- Can American manufacturing really be cornerstone of economic revival?
- Russia says it offers alternative path to peace in Syria
- Rick Santorum rising, along with the culture war. Coincidence? (+video)
- Egyptian judges: NGO workers face up to five years in prison (+video)
- Home-grown terror threat receding, but post-9/11 America remains on edge
The New Economy
The Monitor's Money editor, Laurent Belsie, blogs about the economic changes now under way in the U.S. and around the globe.
Fuel prices are displayed at a Chevron gas station in Phoenix in this October file photo. Oil prices dropped below $97 a barrel in trading Feb. 6, 2012, as concerns ratcheted up that Greece might not reach a deal to avoid defaulting next month. (Joshua Lott/Reuters/File)
Oil prices will rise as supplies tighten? Hardly.
What's the deal with oil prices?
Most commodity prices are collapsing. Copper is down 18 percent from its February 2011 peak. Corn prices are off by a quarter since last summer. Natural-gas prices are half the level of six months ago. Yet crude oil, down from its April peak of $114 per barrel, has risen by a third from its October low of $76 to again flirt with the $100 mark.
On Monday, they dropped below $97 on concerns about the lack of a deal on Greek debt.
Some of the recent increase may stem from tensions with Iran. But much of it seems to be a general view that crude oil is a different kind of commodity that is in perpetual danger of being in short supply, given its essential nature in modern economies; the chronic instability of oil-producing countries in the Middle East, Africa, and South America; and the peak-oil thesis, first predicted by M. King Hubbert in 1956, that global oil production inevitably will dwindle.
I don't buy it. In fact, I think that human ingenuity, constantly improving recovery technology, and higher prices (if needed) probably make any current estimate of recoverable oil far too low – and too static. Actually, global production capacity will rise from 92 million barrels a day in 2010 to 110 million in 2030, forecasts Daniel Yergin of IHS CERA, a forecasting firm in Cambridge, Mass.
That 20 percent jump would more than cover the global rise in demand. Hubbert's peak oil followers tend to discount the idea that reserves are usually underestimated. The US Geological Survey says that 86 percent of US proven reserves are additions to original estimates.
Add in some significant new finds, including Petrobras's huge field off Brazil's coast, a large discovery off French Guyana, and Statoil's potential 1.5 billion-barrel oil field in the North Sea. Then there's the oil boom in North Dakota, which now produces more oil than OPEC member Ecuador.
Besides crude oil, a vast array of alternative energy sources are likely to substitute for petroleum, something the Hubbert's peak devotees seem blind to. Natural gas from shale is now being produced in such tremendous quantities by hydraulic fracturing ("fracking") that natural-gas supplies have leaped and prices have collapsed.
A year after the Japan earthquake and meltdown, nuclear power may not be in favor, but I think this is temporary. The Three Mile Island facility mishap in 1979 and the Chernobyl disaster in 1986 caused temporary but not permanent restraints on nuclear power. Canadian oil sands can be turned into petroleum. While the process is expensive, production is nonetheless forecast to double to 3 million barrels a day by 2020. Coal is plentiful in the United States and its dirty image may be lessened by new emission-cutting technologies.
I'm skeptical about renewable energy, such as ethanol, wind, and solar, mainly because they require so much government subsidy, especially problematic in an era of trillion-dollar deficits.
On the consumption side, increased mileage standards and higher prices encourage conservation. And with an increasingly service-oriented global economy, the amount of oil needed to produce a unit of global economic output fell 41 percent between 1980 and 2010.
I'm forecasting a serious recession in Europe as the eurozone financial crisis spills into the economy, a hard landing in China due to earlier economic restraint and weakening exports, and a mild recession in the US as consumers cut spending to adjust to their falling real incomes. With a sagging global economy, crude oil prices will fall, meaning Hubbert's peak is a long, long way off.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."
Micailia Lucero, left, owner of Kelly's Barber Shop gives a haircut to Charles Gillessen in Henderson, Nevada, in this 2010 photo. For some professions, raising the retirement age makes sense. (Tony Avelar/The Christian Science Monitor/File)
Working beyond 65 can be good. Is it right?
We're all living longer these days. So does it make sense that we still retire at 65?
Raising the retirement age would involve some sacrifices, requiring people to work longer in order to receive their full benefits from government programs for retirees. But it would also help shore up America's shaky finances.
If the eligibility age for Medicare were gradually increased from 65 to 67, for example, annual Medicare spending would decline by 5 percent, according to a recent report by the nonpartisan Congressional Budget Office (CBO). If the eligibility age for full Social Security benefits gradually rose to 70 (from its current 65 to 67 depending on birth year), Social Security outlays would ultimately fall by 13 percent.
Not only would a higher retirement age reduce budget deficits, the CBO says, it would encourage people to work longer careers, increasing the economy's total labor supply and income.
Of course, budget math doesn't measure social well-being very well. Would raising the retirement age really benefit Americans' own bottom line?
I have my own take on the issue: This is the first year my dad will not be going to work every weekday, and he's turning 80 this year! He chose to work until now not because he needed the money, but because he wanted to keep his job. For my dad, 80 is the new 65.
As a chemistry professor, a profession that is much more mental than physical, he found it possible to remain productive at an older age. It's also likely that staying on the job keeps a person "young."
I, too, have a full-time job that is much more mental than physical, and I plan to work until well past today's normal retirement age. People like me and my dad might actually keep working, even if there were no economic benefits, because we love our jobs.
For others, however, working is physically strenuous, and so working beyond one's mid-60s is not so easy, not so enjoyable, and perhaps not even safe. For workers with those kinds of jobs, increasing the eligibility ages for Medicare and Social Security could more likely result in lower well-being by reducing incomes and physical health.
Is it fair to raise the retirement age and in effect cut benefits for this group even if it helps other Americans stay active and helps cut the deficit?
The CBO acknowledges this dilemma. Its report suggests that savings from a higher eligibility age for Medicare and Social Security could be used to strengthen the safety-net features of both programs, which serve a "social insurance" role. That could make each program more progressive at both ends of the income distribution. Those less fortunate would receive more benefits and those more fortunate would get fewer.
Just as with any federal budget issue, this is a hard choice. If lawmakers are going to cut spending and deficits, they will have to cut overall benefits on average. There's no way around that.
But cutting benefits for those who can afford to work longer, both financially and physically, can spare – and perhaps even strengthen – the benefits for those who cannot easily work longer.
And those fortunate enough to be the ones who can "afford it," like me and my dad, may hardly be upset about this common-sense policy change. That's because we are also the ones most likely to choose to work longer for reasons that have little to do with money.
– Diane Lim Rogers is chief economist of The Concord Coalition, a nonpartisan group advocating fiscal responsibility.
Protesters from the Occupy movement release a banner on the first day of the 42nd annual meeting of the World Economic Forum in Davos, Switzerland. Some of the billionaires attending have expressed their own concerns about income inequality. (Anja Niedringhaus/AP)
Davos meeting: Gloomy about economy, worried about capitalism
If the annual gathering of world leaders, corporate chieftains, and economists in secluded Davos in the Swiss Alps is a good barometer of the global economic outlook, then the reading this year is gloomy.
The European debt crisis dominates the conversation, of course. But the outlook everywhere seems to suggest a global slowdown. "The global recovery is threatened by intensifying stains in the euro area and fragilities elsewhere,” concluded a report from the International Monetary Fund, which cut its 2012 forecast of world growth from 4 percent to 3.25 percent.
Beneath the gloom lies a broader worry among many participants that capitalism is failing to provide the widespread economic benefits that it used to.
"Capitalism, in its current form, has no place in the world around us," Al Jazeera quoted economist Klaus Schwab as saying. Mr. Schwab is founder of the World Economic Forum. The WEF's theme this year – The Great Transformation: Shaping New Models – may be adding to the angst.
"I think we have three to four years in the West to improve the economic model that we have," said David Rubenstein, billionaire and co-founder of The Carlyle Group, according to the AFP news agency. "If we don't do that soon, I think we've lost the game."
From Jan. 25 to 29, more than 1,600 chief executive officers, 40 world leaders, and others will talk and meet to explore potential solutions to this systemic crisis.
"We must redesign the model. We must reset it. Stop the greed," Sharan Burrow, general secretary of the International Trade Union Confederation, AFP reports. "Unless employers and workers sit down with governments, the system will continue to fail." Burrow said,
Traditionally, the remote alpine ski resort keeps away voices of dissent. Not this year. For a few days, the luxurious hotel complexes that stretch the picturesque Landwasser high valley, will have to coexist with the igloos that a small number of Occupy protesters have constructed.
"In the last 42 years, I've never seen so much snow in Davos," WEF founder Klaus Schwab tweeted.
"Perfect snow to build igloos!" Occupy Davos protesters tweeted back, according to The Huffington Post.
"We believe that the leaders at World Economic Forum are just trying to implement new systems to maximize their profits, not to help the world," Amadeus Thiemann, a Zurich engineer who traveled to Davos to protest corporate greed, told USA Today.
The protest is resonating with some of the billionaires attending Davos. Bloomberg reports that a half-dozen of the approximately 70 billionaire attendees, interviewed before the conference, underlined the need to tackle the problem.
“Many who will be in Davos are the people being blamed for economic inequalities,” Vikas Oberoi, director of one of India’s biggest real estate developers, told Bloomberg. “I hope it’s not just about glamour and people having a big party.”
George Soros also “recognizes that income inequality is a problem” and is supportive of tax increases for the wealthy, said his spokesman, Michael Vachon.
Launched in 1971, the WEF is "committed to improving the state of the world" by engaging politicians, businesspeople, academics and other prominent international figures to address pressing global issues like terrorism, water supply, HIV/AIDS, as well as furthering dialogue between the West and Islam.
The National Debt Clock hangs from a building near Times Square in New York last year. Deciding what to include as America's debt is a tricky exercise. (Joshua Lott/Reuters/File)
America owes $10 trillion! No, $50 trillion! Let me explain.
America is deep in debt. But how deep?
That question seems simple, yet analysts and pundits give answers that differ by trillions of dollars. Sometimes tens of trillions. That confusion arises because there are various ways to tote up America's debts.
Many observers often focus on the publicly held debt – the bonds that the Treasury has sold into financial markets. By that measure, the federal government owed a bit more than $10 trillion at the end of last fiscal year.
That figure is important because it measures how much the federal government has had to rely on outside investors. For that reason, it does not include the special Treasury bonds in the Social Security Trust Fund and similar accounts owned by the federal government itself. From an accounting perspective, those bonds net to zero – a part of the government owes money to another part. But they are important to Social Security legally and politically. Some analysts use a measure that includes the trust funds, bringing the federal debt to more than $14 trillion.
That's not the only measurement disagreement. Social Security and Medicare reflect a major commitment to seniors in the years ahead, but the government hasn't identified enough dedicated financing to pay for them. Some analysts believe these unfunded amounts should be viewed as debts as well. Their size depends on technical factors like the future growth rate of health spending and how far you look into the future. Depending on their choices, analysts can get huge measures of indebtedness: $50 trillion or more.
This range of figures – $10 trillion, $14 trillion, $50 trillion – sows confusion about how indebted the United States is. Yet none of them captures all of America's debts. The government has a host of other obligations that often get overlooked.
These other liabilities appear in the government's little-known financial statements. Those statements use concepts familiar to anyone who has worked with a corporate balance sheet listing assets and liabilities. The government's liabilities include more than $7 trillion in obligations that don't appear in standard budget measures.
That's real money, even in Washington.
The largest are commitments to federal employees, retirees, and veterans, including pensions and postretirement health benefits. Those commitments, which get surprisingly little attention, now stand at almost $6 trillion.
Another $1 trillion in liabilities includes obligations for environmental cleanup, government insurance payouts, and ongoing commitments to Fannie Mae and Freddie Mac. Add in publicly held debt, and the government owes more than $17 trillion, before accounting for future commitments to Social Security or Medicare.
Of course, the government has assets: buildings, aircraft carriers, and a sizable portfolio of financial assets. Federal accountants tally those as worth a bit less than $3 trillion. The government's net liabilities round out to nearly $15 trillion, 50 percent larger than the public debt alone and comparable to the value of all goods and services produced by the US economy each year.
The US is thus in debt to the tune of roughly 100 percent of gross domestic product. That's daunting, but it need not be fatal. As the economy recovers, our obligations – both past and future – should be manageable if policymakers overcome our greatest liability: a political system that addresses short-term crises rather than long-term challenges.
– Donald Marron, director of the Urban-Brookings Tax Policy Center, previously served on the board that establishes accounting standards for the federal government.
In this 2009 file photo, the logo of German Commerzbank is pictured in the bank's headquarters in Frankfurt. Eurozone leaders should be willing to let some nations default but ensure that it doesn't lead to a financial meltdown. (Michael Probst/AP/File)
Eurozone solution: Save banks, not nations
What Europe needs now is a good "heavy," a bad hombre who talks tough enough to scare the politicians and citizens into doing the right things – and who will make them face the consequences if they don't.
An enforcer seems to be the only way to shove Europe's debt-laden nations toward fiscal sustainability and keep the eurozone from blowing up. The problem is: The obvious candidates for the post aren't up to the job.
The International Monetary Fund usually does the dirty work with developing nations. But it doesn't appear to have the resources to muscle an Italy or a Spain into line.
A European fiscal union could swing the job. For Germany to agree on any union in which it and other strong members would guarantee Eurobonds that bail out weaker nations, it would demand the kind of stringent rules and accountability that are sorely needed. While this fiscal union may be gradually taking shape, it remains patchy at best and lacks a defined process to rescue struggling nations.
So European policymakers need to embrace the only enforcer they currently have: the bond market itself. As Greece, Ireland, and Portugal have already found out, the bond market is a particularly unforgiving taskmaster that cares not one whit for diplomatic niceties or political sensitivities. When it speaks, it tells uncomfortable truths.
The first truth the eurozone needs to understand is particularly uncomfortable: Member nations may default. Government defaults are nothing new. However, the eurozone should take great care that a default does not lead to an implosion of its financial system, as it would cripple the real economy.
That leads to the second uncomfortable truth: If the eurozone is to survive, policymakers will have to stop trying to save European nations and save European banks instead.
Banks have one major advantage over nations. While nations must go into the market to fund themselves, banks can use their central bank. Banks employ a business model that uses substantial leverage. While the leverage makes banks vulnerable, central banks can keep even a technically insolvent banking system afloat.
Importantly, any capital injection can support a high multiple of debt. That's why the US Treasury injected money into the banking system in the fall of 2008 as part of the infamous Troubled Asset Relief Program (TARP) program rather than purchasing toxic assets outright. Europeans had their own bank bailouts at the time. As politicians worldwide weigh the cost of acting versus the cost of inaction, they are aware that further bailouts may amount to political suicide.
Still, in Europe, the focus must be on making eurozone banks strong enough to stomach sovereign defaults. Bank runs need to be avoided, thus making the sovereign default more digestible for the economy as a whole. You can't avoid losses, but you can avoid a financial meltdown.
The good news is that high borrowing costs provide indebted governments the "encouragement" to reduce spending; indeed, the language of the bond market may be the only language that forces policymakers into action.
This is a global financial crisis. Simply put, there is no such thing anymore as a safe asset. Investors may want to take a diversified approach to something as mundane as cash. Just as China diversifies its reserves into a basket of currencies, individuals may want to consider doing the same.
– Axel Merk, president of Merk Investments, in Palo Alto, Calif., is an expert on currencies, macro trends, and international investing.
The Darth Vader burger appears Jan. 31 in Quick restaurants across France. (Courtesy of Quick)
Darth Vader burger? A black bun? Oui!
The Darth Vader burger arrives Jan. 31 at the fast-food chain Quick, just in time for the release of "Star Wars: Phantom Menace 3D."
It's structured like a Big Mac. It could almost pass for a Big Mac, except that the bun is ... well ... black. Not blackened, totally black. Like two well-formed pieces of charcoal.
It's also French, which means that the only way to get a black-bunned Darth Vader burger is to travel to the world center of haute cuisine, visit one of Quick's more than 400 restaurants, and plunk down €4.90. (That's $6.29 – but given the state of the euro, check back tomorrow. It could be cheaper.)
And because it's French, the Darth Vader burger comes with a few quirks.
For starters, don't call it a Darth Vader burger. In French, Luke's father (père de Luc) is known as Dark Vador ("Dark Vah-Door").
Also, you can't walk up to the counter and order un Dark ("Unh Dark"), because Quick is also offering the "Dark Burger" (an homage to Darth Maul).
You can, however, use the term "burger," which these days is instantly recognizable on either side of the Seine. (Un Dark Vador burger, s'il vous plaît.)
If burger noir isn't your thing, there's the aforementioned Dark Burger, which comes on a red bun with sauce aux trois poivres (three-pepper sauce).
If a bun with paprika and beet dye seems too adventurous, you can get the Jedi Burger, which comes with a regular looking bun (sans the sesame seeds of le Big Mac). Just be ready for the dés de mozzarella (diced mozzarella) that sit on the uppermost steak haché goût grillé (grilled patty).
The sandwich promotion starts a little over a week before the release of "Star Wars: Le Menace Fantôme 3D" and runs through March 5.
Bon appétit!
A pedestrian walks by a check-cashing store in Boston's Jamaica Plain district in this 2003 file photo. Some 30 million Americans rely on check-cashing stores, payday lenders, and pawnbrokers for at least some of their banking needs. (Steven Senne/AP/File)
Why banks shun 30 million Americans
They are 30 million consumers, representing a quarter of US households, who earn a collective $1.3 trillion a year. But banks don’t want to serve them, because they lose money. And the nonfinancial institutions who do serve them may not be offering them much value in the long term.
Welcome to the world of the unbanked and underbanked, who in a weird twist may have fewer banking options after Congress passed legislation aimed at protecting them from high bank fees. So who will serve these consumers, who either use no mainstream financial services or have a checking or savings account but also utilize nonbank financial services such as check cashers, payday lenders, and pawnbrokers? A huge opportunity awaits someone.
In the good old days, banks would have stepped in. They received substantial revenue from interchange and overdraft fees, which essentially subsidized checking and savings accounts. But financial reform passed by Congress in 2010 brought the so-called Durbin amendment, which slashed banks’ profits on debit card transactions, and Regulation E, which severely limited the overdraft fees that banks could charge.
In response, many banks have instigated high fees that effectively discourage low-income customers from opening (or keeping) accounts. It’s not by accident. To get a sense of why banks aren’t terribly interested in serving low-income customers, take a look at the following example. Imagine it’s 2007, pre-crisis and pre-regulation.
Let’s assume each deposit account costs the bank $250 a year to maintain regardless of the balance of the account. Adam deposits $10,000 into his bank account, while Brenda deposits $100. The bank loans out that money at 7 percent interest, making $700 off Adam and $7 off Brenda. They pay each customer an interest rate of 1 percent, meaning that Adam earns $100 in interest, and Brenda earns $1. But since each account costs the bank $250 to maintain, the bank makes $350 off Adam and loses $244 on Brenda.
Although Brenda’s deposit earns less in interest than it costs to maintain, the bank also makes money every time she swipes her debit card and every time she incurs an overdraft fee. The latter was particularly lucrative for banks, particularly because low-income customers, who tend to have lower balances, are disproportionately more likely to incur overdraft fees. Ten such charges a year would cover the cost of her checking account, even without revenue from debit card transactions.
Today, that equation looks much different: The bank now lends at 5 percent interest, and pays out 0.1 percent on deposits. Adam’s account earns the bank $500, while he only receives $10 in interest; Brenda’s garners only $5, and she earns 10 cents in interest. On balance, Adam’s account is still profitable for the bank: it nets $245. The bank now loses $245.10 on Brenda’s account, and can no longer count on swipe or overdraft fees to make up the difference. There’s no incentive to hold onto a large number of low-income accountholders. Quite the opposite.
Big retailers fill the void
By contrast, some big retailers are offering financial services that actively court low-income people. Stores like Walmart and Best Buy can take advantage of economies of scale, as well as boost in-store sales if they offer financial services to shoppers. Beyond this, Walmart doesn’t offer deposit accounts, so it doesn’t have to worry about the cost of maintaining them, or about paying interest to accountholders. Instead, Walmart makes a profit by charging fees to cash checks or buy prepaid debit cards.
While these onetime fees are more appealing to some people than the ongoing and often hidden fees associated with many big banks, it’s questionable whether financial services offered at retailers are actually a bargain. Wal-Mart, for example, charges $3 to cash a check between $300 and $1,000, and levies a host of fees on the prepaid Walmart MoneyCard. Compared with the average 2 percent to 4 percent charged at most street-corner check cashers, Walmart is generally cheaper. But if you cashed two $500 checks, used an automated teller machine (ATM) twice, and reloaded your prepaid card once, you’d incur $16 in fees – far more than mainstream checking accounts.
Even more worrying, however, is the indirect harm of remaining unbanked: Those without access to mainstream financial services are far less likely to save for retirement, college, or emergencies. Bank accounts are more secure than relying on cash. Directly depositing part of your paycheck into a savings account helps you adhere to your budget. The unbanked, however, do not receive these incentives or safeguards.
What about credit unions?
Unlike either banks or retailers, credit unions are not-for-profit. They’re member-owned, and pay their “shareholders” in the form of lower interest rates and higher yields. In addition, most credit unions have less than $10 billion in assets, and so are exempt from the Durbin amendment. Oddly enough, checking account costs can be 50 percent lower for small institutions. Larger banks face high overhead costs from bank branches, ATMs, and so on, while credit unions and community banks can outsource call centers, payment processing, and ATM networks.
But while credit unions aren’t put off by low-income members, they may not be as highly motivated to recruit this population as chain retailers that stand to make a profit. This may in part explain the low profile that credit unions tend to have as compared with their for-profit counterparts.
Given the low fees of credit unions, why do so many people seem to prefer less conventional options to fulfill their financial needs, and why are they content to live without checking or savings accounts? There are several possible explanations. For one thing, the term credit union is still only vaguely familiar to many people. People may not be clear about what services credit unions offer, and they’re often unaware that credit unions are not-for-profit institutions, where profits are funneled back to members in the form of lower fees and better interest rates.
In addition, so many people have had bad experiences with unexpected fees at banks that some feel they are better off avoiding financial institutions altogether. Paying a fee at Walmart to cash a check is a one-time deal: You know exactly how much you’ll have to pay, and there won’t be any surprise fees down the road.
Serving the underserved
This “‘underserved’ market is considered one of the fastest growing segments in the United States and represents significant potential for banks willing to develop new products and services,” a 2011 study by the consulting firm KPMG concluded. Altogether, the unbanked and underbanked have around $1.3 trillion in income, and spend $5 billion each year paying off predatory loans. A 2009 survey by the Federal Deposit Insurance Corp. found that some 9 million households were unbanked and another 21 million were underbanked. Nearly a third of African-American households and a quarter of Hispanic households were underbanked.
The KPMG study highlights a number of services that may be important for banks to offer as the number of unbanked and underbanked people rises. For instance, check cashing and bill-pay for noncustomers, as well as international money transfers, are services in demand among these groups. The study found that the number of unbanked and underbanked people is growing as a result of falling credit scores caused by “negative events” in their personal lives that are often linked to the downturn in the economy. Sudden unemployment, for example, can cause a previously banked individual to be forced to leave his or her financial institution.
As the ranks of unbanked and underbanked Americans continue to swell and big banks avoid serving them, big retailers stand to make a profit by finding cost-effective ways to offer financial services to the underserved. In an ironic twist, stores like Walmart have an advantage in many consumers’ eyes because they aren’t affiliated with a mainstream financial institution. In the end, the task will continue to fall to credit unions, big banks, and big retailers to make their case to the unbanked and underbanked and provide services that truly meet the needs and financial limitations of these groups.
– Tim Chen s the CEO of NerdWallet, a credit-card search website.
This December file photo, shows a for sale sign in front of a Newton, Mass., home. Fixed mortgage rates for 15- and 30-year loans have fallen to record lows. (Steven Senne/AP/File)
Fixed mortgage rates hit new lows. Does anyone care?
Fixed mortgages rates for 15- and 30-year loans dropped to record lows this week, but it's not clear that lower interest rates are having much impact.
Not for would-be borrowers. Applications for new mortgages and refinancings are down, according to the latest survey of the Mortgage Bankers Association.
Not for the housing market. "Activity in the housing market continued to be depressed by the substantial inventory of foreclosed and distressed properties," according to minutes of the Federal Reserve's monetary policy committee meeting in December.
Nevertheless, rates continue to edge down.
Fixed mortgage rates for a 30-year loan dropped 0.03 of a percentage point to 4.18 percent, according to the Jan. 4 survey of large lenders by Bankrate.com, an online aggregator of financial rate information. Four weeks ago, it stood at 4.24 percent.
A fixed 15-year mortgage also fell to 3.4 percent. These are the lowest rates for 15- and 30-year mortgages in the 26 years of Bankrate.com's weekly survey.
One of the main factors keeping rates low are continuing concerns over Europe's debt crisis. Nervous about a sudden downturn there, investors are pouring money into the relative safety of US Treasury bonds. That influx of money lowers interest rates.
The Federal Reserve has also been actively trying to reduce mortgage rates by buying up mortgage-backed securities. Fed officials hope to perk up the depressed housing market by making homes cheaper to own for would-be buyers and also to put more money in the pocket of homeowners by making their mortgages less expensive. So far, the effort doesn't appear to be paying many dividends.
"Low mortgage rates appeared to have only modest effects on the rate of mortgage refinancing," according to the minutes of the December meeting, "likely because of tight underwriting standards and low levels of home equity."
Mortgage applications fell 3.7 percent for the week ending Dec. 30, 2011, the Mortgage Bankers Association reported Wednesday. Not only were applications for a home purchase down 9.7 percent from the level two weeks earlier, even after adjusting for the holidays, applications for refinancing also fell 1.9 percent.
This photo taken last month shows a home for sale in Hialeah Gardens, Fla. Typically, recessions begin when the Fed hikes interest rates. But this time, the trigger could be another sizable drop in housing prices, a fall in consumer spending, or the European financial crisis. (Alan Diaz/AP/File)
Forecast for 2012: recession, but not a Great Recession
Despite recent stronger economic data, the United States is likely to fall into a recession that will spread globally. The reason? The US has too much debt – and reducing it hurts growth.
After three decades of US consumers and financial institutions globally taking on more debt, they're now reducing debt – but it's a multiyear process and far from finished. US and European governments are also under pressure to cut debt after incurring huge deficits in the 2007-09 Great Recession. As a result, I expect slow economic growth and high unemployment to persist in the US and Europe.
In Europe, real growth as measured by gross domestic product is probably already headed down. Growth was a mere 0.6 percent in the third quarter in the 17-country eurozone. Unemployment in the eurozone was 16.3 million in October – the highest since record-keeping began in 1995 – and the unemployment rate rose to a high of 10.3 percent in October.
After the Great Recession, it's clear that a common euro currency without a centralized fiscal policy is unstable. No long-term solution is in sight, but strong eurozone countries like Germany believe continuing bailouts of weak economies like Greece, Spain, Italy, and Portugal are preferable to an outright collapse of the eurozone – in effect, they're kicking the proverbial can down the road. The effects on the US of a European recession next year are small, but the financial risks due to intertwined banks are great.
Meanwhile, efforts by China to cool her property bubble and high inflation are working, but a hard economic landing is likely to result, with growth rates of 5 to 6 percent versus the 8 percent-plus growth rate needed to create jobs for China's burgeoning population. The ongoing collapse in commodity prices suggests slowing demand from China. Stock markets are also great predictors of economic activity. The Shanghai Composite Index fell 13.4 percent in 2010 and was off 27 percent between mid-April and mid-December.
In the US, the key to the economic outlook is consumers, whose spending accounts for 71 percent of GDP, but they're now embarking on a saving spree to replace their 25-year borrowing and spending binge. And there's no other sector – government, the Federal Reserve, or the private sector – that can provide meaningful economic growth in the next year or so.
In the postwar era, recessions have been inaugurated by the Fed boosting interest rates to reduce inflation. That prospect isn't in sight. But with slow economic growth likely in 2012, it wouldn't take much of a shock to push growth into negative territory. That could come from a sizable drop in housing prices and the discouraging effects on consumer spending. The spreading effects of the European financial crisis and recession could also be the trigger or maybe some of each combined with a post-Christmas consumer spending retrenchment.
This won't be another Great Recession. I'm forecasting a 2.2 percent peak-to-trough decline in real GDP that lasts for a year (versus the 18-month 5.1 percent plunge in the Great Recession). Europe's recession may be deeper with the financial crisis there and the region's real economic decline reinforcing each other. Combining economic downturns in Europe and the US with a hard landing in China means that a global recession next year is also likely, before the stage is set for a weak US and global recovery in 2013.
– A. Gary Shilling heads an economic consulting firm in Springfield, N.J. His latest book is "The Age of Deleveraging."
Customers shop at Macy's department store in New York last month. Shoppers increased their credit card debt by an estimated $64 billion in the fourth quarter of 2011. (Eric Thayer/Reuters/File)
Credit card debt: Are consumers returning to bad habits?
Americans are edging back toward their bad old pre-recession habits, when they charged whatever they wanted on their credit cards and didn’t worry about the build up of debt. After starting 2011 by paying down over $32 billion in credit card debt, consumers are on track to end the year with a $64 billion increase in their net credit card debt, according to Card Hub’s latest survey of credit card debt.
That’s a far bigger increase than in either 2009 or 2010. Unfortunately, the situation in 2012 will worsen before it improves. You can thank the busy holiday shopping season for that. It occurs during the year’s fourth quarter, which is largely why the fourth quarter sees debt build up faster than in the second and third quarters combined.
Typically, Americans pay down their debt in the first quarter, buoyed by salary bonuses, tax refunds, and New Year’s resolutions. In 2009 and 2010, they paid down more in the first quarter than they ran up new debt through the end of the third quarter. The same cannot be said for 2011.
In the third quarter of 2011, consumer ran up 154 percent more credit card debt than they did in the same period a year earlier.
During the Great Recession, overleveraging (spending more than you bring in) caught up with consumers and companies alike as unemployment skyrocketed and revenue sources dried up and wreaked havoc on our economy. While current credit card debt is far from peak recession levels, the pace at which consumers are adding new debt foreshadows a return to such worrisome levels.
But improve, the situation surely can. Consumers have a number of options at their disposal, but the obvious first step in combating rising debt levels has to be budgeting. It’s the “obvious” first step, not necessarily an easy one. People who are consistently spending beyond their means need to excise spending from their lives, and this necessitates making tough choices.
Make a list of your monthly expenses and rate them based on importance, with things like food, housing, and insurance taking top priority. Then cut the lowest ranked items until your spending is below your monthly income threshold with room to spare (you’ll want some savings for an emergency fund). After that, stick to your budget and work to pay down what you currently owe.
When it comes to sticking to a budget, you might find a debit card or a charge card more helpful than a credit card because they are better suited to instilling spending discipline. With a debit card, one can transfer the budgeted amount to a checking account and only spend that amount. Since charge cards do not allow you to carry a balance, you’re automatically insulated from spending more than you can afford to pay back.
On the other hand, if you don’t want to forgo credit cards because of their rewards and low introductory interest rates, you can do a couple of things to prevent overspending. One is to link your account with a checking account in order to impose the spending discipline you need. The other is to call your credit card company and get it to reduce your credit limit so as to be in line with your monthly budget. Confronting the problem of rising credit card debt with a credit card might seem rather ironic, but it is a problem that must be dealt with, so anything that can help should be welcomed.
At the end of the day, the worst thing you can do is ignore the situation until credit card debt becomes unmanageable and the problem becomes more difficult to solve.
– Odysseas Papadimitriou is CEO of Card Hub, a website where consumers can learn about and compare credit cards.
Become part of the Monitor community
36K on Facebook | 12K on Twitter | 2,250 on YouTube