be the topic that I address in my remarks tonight. Before proceeding, I should note that the views I express here are my own and are not necessarily shared by the Federal Open Market Committee (FOMC) or other Federal Reserve staff members.

Evolution of the Balance Sheet
The initial expansion of our balance sheet was driven primarily by efforts taken to provide short-term funding to the markets. These facilities—including the Primary Dealer Credit Facility, the Term Auction Facility, the foreign-exchange swaps with other central banks, the Commercial Paper Funding Facility, and the various money market support facilities—were focused on extending credit at maturities of up to three months to various types of firms. These liquidity facilities were a key part of the government’s efforts to restore stability to the financial sector. To be sure, they were only part of a broader policy response that had many important dimensions, as other efforts had to address the substantial capital needs of financial institutions and the considerable uncertainty that investors faced about the health of the financial system. But giving financial institutions greater confidence about their access to funding, and that of their counterparties, was a crucial step toward achieving stability. At this juncture, it is well appreciated that short-term funding markets are functioning much better and that liquidity pressures for most financial institutions have subsided.

I would argue that creating these liquidity facilities and implementing them was a lot harder than exiting from them. In fact, the exit from these facilities to date has been fairly straightforward. Almost every facility was designed to provide a useful source of funding during stressed financial market conditions but to be an unattractive source of funding once markets returned toward more normal functioning. That structure has worked extremely well. Summing across these facilities, the total amount of credit extended has fallen from a peak level of $1.5 trillion late last year to around $160 billion today. We expect these balances to continue to decline over time, with many of the facilities set to expire on February 1.

With the liquidity facilities winding down, the composition of the Fed’s balance sheet has shifted notably towards the assets acquired under the large-scale asset purchase programs, known inside the Fed as “LSAP” programs. The Fed is currently in the process of purchasing nearly $1.75 trillion of Treasury, agency, and agency mortgage-backed securities through the LSAP programs. We have already completed our purchases of Treasury securities, totaling $300 billion. And our purchases of agency securities and mortgage-backed securities (MBS) are well advanced. Indeed, we have completed purchases of $155 billion of agency debt securities to date, out of a target level of $175 billion, and of just over $1 trillion of MBS, out of a target level of $1.25 trillion.

With these purchases, we have a total of about $1.8 trillion of Treasury, agency, and mortgage-backed securities on our balance sheet today. These holdings have been steadily increasing as the liquidity facilities have wound down. As a result, although the total size of our balance sheet has held relatively steady since the fourth quarter of last year, there has been a very important rotation taking place in its composition toward the assets purchased through the LSAP programs. As we complete the purchases scheduled through the first quarter of 2010, this component of the balance sheet will continue to grow, with the total amount of securities held projected to reach $2.1 trillion.

Given the importance of these asset holdings in the current balance sheet, I will focus my remaining comments on them, addressing three broad questions. First, what were the intended effects of the asset purchases and were they achieved; second, will winding down the purchases cause an adverse reaction in markets; and third, how will policymakers manage to tighten financial conditions with the expanded balance sheet.

Intended Effects of Asset Purchases
The first question I consider is whether the asset purchases have had their intended effects. It is important to recognize that the LSAP programs differ from the Fed’s liquidity policies in terms of their policy intent. The LSAPs were not aimed at supplying liquidity to financial institutions or at reducing systemic risk. Instead, they were intended to support economic activity by keeping longer-term private interest rates lower than they would otherwise be.

A primary channel through which this effect takes place is by narrowing the risk premiums on the assets being purchased. By purchasing a particular asset, the Fed reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others. In order for investors to be willing to make those adjustments, the expected return on the security has to fall. Put differently, the purchases bid up the price of the asset and hence lower its yield. These effects would be expected to spill over into other assets that are similar in nature, to the extent that investors are willing to substitute between the assets. These patterns describe what researchers often refer to as the portfolio balance channel.

For Treasury securities, the reduction in yields would occur through narrowing the term premium, or the expected excess return that investors receive for their willingness to take duration risk. By removing a considerable amount of duration through its asset purchases, the Fed has kept the term premium narrower than it otherwise would have been. In addition, the purchases of mortgage-backed securities remove prepayment risk from the market. Investors generally find it challenging to hold the negative convexity of MBS associated with prepayment risk, and hence they demand an extra return to bear that risk, which keeps MBS rates higher than they would otherwise be. The removal of a considerable amount of this risk by the Fed’s purchases would be expected to lower MBS rates by offsetting this effect. With lower prospective returns on Treasury securities and mortgage-backed securities, investors would naturally bid up the prices of other investments, including riskier assets such as corporate bonds and equities. These effects are all part of the portfolio balance channel.

In addition to the portfolio balance channel, Fed purchases could raise the price of a particular asset if it improved the liquidity of that instrument. That effect would presumably arise in situations in which trading flows were very one-sided and the Fed’s purchases restored some balance to market dynamics. In those circumstances, the liquidity premium could fall if investors and dealers knew that they could unload that type of security in volume to the Federal Reserve at market prices.

Even if we understand the way that the LSAPs could have an effect on longer-term interest rates, actually quantifying that effect is a challenge. It is difficult to measure precisely the total effect of the LSAPs on longer-term interest rates, but I believe that the effect has been substantial. This can be seen in the movements in longer-term Treasury yields and MBS rates around the times of key announcements about asset purchases. It is also supported by other empirical research, including some regression models that the New York Fed staff has been developing. Taken together, those measures suggest that the effect of all LSAP programs on the 10-year Treasury yield could be as large as 50 basis points, though I reiterate that such estimates have considerable uncertainty surrounding them.

The effects on the MBS rate have been even larger. That can be seen most easily in the spread of yields on mortgage-backed securities over those on Treasuries, adjusted for the prepayment option embedded in those securities. The option-adjusted spread has narrowed by about 100 basis points since the announcement of the program, with more than half of that decline occurring on days of substantive statements about the MBS purchase program.

How has the Fed been able to generate these substantial effects on longer-term interest rates? One word: size. The total amount of securities to be purchased under the LSAPs is quite large relative to the size of the relevant markets. That is particularly the case for mortgage-backed securities. Fed purchases to date have run at more than two times the net issuance of securities in this market. In the securities with 4 percent and 4.5 percent coupon rates, which have been among the most actively produced mortgage-backed securities since purchases began, the Fed has accumulated about two-thirds of the total outstanding amount of those issues. In other words, the Fed has been a substantial presence in these markets and has accordingly left a big footprint.

Another reason for the large impact on MBS rates, in particular, is that the market began from a point of substantial spreads—ones that were well above market norms. These wide spreads could have reflected poor liquidity and an elevated liquidity premium on these securities, or perhaps an extreme risk aversion to any asset containing the word “mortgage.” In either case, Fed purchases would have acted to narrow the premium, bringing MBS rates down by a disproportionate amount as the MBS spread returned to more normal levels.

As the purchase program has progressed, the MBS spread has fallen to levels that are narrower than its historical average, and the liquidity considerations have turned completely in the other direction. Indeed, one issue that the Open Market Desk at the New York Fed now faces is whether its purchases are so large that they reduce market liquidity. The program has to strike the right balance between being large enough to have a meaningful impact on rates, but not so large that it impairs market functioning. As just noted, the LSAPs appear to have been successful in generating an effect on rates, and we are also taking steps to try to limit the adverse effects on market liquidity.

Winding Down the Asset Purchases
The apparent success of the LSAP programs has a flip side, in that we must consider how market pricing will evolve during and after the termination of the programs. This brings me to the second question that I consider: Will markets have an adverse reaction as the Fed winds down its purchases?

One key issue in this regard is whether the market effects mentioned before arise from stock or flow effects. The portfolio balance effects discussed earlier would presumably be associated with changes in the expected stock of assets held by the public. Under this view, even an abrupt end to the Fed’s purchases, if fully anticipated, would not cause an adverse market response, as it would not represent a discrete jump in the outstanding stock of securities held by the public. However, we want to allow for the possibility that the flow of asset purchases, or the ongoing presence of the Fed as a significant buyer, may also be relevant for market pricing. In that case, the end of the Fed’s purchases could cause an increase in longer-term interest rates, at least temporarily until the market has had more of an opportunity to adjust to the Fed’s absence.

On theoretical grounds, it would seem that the main impact of the Federal Reserve purchases reflects stock effects. However, flow effects could matter as well, particularly given the very large MBS purchases we have been making. The bottom line is that we cannot be absolutely sure about the degree to which market effects arise through one channel or the other.

For that reason, the FOMC has adopted a strategy of gradually tapering the size of asset purchases as the programs approach their end. This is a cautious approach. It should help to smooth out any possible market reaction associated with the flow of purchases, and yet it has no cost under a stock-based view. Tapering gives the market time for new investors (or perhaps previously displaced investors) to enter the MBS market in the place of Fed purchases. A tapering strategy was applied to our Treasury purchases with success, as the end of that program did not prompt any notable market response—exactly as we had hoped. However, tapering may be a more important consideration for the termination of the MBS program, given its larger relative size.

Related to this discussion, it is useful to note that exiting from LSAPs can involve a tension that is absent in the Fed’s liquidity facilities discussed earlier. The liquidity facilities were established in response to considerable market strains that had caused the price of term liquidity to skyrocket. In responding, the Fed could be confident that it was pushing market rates toward levels that would be considered normal over the intermediate term. LSAPs, in contrast, could in practice push risk premiums below the levels that would be sustainable over the medium term. Doing so could still be an optimal approach, in terms of achieving macroeconomic outcomes, even if it requires that market pricing will eventually have to reverse.

That reversal would be relatively slow under the portfolio balance theory, if the Fed were to allow its asset holdings to passively run off as they mature. As normal market issuance patterns proceed and as the assets purchased by the Fed mature, the market portfolio will gradually revert back to where it would have otherwise been, allowing risk premiums to gradually renormalize.

Tightening Financial Conditions with an Expanded Balance Sheet
Of course, reducing, and ultimately ceasing, our purchases is only one dimension of exiting from the LSAP programs. The other challenge that the programs pose is that they have injected large amounts of reserves into the banking system in a persistent manner. Thus, the final question I consider is how policymakers will manage to tighten financial conditions, when deemed appropriate, with the expanded balance sheet.

The banking system currently has more than $1 trillion in reserves. These reserves are the liability on the Fed’s balance sheet that corresponds to the aggressive expansion of its asset holdings. The balance sheet is still growing and, absent asset sales, will remain unusually large for years. These balance sheet dynamics, left on their own, would keep reserve balances high for some time, potentially complicating the Fed’s efforts to tighten monetary policy when appropriate.

Based on this consideration, it is not surprising that the Federal Reserve has been dedicating extensive effort to developing the framework and tools that could be used to tighten monetary policy even with a large balance sheet. This is a topic that is frequently discussed by FOMC members in their public speeches and in other communications.

A key part of the framework is the ability to pay interest on excess reserves. This authority alone may allow the FOMC to control short-term interest rates to its satisfaction, even if the banking system is saturated with a large amount of excess reserves. Indeed, the interest rate on excess reserves should act as a magnet for other short-term interest rates, keeping them relatively close together. In the current environment, the federal funds rate has remained modestly below the rate paid on reserves, typically by 10 to 15 basis points. If that spread were to remain steady near those levels even as the interest rate on excess reserves was increased, then policymakers would have sufficient control over short-term interest rates without the use of additional instruments. They could still choose a target level of the federal funds rate and could hit it by adjusting the interest rate on excess reserves.

However, policymakers face some uncertainty about how stable that spread will remain as short-term interest rates increase. The behavior of the spread today might not be that informative in this regard, as the proximity of short-term interest rates to the zero bound prevents the spread from getting much larger. In my view, the most likely outcome is that the spread will not widen substantially as short-term interest rates increase. However, if the spread does become large and variable, then policymakers will need other tools for strengthening their control of short-term interest rates.

With that in mind, monetary policymakers have asked the Federal Reserve staff to develop the ability to offer term deposits to depository institutions and to conduct reverse repos with other firms. These tools are similar in nature, as they both absorb excess reserves by replacing them with a term investment at the Fed. By removing reserves that would have otherwise been available for overnight lending, these tools could pull the federal funds rate and other short-term interest rates up toward the interest rate on excess reserves, providing the Fed with more effective control over the policy rate.

The development of both of these tools has made considerable progress. As indicated in the recent statement from the New York Fed, the Open Market Desk will soon begin conducting a series of small-scale, real-value term reverse repo transactions as part of our efforts to ensure the readiness of this tool. With the successful completion of those transactions, we will have achieved the operational ability to do term reverse repos with primary dealers against Treasury and agency debt collateral, using the triparty system for settlement. In addition, we continue to work on our ability to use MBS collateral in these operations and on a potential expansion of the set of our counterparties. At the same time, the staff is actively working on the Term Deposit Facility. The FOMC has said that it views completing the operational work necessary to establish these tools as an important near-term objective.

It is important to underscore that market participants should not confuse the efforts to achieve operational readiness of these tools with a change in the stance of monetary policy. The mandate handed to the staff by the FOMC was to develop the tools in order to have them ready when needed, with no clear direction on when that time will come. At this point, our efforts are simply aimed at meeting that mandate.

Of course, building the tools is only half the battle. Determining how to use them properly will be at least as challenging.

In that regard, it is useful to consider what these tools can achieve and what they cannot. As noted earlier, draining reserves with these tools could help to improve our control of short-term interest rates, which is the critical issue for ensuring that policymakers can tighten financial conditions when necessary. However, draining reserves with these tools does not undo the portfolio balance effects of the LSAPs. These operations would basically substitute one short-term, risk-free asset for another—replacing what is in effect an overnight loan to the Federal Reserve (reserves) with another short-term loan to the Fed (a reverse repo or term deposit). It is hard to believe that the willingness of an investor to hold risky assets or of a bank to make risky loans would be affected in any meaningful way by this substitution between such similar assets.

A key issue here is whether reserves have some special importance for the availability of credit. Some market observers have a very reserve-focused perspective on the transmission mechanism of monetary policy, arguing that high reserve balances inevitably lead to rapid credit expansion. Under that view, the large-scale asset purchases provide stimulus to the economy primarily by supplying reserves to the banking system, in which case the stimulative effects could be unwound by draining the reserves using any of the tools available. My own perspective differs. In my view, the effects of the asset purchases arise primarily from the removal of duration and prepayment risk from the markets, based on the portfolio-balance effects discussed earlier. Those effects would not be unwound by draining reserves with reverse repos or term deposits.

This is an important consideration for anyone who believes that the portfolio-balance effects could turn out to be too powerful. Some market observers have expressed concerns that the large holdings of liquid assets “on the sidelines” are pushing up risky asset prices excessively as investors attempt to invest those funds. Taking out the excess reserves using the two instruments I discussed will not, by itself, reduce the amount of liquid assets and hence will not undo those effects.

Nevertheless, as long as the FOMC has control of short-term interest rates, it will be able to achieve the desired outcome for broader financial conditions. In particular, the FOMC could always raise short-term interest rates further than would otherwise be the case to offset the stimulus provided by the remaining portfolio balance effects coming from the LSAPs. This type of response is built into the current policymaking process, as any remaining portfolio-balance effects would presumably be factored into the FOMC’s assumptions about how financial conditions are likely to evolve, affecting the FOMC’s economic forecast and the policy decisions based on that forecast. In some sense, this approach places more of the burden on hiking short-term interest rates to tighten financial conditions when the time comes.

An alternative approach would be to reverse a portion of the portfolio-balance effects through asset sales. Asset sales would put the portfolio risk back into the market at a faster pace than redemptions alone, forcing risk premiums to adjust more quickly in order to entice investors to hold that risk. The result would be to put upward pressure on Treasury yields and MBS rates independent of any changes in the expected path of short-term interest rates, so that less of the burden of financial tightening would fall on the short-term interest rate. As described in the minutes of the last FOMC meeting, FOMC participants discussed the possible role of asset sales in their policy strategy going forward and expressed a range of views. My comments are intended only to lay out what I see as the conceptual difference between the effects of asset sales and short-term reserve draining operations.

Conclusions
Overall, the large-scale asset purchases that the Federal Reserve has employed seem to have had their desired effects in terms of reducing longer-term interest rates. These purchases have been an important part of the policy response that the FOMC put in place to foster a sustained economic recovery. Moreover, that conclusion is reassuring for the future, as it suggests that central banks will still have effective policy options should the zero bound threaten again.

However, these asset purchases have ongoing implications for the balance sheet that may require adjustments along other dimensions, such as the implementation of reverse repos, term deposits, asset sales, or other measures. The size, likelihood, and timing of the appropriate adjustments will only become apparent over time, as they will depend on the evolution of the economy and financial markets. They will also depend importantly on the effectiveness of interest on reserves for controlling short-term interest rates in a high reserve environment—a policy regime that has not been fully tested in U.S. markets and that will have to be evaluated in real time.

However, at this point we can at least identify what the policy issues are and evaluate how this set of tools addresses them. I have tried to provide you with my own perspectives on the effects that the Fed’s expanded balance sheet has had on financial markets and the key issues that we face in managing this balance sheet going forward. Hopefully these views will be of some use in assessing and evaluating the future decisions of policymakers and in predicting how financial markets may respond.

Thank you.

[doctorwho]

Dec 27, 2009 14:42:28 GMT -6 macrockett said:

online.wsj.com/article/SB126168307200704747.html#printMode


DECEMBER 28, 2009

U.S. Move to Cover Fannie, Freddie Losses Stirs Controversy

By JAMES R. HAGERTY and JESSICA HOLZER

The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday.

The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.

Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.

"The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed "to prevent the general public from taking note."

Treasury officials couldn't be reached for comment Friday.

So far, Treasury has provided $60 billion of capital to Fannie and $51 billion to Freddie. Mahesh Swaminathan, a senior mortgage analyst at Credit Suisse in New York, said he didn't believe Fannie and Freddie would need more than $200 billion apiece from the Treasury. But he and other analysts have said the market would find a larger commitment from the Treasury reassuring.

In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.

The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.

Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government's role in the companies.

The Treasury reiterated administration plans for a "preliminary report" on the government's future role in the mortgage market around the time the federal budget proposal is released in February.

The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies.

The FHFA said compensation for executive officers of the companies in 2009, on average, is down 40% from the pay levels before the conservatorship.

Under the conservatorship, top officers of Fannie and Freddie take their cues from the Treasury and regulators on all major decisions, current and former executives say. The government has made foreclosure-prevention efforts its top priority.

The pay packages for top officers are entirely in cash; company shares have been trading on the New York Stock Exchange at less than $2 apiece, and it isn't clear when the companies will to profitability or whether common shares will have any value in the long term.

For the CEOs, annual compensation consists of a base salary of $900,000, deferred base salary of $3.1 million and incentive pay of as much as $2 million.

When Mr. Haldeman was hired by Freddie in July, the company set his base pay at $900,000 and said his additional "incentive" pay would depend on a decision by the regulator.

At Fannie, Mr. Williams was chief operating officer until he was promoted in April to CEO. As COO, his base salary was $676,000. He also had annual deferred pay of $2.3 million and a long-term incentive award of as much as $1.5 million.

Under the new packages, Fannie will pay as much as about $3.6 million annually to David M. Johnson, chief financial officer; $2.4 million to Kenneth Bacon, who heads a unit that finances apartment buildings; $2.8 million to David Benson, capital markets chief; $2.2 million to David Hisey, deputy chief financial officer; $3 million to Timothy Mayopoulos, general counsel; and $2.8 million to Kenneth Phelan, chief risk officer.

At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.

The pay deals also drew fire. With unemployment near 10%, "to be handing out $6 million bonuses to essentially federal employees is unconscionable," said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie.

He also criticized the administration for approving the compensation without settling on a plan to remove taxpayer supports: "To be doing that with no plan in place is just unconscionable."

The FHFA said that Fannie and Freddie "must attract and retain the talent needed" for their vital role in the mortgage market.

Write to James R. Hagerty at [e-mail] and Jessica Holzer at [e-mail]

-------------------------------------------------------------------------------------
As of Sept 2009, FNM and FRE held approximate 57% of all loans. In addition, GNME and FHA insured another 25% of all loans. We the taxpayers are exposed to over 80% of the housing market. See the below PDF

www.freddiemac.com/speeches/pdf/DARE%20conference%20october%206%20-%20FINAL.pdf

Why pay the executive of FNM and FRE $6M when they essentially implement policy of the Treasury, as noted in the highlighted and underlined paragraph above? Does that make any sense?

Also what about this guy? www.chicagotribune.com/news/politics/obama/chi-rahm-emanuel-profit-26-mar26,0,5682373.story Emanuel has an uncanny ability to make money in the most unlikely places; first as an investment banker in the Excelon purchase of ComEd, even though he has no previous investment banking experience; then as a director of FRE while they were in the process of manipulating the books (of course he know nothing about that).

this admin throwing money around faster than we can print it - yet with their supporters they are teflon coated...which is why the economy will get much worse before it gets better....the recklessness continues

[macrockett]

online.wsj.com/article/SB10001424052748704718204574616271830376600.html

* HEARD ON THE STREET
* DECEMBER 28, 2009

Fannie and Freddie's Home Inequity

By PETER EAVIS

That was a nice holiday gift to taxpayers.

As expected, the Treasury on Christmas Eve increased the amount of money it can plow into Fannie Mae and Freddie Mac to keep them solvent. Before, the U.S. had pledged up to $200 billion to each. Now, over the next three years, the Treasury can spend as much as is needed to prevent their net worth going negative. Such a change would have required congressional consent after Dec. 31. Given that each U.S. household had effectively committed $3,800 to both firms, the Treasury should have waited till the New Year so the people's representatives could have had their say.
[FANNIEHERD]

While Congress would likely have signed off, seeking its approval would have been an opportunity to open up a serious debate about Fannie and Freddie specifically and housing subsidies in general.

There are strong arguments for abolishing housing support for everyone except the poor. No other advanced economy with high homeownership levels has Fannie- and Freddie-type entities. But not only are they unnecessary, they also caused harm. In good times, they probably kept house prices above true market levels, shutting potential buyers out. And they played a central role in the housing crash with their huge purchases of dangerous Alt-A mortgages. What is more, their politically favored status likely made it easier for executives to practice misleading accounting earlier this decade.

Granted, the Treasury might not have wanted to cause jitters in the mortgage market by letting Congress get involved. But at some point the U.S. needs to be able to make economic policy without worrying about every turn in the housing market.

Write to Peter Eavis at [e-mail]

www.djreprints.com
More In Heard on the Street
-----------------------------------------
Happy New Year everyone! It's a new year but some things will stay the same unless we all get active. Educate yourself about the issues and let your political reps know what you think.

Every PAC, lobby, union and other special interest group is actively seeking to influence on the federal, state and local level. The bottom line on virtually all of there actions? Economic issues, money... higher pay, better benefits, less regulation, government contracts, etc. all affecting their bottom line.

How does that impact you? Higher property taxes, income taxes and fees to name a few. So the next time you decide you don't have time to get involved remember this: for every extra dollar you are making because you work, rather than taking time to understand the issues, it is probably being taken right out of your pocket by government due to these special interests, who DO take the time, a lot of time to influence our government.

[macrockett]

New York Times

January 2, 2010
U.S. Loan Effort Is Seen as Adding to Housing Woes
By PETER S. GOODMAN

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”

The Treasury Department publicly maintains that its program is on track. “The program is meeting its intended goal of providing immediate relief to homeowners across the country,” a department spokeswoman, Meg Reilly, wrote in an e-mail message.

But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.

In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.

Ms. Reilly, the Treasury spokeswoman, said the foreclosure alternatives program did not represent a new policy. “We have said from the start that modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Ms. Reilly said by e-mail. “This has always been a multi-pronged effort.”

Whatever the merits of its plans, the administration has clearly failed to reverse the foreclosure crisis.

In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. This year, more than two million homes were lost, and Economy.com expects that next year’s number will swell to 2.4 million.

“I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.”

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.

Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”

From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.

Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.

“We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”

Under the current program, the government provides cash incentives to mortgage companies that lower monthly payments for borrowers facing hardships. The Treasury Department set a goal of three to four million permanent loan modifications by 2012.

“That’s overly optimistic at this stage,” said Richard H. Neiman, the superintendent of banks for New York State and an appointee to the Congressional Oversight Panel, a body created to keep tabs on taxpayer bailout funds. “There’s a great deal of frustration and disappointment.”

As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation.

The government has pressured mortgage companies to move faster. Still, it argues that trial modifications are themselves a considerable help.

“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”

But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.

In Lakeland, Fla., Jaimie S. Smith, 29, called her mortgage company, then Washington Mutual, in October 2008, when she realized she would get a smaller bonus from her employer, a furniture company, threatening her ability to continue the $1,250 monthly mortgage payments on her three-bedroom house.

In April, Chase, which had taken over Washington Mutual, lowered her payment to $1,033.62 in a trial that was supposed to last three months.

Ms. Smith made all three payments on time and submitted required documents, Chase confirms. She called the bank almost weekly to inquire about a permanent loan modification. Each time, she says, Chase told her to continue making trial payments and await word on a permanent modification.

Then, in October, a startling legal notice arrived in the mail: Chase had foreclosed on her house and sold it at auction for $100. (The purchaser? Chase.)

“I cried,” she said. “I was hysterical. I bawled my eyes out.”

Later that week came another letter from Chase: “Congratulations on qualifying for a Making Home Affordable loan modification!”

When Ms. Smith frantically called the bank to try to overturn the sale, she was told that the house was no longer hers. Chase would not tell her how long she could remain there, she says. She feared the sheriff would show up at her door with eviction papers, or that she would return home to find her belongings piled on the curb. So Ms. Smith anxiously set about looking for a new place to live.

She had been planning to continue an online graduate school program in supply chain management, and she had about $4,000 in borrowed funds to pay tuition. She scrapped her studies and used the money to pay the security deposit and first month’s rent on an apartment.

Later, she hired a lawyer, who is seeking compensation from Chase. A judge later vacated the sale. Chase is still offering to make her loan modification permanent, but Ms. Smith has already moved out and is conflicted about what to do.

“I could have just walked away,” said Ms. Smith. “If they had said, ‘We can’t work with you,’ I’d have said: ‘What are my options? Short sale?’ None of this would have happened. God knows, I never would have wanted to go through this. I’d still be in grad school. I would not have paid all that money to them. I could have saved that money.”

A Chase spokeswoman, Christine Holevas, confirmed that the bank mistakenly foreclosed on Ms. Smith’s house and sold it at the same time it was extending the loan modification offer.

“There was a systems glitch,” Ms. Holevas said. “We are sorry that an error happened. We’re trying very hard to do what we can to keep folks in their homes. We are dealing with many, many individuals.”

Many borrowers complain they were told by mortgage companies their credit would not be damaged by accepting a loan modification, only to discover otherwise.

In a telephone conference with reporters, Jack Schakett, Bank of America’s credit loss mitigation executive, confirmed that even borrowers who were current before agreeing to loan modifications and who then made timely payments were reported to credit rating agencies as making only partial payments.

The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.

“This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”

Mr. Geithner’s explanation did not satisfy the panel’s chairwoman, Elizabeth Warren.

“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”

A good question, Mr. Geithner conceded.

“What to do about it,” he said. “That’s a hard thing.”

------------------------------------------------------------------------------
What is the lesson here? The unintended consequences of trying to put everyone in a home even if they can not afford it...

Social engineering by Congress to allow more liberal rules in lending allowed the Subprime-mortgage.

That, among other things, allowed over two million homes to be built and purchased by people never having the real means to pay for the home (this pushed home ownership close to the 70% mark when, historically, it was near the 66% level). It also created a bubble of historic proportions (see: www.chrismartenson.com/crashcourse/chapter-15-bubbles (I urge you to watch all of the Crash Course, as I have, several times)).

Had Congress acted responsibly and ordered Fannie and Freddie to require higher credit standards for home loans there would have been fewer "qualified" buyers, leading to fewer homes built creating the incredible bubble in housing prices, a smaller inventory of unsold homes, fewer foreclosures, a much smaller retrenchment in the price of homes, fewer CDSs, MBSs, etc., the avoidance of a financial meltdown, the avoidance of trillion dollar budget deficits and the increase in our national debt to close to 15-20 trillion when this is all over, and even, perhaps, the worst recession/period of unemployment since the great depression.

[macrockett]

JANUARY 9, 2010

California Requests Billions From U.S.

By STU WOO and JIM CARLTON

SACRAMENTO, Calif. -- Republican Gov. Arnold Schwarzenegger asked for $6.9 billion in federal funds in his state-budget proposal Friday and warned that state health and welfare programs would be threatened without the emergency help.

Mr. Schwarzenegger's proposed $82.9 billion general-fund budget for the 2010-11 fiscal year would close a $19.9 billion gap over 18 months. In addition to the federal aid, he called for $8.5 billion in cuts and $4.5 billion in alternative funding to balance the budget.

"It's time to enact long-term reforms that will change the way the most populous state and the federal government work together," Mr. Schwarzenegger said. He and state legislative leaders plan to visit Washington to lobby for bailout money. White House budget officials weren't available for comment on the governor's request.

Mr. Schwarzenegger said that without the federal aid, he would propose cutting $4.6 billion from state assistance programs and raise another $2.4 billion, largely by extending the suspension of tax breaks.

The governor said California deserved the federal help because the state sends far more tax money to Washington than it receives in return. Federal mandates, he added, "force us to spend money that we do not have."

The budget proposal said the federal government should reimburse California $2.8 billion for costs related to the state's Medicaid program, as well as more than $1 billion for special-education spending and $2.1 billion in federal-stimulus money.

Mr. Schwarzenegger called the state legislature into a special budget session. He proposed cutting $2.4 billion from health and welfare spending and $1.2 billion from prison spending. He also called for cuts in salaries and pensions for state workers.

Republicans praised the plan. "It's a good first step," said Bob Dutton, vice chairman of the state Senate's budget committee.

State Senate President Darrell Steinberg, a Democrat, said: "I have one reaction: You've got to be kidding me." He and other legislative leaders said they opposed any more cuts to welfare and health programs. Instead, they said they preferred federal help or taxes on, for example, oil drilling and tobacco sales.

"These cuts would come at a bad time because there is growing demand from families who are struggling to make ends meet," said Jean Ross, executive director of the nonprofit California Budget Project, which studies policy impacts on the poor.

Mr. Schwarzenegger has been mired in a budget crisis for much of the past two years. California revenues have plunged amid double-digit unemployment and high foreclosure rates. The state has delayed billions of dollars of payments and issued IOUs to keep the government from defaulting.

The return of partisan statehouse clashes over the budget is likely to revive worries on Wall Street over the state's ability to resolve its fiscal troubles. "My concern at this point is that the negotiations could go on longer than the amount of cash the state has on hand," said Gabriel Petek, analyst at Standard & Poor's Corp., which has California on a negative ratings outlook.

A deeply divided legislature finally closed a cumulative $60 billion shortfall last year -- long after its budget deadline.

There are signs California is beginning to slowly emerge from recession. Housing sales have been growing for several months, and state Controller John Chiang on Thursday released his December cash report that showed the month's receipts rose above estimates by $481 million, or 5.7%.

"December receipts showed signs of improvement, but the state continues to face tremendous fiscal challenges," Mr. Chiang said. "At best, this is the beginning of a long and gradual recovery."

Write to Stu Woo at [e-mail] and Jim Carlton at [e-mail]
Printed in The Wall Street Journal, page A3
---------------------------------------------------------

Correct me if you think i am wrong: The State of CA remits nothing to the Federal government. So your premise is wrong on its face, Governor.

The California taxpayer does, however, pay taxes to the Feds. In return, the CA taxpayer gets a deduction on his or her or its (corps) tax return for the state portion if they itemize (corps get it automatically (currently line 17)).

But if you want to see if your taxpayers are getting a fair return, first look at taxes remitted to the federal government compared to funds flowing back to the state (courtesy of the CA taxpayer). Then look at the subsidy that the rest of the taxpayers of the Union give the tax payers of CA for the deduction for CA state taxes (because CA is one of the highest taxing states in the Union).

It is only after those considerations that the taxpayers of the State of California can fairly assess this issue.

I do sympathize with you Governor, on the Federal mandates that Congress forces on that states without compensation...but talk to your Federal legislators not the rest of us.

Full disclosure: I practiced as a CPA for 4 years in San Francisco in my early years at Deloitte. My area of focus was taxation. I did Corporate, Partnership and Individual tax returns during that time.

[macrockett]

www.youtube.com/watch?v=u69VNU4pJ4I&feature=player_embedded

[macrockett]

I haven't commented directly on the new health care legislation recently passed by the Senate and it seems more appropriate for far more qualified professionals to do the talking, so here goes:

prescriptions.blogs.nytimes.com/2010/01/08/actuary-still-sees-increase-in-health-spending/?pagemode=print

January 8, 2010, 11:37 pm
Actuary Still Sees Increase in Health Spending
By DAVID M. HERSZENHORN

In a new analysis, the chief actuary of the federal Centers for Medicare and Medicaid Services found that the Senate version of major health care legislation would increase total national health spending from 2010 to 2019 by $222.3 billion, or 0.6 percent, more than projected under current law.

The findings by the chief actuary, Richard S. Foster, were generally consistent with his previous reports on earlier versions of the legislation. Republicans said those reports confirmed their criticism of the Democrats’ bill by showing that it would increase rather than lower health costs.

The latest report offered slightly different calculations, reflecting changes that were made by the Senate majority leader, Harry Reid of Nevada, to secure the votes needed to pass the legislation. The Senate approved the bill on a party line vote, 60 to 39, on Dec. 24.

Mr. Foster had found that a prior version of the Senate bill would increase total national health spending from 2010 to 2019 by $234 billion, or 0.7 percent more, than projected under current law.

The analysis by the chief actuary differs from the studies by the Congressional Budget Office, which has projected that the cost of the Senate bill would be more than offset by new taxes and fees and by reductions in government spending, particularly on Medicare, so that it would reduce future federal deficits.

The actuarial report does not take into account a number of the proposed tax provisions in the bill that would increase government revenues.

Still, the report offers a relatively comprehensive alternative to the reports by the Congressional Budget Office, which is regarded as the official scorekeeper for proposed legislation.

Mr. Foster, in his latest analysis, concluded that 36 million people would gain insurance under the Senate bill by 2019. The budget office said that 31 million people would gain coverage.

The new report echoed early concerns that the nation’s health care system could struggle to adjust to the sharp increase in the number of people with health coverage, and that the increase in patients could make it more difficult to obtain care.

A sharp increase in demand, the report said, could lead to even higher health care prices than currently anticipated and could encourage some health care providers to accept more patients who have private insurance, with higher payment rates and fewer patients covered by Medicare or Medicaid, which pay less.

The report also praised two proposals that are central components of the Senate bill but are not included in the House version of the health care legislation, and are now the subject of fierce debate as Congressional lawmakers try to reconcile the differences between the two versions.

The analysis found that the two proposals — an independent government agency to recommend Medicare savings and a proposed excise tax on high-cost, employer-sponsored insurance policies — would both help reduce long-term health care spending. That could give leverage to the Senate in its negotiations with the House. President Obama has already indicated that he, too, favors those two ideas but some House Democrats are still resistant.

The actuary’s report also said that a third component of the Senate bill, proposed reductions in Medicare payment updates for health care providers, would also reduce costs, but that Congress was unlikely to carry through and cut payments to providers.

Overall, however, the report projected higher health care spending as a result of the legislation.

“The proposed reductions in Medicare payment updates for providers, the actions of the Independent Payment Advisory Board, and the excise tax on high-cost employer-sponsored health insurance would have a downward impact on future health care cost growth rates,” the report stated. “During 2010-2019, however, these effects would be outweighed by the increased costs associated with the expansions of health insurance coverage. Also, the longer-term viability of the Medicare update reductions is doubtful.”

The secretary of health and human services, Kathleen Sebelius, issued a statement on Friday night welcoming Mr. Foster’s report as evidence that the legislation will make crucially-needed improvements to the nation’s health care system.

But Republicans are certain to point out that little had changed since Mr. Foster’s analysis of a prior version of the Senate legislation, and that it only confirmed their criticism of the bill, including their assertion that proposed fees on private insurers, drug makers and medical device manufacturers, would simply result in higher costs to consumers.

“We anticipate that such fees would generally be passed through to health consumers in the form of higher drug and device prices and higher insurance premiums,” the reported stated, “with an associated increase in overall national health expenditures ranging from $5.8 billion in 2011 to $13.8 billion in 2019.”

---------------------------------------------------------------
Just remember, if you are going to rely on the CBO for the cost of the Senate health care plan, the federal agency that scored the original Medicare bill in the late 60s (not the CBO, by the way, as it didn't come into existence until 1974) only missed projected costs for 1990 by about $100 billion (I guess that is close enough for goverment work!) You can see the details related to that "miss" earlier in this thread under discussion of Medicare.

[macrockett]

The next two stories are prime examples of what happens when our pols fail to step up and take responsibility for governing our state. Dems, Reps? No difference in my opinion. Both parties have run our state into the ground.

www.chicagotribune.com/news/local/chicago/ct-met-0122-rta-unpaid-bills-20100121,0,116059.story
chicagotribune.com

RTA's unpaid bills in $250 million range
Transit officials say they've been forced to borrow to make ends meet amid state finance woes

By Richard Wronski, Tribune reporter

January 22, 2010

Chicago area transit agencies have racked up $250 million in unpaid bills because of the state's fiscal crisis, Regional Transportation Authority officials said Thursday.

The funding shortfall is causing the RTA to borrow as much as $260 million to help the CTA, Metra and Pace make payroll and pay bills, at a cost of more than $5 million a year in interest.

If the RTA can't borrow more and the state doesn't come up with the money it owes, the CTA, Metra and Pace could be asked to cut service in a "worst-case scenario," officials said.

The RTA is just the latest agency to complain about Illinois' $5 billion pile of unpaid bills. The state owes money to local school districts, universities and community colleges and municipalities.

"We're not the only ones," RTA Executive Director Steve Schlickman said. "Everyone has a similar situation. The state is in arrears to many government systems."

The struggling economy is forcing transit agencies to run more and more on borrowed money. The mass-transit share of anticipated sales tax revenue is hundreds of millions short of expectations.

To help counter this, the RTA on Thursday sold $175 million in bonds, approved by the agency in November. That revenue will help offset the CTA's $300 million budget deficit.

The bond deal, brokered by Gov. Pat Quinn which includes a pledge not to raise CTA fares for two years, won't forestall major service cuts and layoffs set for Feb. 7.

The RTA has $260 million in outstanding working-cash debt, Financial Officer Joe Costello said.

The RTA will ask the legislature to increase this borrowing authority to $400 million.

It is hoped that the move will buy time for the economy to improve, for tax revenue to increase and for the state to work its way out of its financial hole, Costello said.

[e-mail]

Copyright © 2010, Chicago Tribune

[macrockett]

www.chicagotribune.com/news/chi-ap-il-uofillinois-tuiti,0,7784114.story
chicagotribune.com
U. of Ill. expecting sharp tuition increase

Associated Press

8:38 AM CST, January 22, 2010

CHICAGO
Quantcast

University of Illinois interim President Stanley Ikenberry says the school will probably raise tuition for incoming freshmen by at least 9 percent this summer.

Illinois and other state universities are scrambling to cover costs as they wait for millions of dollars being withheld by the state as it struggles with a growing deficit. Illinois alone is owed more than $400 million.

Smaller increases happen every year. Tuition was raised last summer for incoming freshmen by 2.6 percent.

University board of trustees Chairman Christopher Kennedy said Thursday that he is worried the university could become too expensive for some students who can now afford to attend.

Ikenberry also expects to get a preliminary report on potential cost-cutting measures in May.

------

Information from: The News-Gazette, www.news-gazette.com

Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

[macrockett]

CBO analysis of FY2010: $1.3 Trillion Deficit

www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf


Be sure to read the summary page (13)

"Moreover, CBO’s baseline projections understate the
budget deficits that would arise under many observers’
interpretation of current policy, as opposed to current
law."

[Arch]

www.denverpost.com/news/ci_14303473

Colorado Springs cuts into services considered basic by many

Read more: www.denverpost.com/news/ci_14303473#ixzz0eJ6YMqR0


POSTED: 01/31/2010 01:00:00 AM MST
UPDATED: 01/31/2010 09:17:44 AM MST

COLORADO SPRINGS — This tax-averse city is about to learn what it looks and feels like when budget cuts slash services most Americans consider part of the urban fabric.

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.

The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter.

Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every two weeks. If that.

Water cutbacks mean most parks will be dead, brown turf by July; the flower and fertilizer budget is zero.

City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won't pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.

"I guess we're going to find out what the tolerance level is for people," said businessman Chuck Fowler, who is helping lead a private task force brainstorming for city budget fixes. "It's a new day."

Some residents are less sanguine, arguing that cuts to bus services, drug enforcement and treatment and job development are attacks on basic needs for the working class.

"How are people supposed to live? We're not a 'Mayberry R.F.D.' anymore," said Addy Hansen, a criminal justice student who has spoken out about safety cuts. "We're the second-largest city, and growing, in Colorado. We're in trouble. We're in big trouble."

Mayor flinches at revenue

Colorado Springs' woes are more visceral versions of local and state cuts across the nation. Denver has cut salaries and human services workers, trimmed library hours and raised fees; Aurora shuttered four libraries; the state budget has seen round after round of wholesale cuts in education and personnel.

The deep recession bit into Colorado Springs sales-tax collections, while pension and health care costs for city employees continued to soar. Sales-tax updates have become a regular exercise in flinching for Mayor Lionel Rivera.

"Every month I open it up, and I look for a plus in front of the numbers instead of a minus," he said. The 2010 sales-tax forecast is almost $22 million less than 2007.

Voters in November said an emphatic no to a tripling of property tax that would have restored $27.6 million to the city's $212 million general fund budget. Fowler and many other residents say voters don't trust city government to wisely spend a general tax increase and don't believe the current cuts are the only way to balance a budget.

Dead grass, dark streets

But the 2010 spending choices are complete, and local residents and businesses are preparing for a slew of changes:

• The steep parks and recreation cuts mean a radical reshifting of resources from more than 100 neighborhood parks to a few popular regional parks. The city cut watering drastically in 2009 but "got lucky" with weekly summer rains, said parks maintenance manager Kurt Schroeder.

With even more watering cuts, "if we repeat the weather of 2008, we're at risk of losing every bit of turf we have in our neighborhood parks," Schroeder said. Six city greenhouses are shut down. The city spent $19.6 million on parks in 2007; this year it will spend $3.1 million.

"If a playground burns down, I can't replace it," Schroeder said. Park fans' only hope is the possibility of a new ballot tax pledged to recreation spending that might win over skeptical voters.

• Community center and pool closures have parents worried about day-care costs, idle teenagers and shut-in grandparents with nowhere to go.

Hillside Community Center, on the southeastern edge of downtown Colorado Springs in a low- to moderate-income neighborhood, is scrambling to find private partners to stay open. Moms such as Kirsten Williams doubt they can replace Hillside's dedicated staff and preschool rates of $200 for six-week sessions.

"It's affordable, the program is phenomenal, and the staff all grew up here," Williams said. "You can't re-create that kind of magic."

Shutting down youth services is shortsighted, she argues. "You're going to pay now, or you're going to pay later. There's trouble if kids don't have things to do."

• Though officials and citizens put public safety above all in the budget, police and firefighting still lost more than $5.5 million this year. Positions that will go empty range from a domestic violence specialist to a deputy chief to juvenile offender officers. Fire squad 108 loses three firefighters. Putting the helicopters up for sale and eliminating the officers and a mechanic banked $877,000.

• Tourism outlets have attacked budget choices that hit them precisely as they're struggling to draw choosy visitors to the West.

The city cut three economic-development positions, land-use planning, long-range strategic planning and zoning and neighborhood inspectors. It also repossessed a large portion of a dedicated lodgers and car rental tax rather than transfer it to the visitors' bureau.

"It's going to hurt. If they don't at least market Colorado Springs, it doesn't get the people here," said Nancy Stovall, owner of Pine Creek Art Gallery on the tourism strip of Old Colorado City. Other states, such as New Mexico and Wyoming, will continue to market, and tourism losses will further erode city sales-tax revenue, merchants say.

• Turning out the lights, literally, is one of the high-profile trims aggravating some residents. The city-run Colorado Springs Utilities will shut down 8,000 to 10,000 of more than 24,000 streetlights, to save $1.2 million in energy and bulb replacement.

Hansen, the criminal-justice student, grows especially exasperated when recalling a scary incident a few years ago as she waited for a bus. She said a carload of drunken men approached her until the police helicopter that had been trailing them turned a spotlight on the men and chased them off. Now the helicopter is gone, and the streetlight she was waiting under is threatened as well.

"I don't know a person in this city who doesn't think that's just the stupidest thing on the planet," Hansen said. "Colorado Springs leaders put patches on problems and hope that will handle it."

Employee pay criticized

Community business leaders have jumped into the budget debate, some questioning city spending on what they see as "Ferrari"-level benefits for employees and high salaries in middle management. Broadmoor luxury resort chief executive Steve Bartolin wrote an open letter asking why the city spends $89,000 per employee, when his enterprise has a similar number of workers and spends only $24,000 on each.

Businessman Fowler, saying he is now speaking for the task force Bartolin supports, said the city should study the Broadmoor's use of seasonal employees and realistic manager pay.

"I don't know if people are convinced that the water needed to be turned off in the parks, or the trash cans need to come out, or the lights need to go off," Fowler said. "I think we'll have a big turnover in City Council a year from April. Until we get a new group in there, people aren't really going to believe much of anything."

Mayor and council are part-time jobs in Colorado Springs, points out Mayor Rivera, that pay $6,250 a year ($250 extra for the mayor). "We have jobs, we pay taxes, we use services, just like they do," Rivera said, acknowledging there is a "level of distrust" of public officials at many levels.

Rivera said he welcomes help from Bartolin, the private task force and any other source volunteering to rethink government. He is slightly encouraged, for now, that his monthly sales-tax reports are just ahead of budget predictions.

Officials across the city know their phone lines will light up as parks go brown, trash gathers in the weeds, and streets and alleys go dark.

"There's a lot of anger, a lot of frustration about how governments spend their money," Rivera said. "It's not unique to Colorado Springs."

Michael Booth: 303-954-1686 or [e-mail]



Read more: www.denverpost.com/news/ci_14303473#ixzz0eJ6THW4r

[macrockett]

online.wsj.com/article/SB10001424052748704107204575039671922399114.html

The President's Priorities
One of the greatest spend-while-you-can documents in American history.

One rule of budget reporting is to watch what the politicians are spending this year, not the frugality they promise down the road. By that measure, the budget that President Obama released yesterday for fiscal 2011 is one of the greatest spend-while-you-can documents in American history.

We now know why the White House leaked word of a three-year spending freeze on a few domestic accounts before this extravaganza was released. No one would have noticed such a slushy promise amid this glacier of spending. The budget reveals that overall federal outlays will reach $3.72 trillion in fiscal 2010, and keep rising to $3.834 trillion in 2011.

As a share of the economy, outlays will reach a post-World War II record of 25.4% this year. This is a new modern spending landmark, up from 21% of GDP as recently as fiscal 2008, and far above the 40-year average of 20.7%.

In the "out years" in mid-decade, the White House promises that spending will fall all the way back to 23% of GDP. Even if you choose to believe such a political prediction, that still means Mr. Obama is proposing a new and more or less permanently higher plateau of federal spending.

And here you thought the "stimulus" was supposed to be temporary. This is also before the baby boomers retire and send Medicare and Social Security accounts soaring.

If this budget is Mr. Obama's first clear demonstration of his long-term governing priorities, then it's hard not conclude that this spending boom is deliberate. It is an effort to put in place programs and spending commitments that will require vast new tax increases and give the political class a claim on far more private American wealth.

Despite talk of "tough choices" in yesterday's document, the Administration wants $25 billion in new spending for states for Medicaid, $100 billion for yet another jobs "stimulus," big boosts in spending for low-income family programs, for health research, heating assistance and education. If Mr. Obama's priorities become law, federal outlays will have grown an astonishing 29% since 2008.

As further proof, the White House proposes to convert long-standing "discretionary" spending that requires annual appropriations into permanent entitlement programs. A case in point is the Pell Grant program for college, which the budget would shift into the "mandatory" spending column at a cost of $307 billion over 10 years. The political goal here is to make a college education as much of a universal entitlement as Social Security.

All of this spending must be financed, and so deficits and taxes are both scheduled to rise to record levels. The deficit will hit 10.6% of GDP this year, far more than Ronald Reagan ever dreamed of. The deficits are then predicted to fall but still to only a tad below 4% of GDP on average for the rest of the decade. We wouldn't mind those numbers if they were financing tax cuts to revive growth.

But the reality is that even these still-high deficits are based on assumptions for growth and revenue gains from record tax increases starting January 1, 2011. And what a list of tax increases it is—no less than $2 trillion worth over the decade. The nearby table lists some of the largest, all of which the Administration and its economists claim to believe will have little or no impact on growth. If they're wrong, the deficits will be even larger.

Our favorite euphemism is the Administration's estimate that it can get $122.2 billion in new revenue via a "reform" of the "U.S. international tax system." Reform usually means closing some loopholes in return for lower tax rates. But this is a giant tax increase on American companies that operate overseas, and it includes no offsetting cut in the U.S. 35% corporate tax rate, which is among the highest in the world. The Administration agreed last year to drop this idea when it was seeking the help of the Business Roundtable to pass health care. But so much for that, now that the White House needs the money.

Even these tax increases won't be enough to pay for the spending that this Administration is unleashing in its first two remarkable years. On the evidence of this budget, the Massachusetts Senate election never happened.

[macrockett]

Uncle Sam Wants You
A jobs boom in the federal government.

One of President Obama's tropes is to disavow any desire for bigger government, but the facts in his new $3.8 trillion budget show he is getting it whether he wants it or not. One revealing detail is the boom in federal employment to levels last seen at the end of the Cold War.

"Civilian full-time equivalent employees," as they're known in budgetese, held relatively constant before Mr. Obama came to Washington, but they surged to 1.978 million in 2009 from 1.875 million in 2008. In fiscal 2010, the Administration expects to add another 170,000 workers—a 14.5% leap in two years. The nearby chart shows the trend in civilian executive-branch hiring since 2000, not including the Postal Service.

The 2.148 million federal employees in 2010 will be the largest number since 2.169 million in 1992, when the Clinton Administration started in earnest to unwind the Cold War defense buildup. So perhaps the wars in Afghanistan and Iraq explain the federal jobs boom? Hardly. The military employed some 973,000 civilians in 1992, which declined to some 671,000 in 2008 before climbing back to an anticipated 720,000 in 2010.

The real jobs boom is in the federal agencies, not the military—to 1.428 million in 2010, from 1.204 million in 2008 and 1.09 million in 2001. So, for instance, the Agriculture Department will jump to 101,000 in 2010 from 94,000 in 2008, Justice will surge to 119,000 from 106,000, and Treasury to 114,000 from 107,000. We could go on.

Mr. Obama blames the government's all-time high deficits and other budget predicaments on his predecessor, but no one forced him to hire all these new public employees. Presumably, these tens of thousands of new workers are needed to hand out stimulus grants, or monitor this or that new program, or investigate private business (a 10% increase in SEC staff in fiscal 2011, for example). And that's before health care and cap and tax.

No wonder more college graduates are saying they want to head to Washington, and that the Beltway metropolis has been spared the brunt of the recession. That's where all the new jobs are.