Michelle Lui

Mortgage Reform Is Worth the Extra Small Cost to Borrowers

 Commentary, Mortgage Market  Comments Off on Mortgage Reform Is Worth the Extra Small Cost to Borrowers
Apr 252014
 

Swagel-Phillip-HRby Phillip Swagel, Professor in International Economic Policy, Maryland School of Public Policy and Academic Fellow, Center for Financial Policy

This post was originally published in The New York Times’ Economix Blog. To view the original post, click here.

In the current housing financing system, shareholders and management of Fannie Mae and Freddie Mac got the considerable profits in good times, and when the housing market collapsed, taxpayers were stuck with the bill — a $190 billion tab in the recent crisis.

A Senate proposal for a new system would have private investors rather than taxpayers take on most of the risks and returns involved with mortgage lending — if a misguided obsession with the small additional cost to borrowers doesn’t sink the reforms.

The proposal put forward recently by Senators Tim Johnson, Democrat from South Dakota, and Michael Crapo, Republican from Idaho, who lead the Senate banking committee, would bring about a housing finance system driven first and foremost by market incentives rather than by government dictates. There are many pieces to the proposal, including support for affordable housing and an innovative approach by which to reward financial firms that serve a broad range of customers and penalize those that do not.

But reducing the government involvement in housing finance and bringing back private capital is at the heart of the bill, which would end the anomalous situation in which the housing finance giants Fannie Mae and Freddie Mac are private companies that earn enormous profits but remain under the control of a government regulator.

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Apr 142014
 

Longbrake3by Bill Longbrake, Executive-in-Residence, Center for Financial Policy

This is an excerpt of the April 2014 Longbrake Letter. To read the letter in its entirety, click here.

Now that economic expansion in the U.S. finally appears to be gaining traction and the Federal Reserve has begun the process of normalizing monetary policy by slowly reducing the quantity of large scale asset purchases, attention has turned toward whether renewed inflationary pressures might be just around the corner. But, some warn that the pending threat is not one of inflation but rather one of deflation.

With the exception of Japan, courtesy of Abenomics, global inflation rates are either stable at very low levels or are still declining. In the U.S., core PCE inflation has been stable between 1.1 percent and 1.2 percent for the last eleven months, while total PCE inflation has fallen to 0.9 percent. In Europe, total inflation continues to fall steadily and was 0.5 percent in March. Europe’s core inflation rate in March was 0.8 percent. Global inflation was relatively stable at a low 2.0 percent rate in February, reflecting modest downward pressure from some developed economies and an absence of upward pressures from emerging economies.

Conventional wisdom assumes that global growth will improve during 2014 and 2015 and that as that occurs output gaps will narrow and upward pressures on inflation will naturally emerge. But, the question is whether the conventional wisdom is right or whether other forces are at work which threaten deflation, notwithstanding improvements in global growth.

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CFP Partners with Directors & Boards to Present the Private Company Governance Summit

 News & Events, Regulation & Oversight  Comments Off on CFP Partners with Directors & Boards to Present the Private Company Governance Summit
Apr 082014
 

Under the leadership of Professor of the Practice Stephen Wallenstein, the Center for Financial Policy has partnered with Directors & Boards to support the  Private Company Governance Summit in Washington, D.C., May 7-9, 2014. This conference, which will take place at the Dupont Circle Hotel, is ideal for directors, owners, and advisors of family-owned, closely-held and private-equity owned businesses of all sizes.

Session topics include:

  • Best practices for the successful private board meeting
  • Governance for family-controlled companies
  • The use and value of advisory boards
  • Committees for private company boards
  • Private board composition, evaluation and compensation
  • The characteristics of effective private boards

Facilitated peer discussions on:

  • Private Company Director Liability
  • Mentoring the CEO
  • CEO Succession
  • Board Independence
  • Director Recruiting
  • Is your Private Company Board M&A Ready?
  • Board Analytics
  • Risk Oversight
  • Board Strategy

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China – Will Commitment to 7.5 Percent Real GDP Growth Lead to Financial Instability?

 Commentary, Economics & Outlook, Emerging Markets  Comments Off on China – Will Commitment to 7.5 Percent Real GDP Growth Lead to Financial Instability?
Mar 192014
 

Longbrake3by Bill Longbrake, Executive-in-Residence, Center for Financial Policy

This is an excerpt of the March 2014 Longbrake Letter. To read the letter in its entirety, click here.

In recent days, Chinese data reports for industrial output, investment, and retail sales have systematically fallen short of investor expectations. Although this follows a pattern that has occurred at the beginning of the calendar year in each of the last three years, it is receiving more concern this year because of concern about tight credit and potential financial stress. This growing concern is reflected in the poor performance of the China Shanghai Composite stock index, which has fallen over 35 percent over the last three years.

For a variety of reasons, a financial crisis is not imminent in China. But serious imbalances in the Chinese economy have been building for years and, if the policies that have been responsible are not adjusted, the imbalances will continue to build and could lead eventually to a severe financial crisis. That is because resources are being allocated increasingly to investment activities that have low or negative rates of return. The investments are being financed by credit that ultimately cannot be repaid in full because the investments are not earning sufficient returns to service both interest costs and repay principal. Put differently, the rate of return on investment is less than the cost of capital. This state of affairs can be sustained for a while through refinancing loans and capitalizing interest expenses, but eventually losses will have to be realized and bankruptcies will occur. Thus, sometime in China’s future a financial cataclysm – a Minsky moment – lurks unless policies are pursued that reverse the persistent misallocation of resources in non-economic activities.

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Another Way to Do the Math for Social Security Reform

 Commentary, Regulation & Oversight  Comments Off on Another Way to Do the Math for Social Security Reform
Mar 072014
 

Swagel-Phillip-HRby Phillip Swagel, Professor in International Economic Policy, Maryland School of Public Policy and Academic Fellow, Center for Financial Policy

This post was originally published in The New York Times’ Economix Blog. To view the original post, click here.

Social Security is a hot button political issue, but there is actually more agreement on the matter than might meet the eye. Consider a potential Social Security reform that increases benefits for low income retirees and raises taxes on workers with relatively high incomes. This sounds a lot like what Democratic members of Congress might favor.

Now compare this to an alternative that maintains current taxes on the rich but lowers their benefits, while again raising benefits for those with low incomes. In broad strokes, this is the Republican proposal. It turns out that those are the same, once assessed from a perspective that looks at the net of lifetime contributions and benefits. Too bad, though, that President Obama, who once upon a time spoke about making tough decisions to ensure the sustainability of vital entitlement programs such as Social Security, is stepping back from the issue.

The Obama budget released on Tuesday leaves out the President’s previous proposal to modify the formula by which Social Security benefits are adjusted for inflation, a change meant to improve the financial condition of the retirement program. This is even though last year’s budget documents noted that “most economists agree that the chained CPI provides a more accurate measure of the average change in the cost of living than the standard CPI.”

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