It is too early to make a definitive call, but so far the Federal Reserve's (Fed) efforts to stimulate economic activity through quantitative easing has not been effective as noted by this December 10th, 2010 Wall Street Journal piece written by Jon Hilsenrath and Mark Whitehouse. Quantitative easing is a process where the Fed issues short-term U.S. Treasuries to the marketplace and uses its sale proceeds to purchase longer-term U.S. Treasury bonds in an attempt to drive down interest rates on borrowing and investment. Even though the Fed's action by itself was supposed to lower interest rates, separate market forces are counteracting their efforts, so far.
Surprisingly, long-term interest rates have risen sharply. This is not good because this increases the borrowing costs for investors and homeowners. Therefore, it is less likely for us to receive a boost in investment spending or reverse the slide in housing prices. When investment spending is on the upswing, that means that businesses are more likely to create jobs. As for housing, a rise in prices will increase overall wealth and that is usually followed by more consumption spending, which is the main driver for economic growth.
One reason that long-term interest rates might be rising is due to anticipated acts from Congress. First, the markets are anticipating that legislation extending the Bush tax cuts will take place before the end of the year. In addition, this legislative piece is also expected to stimulate the economy with its mixture of tax breaks and a reduction in payroll taxes. Both components are expected to boost economic activity, so investors believe inflation expectations might rise. The reason for this is because firms will be anxious to raise prices once the economy picks. Lastly, continuing the Bush tax cuts, along with other stimulants, will increase the budget deficit. In fact, the cost of this proposed package will probably exceed the $787 billion tab of the American Recovery and Reinvestment Act of 2009.
The expected decline in the dollar has not yet materialized and that is vital to increasing U.S. exports. U.S. exports are goods produced domestically, but sold abroad. When exports rise, this means more jobs here. As our students learn in Principles of Macroeconomics and Mankiw's Open-Economy Macroeconomics: Basic Concepts, increasing money supply will decrease the U.S. nominal exchange rate. However, we can see that after declining for most of 2010, we are starting to see the U.S. dollar appreciate over the last month, as shown by the chart on the upper left-hand corner from the New York Federal Reserve Bank..
Also when the Federal Reserve implemented QE2, it was expected that money supply would increase substantially, but we have not seen that yet. While October's M1 and M2 has grown over the last 12 months according to the charts from the New York Federal Reserve Bank, both growth rates were moderate at around 4-6%. That is low when one sees that money growth rates were almost as high as 40% in 2008. Certainly, the instability of Europe as fiscal weakness in Greece, Portugal and Ireland are causing investors to be more comfortable with the U.S. dollar.
Another effect of European turbulence is investors turning to the U.S. stock market. We have seen improvement in U.S. stocks, so that is leading investors to sell U.S. bonds and reinvest them into the stock market where they can earn a higher rate of return. That could be another reason why long-term bond yields are rising.
Overall, it is too early to make final assessments on QE2, but it does appear that its impact will not be substantive. Even though we have not seen the negative effects of inflation, it remains risky to rely on monetary policy tools for an extended period of time. We should also point out that long-term interest rates were already relatively low and economic activity was subdued. Therefore, fiscal policy should have a much stronger impact and that's why passage of the this bill is important. When an economy is struggling, it is neither prudent to raise taxes or cut government spending if you want the economy to grow soon. However, the time frame for being able to pursue aggressive actions on the economy is quickly diminishing. Otherwise, we will soon be forced to confront a burgeoning budget deficit that will require economically debilitating tax increases and government spending cuts. When this time arrives, it will be better if the economy is on more stable footing than it is now.
Monday, December 13, 2010
Wednesday, December 8, 2010
Regional Economic Update for Southeast Portion of U.S.
The Federal Reserve Bank of Atlanta released a December 1st, 2010 report on the latest economic activity from the Sixth District of the Federal Reserve System. A map of the Federal Reserve System shows the area that encompasses the Sixth District, which includes all of Georgia, Florida and Alabama, along with the eastern portion of Tennessee, and the southern halves of Mississippi and Louisiana. Their economic findings are grouped into five areas: manufacturing, employment, economic growth, inflation, and real estate, but my focus will be on three of the five areas.
U.S. manufacturing activity remains moderate. We still saw growth, but it has slowed down since October with the Institute of Supply Management's Manufacturing Purchasing Managers Index (PMI) declining from 56.9 to 56.6. As long as the index is above 50, this means that it is expanding. However, it is not significant enough to indicate that the recovery is heating up.
Referring back to regional data on employment, we see some improvement in October. The Sixth District added 29,000 jobs during this month with most of the gains occurring under in the leisure and hospitality sector. Given our aging demographic relative to other regions of the U.S., that would be consistent of previous patterns. In past months, we have seen significant decreases in government, but that trend moderated this month.
Additional trends in employment can be found under the Economic Policy Institute's Economy Track, which looks at employment levels since the recession started in 2007. A look at our region shows that we still have not recovered from all of the jobs lost since then. Even though we can see that all regions experienced job loss, a look at the Sixth District demonstrates that we have been hit harder than other areas. In particular, Florida and Georgia suffered greatly with job losses of 9.3% and 8%, respectively. On the positive side, we can see that Louisiana has done better than most with only -1.3% loss in jobs.
A look at unemployment rates shows that half of the states within this region were better than the U.S. unemployment rate of 9.6% in October. Louisiana, Tennessee, and Alabama all experienced lower unemployment rates with Louisiana the lowest at 8.1%. In particular, Florida's unemployment rate stands out with a discouraging 11.9% with Georgia following them at 9.9%. Most of this can be attributed to the housing markets that have disportionately affected Florida and Georgia. Overall, the Sixth District had 10.3% unemployment. The fact that all of Florida and Georgia is included in the Sixth District, while half of Lousiana and Tennessee are not is one of the reasons why unemployment rates are skewed upward here.
Real estate is one area that is holding performance back. While there has been a slight improvement over the last month for the major cities of Atlanta, Miami and Tampa, almost all of their monthly and annual trends lag behind the rest of the country. With foreclosures continuing to be a problem, it is possible that we have not reached the bottom. Until we start to see home prices start to appreciate, it will be difficult to mount a strong recovery because higher housing prices instill more confidence for individuals and stimulate consumer spending.
U.S. manufacturing activity remains moderate. We still saw growth, but it has slowed down since October with the Institute of Supply Management's Manufacturing Purchasing Managers Index (PMI) declining from 56.9 to 56.6. As long as the index is above 50, this means that it is expanding. However, it is not significant enough to indicate that the recovery is heating up.
Referring back to regional data on employment, we see some improvement in October. The Sixth District added 29,000 jobs during this month with most of the gains occurring under in the leisure and hospitality sector. Given our aging demographic relative to other regions of the U.S., that would be consistent of previous patterns. In past months, we have seen significant decreases in government, but that trend moderated this month.
Additional trends in employment can be found under the Economic Policy Institute's Economy Track, which looks at employment levels since the recession started in 2007. A look at our region shows that we still have not recovered from all of the jobs lost since then. Even though we can see that all regions experienced job loss, a look at the Sixth District demonstrates that we have been hit harder than other areas. In particular, Florida and Georgia suffered greatly with job losses of 9.3% and 8%, respectively. On the positive side, we can see that Louisiana has done better than most with only -1.3% loss in jobs.
A look at unemployment rates shows that half of the states within this region were better than the U.S. unemployment rate of 9.6% in October. Louisiana, Tennessee, and Alabama all experienced lower unemployment rates with Louisiana the lowest at 8.1%. In particular, Florida's unemployment rate stands out with a discouraging 11.9% with Georgia following them at 9.9%. Most of this can be attributed to the housing markets that have disportionately affected Florida and Georgia. Overall, the Sixth District had 10.3% unemployment. The fact that all of Florida and Georgia is included in the Sixth District, while half of Lousiana and Tennessee are not is one of the reasons why unemployment rates are skewed upward here.
Real estate is one area that is holding performance back. While there has been a slight improvement over the last month for the major cities of Atlanta, Miami and Tampa, almost all of their monthly and annual trends lag behind the rest of the country. With foreclosures continuing to be a problem, it is possible that we have not reached the bottom. Until we start to see home prices start to appreciate, it will be difficult to mount a strong recovery because higher housing prices instill more confidence for individuals and stimulate consumer spending.
Monday, December 6, 2010
Is Rising Inequality The Root Of Our Problems?
According to University of Chicago economist Raghuram Rajan and his Money Magazine interview with David Futrelle on November 24th, 2010, he believes income inequality is the main problem with the U.S. today. This is a trend that started in the 1980s as tax code changes and technology dramatically transformed the economic landscape. Also, the rapid decline in delivering goods across the globe led to the rise in globalization and the diminishing influence of unions. As for fighting income inequality, the question focuses on whether to create a larger safety net or emphasize strategies on improving the productivity gap.
Before addressing this issue, you might be asking why minimizing income inequality is even important. My response is that it can be necessary to encourage more social mobility and prevent bad economic policy. In these times, images of wealth and prosperity often dominate our airwaves and lead to envy and conflict. As we have seen with this past recession, many middle class Americans have seen their wages shrink, while also noticing the multi-million dollar bonuses given to executives of failing firms. While this particular scenario is not ideal, it does provide a distorted picture of today’s economy where global forces play a significant role.
It is common to question the merits of globalization, while not realizing its impact in growing prosperity in the U.S. and beyond. Rising living standards and wages from the 1990s happened because former President Bill Clinton openly embraced free trade, which led to lower costs and greater productivity. Instead, we see headlines of jobs leaving and going overseas, but do not recognize the new jobs that are created due to lower prices paid by consumers. When we only recognize the negatives, it can lead our policymakers to bad economic decisions, such as reverting to past protectionist policies that led us to the Great Depression of the 1930s. In order to prevent this from happening, we need to ensure that our workforce is adequately trained to adjust to the strains of globalization.
Rajan believes that the promotion of home ownership by both political parties caused our current economic troubles. Democrats wanted to address the wealth gap and thought that the key was affordable housing. They expanded the role of Fannie Mae and Freddie Mac, who bought up various mortgages from servicers and packaged them into investment products called mortgage backed securities. These investment products were initially attractive to investors, who saw above average returns and low risk, given the implicit guarantee from the U.S. government. However, a souring economy caused delinquencies and foreclosures to rise and many of these mortgage backed securities lost their values, in particular subprime mortgages. Subprime refers to borrowers that do not have good credit and must pay higher interest rates and are considered greater credit risks. Since Fannie Mae and Freddie Mac had no control over underwriting any of these mortgages, they were ill-equipped to handle the rapid decline in credit quality.
It should be noted that the George W. Bush administration also did not take steps to limit the influence of Fannie Mae and Freddie Mac because they wanted to refute charges that they were the party for the affluent and were very interested in boosting home ownership rates to generate wealth and more social mobility. Their thinking was that communities would improve if home ownership took precedence over renting. With owning more private property, it was thought that people would take greater care of it and this would limit decay, which brings more violence and crime. If this initiative was successful and the poor and lower middle class found more access to wealth, then they would be more amenable to changing their allegiance to the Republican Party. Given that Fannie Mae and Freddie Mac allowed individuals to buy homes with a lower down payment than one would receive from a traditional bank, there were limited efforts from the Bush administration to deemphasize their influence.
Since home ownership failed in closing the wealth gap, then the question focuses on whether we should revert back to the income redistribution strategies that occurred before the 1980s. This can take the form of either tax code changes and/or the rise in-kind transfers that can diminish income inequality. Starting in the 1980s, we started seeing a shift in the tax code that showed the marginal income tax rates dropped from 70% for the highest income bracket to 35% today, as referenced by the Tax Foundation's history of U.S. federal individual income tax rates. While this change certainly contributed to high economic growth, it also created a tax system that was less progressive. In the mid-1990s, the Clinton administration and a Republican-controlled Congress pushed through the Welfare Reform Act of 1996, which yielded benefits during an economic prosperity in the late 1990s. However, we have since seen increases in poverty as two recessions during the last decade have taken a toll on the less fortunate. Therefore, should we make the tax system more progressive with the wealthy taking on a greater burden of tax liability or should we expand the safety net for vulnerable segments of society?
One way to accomplish this is by focusing on income redistribution strategies to help vulnerable Americans subsist when their jobs go away. However, expanding welfare programs and raising taxes on even the wealthy is carrying less currency with many Americans. They are increasingly concerned about expanding government's role further. As inferred by Rajan, raising the marginal tax rates on the wealthy can be disruptive to our current fragile recovery. We have seen the difficulty in letting the Bush tax cuts expire for even the wealthy with Senate Republicans blocking two measures aimed at letting them expire at either the $250,000 or $1,000,000 income levels.
Both methods are examples of income redistribution that can lead to less income inequality, but it can come at the expense of lower living standards overall. High deficits matter because it can ultimately lead to higher borrowing costs for both businesses and consumers. If businesses invest less and consumers buy less, then that is a double whammy on the economy. The end result can be an upward trend to the unemployment rate that is much too high as it is.
Then, the question becomes what can we do if above strategies do not work. To answer that question, we need to answer whether the U.S. workforce that is suffering from structural and not cyclical unemployment. In other words, are jobs not available because the economy is in a downward business cycle or is it because employers are having difficulty matching the required skills with their new jobs?
Since I believe the latter is the problem particularly in the South, then attaining more education and skills will be necessary. In this case, our priority should be on lowering the high expense of attaining a college education. Therefore, Obama's efforts in boosting funding for Pell Grants and financial aid are essential, along with expanding partnerships between community colleges and the private sector. If these efforts can be successful, then opportunity to wealth can be more equitable to all Americans.
Also, a 2007 speech from Ben Bernanke hints at other efforts at addressing inequalities that go beyond traditional K-12 and college education. Certainly, we understand the importance of K-12 and college education, but Bernanke points out that any type of training, whether it is from on-the-job training, community colleges, vocational colleges, and financial literacy training are also important in closing the income gap. Until the gap in human capital is minimized, then income inequality will be difficult to overcome.
In summary, we must address income inequality in order to improve social mobility and develop a more stable society. It is a challenge that involves complications brought on by the vestiges of discrimination; disparate funding between school districts; and self-defeating cultural behavior traits. It is very difficult to implement public policy that can distinguish individuals, who truly need and appreciate a helping hand, with those that use public resources to maintain an irresponsible and unproductive lifestyle.
Our fiscal situation and declining overall wealth will also limit the level of income redistribution that can be done, so more strategic programming will be needed to increase productivity across all social classes. While also acknowledging that families who made sacrifices and accomplished great success should be rewarded and not penalized, they must be made aware that it is in their self-interest to have an America that is more equitable. When that occurs and people feel that they are being given a fair chance at success, we will have an America that is less fractured and more self-sustaining in the long run.
Before addressing this issue, you might be asking why minimizing income inequality is even important. My response is that it can be necessary to encourage more social mobility and prevent bad economic policy. In these times, images of wealth and prosperity often dominate our airwaves and lead to envy and conflict. As we have seen with this past recession, many middle class Americans have seen their wages shrink, while also noticing the multi-million dollar bonuses given to executives of failing firms. While this particular scenario is not ideal, it does provide a distorted picture of today’s economy where global forces play a significant role.
It is common to question the merits of globalization, while not realizing its impact in growing prosperity in the U.S. and beyond. Rising living standards and wages from the 1990s happened because former President Bill Clinton openly embraced free trade, which led to lower costs and greater productivity. Instead, we see headlines of jobs leaving and going overseas, but do not recognize the new jobs that are created due to lower prices paid by consumers. When we only recognize the negatives, it can lead our policymakers to bad economic decisions, such as reverting to past protectionist policies that led us to the Great Depression of the 1930s. In order to prevent this from happening, we need to ensure that our workforce is adequately trained to adjust to the strains of globalization.
Rajan believes that the promotion of home ownership by both political parties caused our current economic troubles. Democrats wanted to address the wealth gap and thought that the key was affordable housing. They expanded the role of Fannie Mae and Freddie Mac, who bought up various mortgages from servicers and packaged them into investment products called mortgage backed securities. These investment products were initially attractive to investors, who saw above average returns and low risk, given the implicit guarantee from the U.S. government. However, a souring economy caused delinquencies and foreclosures to rise and many of these mortgage backed securities lost their values, in particular subprime mortgages. Subprime refers to borrowers that do not have good credit and must pay higher interest rates and are considered greater credit risks. Since Fannie Mae and Freddie Mac had no control over underwriting any of these mortgages, they were ill-equipped to handle the rapid decline in credit quality.
It should be noted that the George W. Bush administration also did not take steps to limit the influence of Fannie Mae and Freddie Mac because they wanted to refute charges that they were the party for the affluent and were very interested in boosting home ownership rates to generate wealth and more social mobility. Their thinking was that communities would improve if home ownership took precedence over renting. With owning more private property, it was thought that people would take greater care of it and this would limit decay, which brings more violence and crime. If this initiative was successful and the poor and lower middle class found more access to wealth, then they would be more amenable to changing their allegiance to the Republican Party. Given that Fannie Mae and Freddie Mac allowed individuals to buy homes with a lower down payment than one would receive from a traditional bank, there were limited efforts from the Bush administration to deemphasize their influence.
Since home ownership failed in closing the wealth gap, then the question focuses on whether we should revert back to the income redistribution strategies that occurred before the 1980s. This can take the form of either tax code changes and/or the rise in-kind transfers that can diminish income inequality. Starting in the 1980s, we started seeing a shift in the tax code that showed the marginal income tax rates dropped from 70% for the highest income bracket to 35% today, as referenced by the Tax Foundation's history of U.S. federal individual income tax rates. While this change certainly contributed to high economic growth, it also created a tax system that was less progressive. In the mid-1990s, the Clinton administration and a Republican-controlled Congress pushed through the Welfare Reform Act of 1996, which yielded benefits during an economic prosperity in the late 1990s. However, we have since seen increases in poverty as two recessions during the last decade have taken a toll on the less fortunate. Therefore, should we make the tax system more progressive with the wealthy taking on a greater burden of tax liability or should we expand the safety net for vulnerable segments of society?
One way to accomplish this is by focusing on income redistribution strategies to help vulnerable Americans subsist when their jobs go away. However, expanding welfare programs and raising taxes on even the wealthy is carrying less currency with many Americans. They are increasingly concerned about expanding government's role further. As inferred by Rajan, raising the marginal tax rates on the wealthy can be disruptive to our current fragile recovery. We have seen the difficulty in letting the Bush tax cuts expire for even the wealthy with Senate Republicans blocking two measures aimed at letting them expire at either the $250,000 or $1,000,000 income levels.
Both methods are examples of income redistribution that can lead to less income inequality, but it can come at the expense of lower living standards overall. High deficits matter because it can ultimately lead to higher borrowing costs for both businesses and consumers. If businesses invest less and consumers buy less, then that is a double whammy on the economy. The end result can be an upward trend to the unemployment rate that is much too high as it is.
Then, the question becomes what can we do if above strategies do not work. To answer that question, we need to answer whether the U.S. workforce that is suffering from structural and not cyclical unemployment. In other words, are jobs not available because the economy is in a downward business cycle or is it because employers are having difficulty matching the required skills with their new jobs?
Since I believe the latter is the problem particularly in the South, then attaining more education and skills will be necessary. In this case, our priority should be on lowering the high expense of attaining a college education. Therefore, Obama's efforts in boosting funding for Pell Grants and financial aid are essential, along with expanding partnerships between community colleges and the private sector. If these efforts can be successful, then opportunity to wealth can be more equitable to all Americans.
Also, a 2007 speech from Ben Bernanke hints at other efforts at addressing inequalities that go beyond traditional K-12 and college education. Certainly, we understand the importance of K-12 and college education, but Bernanke points out that any type of training, whether it is from on-the-job training, community colleges, vocational colleges, and financial literacy training are also important in closing the income gap. Until the gap in human capital is minimized, then income inequality will be difficult to overcome.
In summary, we must address income inequality in order to improve social mobility and develop a more stable society. It is a challenge that involves complications brought on by the vestiges of discrimination; disparate funding between school districts; and self-defeating cultural behavior traits. It is very difficult to implement public policy that can distinguish individuals, who truly need and appreciate a helping hand, with those that use public resources to maintain an irresponsible and unproductive lifestyle.
Our fiscal situation and declining overall wealth will also limit the level of income redistribution that can be done, so more strategic programming will be needed to increase productivity across all social classes. While also acknowledging that families who made sacrifices and accomplished great success should be rewarded and not penalized, they must be made aware that it is in their self-interest to have an America that is more equitable. When that occurs and people feel that they are being given a fair chance at success, we will have an America that is less fractured and more self-sustaining in the long run.
Friday, December 3, 2010
Job Recovery Continues To Hit Bumps
The November job report was disappointing as job growth rose slower than expected and the unemployment rate increased by two-tenths of percentage point, as reported by the December 3rd, 2010 CNNMoney article written by Annalyn Censky. While 39,000 jobs were created, it was much lower than last October's of 172,000. Also, it should be noted that this is the 19th straight month of the unemployment rate being above 9%. which will break the Post-World War II record previously set in the 1980s. Uncertainty in the business climate and deteriorating state and local fiscal conditions are all contributing to the sluggish job report.
A closer review of the press release from the Bureau of Labor Statistics shows declines in retail and manufacturing, while health care and temporary jobs were on the rise. Even though most analysts projected that holiday sales would be better than last year, Black Friday sales show only a modest increase of 0.3%. That might explain the loss of 38,000 in retail trade. As for manufacturing, we did see an increase in activity for the 16th straight month, but it should be noted that the increase was less than October. The Institute for Supply Management (ISM) showed that its activity index was at 56.6, which is slighly lower than October's 56.9. In addition, firms have been able to boost productivity without increasing labor as described in this November 24th, 2010 Bloomberg Businessweek article written by Craig Torres and Anthony Feld. Both of these factors can explain manufacturing jobs declining by 13,000.
When looking at overall jobs, one can surmise that businesses are awaiting a change in Congress next year. One question is whether the Bush tax cuts will be extended to all Americans and not just the middle class. In addition, they will be lobbying for changes in the tax code that will encourage more saving and investment. When dealing with health care and other regulatory activity, they might also try to influence legislation to minimize their costs there.
As we look to the future, it will be important to anticipate trends that influence economic activity. While Black Friday sales were somewhat disappointing, it will be interesting to see if sales activity will increase in December. If sales are better than expected, then that can lead to more business optimism and more job creation. In this globalized economy, we also need to monitor events abroad. There is the European crisis where efforts are underway to minimize its contagion and there's North Korea's nuclear ambitions that threaten to disrupt economic activity in China and South Korea. Even though the job market remains muddled and unclear, a turnaround in 2011 can occur, but the above trends will need to be more favorable.
A closer review of the press release from the Bureau of Labor Statistics shows declines in retail and manufacturing, while health care and temporary jobs were on the rise. Even though most analysts projected that holiday sales would be better than last year, Black Friday sales show only a modest increase of 0.3%. That might explain the loss of 38,000 in retail trade. As for manufacturing, we did see an increase in activity for the 16th straight month, but it should be noted that the increase was less than October. The Institute for Supply Management (ISM) showed that its activity index was at 56.6, which is slighly lower than October's 56.9. In addition, firms have been able to boost productivity without increasing labor as described in this November 24th, 2010 Bloomberg Businessweek article written by Craig Torres and Anthony Feld. Both of these factors can explain manufacturing jobs declining by 13,000.
When looking at overall jobs, one can surmise that businesses are awaiting a change in Congress next year. One question is whether the Bush tax cuts will be extended to all Americans and not just the middle class. In addition, they will be lobbying for changes in the tax code that will encourage more saving and investment. When dealing with health care and other regulatory activity, they might also try to influence legislation to minimize their costs there.
As we look to the future, it will be important to anticipate trends that influence economic activity. While Black Friday sales were somewhat disappointing, it will be interesting to see if sales activity will increase in December. If sales are better than expected, then that can lead to more business optimism and more job creation. In this globalized economy, we also need to monitor events abroad. There is the European crisis where efforts are underway to minimize its contagion and there's North Korea's nuclear ambitions that threaten to disrupt economic activity in China and South Korea. Even though the job market remains muddled and unclear, a turnaround in 2011 can occur, but the above trends will need to be more favorable.
Wednesday, December 1, 2010
Georgia's Recovery Stalled by Troubled Banks
Georgia's recovery is contingent on a healthier banking system. In the November 29th, 2010 article from TheStreet, we can see that Georgia banks are still vulnerable. They have the 41 banks that are considered undercapitalized which is more than double than Florida, which has the second most troubled banks. One can mainly attributed the troubles to the Atlanta housing market and deregulatory environment as described by NY Times columnist, Paul Krugman, and his "Georgia On His Mind" article on April 11th, 2010.
When looking at the last recession, it should be noted that it mainly affected major metro areas. Typically, it involved areas where housing prices skyrocketed and ultimately creating an asset bubble that burst. However, Atlanta did not experience this type of price acceleration due to urban sprawl. Instead, a large number of new banks popped up, and in their haste to boost market share, they engaged in unsafe banking practices. As surmised by Krugman, lax consumer protection laws which allowed Georgia borrowers to obtain additional funds by increasing the size of their mortgages. When the economy took a plunge, many of these mortgages started to go under water. As shown by Forbes Best Places for Business and Careers, you can see that Atlanta ranks 136th out of 200 metro areas in the number of subprime mortgages which represented 13.6% of all originations between 2006 and 2008. Subprime mortgages are an indication of overall credit quality and negatively impact bank performance.
With the latest figures in home prices, we can see that Atlanta has not yet recovered from their pre-recession levels. A look at S&P/Case-Shiller U.S. National Home Price Index for the 3rd quarter of 2010, we can see that Atlanta's home prices have declined by 3.1% over the last year. In addition, the November 30th, 2010 edition of the Atlanta Business Chronicle reports from Brookings Global MetroMonitor how much Atlanta has fallen over the last few years. Compared to 2007 where Atlanta's economic performance ranked 57th overall, they now stand at a lowly 136th as rising unemployment and income declines hamper current activity. All of these indicators need to improve in order to improve the health of Georgia's banking system.
In order for the banking system to improve, bank management will need to be more prudent and take on less risk. They will need to find ways to raise capital and instill more investor confidence. As of right now, their focus should be installing more effective risk management and loan underwriting systems in order to minimize credit problems in the future. Lastly, it might be helpful for the state legislature to take a more proactive approach in implementing stronger consumer protection statutes in order to prevent a similar meltdown from occurring in the future.
When looking at the last recession, it should be noted that it mainly affected major metro areas. Typically, it involved areas where housing prices skyrocketed and ultimately creating an asset bubble that burst. However, Atlanta did not experience this type of price acceleration due to urban sprawl. Instead, a large number of new banks popped up, and in their haste to boost market share, they engaged in unsafe banking practices. As surmised by Krugman, lax consumer protection laws which allowed Georgia borrowers to obtain additional funds by increasing the size of their mortgages. When the economy took a plunge, many of these mortgages started to go under water. As shown by Forbes Best Places for Business and Careers, you can see that Atlanta ranks 136th out of 200 metro areas in the number of subprime mortgages which represented 13.6% of all originations between 2006 and 2008. Subprime mortgages are an indication of overall credit quality and negatively impact bank performance.
With the latest figures in home prices, we can see that Atlanta has not yet recovered from their pre-recession levels. A look at S&P/Case-Shiller U.S. National Home Price Index for the 3rd quarter of 2010, we can see that Atlanta's home prices have declined by 3.1% over the last year. In addition, the November 30th, 2010 edition of the Atlanta Business Chronicle reports from Brookings Global MetroMonitor how much Atlanta has fallen over the last few years. Compared to 2007 where Atlanta's economic performance ranked 57th overall, they now stand at a lowly 136th as rising unemployment and income declines hamper current activity. All of these indicators need to improve in order to improve the health of Georgia's banking system.
In order for the banking system to improve, bank management will need to be more prudent and take on less risk. They will need to find ways to raise capital and instill more investor confidence. As of right now, their focus should be installing more effective risk management and loan underwriting systems in order to minimize credit problems in the future. Lastly, it might be helpful for the state legislature to take a more proactive approach in implementing stronger consumer protection statutes in order to prevent a similar meltdown from occurring in the future.
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