Big Banks | timiacono.com - Part 20

End the Unpopular Fed?

This week has turned out to be a horrible one for Fed chief Ben Bernanke who set the wheels in motion last Friday when he taped that 60 Minutes interview that has been roundly ridiculed since it aired on Sunday. While economists around the world may be marveling at Bernanke’s resolve, denials of money printing and 100 percent confidence that inflation will never pose a threat to the U.S. economy have not gone over so well with the public at large.

The latest evidence of such comes via this report at the Washington Post (with Bloomberg) today in which recent polling reveals that most Americans think the country might be better off without the central bank as we’ve come to know and love it.

Americans say the Fed shouldn’t retain its current structure of independence. Asked if the central bank should be more accountable to Congress, left independent or abolished entirely, 39 percent said it should be held more accountable and 16 percent that it should be abolished. Only 37 percent favor the status quo.

In a previous poll, conducted Oct. 7-10, 35 percent of Americans said the Fed should be radically overhauled, while 8 percent said it should be abolished.

Republicans and independents are more likely to support ending the Fed, with 19 percent of independents, 16 percent of Republicans, and 12 percent of Democrats wanting to do away with the central bank. Among those who identify themselves as supporters of the Tea Party movement, 21 percent want to abolish the Fed.

As if all that isn’t bad enough, news came late yesterday that, next month, Rep. Ron Paul (R-TX) will become chairman of the House subcommittee that oversees the Federal Reserve. Details are in this story at Bloomberg/Businessweek (is there anyone that Bloomberg isn’t teaming up with these days) and one can only imagine how Bernanke will feel in 2011 sitting across the room at hearings chaired by the guy who wrote the book “End the Fed“.

Both Senator Bernie Sanders (I-VT) Representative Ron Paul (R_TX) had a few thoughts to share this week on how they see things these days, neither thinking that the direction that the nation is currently headed is very good. First up, Sanders rails against the influence of wealthy Americans and the shrinking middle class.

The numbers he cites really are startling – the top one percent earn 23.5 percent of all income, more than all of the bottom 50 percent, and the top one-tenth of one percent earns about 12 cents of every dollar. Hmmm… Maybe their taxes should be raised.

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Hoenig Takes on the Big Banks

Kansas City Federal Reserve President Thomas Hoenig takes on the too big to fail banks a thousand miles to the East in this New York Times op-ed today.

The world has experienced a severe financial crisis and economic recession. The Treasury and the Federal Reserve took actions that saved businesses and jobs and may very well have saved the economy itself from ruin. Still, the public seems ungrateful, expressing anger at these institutions that saved the day. Why?

Americans are angry in part because they sense that the government was as much a cause of the crisis as its cure. They realize that more must be done to address a threat that remains increasingly a part of our economy: financial institutions that are “too big to fail.”

Last summer, Congress passed a law to reform our financial system. It offers the promise that in the future there will be no taxpayer-financed bailouts of investors or creditors. However, after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.

How is it possible that post-crisis legislation leaves large financial institutions still in control of our country’s economic destiny? One answer is that they have even greater political influence than they had before the crisis. During the past decade, the four largest financial firms spent tens of millions of dollars on lobbying. A member of Congress from the Midwest confirmed for me that any candidate who runs for national office must go to New York City, home of the big banks, to raise money.

The solution, of course, is for Congress to break up the “too big to fail” banks, something that still seems quite unlikely even after the events of the last few years and the changing political climate in Washington. Unfortunately, it will probably take another crisis even worse than the last one for real reform to come.

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HAFA Likely to be Worse than HAMP

The WSJ Real Estate blog reports that the government’s HAFA (Home Affordable Foreclosure Alternatives) program could be even less successful than HAMP (Home Affordable Modification Program) as less than 350 deals have gone through in about five months.

It may be too early to pass judgment on this effort to avoid foreclosures by providing incentives to the involved parties to do a short sale instead but, given the government’s track record in providing assistance to a very troubled housing market, probably not.

Many real-estate agents say banks have largely ignored the program and that they are applying it unevenly. “Banks are initiating the HAFA transaction and then after three weeks they say, ‘Naw, sorry, you didn’t qualify,’” says Greg Markov, a Phoenix real-estate agent. “That three weeks is a huge pain. You wasted all this time.

Industry officials, meanwhile, say that HAFA has been hindered by extensive documentation requirements and restrictive qualification guidelines. A homeowner that’s already relocated isn’t HAFA eligible, for example, and neither are borrowers that apply within 60 days of a foreclosure date.

The program is also voluntary, which may limit participation from second-lien holders and mortgage insurance companies that see a financial reason to avoid a short sale that requires them to forgo the opportunity to seek deficiencies against borrowers.

During our six month long short sale ordeal (see here for full details), HAFA cost us at least a month of that time as the bank put our “file” into the HAFA process when the listing agent knew from the very beginning that the second lien holder was not going to participate in that kind of a deal. Anyone trying to buy a short sale property (particularly with a listing agent who is new to this sort of thing) is advised to ask HAFA questions up front.

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