Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)

April 9, 2009

As we’ve blogged about before, Federal Reserve Bank of St. Louis has published a timeline of the current financial crisis. The entire site is a great resource, but one thing that may interest people in particular – who are looking to understand the crisis – is the glossary of terms.

Are you curious about what an Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) is? Me too, to learn more about some of the terms associated with the financial and mortgage crisis click on the picture below.



Five Tips for Avoiding Foreclosure Scams

April 1, 2009

The Federal Reserve just came out with an ad for a section of their website, “Five Tips for Avoiding Foreclosure Scams.”  The ad urges people who may be facing foreclosure to check out this section of to get trusted information on how to avoid foreclosure scams.

If you or someone you know is facing foreclosure, be sure to take a look at the Fed’s site–you should only work with HUD-certified counselors, and you shouldn’t have to pay a lot of money to get help. 

First draft of $700 billion bailout offers no concrete solution for troubled homeowners

September 23, 2008
September 23, 2008

Over the past two weeks, market-rattling changes on Wall Street such as Lehman Brothers’ bankruptcy and the government’s $85 billion rescue of AIG shook investor confidence and saw stocks at their lowest since trading resumed post 9/11. Last week, Treasury Secretary Henry Paulson proposed a $700 billion bank bailout to revive the economy during what many are calling the worst decline since the Great Depression, citing the mortgage crisis as its “root cause”.

Without the bailout, Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee at today’s congressional hearing, “…unemployment rates will rise, more homes will be foreclosured upon…the economy will not be able to recover.”

Paulson said multiple times that tax payer interest is a top priority, but Senator Chris Dodd, banking committee chair, insisted the bill include these three conditions:

  1. Taxpayer investments are protected
  2. Those responsible for bad banking decisions are held accountable
  3. More assistance is provided for homeowners facing foreclosure

Though the rate of foreclosures is expected to rapidly increase within the next year, Paulson had no concrete answer as to why his $700 billion bill doesn’t address foreclosure prevention. At this point, help for homeowners under this bill is purely speculative. If the government buys up the bad debt backed by their mortgages it could help speed up loan workout processes, but there are no guarantees.

“Unfortunately, not every home will be saved,” said Paulson. “If a person can afford to stay in their home, we plan to do whatever we can to help them stay in their home.”

Fortunately for troubled homeowners, it is unlikely this bailout will pass as it presently exists. “What they have sent us is unacceptable,” said Senator Dodd of the Treasury’s proposal. Alternative plans have been mentioned, but their details have not been released.

Read more about today’s congressional hearing:

Bloomberg coverage

Associated Press coverage

St. Louis Beacon discusses Wall Street woes with local economist

September 17, 2008
September 17, 2008

Published September 16 at

By Dale Singer

Venerable financial names are being swallowed or going broke, the stock market is heading south and the financial websites and cable networks might as well have a black border around their screens.

What should you do? What can you do? When will things improve?

Noting this morning’s steep drop on Wall Street, Hafer said the historic ability of the markets to bounce back should give individuals some comfort, whether they are worrying about their portfolio, their jobs or both.

“It’s not a pretty picture,” Hafer said, “but the markets are pretty resilient. If you were to tell somebody two years ago of all the things that have happened up to now and the economy still is not in a serious recession, I think they would be pretty surprised.”

Even with this morning’s downturn, Hafer admitted that as he watched MSNBC on Sunday night and they were talking about the sale of Merrill Lynch to Bank of America, “I thought it was going to be a lot worse than this.

“Part of what’s going on is these are not commercial banks, so it’s not depositors who have to worry. These are investment banks. They make financial deals. I don’t think people should take it in the same vein as if it were Bank of America. Commercial banks like Bank of America are much better diversified.”

The bad news over the weekend is an extension of the bleak headlines that have hit the economy for months, Hafer said.

“What we are seeing now is still wringing out of the situation that started several years ago,” he said. “You had extremely low interest rates, extremely easy borrowing opportunities, and the mortgage market took off. Then we ran into this patch of mortgage market problems and a worldwide economic slowdown, and it’s still unraveling.

“Banks made too risky loans, and now we’re paying the price.”

Still, Hafer noted, individuals can take some measure of solace from the fact that the safeguards in the American economy are working as they should: The Federal Reserve stepped in and helped arrange for Merrill Lynch to be acquired instead of going under.

That’s not to say that investors whose 401(k) accounts are a fraction of what they once were shouldn’t be concerned. Hafer just wants them to take a step back.

“I don’t want to be Pollyannish about these things,” he said. “Like everybody else, I’m sitting here watching the stock market go down. But if you take a longer-term perspective, I’m still ahead of where I was several years ago.

“You have to be cognizant of the fact that these things do shake out. We’ve already been in this for a year, so it may be another six months, a 12-18 month cycle. It’s not your standard business cycle by any stretch of the imagination, but at the same time it’s not fair to make comparisons to the Great Depression, which is always what people do. I guess I’m a little more optimistic than some of the things I’ve been reading.”

Benjamin F. Edwards III, former head of A.G. Edwards & Sons, isn’t comparing the situation to the ’30s either. But he wonders whether some tough medicine is just what today’s economy needs.

“Maybe this is just foolishness and naivete, but I’d like to see whether our country could handle the bankruptcy of Freddie Mac and Fannie Mae. I don’t know that anybody ever learns a lesson. They learn for maybe a year and a half, then they’re back doing the same thing again.

“It’s sort of like people building homes on a floodplain. They’ve gotten the land for less than market, and if they get flooded out, the government bails them out of their decision. I think this is the sort of attitude that some of the big financial institutions are taking. They’ll take the higher risk to get the higher performance and make higher bonuses and everything that goes with it, and if they’ve ended up ruining things, they’ll get bailed out.”

Edwards recalled the old financial axiom: If something appears to be good to be true, it probably is – “and it always comes back to bite you.”

In the long run, he feels the U.S. has the sound economic foundation to ride the current crisis through, but the process may be painful.

“We may have some blood in the streets getting there,” he added. “I always hear that a company may be too big for the government to let it go under. Maybe there’s some truth to that, but I haven’t seen it.”

Looking at the local economy, Hafer said, the manufacturing sector of the St. Louis area economy is likely to be hit harder than health services, which is the largest regional employer. Individuals who are caught in the job crush should do what they can to make themselves as marketable and as mobile as possible, perhaps by going back to school and increasing their skills.

And those dwindling investment balances? Hafer says if you haven’t been paying enough attention to those, it may be a little late to start.

“It may sound trite, but you should have a diversified portfolio. While a 20 percent decline in stock prices is going to reduce your assets, your portfolio should be diversified so that it can absorb those losses.

“These things have to work themselves through. Until this episode, I thought the stock market had bounced to the bottom over the summer. I know today’s numbers are pushing it back to the low end, but I’m convinced we’ll get through this latest piece of information and the stock market may start turning up by the end of the year. I’d be really glad to see that.”

Individually, the answer may be: not a lot. But Rik Hafer, distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University at Edwardsville, is doing his best to take the long view.


St. Louis Beacon – The Mortgage Crisis is Really a Savings Crisis

July 14, 2008
July 14, 2008

Originally published by The St. Louis Beacon on Wednesday, July 9, 2008:

By Mary Delach Leonard, St. Louis Beacon staff

The roots of the mortgage crisis reach back to the 1980s, when looser credit encouraged families to spend rather than save. A booming real estate market masked the problem – but only temporarily.

While it can be argued that all levels of the lending industry played some part in the sub-prime mortgage collapse, economist William Emmons of the Federal Reserve Bank of St. Louis adds another factor: household financial behavior.

Emmons believes the sub-prime mortgage meltdown was a long time coming and is linked to the downward trend in both U.S. personal and national saving.

“I think it goes back 20 years, and this is the manifestation,” Emmons said. “To me, the big story is we have a national savings crisis, and this goes back to at least the 1980s.”

In 2005, the U.S. personal savings rate hit zero and kept heading south — to a negative 0.4 percent, according to the U.S. Commerce Department. It’s called negative spending, a polite word for debt. 

“Saving is defined as ‘not spending’: income after taxes not spent. And we’ve now gotten down to the zero or negative rate. How do people do that? By borrowing. That’s how the growth of spending has been much faster than income,” Emmons said.

Why have Americans been borrowing so much?

Emmons, whose research area includes banking, financial markets and financial regulation, points to financial deregulation that increased access to credit in a big way in the 1980s. Lower nominal interest rates opened the door to more borrowers by effectively stretching out payments and shifting the burden of repayment further into the future. So, more people were able to qualify for loans.

At the same time, advances in technology simplified the lending process. The simplicity of credit scoring, for example, gave lenders more confidence in lending outside their markets and lending to more people, he said.

But access to credit is still only half the story, Emmons believes.

“The other thing that has been instrumental and pernicious was asset booms,” he said. “When we think about asset booms we think first about the stock market boom, but that wasn’t as widespread because not as many people have large stock portfolios. And more important, you can’t borrow as much against stocks. But the housing price boom in this decade was widespread. Large dollars are involved, and it opened the door to borrowing.”

Emmons said that at the height of the boom, he talked to a cousin who lives in California about that state’s skyrocketing housing prices.

“He said, ‘It doesn’t matter what you pay, as long as you can get the financing. It doesn’t matter what the price is because it is going up. I’ll always make a profit,’ ” Emmons said. “So, in that sort of a market, price is sort of meaningless. The constraint is not the price but the credit access. You can not have a bubble without credit.”

And consumer credit seemed to be readily available everywhere.

“Everybody wanted to offer you financing,” Emmons said. “Everybody wanted to finance you whether it was furniture or automobiles. You can even borrow against home improvements, like a new door.”

While Emmons acknowledges that credit is a good thing, the question became: Is this too much of a good thing?

“Economists would always say that more choice is better, but at the same time, do people understand their options? Do they understand how to make good financial decisions? Which loops back around to financial literacy,” he said.

Responsible borrowing can make it possible for people to buy homes, or fulfill important needs, such as health care or transportation to get to work. But things got out of hand when the mentality of got-to-have-it-now trumped saving-for-the future, analysts say.

“If it’s medicine, that’s a need. But if it’s a durable good, a large purchase — a house — the timing is the question. Do you buy it today, tomorrow, or two years from now?” Emmons said.

“The sub-prime market has always existed on a small scale, but the modern sub-prime market is very different,” he said. “One of the major effects of the sub-prime market was to accelerate home ownerships. It wasn’t that certain people should never buy a house, but before this current market it was more difficult. You had to wait longer, build up a larger down payment.”

In the end, it was all about risk, explains Yuliya Demyanyk, an economist and colleague of Emmons at the Federal Reserve Bank of St. Louis.

“It used to be that when a bank loaned you money, you owed the money to the bank. In the case of default, the bank would lose the money,” she said.

As new loan products arrived on the market and access to credit improved, banks could diversify their risk. Sub-prime mortgages were sold and pooled.

“Any particular loss as long as there was no massive default, was not the bank’s loss,” Demyanyk said. “On one hand, that’s an overall improvement in the financial market because you could share the risk. It was a bad thing for you if you were to lose your home, but in the opinion of the bank it was no loss. So, they didn’t need to be scrutinizing borrowers to the same extent, and there is a cost associated with screening borrowers.”

That lack of scrutiny proved costly in the long run, Emmons points out.

“The flaw on the investor side was they thought they could get this risk pooling without affecting the risk. But, in fact, the incentive for the loan originator had changed, and underwriting quality seemed to decline. So, this logic of spreading the risks still holds, but there was a lot more risk being put into this pool than the investors originally thought,” he said. “That’s the big mistake made on the investors side — Wall Street, the rating agencies, the ultimate investors were naive in thinking they did not change the nature of the risk by opening up this huge pool of capital to the mortgage markets.”

With those investors out of the market, the result has been a credit crunch.

“That’s the big question mark: Whether those big investors will come back,” Emmons said.

The process to create mortgage pools was elaborate and complicated and won’t just snap back, he said.

“Investors have to have confidence in every link in the chain. And each of those links has been discredited, whether it is mortgage brokers, appraisers, securitizers, rating agencies, bond insurers. All have been through the wringer,” Emmons said.

Demyanyk says her research on sub-prime loans indicates that when housing prices stopped rising, it didn’t cause all the mortgages to become bad all of a sudden.

“Those mortgages were bad, even when the house prices were rising,” she said. “But the mortgage had an escape: The house market is wonderful; you could always sell. The market was hot — you could get away with a bad mortgage situation. The crisis was in the quality of the mortgages.”

She believes the industry didn’t see the collapse coming because it was masked by housing prices.

“It is like a virus feeding in your body during the incubation period. You do not see it. You do not know it’s there. It is ready to show signs, but before it does, you would not go to the doctor and start checking on different things because you feel so well,” Demyanyk said. “After the first sneeze, then you start getting it. What happened? You have a lot of sneezes in 2006, and boom we’re in a crisis.”

She also speculates that the bust was inevitable, given the mindset of the market.

“Knowing there will be a crisis won’t necessarily spurn the crisis but could make it happen sooner,” she said. “If you were told two years ago, when things were going great, that if everyone takes the equity out of their houses to buy boats there will be trouble two years from now. Would you not do it? You might say, ‘I need to do it sooner, while I still can. I need to do it faster because I need that boat.’ “