DailyFinance.comhttp://www.dailyfinance.comDailyFinance.comhttp://o.aolcdn.com/os/df/2013/img/2-dailyfinance_logo_m.pngDailyFinance.comhttp://www.dailyfinance.comen-usCopyright 2013 Weblogs, Inc. The contents of this feed are available for non-commercial use only.Blogsmith http://www.blogsmith.com/Could the U.S. Do Like Cyprus and Seize Bank Deposits?http://www.dailyfinance.com/on/cyprus-crisis-bank-deposits/http://www.dailyfinance.com/on/cyprus-crisis-bank-deposits/http://www.dailyfinance.com/on/cyprus-crisis-bank-deposits/#commentsFiled under: , , , ,

Cyprus financial crisis banks insured deposits
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Just when we all thought it was safe to stop worrying about the eurozone, another country's banking system blew up and stopped the Continent in its economic tracks.

This time, the victim was Cyprus: a tiny Mediterranean island not far from Greece, whose two biggest banks were facing insolvency if Europe didn't come to the rescue. And yes, a last-minute rescue plan was arranged. But rather than simply bailing out the banks with EU taxpayer money, as had been done previously, the European Union initially decided to "bail in" the creditors -- that is, make people with money deposited in the banks take some of the hit for the rescue.

Initially, part of this hit was going to be against insured depositors -- ordinary savers whose accounts were insured by the European Union up to €100,000. Had the plan gone through as proposed, they would have faced a one-time 6.75 percent tax on their accounts.

However, there was such local and international uproar against the notion that ordinary citizens could have their bank accounts raided by the government that a new bailout plan was devised. This one protected insured depositors but still left those with various levels of "unsecured debt" -- i.e., very large deposits -- in the country's two biggest banks on the hook.

The mere fact that Cyprus attempted to raid insured accounts has left a bad taste in people's mouths around the world. And it has led some people to ask: Could that ever happen here in America?

Let's play pretend with the U.S. banking system

Imagine if the U.S. found itself in Cyprus' situation, with a failing banking system and no way to save it except by accepting the terms of whatever rescue plan was handed down by foreign governments or multinational organizations.

Finding that hard to imagine? It's no wonder.
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That's because, unlike EU members, Washington isn't subject to any superseding government. No outside force can dictate terms to it. And if the U.S. banking system does get itself into trouble (as it did in when the housing bubble burst and tanked the markets), we're still not in danger of running out of money to pay off our IOUs.

Unlike eurozone nations, we have our own currency. We can just "print" more of it until our debts are covered. So you can rest assured -- if the government needed money to prop up endangered banks, it surely wouldn't need to reach into your savings account to find it.

True, there are dangers associated with flooding the market with dollars, inflation being one of them. But the fact remains that the U.S. literally can't run out of money. For Cyprus, and other countries that have had to take European Union bailout money because there was no other place to turn, this is one of the major downsides of not having a separate currency.

Our ability to print money isn't the only stop-gap against a Cyprus situation. We also have a long-standing deposit-insuring agency: the Federal Deposit Insurance Corp.

We've Got You Covered

The FDIC was established as part of The Banking Act of 1933, in part as a response to the thousands of bank failures that occurred in the U.S. in the late 1920s and 1930s. (At FDIC-approved financial institutions, single depositors are covered up to $250,000 per owner, joint depositors are covered up to $250,000 per co-owner, and even IRAs are covered up to $250,000 per owner.)

No depositor has ever lost a dollar on insured deposits under the limits since the depositor guarantee was written into law in 1933. Without first changing the law, no American president or other member of the federal government could unilaterally tax the accounts of insured bank depositors to "bail in" failing banks. (Interestingly, the FDIC and the Bank of England have floated the idea of a policy that could, in theory, legalize such bank account haircuts, turning the Cyprus experiment into a U.S. precedent. But at this point, it's only a White Paper, an ivory tower exercise.)

And if you think there was an uproar over Cyprus trying a move like this, imagine the uproar the American press or Rep. Nancy Pelosi would create in response to a similar move.

We've Got a Well-Established Blueprint

The European Union and corresponding eurozone haven't been around for that long. There isn't much history in the eurozone as an entity, and the economic rule of law is still shaky in some of these smaller countries, like Cyprus.

Since the financial crisis, they've been putting out fires left and right on a case-by-case basis with varying levels of consistency and success. And that's what the Cyprus rescue was: a poorly thought out, ad hoc response that panicked markets and citizens everywhere.

Luckily for us in the U.S., we have history and established laws on our side. These two things, along with the flexibility having a separate currency provides, is why what happened in Cyprus can't happen here.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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1. Gas Prices2. Higher Taxes3. Lower Wages4. Heavy College Costs5. Less Cash

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]]>banksCyprusEuropean debt crisisEuropean unioneurozoneFDICFinancefinancial crisisGreeceinsured depositsJohn GrgurichWed, 03 Apr 2013 16:30:00 ESTA Radical New Proposal for the Mortgage Interest Tax Deductionhttp://www.dailyfinance.com/2013/03/29/mortgage-interest-tax-deduction-Common-Sense-Housing-Investment-Act/http://www.dailyfinance.com/2013/03/29/mortgage-interest-tax-deduction-Common-Sense-Housing-Investment-Act/http://www.dailyfinance.com/2013/03/29/mortgage-interest-tax-deduction-Common-Sense-Housing-Investment-Act/#commentsFiled under: , , , ,

UNITED STATES - NOVEMBER 30: Rep. Keith Ellison, D-Minn., is interviewed in his Longworth office about his Muslim faith. (Photo By Tom Williams/CQ Roll Call)
Tom Williams/CQ Roll Call Rep. Keith Ellison (D-Minn.)
U.S. Rep. Keith Ellison has a game-changing tax fix that he think most Americans would happily get behind.

Ellison, the Democrat who represents Minnesota's 5th Congressional District, just proposed a bill that would revise the federal tax code, radically changing the way America's mortgage-interest deduction works.

Where you fall on the income scale will likely determine how you feel about Ellison's idea as proposed in The Common Sense Housing Investment Act.

Mortgage Interest Deduction Math

Right now, anyone with a home mortgage can write off the interest they pay on their federal income taxes. The calculation is simple: The amount you paid in interest for that year is subtracted from your income.

This is a big deal for many taxpayers. One estimate from The Wall Street Journal puts total federal tax savings at $100 billion a year. It's also a big deal to real estate agents and banks, as the tax write-off can be a major selling point for homes and home loans.

But to utilize the mortgage-interest deduction, you have to itemize your taxes, which not everyone can do. Enter Rep. Ellison and his Common Sense Housing Investment Act. His bill would open the mortgage-interest deduction to more taxpayers by changing how they claim it. Rather than taking whatever they paid in interest off their income, now homeowners would claim a standard 15 percent tax credit.

Under the Common Sense Housing Investment Act, the number of Americans able to claim the mortgage-interest deduction would jump from the current 43 million to 60 million.

Everyone Wins! Well, Almost Everyone

Perhaps the most interesting trick here is that the bill would allow more homeowners to claim a mortgage-interest deduction on their federal income taxes, but also allow more total tax revenue to be raised.

Ellison's plan would allow people to only deduct interest on mortgages up $500,000; after the half-million dollar mark, they couldn't deduct any mortgage interest whatsoever. According to Ellison, however, only 4 percent of homes nationwide sell for more than half a million dollars. So in the end, far more middle-class homeowners would be able to write off their mortgage interest, while the well-to-do would lose the tax break.

According to Ellison's calculations, his plan would generate an additional $196 billion in revenue over 10 years -- money he would earmark toward addressing what he calls a "national rental shortage" -- which mainly affects minorities, the elderly, and the poor -- by expanding the Low Income Housing Tax Credit and Section 8 rental assistance.

A Tempting Tax Target

The mortgage-interest deduction comes under attack every once in a while for different reasons.

In the wake of the financial crash, it was called out as a contributing factor in that it helped feed the general mentality that everyone should own a home, which in turn propelled us into the housing boom and bust. The mortgage-interest deduction has also been called out as a debt and deficit expander, because it causes the government to miss out on a lot of tax revenue.
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Then there's the free-market economics argument that claims the mortgage-interest deduction is a market distorter. There's no logical reason the federal government should give homeowners the ability to write off their interest on a large purchase. Why don't car owners get to write off their car-loan interest, or boat owners their boat-loan interest?

In his documentary "The Ascent of Money," historian Niall Ferguson claims the federal government made the move to create a large class of property owners in the 1930s -- specifically, with the creation of the Federal Housing Administration -- in part as an effort to blunt the rise of communism and socialism in America.

But however you want to look at the issue, the bottom line is that it was decided a long time ago in this country to promote home ownership, and Americans are used to it. The real-estate and banking sectors don't want to see the deduction go anywhere, either.

So if the mortgage-interest deduction is here to stay, sure, why not open it up to more of the middle class? And then you can use the projected proceeds to help the less fortunate.

Most would see this as a win-win, probably except for the people at the top who have to pay for it.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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]]>BuyingAHouseFederal Housing AdministrationFinancehome priceshousingKeith EllisonLow-Income Housing Tax CreditMinnesota's 5th congressional districtmortgage interest deductiontax deductionsThe Motley FoolJohn GrgurichFri, 29 Mar 2013 05:00:00 ESTShould We Get Rid of Fannie Mae and Freddie Mac?http://www.dailyfinance.com/2013/03/06/fannie-mae-freddie-mac-shutdown-recommendation-bipartisan-policy/http://www.dailyfinance.com/2013/03/06/fannie-mae-freddie-mac-shutdown-recommendation-bipartisan-policy/http://www.dailyfinance.com/2013/03/06/fannie-mae-freddie-mac-shutdown-recommendation-bipartisan-policy/#commentsFiled under: , , , ,

Freddie Mac
Andrew Harrer, Bloomberg via Getty Images
What if the two government-owned housing agencies that backstop so many of the nation's mortgages ceased to exist? A new report from an influential think tank says that's what should happen.

But while the plan isn't quite as radical as it first sounds, if implemented it would mean a significant change if another housing bubble builds and bursts -- a change that would have more of the risk falling onto individual homeowners instead of the federal government.

"Housing America's Future: New Directions for National Policy" was authored by the Bipartisan Policy Center, a Washington, D.C.-based group founded by former Senate luminaries Howard Baker, Tom Daschle, Bob Dole, and George Mitchell.

Among other things, the report recommends slowly winding down Fannie Mae and Freddie Mac -- the government-owned housing agencies that had to be bailed out at great taxpayer expense after the most recent real-estate bust -- and replacing them with what the report's authors call the "Public Guarantor."

Taking the heat off taxpayers and putting it on homeowners

As the name suggests, the Public Guarantor would serve a similar function as Fannie and Freddie, but with a twist that would take the heat off the taxpayer in the event of another catastrophic housing-market event, like the one we saw in 2007.

Right now, Fannie and Freddie buy mortgages originated by the nation's banks, package them up into mortgage-backed securities, and sell them to investors. In return, Fannie and Freddie pay interest on the securities back to the investors.

But unlike Fannie and Freddie, the Public Guarantor wouldn't buy mortgages or issue mortgage-backed securities. The private sector would now handle that. And in the event of another burst housing bubble, the Public Guarantor would only guarantee investors their interest payments and the return of their initial investments.

This guarantee would only be triggered after the private capital in line ahead of it had been exhausted. Specifically, the government would be fourth in line to take a loss, which means, of course, the taxpayer is also fourth in line.

Mission accomplished, right? Yes, but it's a double-edged sword.

Goliath Wins This Match, for David's Own Good

While it's great that the taxpayer is less on the hook for mortgage-market trouble, that default risk has to land somewhere.

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With this new plan, part of that somewhere is back onto the borrower, who would be first in line to take the hit if the Public Guarantor guarantee is ever triggered. Next in line after borrowers are private-credit enhancers and finally the corporate resources of mortgage issuers and servicers.

So in the end, under this proposed plan the government would only be giving an ironclad guarantee to investors in privately issued mortgage-backed securities.

Why favor the big investor over the little homeowner? Because investor demand for mortgage-backed securities is what drives demand for mortgage lending in the first place, thus allowing the little guy to get his mortgage at all.

There simply aren't enough investors who will buy mortgage-backed securities without some sort of backstop from the federal government. Over a 30-year period, the time span of popular U.S. mortgages, there's just too much risk of default, even with borrowers who have good credit. So the only way to keep enough liquidity in the home-lending market -- and therefore ensure that qualified people who want home loans can get them -- is to guarantee the big-time investor.

Taking on homeowner-default risk is the whole reason the government started supporting the housing market to begin with, all the way back in the 1930s, when the Federal Housing Administration was created. The private-lending market wouldn't take the risk on all by itself then, and it won't take it on now, either.

Not to Worry, Nation

So under this proposed plan, ultimately the taxpayer is still on the hook but would gain some protection from the vagaries of the housing market. It would come, however, at the expense of the homeowner.

If any of this frightens you, keep the following in mind: This report and its recommendations is a nonbinding report by a nongovernmental bipartisan institution -- even if it is an influential one.

Bipartisanship isn't exactly the watchword of the day in Washington. (If there's one thing partisans from the left and the right typically find common ground on, it's their dislike of wishy-washy, weak-spined bipartisans.) So, while the recommendations in the report are interesting and potentially game-changing, nobody in Washington has to pay any attention to it. So they probably won't.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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]]>Bipartisan Policy CenterBob DoleFannie MaeFannie mae bailoutFederal Housing AdministrationFederal takeover of Fannie Mae and Freddie MacFinanceFreddie MacHousing Americas Future: New Directions for National PolicyHoward BakerMission Accomplishedmortgage backed securitiesPublic GuarantorThe Motley FoolTom DaschleJohn GrgurichWed, 06 Mar 2013 05:00:00 ESTPost-Financial Crisis, the SEC Is More Toothless Than Everhttp://www.dailyfinance.com/2013/02/28/Securities-and-Exchange-Commission-lax-enforcement/http://www.dailyfinance.com/2013/02/28/Securities-and-Exchange-Commission-lax-enforcement/http://www.dailyfinance.com/2013/02/28/Securities-and-Exchange-Commission-lax-enforcement/#commentsFiled under: , ,

Elisse Walter, chairman of the Securities and Exchange CommissionWhether you have millions of dollars invested in stocks, or a few thousand bucks in bonds or mutual funds, it's vitally important to you that the Securities and Exchange Commission -- Wall Street's cop on the beat -- is doing its duty. Not just being seen, that is, but actually getting out there and enforcing the law.

After all, what good is it to have a high-profile police officer on patrol if he or she doesn't occasionally chase down a few law-breakers and crack some heads? If laissez faire policing becomes the norm, the bad guys stop fearing retribution and the rest of the community suffers.

Unfortunately, there's some evidence to suggest the SEC may not be doing as much head-cracking as it's claiming.

Reorganizing for Assault

Bloomberg is reporting that of 734 securities enforcement actions the SEC undertook in 2012, 228 were what's known as "administrative proceedings": essentially follow-up actions to cases that had already been brought. That leaves 506 new cases brought by the SEC in 2012, which is fewer than it filed in 2009.

The number of new actions brought by the SEC in 2011 also did not surpass the number of new cases brought in 2009. This comparison with 2009 matters because it was after that year -- in the wake of the financial crisis and the coming to light of Bernie Madoff's massive fraud scheme -- that the enforcement agency famously reorganized.

Mary Shapiro -- who became head of the SEC in 2009, not long after the Madoff affair surfaced -- headed up that reorganization, and spent the next four years trying to convince the American public that Wall Street's policeman was back on the case.

She stepped down this past December, but right before she left, the SEC issued a press release touting the agency's accomplishments, citing the above-mentioned numbers as evidence of just that.

Hit Me with Your Best Shot

So if the SEC isn't pursuing new enforcement actions like it used to, based on its 2012 record, what are these follow-up actions the agency is spending 31 percent of its time doing?

Some of the administrative proceedings referred to earlier included "barring people who've already been found guilty of fraud from working in the industry," and "temporarily suspending accountants from practicing before the SEC," says Bloomberg.

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Essentially, this follow-up work is putting penalties into place for judgments that had already been rendered, some of which -- according to Bloomberg -- were from cases brought years earlier.

But to be fair, it's not like the SEC has been completely sitting on its hands in the time since the crisis and its own organizational revamping.

In the past two-and-a-half years, the agency has brought crisis-related enforcement actions against both JPMorgan Chase (JPM) and Goldman Sachs (GS), two of the country's biggest banks, which got mixed up in some of the more financially abusive aspects of the crisis (JPMorgan less so than Goldman).

The SEC also claims that, in those same two-and-a-half years, it filed crisis-related actions against 117 defendants -- almost half of whom were CEOs and other high-level managers -- which resulted in penalties and "disgorgements" (the repayment of ill-gotten gains) of $2.2 billion.

The Toughest Neighborhood Around

But given the massive financial devastation wrought by the banks and other similar institutions -- so much of which arose out of poorly or outright fraudulently structured securities -- you would think there would be an excess of new work for the SEC to do, and therefore even more enforcement action would have been taken.

As mentioned earlier, a cop on the beat keeps the peace by virtue of not just visibility, but also with a credible record of law-enforcement action. To be truly effective, you can't have one without the other. And while every neighborhood can benefit from such a firm-but-fair presence, the tough ones need it most.

And is there a tougher neighborhood than Wall Street? Or one that can more adversely affect the wealth and well-being of the average American when it's not properly policed?

The Treasury Department puts the amount of household wealth lost in the financial crisis in the U.S. alone at $19.2 trillion, which seems to be answer enough to that question.

You can follow Motley Fool Contributor John Grgurich on Twitter @TMFGrgurich. He owns shares of JPMorgan Chase & Co. The Motley Fool owns shares of JPMorgan Chase & Co.

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]]>Bernard Madoffdisgorgementsecurities and exchange commission secFinancefinancial crisisFinancial meltdownGoldman Sachs Group IncJPMorgan ChaseJPMorgan Chase & CoMary SchapiroSECsec enforcementSecurities and Exchange Commissionsecurities fraudThe Motley FoolUnited States Department of the TreasuryWall StreetJohn GrgurichThu, 28 Feb 2013 12:45:00 ESTBuried Under Student Loan Debt? The Government Is Here to Helphttp://www.dailyfinance.com/2013/02/27/student-loan-debt-crisis-cfpb/http://www.dailyfinance.com/2013/02/27/student-loan-debt-crisis-cfpb/http://www.dailyfinance.com/2013/02/27/student-loan-debt-crisis-cfpb/#commentsFiled under: , , ,

College debt"I'm from the government, and I'm here to help."

Those nine words may terrify many people, but to today's ex-students -- some of whom feel helplessly crushed under a mountain of student loan debt -- those words may be the most reassuring thing they've ever heard.

The Consumer Financial Protection Bureau announced last week that it will be soliciting comments from the public about how best to alleviate the crushing loan burden some students are facing in this post-financial-crash economy, one without without the jobs they counted on to make good on that loan burden.

You're on your own, kid
"Too many private student loan borrowers are struggling with unwieldy debt that prevents them from climbing the economic ladder," CFPB Director Richard Cordray said in the release announcing the plan.

Indeed. Having tens of thousands of dollars in debt hanging over your head from the get-go -- with no employment in sight -- means buying a car or getting a mortgage is most likely out of the question.

With this call for comments, the CFPB is looking to address private student loan debt in particular. Out of the $1 trillion in total outstanding student debt, 15 percent of it is private, not backed by the federal government.

For those with government-backed student loans, there's a hardship option that at least lets students avoid default through an income-based repayment scheme. So if you don't make a lot, you don't have to pay a lot. But if you have private student loans, you're on your own with the bank you borrowed from.


Trying to avoid Financial Crisis 2.0
Aside from the personal pain this mountain of private student-loan debt is causing, the other concern the CFPB has is the effect it could have on the economy as a whole.

Alongside the mortgage-lending boom of the 2000s, there was also a private student-lending boom. As with the mortgage-lending boom, there was an excess of lending to people who never should have gotten loans in the first place. And again as with the mortgage-lending boom, a lot of this private student-loan debt was packaged into asset-backed securities for sale to investors.

Five-plus years ago, when homeowners started defaulting en masse on their mortgages, the securities these mortgages had been packaged into also began to default, triggering the financial crisis.

If private-student-loan borrowers begin defaulting on their loans now, the thinking goes, the securities their loans were packaged into could also default, potentially triggering another financial crisis -- this one generated by defaulting private student loans instead of defaulting home loans.

United we're solvent
One of most interesting aspects of the CFPB's comment solicitation project is that the agency is looking for help in solving this problem not just from distressed borrowers, but also from banks and other vested parties.

"We want to hear from borrowers, lenders, schools, and everyone with a stake in the success of this market," Rohit Chopra, the CFPB's student-loan ombudsman, said in a statement announcing the plan.

This makes sense. The banks who made these loans -- even if they lent in a predatory manner -- have as much of a vested interest in working out a payment scheme with defaulting borrowers as the borrowers themselves do.

So whether you're a debt-soaked ex-student, a banker, or even just a concerned citizen, you have until April 8, 2013, to make your voice heard to the CFPB on this issue. Who knows? Your comment may be the one that makes the student-loan debt burden for you or someone you know far more bearable, and keep the country on a far more stable financial footing.

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John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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]]>asset backed securitiesCFPBconsumer financial protection bureaufinancial crisishousing crisismortgage backed securitiesprivate student loan debtprivate student loansstudent loan debtstudent loan debt crisisJohn GrgurichWed, 27 Feb 2013 15:00:00 ESTIf Fed Ends Quantitative Easing Now, It'll Hurt More Than Just Housinghttp://www.dailyfinance.com/2013/02/21/fed-quantitative-easing-QE3-economic-recovery/http://www.dailyfinance.com/2013/02/21/fed-quantitative-easing-QE3-economic-recovery/http://www.dailyfinance.com/2013/02/21/fed-quantitative-easing-QE3-economic-recovery/#commentsFiled under: , , , , ,

Federal ReserveJust as we hear that previously occupied home sales hit their second-highest level in three years, we also hear that the Federal Reserve is having second thoughts on its latest round of quantitative easing, also known as QE3.

This is potentially a perfect storm of economic news.

QE3 is the Fed's asset-purchase program: The central bank has committed to use it to buy $40 billion worth of mortgage-backed securities every month. These massive securities purchases by the Fed are designed to drive home lending by the banks, which in turn should boost the housing market.

According to the National Association of Home Builders, America's housing sector has traditionally contributed as much as 18 percent to the country's gross domestic product, hence the importance of QE3 not just to housing, but to the economy as a whole.

Slowing Down the Money Printing Press

The Fed, like any other bank, has a balance sheet, and it's grown big -- too big, some Fed officials say. There's also the worry that maintaining asset purchases at the current pace for too long could cause inflation. To buy these assets, the Fed essentially prints money. Theoretically, the more money in the system, the less each dollar is worth.

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The Fed had initially taken the the unusual step of publicly committing to keep QE3 rolling until the labor market had improved considerably. Now, just as the U.S. housing market is finally beginning to come around, and the economy along with it, that open-ended commitment to QE3 might go away.

The purchase of so many mortgage-backed securities has undoubtedly lent support to America's recovering housing market, and to the economy as a whole. If the Fed decides to end QE3 prematurely, it may knock out an irreplaceable pillar of support from beneath the economy.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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]]>Ben BernankeFed asset buyingfed inflation fearsFederal ReserveFinancehousing market recoveryinflationmortgage backed securitiesNAHBNAHB Housing Market IndexNational Association of Home BuildersQE3quantitative easingJohn GrgurichThu, 21 Feb 2013 15:21:00 ESTRental-Backed Securites: Wall Street's Clever Plan for Foreclosed Homes?http://www.dailyfinance.com/2013/02/20/rental-backed-securites-wall-street-foreclosed-homes/http://www.dailyfinance.com/2013/02/20/rental-backed-securites-wall-street-foreclosed-homes/http://www.dailyfinance.com/2013/02/20/rental-backed-securites-wall-street-foreclosed-homes/#commentsFiled under: , , , ,

foreclosureIt feels like this country went from a housing glut to a housing boom almost overnight. One day, all you're hearing about is how much extra housing capacity there is, and the next you're reading headlines about record home starts.

But before the housing-market resurgence, the other thing you heard about was how no one knew what to do with all that extra housing.

Well, Wall Street is trying to figure out what to do with it, and their idea doesn't bode well for either individual neighborhoods or the economy as a whole.

It's Deja Vu All Over Again

Though you're currently seeing new home developments springing up left and right, the fact is there are still plenty of empty houses out there, especially in certain areas of the country. These are homes people bought during the boom but in short order discovered they couldn't afford.

As these homeowners defaulted on their loans, the mortgage-backed securities the loans had been bundled into also began to fail -- triggering the financial crisis. But someone owns these foreclosed homes, and they want to do something profitable with them, which has turned out to be renting them.

Sounds good so far.

However, now Wall Street is considering packaging up these rental properties into securities that can then be sold off to investors. (Sound familiar?) But apparently, even the ratings agencies are nervous about this untested bit of financial innovation. That's right: Those same ratings agencies that gave AAA ratings to so many of the mortgage-backed securities that ended up going bust and dropping the U.S. economy off a cliff? Even they don't feel comfortable with Wall Street's latest clever idea.

Your Friendly Neighborhood Renter

So, Wall Street may be brewing some new macro-level concoction that could come back to bite us all. Again. But what might this idea for rental-backed securities mean on a more micro level?

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Nobody likes empty, foreclosed homes in their neighborhood. In the best-case scenario, a bank or some similar entity is keeping the grass cut, the driveway weeded, and the squatters out.
In the not-so-best-case scenario, none of the above is happening, plus the windows are broken or boarded up; "entrepreneurs" are stripping the home of interior furnishings, wiring and plumbing; and your kids have decided these ripped-up homes are a great place to play in.

So are renters worse than the worst-case scenario described above? Hardly. A responsible renter can be as good a neighbor as a home owner. And it's far from gospel that all home owners are responsible neighbors, diligently keeping up their property, and therefore the neighborhood's property values. In fact, the right kind of renter could turn out to be a far better neighbor than the homeowners you're living next to right now.

The Truly Worst-Case Scenario

But if the idea of rental-backed securities takes hold with investors, and the Wall Street securitization machine consequently gets humming, the same thing that happened with mortgage-backed securities might happen again: The demand for investments would drive the demand for rental homes, and thereby lower the caliber of the renters.

Not only would this be bad for neighborhoods, but if enough poorly qualified people are renting properties that have been bundled up into securities, and those people stop paying their rent, the securities could also then fail. This could put the financial industry -- along with the rest of us -- right back where we were four-and-a-half years ago.

Before the boom in mortgage-backed securities, no one knew how they would perform on a large scale, nor how they would change the real estate market, and today, no one can be sure how these rental-backed securities will perform on a large scale either. But here's a hint: If the previously AAA-happy credit agencies are nervous about this new type of investment, maybe the rest of us should be wary as well.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.



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]]>Financeforeclosed homesForeclosuresHousing Bubblehousing constructionmortgage backed securitiesnew home constructionNew Home Salesreal estate investingrental propertyrental-backed securitiessecuritizationThe Motley FoolWall StreetJohn GrgurichWed, 20 Feb 2013 13:27:00 ESTMore States Join Lawsuit Challenging CFPB and Dodd-Frankhttp://www.dailyfinance.com/2013/02/14/states-cfpb-lawsuit-kill-consumer-financial-protection-bureau/http://www.dailyfinance.com/2013/02/14/states-cfpb-lawsuit-kill-consumer-financial-protection-bureau/http://www.dailyfinance.com/2013/02/14/states-cfpb-lawsuit-kill-consumer-financial-protection-bureau/#commentsFiled under: , , ,

Richard Cordray, director of the CFPB. (Getty Images)Eight more states have joined a lawsuit which challenges the constitutionality of parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the creation of the Consumer Financial Protection Bureau.

The CFPB was created in the wake of the financial crisis to protect consumers from predatory, unfair and abusive financial practices and has already taken action on many issues of concern, some of which contributed directly to the financial crisis. If the CFPB is ruled unconstitutional and dismantled, it is highly likely all the consumer protections it enacted would be dismantled along with it.

To be clear, the eight new states joining the suit are only signing onto those provisions specifically challenging the ability of the federal government to liquidate the country's biggest banks in the event of their failure -- a power granted under Dodd-Frank. But the weight of eight more attorneys general behind the suit as a whole can't possibly bode well for the CFPB's future.

The suit originated in Texas, and was filed on behalf of a Texas-based community bank named State National Bank of Big Spring and two conservative political groups. It contends that both Dodd-Frank and the CFPB give too much power to federal officials, allowing unelected bureaucrats to "unilaterally liquidate financial institutions in which the state invests taxpayer dollars ... [therefore depriving states] of basic due process rights and [placing] taxpayers' resources at risk."

It was announced on Wednesday that the state of Texas officially joined the suit along with Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, and West Virginia. Oklahoma, South Carolina, and Michigan were the first states to sign on. Just for good measure, the suit also names Federal Reserve Chairman Ben Bernanke as one of the defendants.

Ending Predatory Financial Practices

The CFPB's stated mission is "to make markets for consumer financial products and services work for Americans -- whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products." In its short lifespan, the agency already has a remarkable list of accomplishments under its belt, including:
  • Helping to make credit card agreements easier to understand.
  • Helping to make financial-aid options easier for parents and prospective college students to understand.
  • Focusing on oversight of consumer credit bureaus, to make sure credit information is accurate, as well as quickly and easily fixable.
But the best known and perhaps most important of the CFPB's consumer-protection accomplishments is new mortgage-writing guidelines that protect prospective homeowners from the kind of predatory lending practiced in the years leading up to the crash.

The new rules would incentivize banks to write mortgages fairly and squarely -- offering them some measure of protection from consumer lawsuits as long as they follow a set of common-sense guidelines, which include checking such basic items as current income, current employment status, current debt obligations, credit history, and the projected ability of the borrower to make his or her monthly mortgage payment.

Believe It or Not, Everybody Wins

As crazy as it sounds, these kinds of underwriting basics were ignored on a massive scale by many banks in the years leading up to the financial crash. At the extreme end of the predation spectrum, some consumers were on the receiving end of no-income, no-job, no-asset loans (known in finance industry slang as "NINJA loans") and got into homes they were never going to be able to afford.

Such predatory home-lending practices fueled the housing bubble that eventually crashed Wall Street and then the rest of the economy when it burst. It, of course, also crashed an untold number of personal finances along with it -- personal tragedies people across the country are still recovering from.

If large parts of Dodd-Frank are ruled unconstitutional, including the CFPB, Americans will be back to square one when it comes to basic financial protections that we're already beginning to take for granted. The banks were actually happy when the above-mentioned home-lending reforms were agreed to: They got protection from consumer lawsuits just for doing their due diligence on loans, which of course would also be better for them in the long run.

No bank wants bad loans on its books, and no consumer wants or needs to get into a mortgage, student loan, or credit card agreement that harms them in the short run and potentially the economy in the long run. As rare as it is in our polarized political world, with the Consumer Financial Protection Bureau, everyone actually wins.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

Correction (March 1, 2013): This article originally reported that the 11 state attorneys general joined the portion of the lawsuit challenging the creation of the Consumer Financial Protection Bureau. They did not. They have only joined the portion of the lawsuit challenging the government's ability to liquidate the largest banks.

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]]>AlabamaBen BernankeCFPBCFPB lawsuitConsumer Financial Protection BureauDodd–Frank Wall Street Reform and Consumer Protection ActFinanceGeorgiaHousing BubbleKansasMichiganMontanaNebraskaNINJA loansOhioOklahomapredatory lendingSouth CarolinaState National BankState National Bank of Big SpringTexasThe Motley FoolWall StreetWest VirginiaJohn GrgurichThu, 14 Feb 2013 17:02:00 ESTInvestors, Take Note: The Robin Hood Tax Might Be Coming to Americahttp://www.dailyfinance.com/2013/02/11/robin-hood-tax-investing-speculators-high-speed-traders/http://www.dailyfinance.com/2013/02/11/robin-hood-tax-investing-speculators-high-speed-traders/http://www.dailyfinance.com/2013/02/11/robin-hood-tax-investing-speculators-high-speed-traders/#commentsFiled under: , , , ,

Robin Hood TaxIn January, 11 European countries moved significantly closer to implementing a financial transaction tax, known informally as a "Robin Hood" tax, which would be levied on stock, bond, and derivatives trades, with the proceeds potentially used to fight poverty and climate change.

Here in the U.S., the idea of a financial transaction tax has never gotten any real traction in Congress, but that may be about to change.

Sen. Tom Harkin of Iowa and Rep. Peter DeFazio of Oregon are planning to reintroduce a bill this month that would levy a Robin Hood tax right here in the States at an even higher rate than what looks set to go into effect in Europe.

Pennies on the Pound

If implemented as proposed, Europe's version of the tax will be as follows: a 0.1 percent levy on stock and bond trades and a 0.01 percent levy on derivatives trades.

For the U.S. version, Harkin and DeFazio are calling for a 0.03 percent tax on stock, bond, and derivatives trades, or 3 cents for every $100 worth of transactions.

The name of the proposed U.S. tax is The Wall Street Trading and Speculators Tax. According to Harkin, proceeds would "help raise necessary funds to invest in our infrastructure and the education of our children."

A nearly identical bill was introduced by the same two legislators in November 2011, but got nowhere. So why are its chances better now?

C'mon, Everybody's Doing It

A combination of peer pressure and popular sentiment might make a stronger case for a financial transaction tax this time around. With large economies in Europe all but certain to levy the tax -- and with heavy hitters like Germany, France, Spain, and Italy signed on -- the U.S. will feel more under the gun than ever to come up with its own version. But notable for its opposition to the tax: the government of England, where The City is both the heart of London and a world financial capital to rival Wall Street.

And it's no secret to the average person that the combined shenanigans of Wall Street and The City were behind the financial crash and ensuing global recession. To add insult to injury, taxpayers watched as many of the big banks at the root of the crisis were bailed out to the tune of billions one minute, only to turn around and pay their employees and executives hundreds of millions in bonuses the next.

As such, there's strong popular feeling on both sides of the Atlantic for some sort of general recompense and contribution to the greater good from the banks.

Also like much of Europe, the U.S. has a high level of public debt and runs chronic budget deficits. So the federal government is looking for quick and politically easy sources of revenue. A tax levied on big, unpopular financial institutions fits that bill perfectly.

Who Wins, Who Loses?

Critics argue that a financial transaction tax will hurt the little guys: middle-class investors who are just trying to save for their kids' college, retirement, or a rainy day. But this wouldn't be the case.

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Middle-class investors are typically buy-and-hold types, investing in stocks or bonds more or less for the long term. As such, they don't make trades in the kinds of volumes that would be affected in any real way by such a minuscule tax. Remember, we're talking about 3 cents for every $100 here. To boot, Harkin and DeFazio's bill would explicitly make exceptions for retirement and education savings accounts.

As is clear from the tax's official title, speculators are one of the main targets of this bill: professionals who trade in high volumes and extremely high speeds and whose actions, as a result, can sometimes destabilize markets. It's hoped that a financial transaction tax of this kind would make that sort of trading prohibitively expensive and therefore make markets more stable for everyone.

Last time around, Harkin and DeFazio's bill drew the support of senators such as Bernie Sanders (I-Vt.) and Sherrod Brown (D-Ohio) -- no strangers to anti-big-bank legislation -- as well as a host of similarly minded congressional representatives. If the resubmitted bill picks up any real traction this time around, expect support from the same bunch and probably many more, now that Europe has made its move and there's some real momentum building for a Robin Hood tax on the Continent.

But also expect staunch opposition, and not just from conservative politicians. Wall Street and the financial services industry will certainly get in on the fight, as well, if not under the withering glare of the public eye, then behind the scenes. Because while a tax of 3 cents on every $100 of trades doesn't add up to much when you're building a personal retirement portfolio, it can add up to quite a pretty penny when you're building a hedge fund.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.


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]]>Bernie Sandersderivatives tradingEuropeFinancefinancial transaction taxhigh-speed tradingIowaOregonPeter DeFazioRobin Hood taxSherrod Brownspeculatorsthe cityThe Motley FoolTom HarkinUnited States House of RepresentativesWall StreetJohn GrgurichMon, 11 Feb 2013 11:32:00 ESTBen Bernanke Finally Hires an Asset Bubble Buster: Jeremy Steinhttp://www.dailyfinance.com/2013/02/08/ben-bernanke-finally-hires-an-asset-bubble-buster-jeremy-stein/http://www.dailyfinance.com/2013/02/08/ben-bernanke-finally-hires-an-asset-bubble-buster-jeremy-stein/http://www.dailyfinance.com/2013/02/08/ben-bernanke-finally-hires-an-asset-bubble-buster-jeremy-stein/#commentsFiled under: , , ,

Federal Reserve Governor Jeremy Stein (Getty Images)"What factors lead to overheating episodes in credit markets?"

This was one of the opening lines of a speech given Thursday at the Federal Reserve Bank of St. Louis by Jeremy Stein, a Federal Reserve Governor brought on board just last year. And his talk may mark a sea change in how the Federal Reserve thinks about, approaches, and responds to asset bubbles.

Live and Let Pop

Not long ago, the Federal Reserve didn't feel it had any business trying to deflate asset bubbles -- those weapons of mass financial destruction that can wipe an economy out almost overnight, like America's real-estate bubble did in 2008. And this was the policy from America's central bank, one of the country's primary financial overseers.

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In 2010, Fed Chairman Ben Bernanke himself told the Financial Crisis Inquiry Commission: "Monetary policy is a blunt tool. Raising the general level of interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy."

What that means in English is, even if the Fed spots, say, a housing bubble, it fears raising interest rates broadly (the only way to do it) because while raising interest rates would almost certainly deflate said bubble, it could also cool down other sectors of the economy that are humming along quite nicely in a safe, non-bubbly manner.

You Have to Start Somewhere

In his speech, Stein gave three factors he feels contribute to the overheating of credit markets, where asset booms are typically born:

1. Financial innovation, like the boom in complex investments such as derivatives and collateralized debt obligations that proved to be such ruinous contributors to the 2008 crash.

2. Changes in regulation, like we also saw in the lead-up to the crash, dating back decades, that allowed banks to take more and more risks until they were leveraged within inches of their financial lives.

3. Changes that alter "the risk-taking incentives of agents making credit decisions." Again, in English, this means if you pay, say, mortgage brokers to write subprime loans, they will do so without any regard for the eventual mayhem that might follow. Again, see the roaring 2000s.

All this still doesn't mean the Fed can or will step in to deflate or gently burst the next asset bubble (and there will be asset bubbles as long as there's capitalism). But you can tell that Stein gets it here. And for this potentially new direction in the Federal Reserve's thinking we can all be grateful. If nothing else, it's an encouraging start to a potentially less bubble-fraught future.

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]]>asset bubblesBen Bernankecredit marketseconomyFederal ReserveFederal Reserve Bank of St LouisFederal Reserve Governor Jeremy SteinFederal Reserve SystemFinanceFinancial Crisis Inquiry CommissionHousing Bubbleinflationinterest ratesreal estate bubbleTech BubbleJohn GrgurichFri, 08 Feb 2013 16:27:00 ESTU.S. Regulators Warn Banks: Don't Expect International Cooperation if You Failhttp://www.dailyfinance.com/2013/01/29/fed-fdic-bank-failures-no-international-cooperation/http://www.dailyfinance.com/2013/01/29/fed-fdic-bank-failures-no-international-cooperation/http://www.dailyfinance.com/2013/01/29/fed-fdic-bank-failures-no-international-cooperation/#commentsFiled under: , , , ,

Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg (L) and Federal Reserve System Board of Governors General Counsel Scott Alvarez
Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg (L) and Federal Reserve System Board of Governors General Counsel Scott Alvarez. (Getty Images)
In another example of how far we haven't come since the financial crash, U.S. regulators are now warning banks they shouldn't presume regulators will work across borders if a too-big-to-fail institution finds itself about to fail.

According to Financial Times, banks were made aware of this fact in recent guidance from the Federal Reserve and Federal Deposit Insurance Corporation on how to prepare their so-called "living wills" -- detailed plans on how to calmly and with minimal collateral damage wind up their operations in the event of unavoidable bankruptcy.

Banks were reportedly told by the Fed and FDIC "not to assume that countries will work together to avoid the catastrophic failure of a financial group."

You Could Have at Least Phoned

This is a problem for the banks as well as for the rest of us. When Lehman Brothers declared bankruptcy nearly four-and-a-half years ago, it came as a shock to regulators around the globe.

Yes, regulators from the U.S. and other countries were talking about the situation, and it was no secret that Lehman was in serious trouble. But it was widely assumed that -- when push came to shove -- America wouldn't allow Lehman to fail.

The federal government had brokered a deal with JPMorgan Chase (JPM) to save the faltering Bear Stearns just six months earlier, so surely it would do something similar for Lehman, right?

Wrong.

When the same kind of private deal couldn't be arranged, the federal government did not step in. Lehman was allowed to declare bankruptcy, and foreign regulators only found out from the morning news, along with the rest of the world, as global markets began to descend into chaos.

We Thought You Guys Were Working on This

Lehman operated domestically as well as internationally -- like JPMorgan, Citigroup (C), Bank of America (BAC), and other too-big-to-fail banks still operate. As such, markets and economies everywhere were affected by Lehman's surprise bankruptcy: all made worse by the fact that U.S regulators didn't consult their international peers before they let it happen.

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In the time since the crash, regulators worldwide were supposed to have been working on this problem of cross-border communication, so that if there ever was another Lehman-like collapse, no country would be caught off guard again. Part of the U.S. effort was the Dodd-Frank mandated requirement that all too-big-to-fail banks draw up the aforementioned living wills.

News that banks should now be writing them up with the assumption there would be no cross-border cooperation was, in the words of at least one bank executive who spoke to Financial Times, "shocking."

How do you go about writing a cross-border wind-up plan when you can't assume that the regulators from your country will be speaking with the regulators from the countries your wind-up is most likely to affect?

Divided We Fail

It's not just bankers who should be concerned about this development. Big banks still operate internationally as well as domestically. What happens in the U.S. financial system potentially affects the world, and what happens in the world financial system potentially affects us.

If U.S. regulators now feel they can't talk to and work with their peers worldwide in the event of another too-big-to-fail collapse, we can hardly expect any better when some European or Asian giant goes south.

If at some point Deutsche Bank (DB) -- the world's biggest bank by assets -- starts having bankruptcy talks with the German government, at what point will U.S. regulators find out? The morning of the collapse, like they did for Lehman? And what if HSBC (HBC) -- the world's second-biggest bank by assets -- needs to take a dive? When will British regulators decide to let us in on it?

We could argue that -- what with us being the United States of America and all, with the mightiest economy on the planet -- it's highly unlikely that the home country of another crashing too-big-to-fail bank would keep us out of the loop.

Of course, that's an assumption, and as we've just seen, assumptions aren't something any of us should count on.


John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase.


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]]>bank bailoutbank failuresBank of Americabank regulatorsBear StearnsCitigroupDeutsche Bank AGDodd–Frank Wall Street Reform and Consumer Protection ActFDICFederal Deposit Insurance CorporationFederal ReserveFinanceFinancial TimesHSBC Holdings PLCJPMorgan Chasetoo big to failJohn GrgurichTue, 29 Jan 2013 10:30:00 ESTThe Next Flash Crash Awaits: Why High-Speed Trading Is Still a Huge Threathttp://www.dailyfinance.com/2012/12/10/flash-crash-high-speed-trading-dangers/http://www.dailyfinance.com/2012/12/10/flash-crash-high-speed-trading-dangers/http://www.dailyfinance.com/2012/12/10/flash-crash-high-speed-trading-dangers/#commentsFiled under: , , , ,

Flash Crash 2010
In 2010, when the Dow Jones Industrial Average suddenly dropped 600 points and then just as quickly recovered -- the so-called "flash crash"-- high-frequency trading, or HFT, became the new economic bogeyman: hiding in a dark corner of financial cyberspace, waiting to jump out and wreak havoc in the markets.

But just as quickly as HFT became infamous, and the subject of intense debate in government and the press, it crept back into the shadows.

An upcoming report from the Commodity Futures Trading Commission may change all that and put HFT back into the spotlight where it belongs.

Trading at Inhuman Speeds

HFT works like this: Powerful computers use complex programs to execute a large number of market orders extraordinarily fast. The algorithms in these computer programs go out to multiple markets, analyze them, and execute trades according to previously encoded parameters -- all by themselves, in a split-second's time, without a human at the helm to check to make sure everything's going smoothly.

Currently, 60 percent of all trades on U.S. stock markets are executed as high-frequency trades, and therein lies the danger: With the majority of equity trades now done by mindless computer programs, there's the potential for runaway, market-crashing errors.

This is precisely what happened in the flash crash on May 6, 2010.

According to the Securities & Exchange Commission, a mutual fund started running a trading program near the end of the trading day to sell $4.1 billion of futures contracts, which dumped 75,000 contracts into the markets over a period of 20 minutes. Normally, that's how many contracts would be moved over a period of five hours. High-frequency traders quickly snatched up these contracts to start doing deals with, which in turn caused the mutual fund's program to accelerate its selling.

This frenzy of buying and selling in the futures market then made the jump to the stock market, causing the Dow to briefly -- but terrifyingly -- plunge.

Follow the Fast-Moving Money

The upcoming CFTC report might reignite the debate surrounding HFT. It focuses on futures contracts, specifically, the kind that bet on the future value of the S&P 500.

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The report finds that, due to the practice of HFT, small traders are losing an average of $5.05 per trade on S&P 500 futures contracts, a very popular and widely used kind of financial contract.

While $5.05 may not sound like much, when you multiply that by millions and millions of transactions, it's big money. And while it is retail investors who are being hurt the most by HFT, brokerages and pension funds -- the big institutional traders -- are also being hurt, which could affect the performance of 401(k)s, IRAs, and defined-benefit retirement funds.

A Potentially Not-So-'Flash' Crash

Defenders of HFT make the argument that the practice injects liquidity into the market, which can help the markets if they get stalled (that is, when buyers or sellers can't find parties to take the other side of the trade).

But even the defenders of high-speed trading acknowledge the lurking dangers. Professor John Beddington, the U.K.'s chief science advisor and author of a report claiming HFT is mainly beneficial to markets, says: "There's a real potential for feedbacks [sic] between computer programs to exacerbate fluctuations in trades."

HFT certainly seems to be picking the pockets of both institutional and retail investors, and that's a problem, because it could hurt the integrity of the markets. But that's small potatoes compared to the kind of real damage HFT could wreak in conditions similar to those surrounding 2010's Dow plunge, damage that -- with 60 percent of all trades now being made as HFT -- may not be over in such a flash.

John Grgurich is a regular contributor to The Motley Fool.

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]]>CFTCCommodity Futures Trading CommissionDow Jones Industrial AverageFinanceflash crashfutures contractsHFThigh-frequency tradingJohn BeddingtonSECSecurities Exchange Commissionstock marketStock TradingJohn GrgurichMon, 10 Dec 2012 07:30:00 ESTShadow Banking: The $67 Trillion Threat to the U.S. Economyhttp://www.dailyfinance.com/2012/11/20/shadow-banking-67-trillion-threat-economy/http://www.dailyfinance.com/2012/11/20/shadow-banking-67-trillion-threat-economy/http://www.dailyfinance.com/2012/11/20/shadow-banking-67-trillion-threat-economy/#commentsFiled under: ,

Shadow Banking

Shadow banking. The name alone sounds ominous -- like some dangerous phantom biding its time, waiting for the perfect moment to leap from its hiding place to do its deadly work.

On a financial level, that metaphor actually works pretty well.

The shadow banking system does exist in the shadows, away from the spotlight of regulation we've come to expect banks to operate within. And given the right conditions, it could leap unexpectedly from its dark, financial hiding place and bring the U.S. economy to its knees, just like it nearly did in 2008.

An Honor We'd Rather Not Hold

What's bringing this issue to the forefront again is a new report by the Financial Stability Board, an international financial-standards advisory group. It cites that assets held in the global shadow banking system hit a new high last year: $67 trillion, which comes out to about half the world's total banking assets.

In the report, the FSB formally describes the shadow banking system as "credit intermediation involving entities and activities outside the regular banking system." Translated into English, this means the act of borrowing, lending, or otherwise shifting of money around by financial institutions that aren't subject to regulation, like hedge funds. It can also refer to traditional banks operating in largely unregulated arenas such as credit-default swaps.

America's portion of this $67 trillion in global assets is $23 trillion. In terms of total share, that's a decrease from 44 percent in 2005 to 35 percent in 2011 -- still enough to give the U.S. the dubious honor of having the world's largest shadow banking system, and more than enough to put the entire U.S. economy at risk of another credit freeze.

That's the danger here: Without the smooth flow of cash and credit, the lifeblood of any free-market system, economic life grinds to a halt.

What Refrigerators and Lehman Brothers Have in Common

If banks aren't lending to consumers, there's no one to buy Ford (F) cars, General Electric (GE) refrigerators, and Apple (AAPL) iPhones that keep those companies in business. And if banks aren't lending to other businesses, when companies like Starbucks (SBUX) need to replace its aging fleet of latte machines or Southwest Airlines (LUV) its aging fleet of 737s, they won't be able to borrow the capital to do so.

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What happened in the fall of 2008 is that banks stopped lending to other banks -- part of this shadow banking system. The now-failed Lehman Brothers was then very dependent on the interbank lending market (known to bankers as the "repo market") to fund its day-to-day operations. But as fears grew that the Wall Street titan was overexposed to defaulting mortgage debt, other banks stopped lending to it. As a direct result, Lehman Brothers went bankrupt.

Once that happened, not only did the other big banks stop lending to each other out of fear they might go bankrupt if they didn't hang on to every last drop of capital, they stopped lending to consumers and businesses, as well, beginning the economic chain reaction described above.

This is the point where the Federal Reserve and Congress stepped in to bail out the banks: not only to ensure that those that made it through the crash had enough capital on their balance sheets to survive, but also to ensure they felt secure enough to begin lending to consumers, businesses, and each other again.

$67 Trillion and Counting

From 2002 to 2007, the size of the shadow banking system grew from $26 trillion in total global assets to $62 trillion. After a slight decline in 2008, the system began to grow again, leaving it at the $67 trillion mark it stands at today.

Since the crash, there's been a vast amount of regulation aimed at addressing the shortfalls of the regular banking system -- like Dodd-Frank and Basel III -- but nothing to seriously curb the growth of the shadow banking system.

Naturally, the Financial Stability Board is calling for increased regulatory oversight: "The FSB is of the view that the authorities' approach to shadow banking has to be a targeted one ... to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability." Whether or not that will actually happen remains to be seen.

Money may not make the world go around, but it definitely makes goods and services circle the globe, which keeps businesses running, people employed, and taxes flowing into government coffers for essential services. As the FSB report argues, the continued lack of regulation in the shadow banking system puts all of that at risk.

John Grgurich is a regular contributor to The Motley Fool. Follow John's dispatches on Twitter @TMFGrgurich.




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]]>bank bailoutbank regulationBasel IIIDodd–Frank Wall Street Reform and Consumer Protection ActFederal Reserve SystemFinancefinancial crisisFinancial Stability BoardLehman Brothersshadow bankingshadow banksWall Street reformJohn GrgurichTue, 20 Nov 2012 15:39:00 ESTAT&T Wants To Cut the Cord on Your Landline Phonehttp://www.dailyfinance.com/2012/11/13/att-landline-phone-cord-cutting/http://www.dailyfinance.com/2012/11/13/att-landline-phone-cord-cutting/http://www.dailyfinance.com/2012/11/13/att-landline-phone-cord-cutting/#commentsFiled under: , , ,

landline phone extinctionIf AT&T (T) has its way, your traditional landline phone (assuming you still have one) might be going the way of the dodo bird.

On a recent conference call to investors, Chairman and CEO Randall Stephenson said, "We plan to begin an aggressive transition away from legacy TDM technology."

Here's what that means in plain English: TDM is short for "time division multiplexing," the venerable phone technology we all grew up with. TDM carries calls over traditional copper phone lines that are physically switched in a public branch exchange, or PBX -- those enormous banks of analog circuits that a technician could literally step up to and repair. PBXs were the next leap in telephony technology after the age of the live operator, who connected your call by hand on a switchboard a la Lily Tomlin as the snorting, condescending telephone operator Ernestine on "Laugh In."

The next big leap in telephone technology emerged around 2004: VoIP, short for "Voice over Internet Protocol." Digital VoIP calls are made over Internet service lines, typically fiber-optic ones, which completely bypass the old copper-wire TDM/PBX system.

It was a giant leap forward, but VoIP didn't quite deliver as expected.

One advantage of VoIP over TDM was supposed to be lower cost for the system setup, but that hasn't always been the case. Another anticipated price advantage of VoIP was supposed to be that you didn't need a dedicated technician on site servicing your lines; everything would be managed over the Internet. But in practice it was discovered that such costs needs to be weighed against the fact that, with VoIP, if the power goes out, most likely so will phone service.

Which brings us to one of the primary concerns about the end of TDM.

They Don't Make 'Em Like They Used To

The old, analog phones will typically work in a power outage, because they have their own power source. Did you ever notice there's no separate power cord with an old TDM phone? You simply plug it into the jack on the wall and you're connected: Power and voice service come through the same line.

This is important if, say, you're in the middle of a hurricane and the electricity cuts out.

One of the editors here at DailyFinance recounted her own similar story. As Hurricane Sandy was barreling up the Eastern Seaboard, her old, corded, landline phone (which she otherwise kept in a closet) was the only telephone service she had. Smart thinking of her to have kept it. VoIP phones also might not seamlessly connect to 911, nor offer directory assistance.

Resistance Is Futile

So why not keep TDM around and let customers choose what they want, or even just keep a TDM line as a backup service, like our aforementioned, highly resourceful editor does? As is usually the answer in these cases: money.

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AT&T doesn't want to deal with TDM service anymore because it's a dying technology, one that doesn't bring in the revenue. Many consumers are already getting voice service from cable companies, and a third of people in the country already use a cellphone for voice.

In AT&T's third-quarter earnings report, the company announced it will invest $14 billion in wireless and wireline IP broadband networks, where, including managed IT services, the company expects 90% of its future revenue to come from. There's no mention of investment in TDM.

In fact, just this past September, the telecom giant petitioned the Federal Communications Commission to make each state set a final date to terminate landline services so that carriers like AT&T and Verizon (VZ) no longer have to maintain their old TDM networks.

How May I Place Your Call?

So where does this leave the average American, who might need coverage in a bad storm when their cellphones or digital VoIP phones are out? Or what about folks out in rural areas who still depend entirely on analog phones for their voice communications?

In Kurt Vonnegut's Slaughterhouse-Five the book's narrator tells a movie maker that he is writing an anti-war book. The movie maker laughs and asks, "Why don't you write an anti-glacier book instead?" The same could be asked of people resisting the end of the legacy TDM phone system. VoIP and its digital, electrical-grid-dependent brethren are coming, whether we like it or not.

Of course, if we miss our TDM phones and PBX system, there's always YouTube, where we can stream old "Laugh In" episodes and watch Ernestine sneering at her next unfortunate victim. Unless, of course, the power's out.

John Grgurich is a regular contributor to The Motley Fool. Follow John's dispatches from the bleeding edge of capitalism on Twitter @TMFGrgurich.

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]]>analogATTcord cuttingHurricane Sandylandline phonespower outageRandall StephensonTDMVerizonVoice over Internet ProtocolVoIP phoneJohn GrgurichTue, 13 Nov 2012 10:55:00 ESTWoman Who Lost Home Sues Big Banks Over LIBOR Manipulationhttp://www.dailyfinance.com/2012/10/18/woman-who-lost-home-sues-big-banks-over-libor-manipulation/http://www.dailyfinance.com/2012/10/18/woman-who-lost-home-sues-big-banks-over-libor-manipulation/http://www.dailyfinance.com/2012/10/18/woman-who-lost-home-sues-big-banks-over-libor-manipulation/#commentsFiled under: , ,

suing wall streetYou can't fight City Hall, but you can fight Wall Street -- at least that's what Annie Bell Adams hopes.

When the U.S. pensioner lost her home to foreclosure, she could have easily done what so many others have: swallowed hard, accepted her fate, and moved on. After all, what else are you supposed to do when a Wall Street megabank tells you that you don't own your home anymore?

If you're Adams, you do what many Americans do when all else fails: sue.

The Financial Times is reporting that Adams, along with four co-plaintiffs, has filed suit against 12 of the biggest banks in the world, including Bank of America (BAC), alleging that manipulation of the LIBOR rate caused their mortgage payments to be much higher than they otherwise would have been.

LIBOR (pronounced LIE-bore) stands for London Interbank Offered Rate, and is the average rate at which the biggest U.S. and European banks can lend money to each other. Rates are reported by the participating banks each morning, and the LIBOR is made public at 11:45 a.m. GMT each day.

Over the summer, allegations emerged that bankers had manipulated LIBOR in the run-up to and during the financial crisis. British superbank Barclays (BCS) was the first bank to be publicly reprimanded because of it -- suffering a fine of $450 million at the hands of American and British regulators, and seeing CEO Bob Diamond sent packing in the process.

But if Adams' suit is any indication, Barclays won't be the last bank to feel the pain.

Here's how LIBOR Affects Your Wallet

If you don't remember the LIBOR scandal with much clarity, don't be too hard on yourself. Bank scandals have been hitting the headlines with a renewed vigor lately. And as banking scandals go, the LIBOR uproar may have seemed a bit arcane and too inside-the-industry, leaving the average observer thinking that it wasn't an issue for them.

Nothing could be further from the truth.

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LIBOR is important to consumers everywhere because it's the daily reference rate at which trillions in dollars of financial instruments are issued. (One estimate places the total at $360 trillion.) If you have a credit card, chances are the rate you pay is based on LIBOR; same thing for small-business loans and student loans.

Most important for our purposes here, LIBOR is the rate used in the issuance of adjustable-rate mortgages. Typically these rates are indexed along the lines of "LIBOR plus 2%" or the like.

This is exactly the kind of adjustable-rate mortgage that Adams and her co-plaintiffs held, and that are front and center in their complaint. According to the Financial Times, their suit alleges in particular that bankers at the 12 institutions in question "were incentivized to manipulate the London interbank offered rate to a higher rate on certain dates on which adjustable mortgage interest rates were reset."

More Lawsuits to Follow?

Following months of public outcry, and much hand-wringing on the part of politicians and bureaucrats on both sides of the Atlantic, at the end of September, the British Bankers' Association formally ceded control of LIBOR to British government oversight. The LIBOR will now receive what U.K.'s Financial Services Authority Managing Director Martin Wheatley is calling "a complete overhaul." The BBA had overseen the LIBOR since its first use in 1986.

But a new and improved LIBOR is neither here nor there for Annie Bell Adams and her co-plaintiffs. They have a legitimate gripe, and this suit could be just the beginning of more like it. When will the first LIBOR manipulation suit for credit card rates appear? Or for student loans? It's estimated that Adams' class action suit alone could draw up to 100,000 additional plaintiffs.

Four years after the financial crash, the world's big banks can't quite get away from the trouble they caused. Just ask the lawyers gearing for Annie Bell Adams' lawsuit.

John Grgurich is a regular contributor to The Motley Fool, and owns no shares of Bank of America. The Motley Fool owns shares of Bank of America. Follow John's dispatches from the bleeding edge of capitalism on Twitter @TMFGrgurich.


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]]>adjustable rate mortgagesBank of America CorpBarclays PLCBritish Bankers' Associationcredit card interest ratesFinanceLIBORLIBOR One Month FuturesLibor riggingLIBOR scandalLondon Interbank Offered Ratemortgage ratessmall business loansstudent loans.Wall StreetJohn GrgurichThu, 18 Oct 2012 15:30:00 ESTGoldman Sachs's Great Muppet Caper Comes to an End, For Nowhttp://www.dailyfinance.com/2012/10/12/goldman-sachs-greg-smith-clients-muppets/http://www.dailyfinance.com/2012/10/12/goldman-sachs-greg-smith-clients-muppets/http://www.dailyfinance.com/2012/10/12/goldman-sachs-greg-smith-clients-muppets/#commentsFiled under:

The MuppetsIt appears that Kermit, Miss Piggy, and Animal can all finally relax, at least for the moment. Financial Times is reporting that Goldman Sachs (GS) has officially called off the great Muppet hunt.

If you recall, this past March Greg Smith, a departing Goldman employee, published an angry missive in the opinion section of The New York Times, blasting the bank's environment as "toxic" and "destructive." But perhaps the most stinging criticism -- or at least the one the bank and public took the most notice of -- was Smith's charge that the some members of the firm referred to their clients as "muppets." (Muppet, in British slang, means "an incompetent or foolish person," a usage that perhaps derives from Jim Henson's creations being ridiculous figures manipulated by puppeteers.)

It's Time to Get Things Started on the Muppet Hunt Tonight

In response, Goldman launched an internal investigation into all the charges Smith made, the result being that little evidence was found to support his allegations.

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Specifically, of the 4000 references to the word muppet found in millions of employee emails, only one referred to clients as muppets; the rest were all references to the 2011 Muppet movie.

Also of interest: According to the Times, just weeks before he resigned Smith complained about his bonus, saying he deserved to be paid more than $1 million. Smith was a derivatives trader at Goldman, one of the most lucrative positions you can hold at any investment bank.

It's Not Easy Being Goldman

This was an internal investigation, and even the least cynical among us might suspect that Goldman didn't exactly go out of its way to prove Smith's case, and that they were happy to find out--and report -that he was carping about his substantial pay. Even so, this report would probably be the end of the great Goldman Muppet caper if it weren't for the fact that Smith's book -- Why I Left Goldman Sachs -- is about to be published. Goldman is apparently bracing for the worst.

Of all the scandals that have hit the big Wall Street banks over the past four years, this is by far the most fun for the casual observer, if not the most financially instructive. But as scandal after scandal, lawsuit after lawsuit, and bank blowup after bank blowup have rocked the U.S. economy, at least we can sit back and have a laugh over this one.

John Grgurich is a regular contributor to The Motley Fool, and owns no shares of Goldman Sachs. Follow John's dispatches from the bleeding edge of capitalism on Twitter @TMFGrgurich.


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]]>clientsGoldman SachsGoldman Sachs muppetsGreg Smithinvestigationinvestment bankingLloyd BlankfeinmuppetsJohn GrgurichFri, 12 Oct 2012 11:30:00 ESTVictoria's Secret's First NFL Stadium Store to Open Tonighthttp://www.dailyfinance.com/2012/10/01/victorias-secrets-first-nfl-stadium-store-to-open-tonight/http://www.dailyfinance.com/2012/10/01/victorias-secrets-first-nfl-stadium-store-to-open-tonight/http://www.dailyfinance.com/2012/10/01/victorias-secrets-first-nfl-stadium-store-to-open-tonight/#commentsFiled under: ,

Victoria's SecretAre you ready for some football? And more importantly, would you like some lingerie with that?

Tonight's Monday Night Football game will not only feature the season's first match-up between two legendary teams -- the Dallas Cowboys and the Chicago Bears -- but also the first link-up between legendarily crusty football fans and supernaturally sexy Victoria's Secret.

That's right: It's gonna be a pigskin and lace mash-up when Victoria's Secret opens its first NFL shop in Dallas Cowboys Stadium.

Beer, Nachos and Models

In case you're going to be there and you want to stop by to check out the merchandise, just head to the main concourse club area above entry "A."

Before the game, there will be a ribbon-cutting ceremony where two top models from Limited Brands' (LTD) best-known brand, Elsa Hosk and Jessica Hart, will be in attendance.

Also in attendance will be Charlotte Anderson, daughter of Cowboys owner Jerry Jones, and the team's vice president of brand management.

Cute as a Bug?!

"We think it's cute as a bug and very in place to show it and sell it out there," Jones said recently regarding the Victoria's Secret merchandise. Note: "Cute as a bug" are words that have likely never before been spoken in any connection with pro football, known more for bone-crunching hits than leg-flattering hosiery.

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Of course, back in the day, New York Jets quarterback Joe Namath famously (or maybe infamously) did a pantyhose commercial. And let's not forget a little something called the Lingerie Football League (which is exactly what it sounds like -- women playing football in skimpy outfits). And the Dallas Cowboys themselves are arguably as well-known for their scantily clad cheerleaders as for their armor-clad players.

So perhaps this latest concession to modernity and corporate culture was inevitable. Football might never be the same, but for some viewers, it might be even better.


John Grgurich is a regular contributor to The Motley Fool.





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]]>Chicago BearsCowboys StadiumDallas CowboysEntertainmentJerry JonesJoe NamathLimited Brands IncLingerie Football LeagueMonday Night FootballNew York JetsSportsVictoria's Secretvictorias secretvictorias secret modelsJohn GrgurichMon, 01 Oct 2012 15:21:00 ESTBank of America VP Makes Bad Call of a Lifetime as an NFL Refhttp://www.dailyfinance.com/2012/09/28/bank-of-america-vp-makes-the-bad-call-of-a-lifetime-as-an-nfl-re/http://www.dailyfinance.com/2012/09/28/bank-of-america-vp-makes-the-bad-call-of-a-lifetime-as-an-nfl-re/http://www.dailyfinance.com/2012/09/28/bank-of-america-vp-makes-the-bad-call-of-a-lifetime-as-an-nfl-re/#commentsFiled under: , ,

Lance EasleyYou gotta call 'em like you see 'em, whether it's on the field or on the balance sheet. This is especially true if you're a Bank of America (BAC) vice president moonlighting as a National Football League referee.

Such is the story of Lance Easley, a vice president of small business for Bank of America in California, who had been refereeing NFL games in his spare time while the league had locked out its full-time referees during exceptionally bitter contract negotiations. But the professional referees now suddenly find themselves back at work, and it might be due in part to a particularly contentious call Easley made during last Monday's Seahawks-Packers game -- a call contentious enough for the president to weigh in on.

Sorry, Mr. President, the call will stand
According to an NFL statement on the controversy, Easley was in the end zone when Seahawks wide receiver Golden Tate and Packers safety M.D. Jennings both went after a pass thrown by Seahawks quarterback Russell Wilson. In the fight for the ball, Tate can be seen shoving Packers cornerback Sam Shields to the ground.

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When all was said and done, Tate did catch the ball and was awarded possession of it, but his knockdown of Shields should have nullified the play. Easley, however, called it as a touchdown, and the Seahawks won as a result.

President Obama, an infamous sports junkie, said it was a "terrible" call. In its own statement, the NFL has said the call will stand.

All Good Things Must Come to an End, Luckily for Easley

The professional refs may have Easley to thank for the sudden end to the lockout, with the league apparently caving in on all their demands. Had it not been for Easley's controversial touchdown call -- and the resulting media, fan, and presidential furor -- the lockout might still be going on.

Easley had apparently never refereed anything above junior college games before this season in the NFL. And while this must have been the thrill of lifetime (refereeing a pro football game likely being a bit more exciting than his day job), Easley's days as a big-time referee are at an end.

However, maybe that's something worth cheering about, and not just for the fans enraged over bad calls by amateur refs, but for Lance Easley as well: Bankers aren't exactly the most popular people in the world these days anyway, but being an NFL referee on top of that? Even JPMorgan Chase (JPM) CEO Jamie Dimon may never have faced such pressure.

The Ref Behind the Controversial Seahawks Call

John Grgurich is a regular contributor to The Motley Fool. The Motley Fool owns shares of Bank of America and JPMorgan Chase.


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]]>John GrgurichFri, 28 Sep 2012 14:31:00 ESTWill Kellogg Snap, Crackle and Pop in China, or Just Get Soggy?http://www.dailyfinance.com/2012/09/26/kellogg-china-expansion/http://www.dailyfinance.com/2012/09/26/kellogg-china-expansion/http://www.dailyfinance.com/2012/09/26/kellogg-china-expansion/#commentsFiled under: , , ,

KelloggsSince 1927, Rice Krispies have been an American breakfast staple. Who doesn't like to hear that trademark snap, crackle and pop as the milk hits the cereal? Well, Kellogg (K) is about to find out whether or not the Chinese do.

The cereal and snack-food giant has just struck a deal to manufacture and distribute its products in China. For companies and investors hungry for growth, China can sometimes seem like the answer to everyone's prayers: a country with more than a billion people and an expanding middle class eager to eat up anything America can throw at it.

But it doesn't always work out that way. Home Depot (HD), Best Buy (BBY), and Mattel (MAT) all went into China smiling -- blithely assuming the Chinese consumer was going to buy up everything they had to offer -- and left crying. Kellogg, however, may just have a secret weapon up its sleeve, one that any foreign-enterprise adventurer shouldn't leave home without: a local partner that knows the tastes and psychology of the region.

The Agribusiness King of Singapore

In Kellogg's case, that partner is Wilmar International. Based in Singapore, Wilmar has more than 400 manufacturing plants and an extensive distribution network that includes China, India and Indonesia. Its business specialties include edible-oils refining, sugar milling and refining, and -- important for Kellogg -- grains processing.

The two companies will partner 50-50 on all of Kellogg's China operations. Wilmar will contribute its home-team infrastructure, its massive supply-chain scale, and its extensive sales and distribution network. Kellogg will contribute its globally recognized portfolio of brands and products, focusing on two in particular: Kellogg and Pringles.

Wilmar has been around for more than 20 years, and seems to know the region intimately, along with the business of manufacturing and distributing grains-based food products. This is encouraging news for Kellogg investors, as the company seems to be smartly following in the successful Asian footsteps of another big American brand: Starbucks (SBUX).

How to Sell Coffee in the World's Premier Tea Market

So far, China has been very good to Starbucks. The company believes that China will be its second biggest market by 2014. But what's left to conquer after you've conquered the biggest country in the world by population? Why, the second biggest country in the world by population: India.

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Earlier this year, Starbucks inked a partnership deal with Indian conglomerate Tata Group to spread the gospel of coffee across the subcontinent. Tata is relatively unknown in the U.S., but is very well known in India and elsewhere around the globe for products as varied as cars, steel, and hotels. But most important for Starbucks, Tata is best known for its beverages: tea in particular.

This is important because India is primarily a tea-drinking country, so who better than the primary purveyor of the country's favorite beverage, Tata Group, to shepherd America's favorite coffee shop, Starbucks, around the country?

Everyone's a Winner

Like Kellogg and Wilmar, the Tata Group and Starbucks partnership was also a 50-50 enterprise. Deals like this are a bargain for all the companies involved. Local companies get the brand cachet and instant product recognition of the American companies, while the latter get personally escorted around tricky foreign markets -- "tricky" being an understatement.

Home Depot found out the hard way that, in China, do-it-yourself means you're too poor to have someone else do it for you: The company just announced it will be closing its seven remaining stores there. Best Buy ended up closing all its Best Buy branded stores in China, as well, which it imported with no adjustment for how Chinese consumers are used to shopping -- part of which includes price haggling. Mattel opened a flagship, six-story Barbie store in Shanghai to great fanfare in 2009, only to close it two years later: Chinese parents thought Barbie was sexy rather than cute, and therefore not appropriate for their children.

There's no way to know right now exactly how Rice Krispies will go down in China. If Kellogg is smart, it will rely heavily on Wilmar for product advice and consumer tastes, as well as do a lot of consumer testing: better to find out now whether its benchmark products will be a crackling delight or a soggy disappointment.



John Grgurich is a regular contributor to The Motley Fool. The Motley Fool owns shares of Starbucks and Best Buy. Motley Fool newsletter services have recommended buying shares of Starbucks, The Home Depot, and Mattel. Motley Fool newsletter services have recommended writing covered calls on Starbucks and creating a bear put spread position in Mattel.


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]]>Best Buy Co IncchinaFinanceIndiakelloggkelloggsMattelRice KrispiesSingaporeStarbucks CorpTata GroupThe Home DepotThe Motley FoolWilmar International LtdJohn GrgurichWed, 26 Sep 2012 07:00:00 EST5 Ways QE3 Will Affect Your Wallethttp://www.dailyfinance.com/2012/09/18/5-ways-qe3-will-affect-your-wallet/http://www.dailyfinance.com/2012/09/18/5-ways-qe3-will-affect-your-wallet/http://www.dailyfinance.com/2012/09/18/5-ways-qe3-will-affect-your-wallet/#commentsFiled under: , , ,

QE3How many times have you seen a box of detergent or a bottle of cold medicine that says something like "new and improved" or "more powerful than ever" and wondered whether the contents could live up to the hype on the label? Well, the Federal Reserve's third round of quantitative easing -- known as QE3 -- is all that and more. In fact, if rounds of quantitative easing had slogans, QE3's would be: "Wow! We've never tried anything this powerful before!"

Compared to QE1 and QE2, QE3 is unprecedented in its direction and scope. As such, it's making people across the board nervous, for one familiar reason: the possibility of inflation.

Boldly Going Where No Fed Chair Has Gone Before

Quantitative easing is when the Fed buys securities in the hope of driving down interest rates -- ideally spurring people and businesses to borrow more and spend more. In the case of QE3, the Fed has committed to buying $40 billion of mortgage-backed securities each month.

What makes QE3 different from QE1 or QE2 is that the Fed has put no limit on how long it will keep buying them. Chairman Ben Bernanke has simply said that the Fed will keep buying mortgage-backed securities until the U.S. labor market improves substantially.

As such, QE3 is an open-ended commitment from the Fed to virtually print money. This makes people nervous. And justifiably: Any time you inject massive amounts of money into a country's economy, you risk inflation.

What QE3 Means for You and Me

Gallery: What QE3 Means for You and Me

1. Higher prices at the mall2. Higher prices at the grocery store3. Higher prices at the pump4. Lower mortgage interest rates5. Lower checking and savings account rates


John Grgurich is a regular contributor to The Motley Fool.


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]]>Ben BernankeBernankeconsumer price indexFederal Reserve SystemFinanceinflationinterest ratesmoney supplymortgage backed securitiesmortgagesQE3quantitative easingJohn GrgurichTue, 18 Sep 2012 16:45:00 EST