Like the kid who sings loudly and enthusiastically at
a grade school concert while wary peers dodge his O Sole Mio arm sweeps, the
Federal Reserve has been getting a lot of attention lately. That didn’t change
last week.
Markets pulled back from record highs after Chicago
Fed President, Charles Evans, who has been a supporter of the Fed’s
quantitative easing program, indicated the Fed could begin to reduce bond
purchases at its policy meeting in mid-September. He reiterated the fact that
moderating quantitative easing did not mean the Fed would begin to raise rates.
The Fed also garnered some attention for the contentious
tone of discussions about who should replace current Fed Chairman, Ben Bernanke,
when his term ends next January. Some of the rancor stems from contender Larry
Summers stint as President of Harvard University which ended badly, in part,
because of comments he made on “the issue of women's representation in tenured
positions in science and engineering at top universities and research
institutions,” and the fact his primary competition for the job is female.
Paddy Power, which bills itself as “Ireland’s
biggest, most successful, security conscious and innovative bookmaker,” is
taking bets on who will be appointed as the next Fed Chairman. On August 11,
2013, it gave the odds as: Larry Summers, former Treasury Secretary, 1-to-2;
Janet Yellen, current Fed Vice-Chairman, 2-to-1; Roger Ferguson, President and
CEO of TIAA-CREF and previous Fed Vice-Chairman, 12-to-1; and Don Kohn, current
member of the Bank of England (BOE) Financial Policy Committee and previous Fed
Vice-Chairman, 18-to-1.
Speaking of the BOE… the United Kingdom’s central
bank did a fair imitation of the Federal Reserve last week when it offered
forward guidance tying tighter monetary policy to unemployment levels. The U.K.
bond market’s response to the BOE’s assurances that rates would remain low for
some time was quite similar to the U.S. bond market’s response to similar declarations
from the Fed: yields on Gilts – bonds issued by the British government – moved
higher.
a new twist on a controversial issue… It hasn’t been that
long since eminent domain was a topic of conversation in households across the
United States. Just after the turn of the century, homeowners in New London,
Connecticut tried to stop the city from invoking its powers of eminent domain
to acquire their homes and use the land for new development that was intended
to boost the local economy. In 2005, in a five to four decision, the Supreme Court
determined that the distressed city could acquire the properties.
According
to a 2009 Federal Reserve article, the response to the ruling was immediate and
intense. The U.S. House of Representatives passed a resolution denouncing the
court, as well as a bill requiring federal development funds be withheld from
states and political subdivisions that used eminent domain in specific ways. In
addition, a majority of states took action to limit the reach of eminent domain.
Today,
eminent domain is making headlines again. In a strange twist, some cities are
considering invoking eminent domain to acquire and reduce mortgage debt, keeping
people in their homes as a means of boosting the local economy. According to
economists at the New York Federal Reserve:
“With more than 11 million homes still
“underwater,” the mortgage debt overhang caused by the housing bubble remains
an impediment to economic growth and a burden on communities across the
country. One possible solution to this problem is for state and municipal
governments to use their eminent domain authority to purchase and restructure
underwater mortgages.”
This
time, banks and investors (including Freddie Mac, a government-backed company
that is one of the biggest buyers of private home loan bonds) are protesting. They
argue invoking eminent domain in this way could create losses for bond holders,
as well as make lending institutions more reluctant to lend if the loans could
be seized.
Will
this thorny issue continue to ripen or will it die on the vine? It may depend
on how fast home prices increase and how quickly the housing market recovers.
Weekly Focus – Think
About It
“Rarely
do we find men who willingly engage in hard, solid thinking. There is an almost
universal quest for easy answers and half-baked solutions. Nothing pains some
people more than having to think.”
--Martin Luther King, Jr., clergyman and leader of the Civil Rights
Movement
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