“It’s great that you are getting this message out, but I was wondering if you are purposely pulling your punches…Do you need to be diplomatic to make the message easier to swallow (i.e. are you being tactical), or do you genuinely need to be careful about the aggressiveness of the message given your position at Indy Mac (honest question, not trying to be rhetorical)?

Perhaps my tact would not evoke the right response from the masses who need convincing, but I would label the Coronel’s behavior as either irresponsible, or irresponsibly opportunistic.  I think it’s important to drive the point home with tax payers, that the  Coronels opted to suck several hundred thousands of dollars of cash from their home and squander it, and the resolution means that tax-payers get to foot the bill.  In other words, I think it’s a perfect opportunity to draw the connection between bank/gse bail-outs and the direct expense to the tax-payer.  My feeling is that liberal-leaning consumers have been blinded by the media, and they need a simple, straight-forward message that explains how much it costs them to bail out these people.

I like the way you lay out the numerous re-fi’s, but I would strengthen the point by summing up exactly how much money these people took from lenders and spent, then reminding people that the GSE’s use 100% tax-payer money to pay to bail out these people.

Just some thoughts…”, Anonymous Reader of Blog Posting #504

“How does anybody change the dialogue?  It’s frustrating.”, Anonymous Reader of Blog Posting #504

“I see this crap all the time, but ONLY because I have the resources. The public only sees what the media wants them to.  It sucks.”, Anonymous Reader of Blog Posting #504

…The mortgage lenders aren’t victims either (they made the loans), but the fact that the Coronel’s chose to use the equity in their home to live off, when many others would have chosen to pay off their $6,329 first mortgage and own their home free and clear, I don’t think makes them a victim either. Given the level of cash they pulled out of their home over the years, it looks to me like they might never have made any payments on their home mortgages, with funds they actually earned. And yet they were labeled a mortgage victim by advocates and the press, and that label allowed them to stay in their home and rent it (after losing it in foreclosure to Fannie Mae, who itself remains in government conservatorship) and now buy back their home for just $280,000; with a new FHA mortgage and a down payment of not even 2%; about $5,000. Yes, it is a tragedy when people lose their home to foreclosure, but if they really have no equity (because they never put much down in first place or they took all the equity out in cash) and can’t make their payments, is there a big difference between losing your home to foreclosure and the scores of renters who are evicted for non-payment each and every day? Maybe, because the Coronel’s lived there for a long time, but could they really have afforded to live there that long without pulling all that cash out?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Mr. Jaime R. and Ms. Juan V. Coronel, Joint Tenants, Title Record of Borrowing for 18417 E. Ghent St., Azusa, CA 91702:

1. Purchase of Home: September 15, 1994, First Trust Deed, $6,329, Transamerica Financial Services, Inc.
2. Cash Out Home Equity Loan: January 10, 2000, 2^nd Trust Deed, $21,929, American General Financial Services, Inc.
3. Cash Out Home Equity Loan: October 30, 2000, 2^nd Trust Deed, $21,794, American General Financial Services, Inc.
4. Cash Out Home Equity Loan: April 23, 2001, 2^nd Trust Deed, $26,085, American General Financial Services, Inc.
5. Cash Out Refinance of All Loans: August 2, 2002, 1^st Trust Deed, $161,000, New Century Mortgage Corp.
6. Cash Out Home Equity Loan: March 25, 2003, 2^nd Trust Deed, $12,369, American General Financial Services, Inc.
7. Cash Out Home Equity Loan: February 11, 2004, 2^nd Trust Deed, $26,574, American General Financial Services, Inc.
8. Cash Out Refinance of All Loans: June 25, 2004, 1^st Trust Deed, $214,000, First Magnus Financial Corp.
9. Cash Out Home Equity Loan: July 30, 2004, 2^nd Trust Deed, $11,120, American General Financial Services, Inc.
10. Cash Out Refinance of All Loans: July 11, 2005, 1^st Trust Deed, $284,000, BNC Mortgage Inc.
11. Cash Out Refinance of All Loans: December 1, 2006, 1^st Trust Deed, $335,000, Mortgage IT, Inc.
12. Cash Out Refinance of All Loans: August 22, 2007, 1^st Trust Deed, $371,000, TJ Financial, Inc.
13. Notice of Default: June 7, 2010, Bank of America (BAC) Home Loan Servicing, LP
14. Notice of Sale: September 13, 2010, Minimum Bid $408,650, Bank of America (BAC) Home Loan Servicing, LP
15. Buyer Name: September 19, 2010, Price $411,701, Federal National Mortgage Association (Fannie Mae)
16. Purchase of Home (same owners as above, seller Fannie Mae): October 30, 2014, Purchase Price $280,000, 1^st Trust Deed of $274,928, New American Funding

Mortgage giants’ stance against principal reduction may be softening

By E. Scott Reckard

Jaime Coronel’s pick and shovel sat idle when the recession made landscaping jobs scarce, and the home where he and his wife, Juana, raised four children fell into foreclosure. Mortgage giant Fannie Mae gave permission in 2010 for the Coronels to stay on in the Azusa house as renters.

“That was the best deal that we could get at the time,” said Peter Kuhns, a Los Angeles organizer of an activist group that took up the Coronels’ cause, disrupting banks and invading Fannie Mae’s Pasadena offices, a 20-minute drive from the couple’s working-class neighborhood. Religious and community leaders and state legislators joined in, lobbying on their behalf.

On Friday, the Coronels, now living on Social Security and Jaime’s pension as a union laborer, will throw a party to celebrate another Fannie Mae concession that lets them buy back their home for $280,000, far less than the $400,000-plus debt that had gone into default. The effect of the deal was to reduce the principal owed by the Mexican immigrants, enabling them to qualify for a new mortgage.

The go-ahead for the indirect reduction appears to mark a shift for Fannie Mae, which with its brother mortgage company, Freddie Mac, required a federal bailout in 2008.

Shrinking the mortgage amount that a homeowner owes has been done often in recent years to help underwater borrowers with loans not backed by Fannie and Freddie, in cases where foreclosing would be more costly for the lender or investors in the loan.

But in the six years since Congress created the Federal Housing Finance Agency to oversee Fannie and Freddie, the agency has never included mortgage principal reduction on its list of approved techniques to help homeowners in distress.

Now, the stance against principal reduction may be softening. The mortgage companies’ top federal regulator testified Wednesday that the concession was being accomplished by using another indirect strategy: transferring Fannie and Freddie loans to third parties, which then reduce the principal amount owed.

The housing industry will be watching closely, trying to discern if the Coronels’ deal is a one-time response to a lobbying campaign for sympathetic victims or a sign that Melvin L. Watt, appointed by President Obama a year ago to head the FHFA, is moving toward loosening the restrictions on principal reduction.

The ban on principal reduction outrages critics such as Sen. Elizabeth Warren (D-Mass.). She and others point to Treasury Department and congressional studies concluding that Fannie and Freddie would save themselves billions of dollars in foreclosure costs by reducing the balances on loans they guarantee.

The issue erupted Wednesday at a Senate Banking Committee hearing during which Warren berated Watt, who had been widely expected to lift the ban on principal reduction.

“Five million families lost their homes during the financial crisis. According to the latest data from CoreLogic, a leading housing market research firm, another 5.3 million homeowners remain underwater on their homes,” owing more than the homes would bring if sold, Warren said.

“I’ve asked about this repeatedly and you’ve said you’d look into allowing Fannie and Freddie to engage in principal reduction,” Warren said. “So I want to know why this has not been a priority for you. The data are all there!”

Watt testified that he had retained the restriction because sorting out which reductions would result in a “win-win” for the government and homeowners “has been perhaps the most difficult issue I have faced as director of the agency.”

He also told Warren that he already was allowing principal reductions in another indirect way — by using a neighborhood stabilization program to transfer mortgage debts to third parties, which then reduce the principal.

Watt said he expects to hammer out a policy on reducing loan balances in less than a year, but Sen. Robert Menendez (D-N.J.), chairman of a subcommittee on housing, pressed him to act more rapidly, saying “time is of the essence.”

Meantime, the Coronels, who have spent four years as renters in the home they owned for two decades, were ecstatic.

With help from advocates for low-income areas, the couple were able to qualify for a mortgage insured by the Federal Housing Administration based on their Social Security earnings, his payments from a pension plan and contributions from two other people living in the house.

The Coronels, who became U.S. citizens eight years ago, completed the repurchase of their 60-year-old, 1,268-square-foot home Oct. 23. They said through a translator that they were looking forward to working with Kuhns’ advocacy group, the Alliance of Californians for Community Empowerment, to help other immigrants in similar circumstances.

But first, said 63-year-old Jaime Coronel, they will have to finish unpacking clothing, photos and other belongings they had boxed up in case they were forced to move on.

Juana Coronel, 64, said she never considered moving from the small house, which is near the homes of her children and grandchildren and is filled with religious posters and a lifetime of family photos.

“I want to die in my house. It’s cost me many tears and a great deal of depression,” she said. “But now I’m content.”

International Business

Mario Draghi Says E.C.B. Will ‘Do What We Must’ to Stoke Inflation

By DAVID JOLLY

Mario Draghi, head of the European Central Bank, said on Friday that he planned new stimulus. Credit Michael Probst/Associated Press

PARIS — Mario Draghi, the European Central Bank president, strongly signaled on Friday that he and his colleagues were preparing a new round of powerful monetary stimulus to jolt the flagging eurozone economy.

The remarks buoyed European stocks and bonds even before the Chinese central bank moved markets further on Friday by surprising investors with its first interest rate cut in two years.

While slowing growth was the reason for Beijing’s move, in Europe the big concern is a worrisomely low inflation rate that is both a symptom and cause of the 18-nation euro currency union’s inability to achieve any sustainable growth at all.

Speaking at a banking conference in Frankfurt, Mr. Draghi said the European Central Bank would “do what we must to raise inflation and inflation expectations as fast as possible.”

If the bank’s current policies, which include some purchases of corporate bonds, do not end the threat, Mr. Draghi said, “we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”

The blunt call was reminiscent of a speech Mr. Draghi gave in July 2012, when he said the central bank “is ready to do whatever it takes to preserve the euro,” an assertion that has been widely credited with having helped to ease the sovereign debt crisis.

At issue is whether the European Central Bank will follow its peers around the world, including the Federal Reserve in the United States, the Bank of Japan and the Bank of England, in buying government bonds on a large scale, a policy known as quantitative easing.

With interest rates around most of the developed world having been effectively cut to as low as they can go, conventional monetary policy has reached its “zero lower bound.” While there is no consensus on the effectiveness of quantitative easing, many economists point to the relatively strong British and American recoveries as evidence that it works.

While Mr. Draghi on Friday did not actually say much that was different from previous utterances, there was a significant new emphasis on the risk of deflation in the eurozone. He warned that the “inflation situation in the euro area has also become increasingly challenging.” The word “inflation” appeared 45 times in the text of his speech on Friday.

The risk Mr. Draghi now runs is that unless the central bank’s actions keep pace with his words, he can lose credibility. Many economists have been pushing for most of this year for the central bank to take more aggressive stimulus steps, while Mr. Draghi in his monthly news conferences has been saying the equivalent of “stay tuned.”

If, after Friday’s statements, Mr. Draghi is unable to announce significant new measures when he and his governing council meet in early December, the financial markets could register their disappointment. Some analysts immediately predicted, though, that Mr. Draghi was simply trying to buy more time.

Mr. Draghi will find himself even more on the spot at the December meeting if a closely watched report on eurozone inflation next week shows prices falling further.

Mr. Draghi spoke Friday as the world’s central banks are increasingly concerned that very low inflation will tip into outright deflation — a self-reinforcing condition in which consumers and businesses put off purchases and investments in the expectation that prices will fall. Deflation can also crush fragile borrowers by raising the real interest rate on their loans, which would load weak banks with a new round of defaults on loans.

Eurozone consumer prices rose just 0.4 percent in October, far below the central bank’s target of close to but less than 2 percent. In fact, some member states have already begun to experience deflation. Mr. Draghi and his peers are afraid that consumers and investors will increasingly see low inflation as the new normal, creating a self-fulfilling prophecy.

The European Central Bank in September cut its main interest rate target to a rock-bottom 0.05 percent, and reduced its deposit rate to minus 0.2 percent, effectively charging banks for leaving unused funds at the central bank. The bank has been buying private-sector loan assets since early October. And it has announced longer-term low-interest loans to banks in an effort to restart lending.

So far, that has not been enough. Recently, Mr. Draghi has said the central bank intends to expand the size of its balance sheet — that is, to inject money into the market — by 1 trillion euros, or about $1.25 trillion. Economists say the current measures fall far short of what is needed to hit that level.

Michel Martinez, chief eurozone economist with Société Générale, noted that Mr. Draghi had not provided much detail about his inflation-fighting plans. Mr. Martinez said he expected the central bank to increase its purchases of private-sector assets, including packages of housing loans known as covered bonds, as well as of debt issued by agencies like the European Investment Bank.

“But when you do the math, you make a rough assumption that the E.C.B. takes 20 percent of all those available assets,” Mr. Martinez said. “That’s barely €400 billion.”

If Mr. Draghi is going to hit his target, Mr. Martinez added, “obviously the answer is to purchase government bonds.”

Expectations that the central bank will increase the supply of euros in the market led investors to sell the European currency in favor of dollars, particularly as the Federal Reserve has begun reining in its own bond-buying. The euro fell about 1 percent to $1.2438 in afternoon trading. The Euro Stoxx 50 index gained 2.97 percent. Yields on Spanish and Italian 10-year bonds fell roughly 1 percent.

Mr. Draghi also acknowledged that weak growth had contributed to the risk of deflation. The economy of the 18-nation euro currency bloc largely has largely stagnated since April, and a private-sector survey of purchasing managers on Thursday showed more signs of deceleration. The poor labor market has kept consumer demand suppressed.

And yet, the path to employing wholesale bond-buying is not an easy one. There is significant opposition to such a policy in Germany, for example, and even if the political hurdles are overcome, economists say they wonder whether the eurozone — in which each country, rather than the bloc as a whole, issues bonds — is the appropriate venue for quantitative easing.

Two of Germany’s gatekeepers on the question of quantitative easing — the government’s finance minister, Wolfgang Schäuble, and the German central bank’s president, Jens Weidmann — addressed the same conference on Friday but declined to comment on Mr. Draghi’s speech.

In any case, Mr. Martinez said he was not convinced that Mr. Draghi was ready to act in the near term, perhaps not before next summer.

“The E.C.B. is buying time in the hope that the outlook improves,” he said.

Guntram B. Wolff, who follows the European economy as director of the Brussels-based research institute Bruegel, agreed.

“My take is that it will still take some time before” Mr. Draghi commits to buying government bonds, Mr. Wolff said. “My sense is that the German government is moving toward the position that this may have to happen at some point to prevent a catastrophe in terms of prolonged low inflation or even deflation. It has serious implications for Germany, too.”

A version of this article appears in print on November 22, 2014, on page B7 of the New York edition with the headline: Mario Draghi Says E.C.B. Will ‘Do What We Must’ to Stoke Inflation.

“More conservative or realistic (pension) assumptions may make it harder for L.A. to give pay raises, hire more workers or restore much-needed services in the near term. And politicians are famously unwilling to accept short-term pain for long-term gain. That’s why in 2013 California’s 130 public pension systems, including L.A.’s, had $198 billion in unfunded liabilities — the gap between what workers and retirees are owed and how much money the funds have to pay them — up from $6.3 billion in 2003…In reality, the problems of public pension funds existed long before the market crashed; generous pay and benefits were promised without setting aside enough money to cover the long-term obligations. Politicians thought they could afford to be munificent, in part because of the overly optimistic assumption that the economy would keep growing and that pension fund investment returns would cover the expense. Instead, when the recession hit, the city had to take money from public services to cover the gap between anticipated earnings and actual earnings. The recession made clear the risks that come with overly optimistic projections.” Los Angeles Times Editorial Board, “Getting more realistic on L.A. pension returns”, Los Angeles Times

Opinion

Editorial

Getting more realistic on L.A. pension returns

By The Times Editorial Board

In the last year, all three of Los Angeles’ public employee pension funds have recalculated their too-rosy estimates of how much they will earn in the years ahead. Those lowered earning forecasts may cost the city in the short term — if it has to deposit more money into the funds now rather than counting on the market to earn the money later. But over the long term, the more conservative assumptions will help ensure that there is enough money to cover the city’s pension promises.

The three funds, which provide pension benefits and retirement healthcare for police officers, firefighters, civilian workers and Department of Water and Power employees, will now assume an average return of 7.5%, instead of the current 7.75%, based on projections that investments will earn less. That may not sound like much of a change, but the decisions could cost the city as much as $50 million in the next year alone.

It’s good to see pension fund managers taking a more fiscally conservative approach. But Mayor Eric Garcetti and the fund managers should continue to ask whether the city is being careful enough. If Los Angeles learned anything from the last few years, when the city teetered on the edge of bankruptcy, it’s that a little financial discipline in good years can prevent a lot of pain in the bad ones.

When the recession hit and the value of the public pension funds’ investments plummeted, L.A. — like many cities and states across the nation — found itself in a difficult situation. It owed hundreds of millions of extra dollars to ensure that the funds could meet obligations made to workers and retirees even as tax revenues were dropping precipitously. The city had to lay off workers, reduce library hours, stop trimming trees and cut other programs while pension payments quadrupled over the decade ending in 2013.

In reality, the problems of public pension funds existed long before the market crashed; generous pay and benefits were promised without setting aside enough money to cover the long-term obligations. Politicians thought they could afford to be munificent, in part because of the overly optimistic assumption that the economy would keep growing and that pension fund investment returns would cover the expense. Instead, when the recession hit, the city had to take money from public services to cover the gap between anticipated earnings and actual earnings. The recession made clear the risks that come with overly optimistic projections.

Now, as the economy and the city’s budget situation improve, city officials have the opportunity to set the funds on a path toward long-term financial stability, a path that protects against future recessions. Garcetti, who has promised to make fiscal responsibility a cornerstone of his administration, should put together a panel of apolitical, independent financial experts who can assess the city’s pension systems and recommend changes to ensure that retirement benefits are fully funded, in good and bad times alike.

Are Los Angeles’ 7.5% assumptions still too optimistic? (An audit last year of the city’s civilian pension system recommended lowering projections to 7.25%. And by comparison, Detroit will emerge from bankruptcy with a court-approved 6.75% rate of return assumption on its pension plans.)

Are the decisions being made today on pay, pensions and healthcare benefits based on realistic assumptions of how much those promises will cost tomorrow?

Will Los Angeles be able to cover its pension obligations in the next financial downturn?

More conservative assumptions — or more realistic ones, as some would argue — may make it harder for the city to give pay raises, hire more workers or restore much-needed services in the near term. And politicians are famously unwilling to accept short-term pain for long-term gain. That’s why in 2013 California’s 130 public pension systems, including L.A.’s, had $198 billion in unfunded liabilities — the gap between what workers and retirees are owed and how much money the funds have to pay them — up from $6.3 billion in 2003. Los Angeles has a chance to avoid repeating the mistakes of the past by preparing now for a more stable, secure financial future.

Jumbo Jungle

Jumbo-Loan Challenges for Retirees

Because of income requirements, retirees may have trouble qualifying for a jumbo mortgage. Advance planning can avert these issues.

Chris Gash

By Anya Martin

A lifetime of saving and investing can make retirees feel secure, but showing that assets translate into income remains key when qualifying for a jumbo mortgage.

Debt-free retirement has its allure, but with interest rates so low for jumbo mortgages, some retirees are calculating bigger returns if they leave cash invested and borrow to buy their retirement home, says Brad Blackwell, executive vice president of Wells Fargo Home Mortgage. Jumbo mortgages have higher loan limits than government-backed loans, which top at $417,000 in most places but go up to $625,500 in some high-price areas. Average interest rates were 4.11% for the 30-year, fixed-rate jumbo and 3% for a five-year, adjustable-rate jumbo on the week ending Nov. 14, according to HSH.com.

A retiree, like any other borrower, generally must meet a 43% debt-to-income ratio (DTI), mandated by federal mortgage rules. This number reflects the borrower’s percentage of monthly debt payments relative to monthly income.

Retirees who plan ahead can qualify, and lenders have methods to translate investments into eligible income even if a borrower can’t produce a W-2, Mr. Blackwell says.

Today’s typical retiree will receive income from Social Security; distributions from IRAs, 401(k)s, annuities and other retirement accounts; and possibly a pension. Business owners may no longer get a salary but still receive profit shares and/or have significant wealth tied up in an enterprise, and many high-end retirees may draw revenue from commercial real-estate ownership, residential rental properties or other sources, says Tom Wind, executive vice president of home lending at EverBank .

High-net-worth individuals often will argue that they clearly have enough money in assets to pay off a loan at any time, says Bill Banfield, vice president at Quicken Loans. “They may be thinking that they have a big IRA and they could use that to take a distribution to make the loan payments,” he adds. “That’s all good and fine, but we’d like to see that all set up before they apply for the loan.”

‘The key to qualifying is showing that a retiree’s assets translate into income.’

The key to qualifying is to demonstrate that a retiree’s assets translate into income via tax returns, bank statements and other documents, he adds. “The lender is going to want to make sure you have receipts for distributions and a schedule for receiving them,” he adds.

Retirees also need to show proof that the payments will continue in the same amounts for at least three years into the future, Mr. Banfield says. If a borrower is an early retiree under 59½ years old, the threshold for taking withdrawals from IRAs without tax penalties, the lender will adjust income estimates accordingly, he adds.

For retirees who don’t want to increase their distributions, another possible option is a nonqualified jumbo mortgage, which offers flexibility on the federal DTI rule, Mr. Wind says. Lenders have to waive liability protection to issue nonqualified mortgages, but some lenders will take that risk with retirees who have substantial invested assets they don’t want to liquidate, he adds.

To calculate an income estimate in such cases, EverBank will assign a conservative earnings rate to the total dollar amount of the assets and amortize the amount to the loan’s term length, Mr. Wind says. Wells Fargo uses a similar method to calculate DTI for nonqualified mortgages for borrowers with multimillions of dollars in assets, Mr. Blackwell says.

The first step for any retiree or person approaching retirement is a financial adviser, Mr. Blackwell says. An adviser can look at a retiree’s overall financial picture and advise whether to pay cash or borrow when buying as home. The adviser can also calculate retirement-account distributions that will help the borrower qualify for a loan, he adds.

Here are some more considerations that retirees may want to weigh when deciding whether to apply for a jumbo mortgage:

• Credit scores. Retirees with a sufficient income stream but lower credit scores still may not qualify for a mortgage or will receive a higher interest rate from a lender.
• Trusts. Retirees who want to buy a home and hold it in a revocable trust as part of their estate plan still have to demonstrate their ability to repay the loan, Mr. Blackwell says. Still, assets in the trust are considered in the ability-to-repay debt calculation, he adds.
• Capital-gains taxes. When deciding whether to cash out investments to buy real estate, remember to calculate not just lost returns but also the potential capital-gains-tax hit, Mr. Banfield says.

…The foreign holdings of dollars were promptly returned to the dollar market, an example of demand duplication. This helped fuel a boom-and-bust in foreign markets and U.S. housing prices. The global excess credit creation also spilled over to commodity markets, in particular causing the world price of crude oil (which is denominated in dollars) to spike to $150 a barrel…… Ending the dollar’s reserve-currency role will limit deficit financing, increase net national savings and release resources to U.S. companies and their employees in order to remain competitive with the rest of the world.”, Lewis E. Lehrman and John D. Muehler, “How the ‘Reserve’ Dollar Harms America”, Wall Street Journal

“Again, the truth about the root causes of the 2008-09 financial crisis are slowly, but surely being revealed.”, Mike Perry, Former Chairman and CEO, IndyMac Bank

Opinion

How the ‘Reserve’ Dollar Harms America

Ending the greenback’s reserve-currency role will raise savings and make U.S. companies more competitive.

Getty Images

By Lewis E. Lehrman And John D. Mueller

For more than three decades we have called attention on this page to what we called the “reserve-currency curse.” Since some politicians and economists have recently insisted that the dollar’s official role as the world’s reserve currency is instead a great blessing, it is time to revisit the issue.

The 1922 Genoa conference, which was intended to supervise Europe’s post-World War I financial reconstruction, recommended “some means of economizing the use of gold by maintaining reserves in the form of foreign balances”—initially pound-sterling and dollar IOUs. This established the interwar “gold exchange standard.”

A decade later Jacques Rueff, an influential French economist, explained the result of this profound change from the classical gold standard. When a foreign monetary authority accepts claims denominated in dollars to settle its balance-of-payments deficits instead of gold, purchasing power “has simply been duplicated.” If the Banque de Francecounts among its reserves dollar claims (and not just gold and French francs)—for example a Banque de France deposit in a New York bank—this increases the money supply in France but without reducing the money supply of the U.S. So both countries can use these dollar assets to grant credit. “As a result,” Rueff said, “the gold-exchange standard was one of the major causes of the wave of speculation that culminated in the September 1929 crisis.” A vast expansion of dollar reserves had inflated the prices of stocks and commodities; their contraction deflated both.

The gold-exchange standard’s demand-duplicating feature, based on the dollar’s reserve-currency role, was again enshrined in the 1944 Bretton Woods agreement. What ensued was an unprecedented expansion of official dollar reserves, and the consumer price level in the U.S. and elsewhere roughly doubled. Foreign governments holding dollars increasingly demanded gold before the U.S. finally suspended gold payments in 1971.

The economic crisis of 2008-09 was similar to the crisis that triggered the Great Depression. This time, foreign monetary authorities had purchased trillions of dollars in U.S. public debt, including nearly $1 trillion in mortgage-backed securities issued by two government-sponsored enterprises, Fannie Mae and Freddie Mac. The foreign holdings of dollars were promptly returned to the dollar market, an example of demand duplication. This helped fuel a boom-and-bust in foreign markets and U.S. housing prices. The global excess credit creation also spilled over to commodity markets, in particular causing the world price of crude oil (which is denominated in dollars) to spike to $150 a barrel.

Perhaps surprisingly, given Keynes ’s central role in authoring the reserve-currency system, some American Keynesians such as Kenneth Austin, a monetary economist at the U.S. Treasury; Jared Bernstein, an economic adviser to Vice President Joe Biden ; and Michael Pettis, a Beijing-based economist at the Carnegie Endowment, have expressed concern about the growing burden of the dollar’s status as the world’s reserve currency. For example, Mr. Bernstein argued in a New York Times op-ed article that “what was once a privilege is now a burden, undermining job growth, pumping up budget and trade deficits and inflating financial bubbles.” He urged that, “To get the American economy on track, the government needs to drop its commitment to maintaining the dollar’s reserve-currency status.”

Meanwhile, a number of conservatives, such as Bryan Riley and William Wilson at the Heritage Foundation, James Pethokoukis at the American Enterprise Institute and Ramesh Ponnuru at National Review are fiercely defending the dollar’s reserve-currency role. Messrs. Riley and Wilson claim that “The largest benefit has been ‘seignorage,’ which means that foreigners must sell real goods and services or ownership of the real capital stock to add to their dollar reserve holdings.”

This was exactly what Keynes and other British monetary experts promoted in the 1922 Genoa agreement: a means by which to finance systemic balance-of-payments deficits, forestall their settlement or repayment and put off demands for repayment in gold of Britain’s enormous debts resulting from financing World War I on central bank and foreign credit. Similarly, the dollar’s “exorbitant privilege” enabled the U.S. to finance government deficit spending more cheaply.

But we have since learned a great deal that Keynes did not take into consideration. As Robert Mundell noted in “Monetary Theory” (1971), “The Keynesian model is a short run model of a closed economy, dominated by pessimistic expectations and rigid wages,” a model not relevant to modern economies. In working out a “more general theory of interest, inflation, and growth of the world economy,” Mr. Mundell and others learned a great deal from Rueff, who was the master and professor of the monetary approach to the balance of payments.

Those lessons are reflected in the recent writings of Keynesians such as Mr. Austin, who has outlined what he calls the “iron identities” of international payments, which flow from the fact that global “current accounts, global capital accounts, and global net reserve sales, must (and do) sum to zero.” This means that a trillion-dollar purchase, say, of U.S. public debt by the People’s Bank of China entails an equal, simultaneous increase in U.S. combined deficits in the current and capital accounts. The iron identities necessarily link official dollar-reserve expansion to the declining U.S. investment position.

The total U.S. international investment position declined from net foreign assets worth about 10% of gross domestic product in 1976 to minus-30% of GDP in 2013—while the books of U.S. private residents went from 10% of U.S. GDP in 1976 down to balance with the rest of the world in 2013. The entire decline in the U.S. net international investment position was due to federal borrowing from foreign monetary authorities—i.e., government deficit-financing through the dollar’s official reserve-currency role.

Ending the dollar’s reserve-currency role will limit deficit financing, increase net national savings and release resources to U.S. companies and their employees in order to remain competitive with the rest of the world.

Messrs. Riley and Wilson argue that “no other global currency is ready to replace the U.S. dollar.” That is true of other paper and credit currencies, but the world’s monetary authorities still hold nearly 900 million ounces of gold, which is enough to restore, at the appropriate parity, the classical gold standard: the least imperfect monetary system of history.

Messrs. Lehrman and Mueller are principals of LBMC LLC, an economic and financial market consulting firm. Mr. Lehrman is the author of “The True Gold Standard: A Monetary Reform Plan Without Official Reserve Currencies” (TLI Books, 2012). Mr. Mueller is the author of “Redeeming Economics: Rediscovering the Missing Element” (ISI Books, 2014).

…Mr. Stiglitz, for example, writes that “wealth is a main determinant of power.” If the state grabs the wealth, even if fairly earned, then the state can benevolently exercise its power on behalf of the common person. No. Cronyism results when power determines wealth. Government power inevitably invites the trade of regulatory favors for political support. We limit rent-seeking by limiting the government’s ability to hand out goodies. So when all is said and done, the inequality warriors want the government to confiscate wealth and control incomes so that wealthy individuals cannot influence politics in directions they don’t like. Koch brothers, no. Public-employee unions, yes. This goal, at least, makes perfect logical sense. And it is truly scary. Prosperity should be our goal. And the secrets of prosperity are simple and old-fashioned: property rights, rule of law, economic and political freedom. A limited government providing competent institutions. Confiscatory taxation and extensive government control of incomes are not on the list.”, John H. Cochrane, “What the Inequality Warriors Really Want”, Wall Street Journal

Opinion

What the Inequality Warriors Really Want

Confiscating wealth is ultimately about political power. Koch brothers, no. Public-employee unions, yes.

By John H. Cochrane

Getty Images/Blend Images

Progressives decry inequality as the world’s most pressing economic problem. In its name, they urge much greater income and wealth taxation, especially of the reviled top 1% of earners, along with more government spending and controls—higher minimum wages, “living” wages, comparable worth directives, CEO pay caps, etc.

Inequality may be a symptom of economic problems. But why is inequality itself an economic problem? If some get rich and others get richer, who cares? If we all become poor equally, is that not a problem? Why not fix policies and problems that make it harder to earn more?

Yes, the reported taxable income and wealth earned by the top 1% may have grown faster than for the rest. This could be good inequality—entrepreneurs start companies, develop new products and services, and get rich from a tiny fraction of the social benefit. Or it could be bad inequality—crony capitalists who get rich by exploiting favors from government. Most U.S. billionaires are entrepreneurs from modest backgrounds, operating in competitive new industries, suggesting the former.

But there are many other kinds and sources of inequality. The returns to skill have increased. People who can use or program computers, do math or run organizations have enjoyed relative wage increases. But why don’t others observe these returns, get skills and compete away the skill premium? A big reason: awful public schools dominated by teachers unions, which leave kids unprepared even to enter college. Limits on high-skill immigration also raise the skill premium.

Americans stuck in a cycle of terrible early-child experiences, substance abuse, broken families, unemployment and criminality represent a different source of inequality. Their problems have proven immune to floods of government money. And government programs and drug laws are arguably part of the problem.

These problems, and many like them, have nothing to do with a rise in top 1% incomes and wealth.

Recognizing, I think, this logic, inequality warriors go on to argue that inequality is a problem because it causes other social or economic ills. A recent Standard & Poor’s report sums up some of these assertions: “As income inequality increased before the [2008 financial] crisis, less affluent households took on more and more debt to keep up—or, in this case, catch up—with the Joneses. ” In a 2011 Vanity Fair article, Columbia University economist Joe Stiglitz wrote that inequality causes a “lifestyle effect . . . people outside the top 1 percent increasingly live beyond their means.’’ He called it “trickle-down behaviorism.”

I see. A fry cook in Fresno hears that more hedge-fund managers are flying in private jets. So he buys a pickup he can’t afford. They are saying that we must tax away wealth to encourage thrift in the lower classes.

Here’s another claim: Inequality is a problem because rich people save too much. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”

I see. Now we need to forcibly transfer wealth to solve our deep problem of national thriftiness.

You can see in these examples that the arguments are made up to justify a pre-existing answer. If these were really the problems to be solved, each has much more natural solutions.

Is eliminating the rich, to eliminate envy of their lifestyle, really the best way to stimulate savings? Might not, say, fixing the large taxation of savings in means-tested social programs make some sense? If lifestyle envy really is the mechanism, would it not be more effective to ban “Keeping Up With the Kardashians”?

If we redistribute because lack of Keynesian “spending” causes “secular stagnation”—a big if—then we should transfer money from all the thrifty, even poor, to all the big spenders, especially the McMansion owners with new Teslas and maxed-out credit cards. Is that an offensive policy? Yes. Well, maybe this wasn’t about “spending” after all.

There is a lot of fashionable talk about “redistribution” that’s not really the agenda. Even sky-high income and wealth taxes would not raise much revenue for very long, and any revenue is likely to fund government programs, not checks to the needy. Most inequality warriors, including President Obama, forthrightly advocate taxation to level incomes in the name of “fairness,” even if those taxes raise little or no revenue.

When you get past this kind of balderdash, most inequality warriors get down to the real problem they see: money and politics. They think money is corrupting politics, and they want to take away the money to purify the politics. As Berkeley economist Emmanuel Saez wrote for his 2013 Arrow lecture at Stanford University: “top income shares matter” because the “surge in top incomes gives top earners more ability to influence [the] political process.”

A critique of rent-seeking and political cronyism is well taken, and echoes from the left to libertarians. But if abuse of government power is the problem, increasing government power is a most unlikely solution.

If we increase the top federal income-tax rate to 90%, will that not just dramatically increase the demand for lawyers, lobbyists, loopholes, connections, favors and special deals? Inequality warriors think not. Mr. Stiglitz, for example, writes that “wealth is a main determinant of power.” If the state grabs the wealth, even if fairly earned, then the state can benevolently exercise its power on behalf of the common person.

No. Cronyism results when power determines wealth. Government power inevitably invites the trade of regulatory favors for political support. We limit rent-seeking by limiting the government’s ability to hand out goodies.

So when all is said and done, the inequality warriors want the government to confiscate wealth and control incomes so that wealthy individuals cannot influence politics in directions they don’t like. Koch brothers, no. Public-employee unions, yes. This goal, at least, makes perfect logical sense. And it is truly scary.

Prosperity should be our goal. And the secrets of prosperity are simple and old-fashioned: property rights, rule of law, economic and political freedom. A limited government providing competent institutions. Confiscatory taxation and extensive government control of incomes are not on the list.

Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at the Hoover Institution, and an adjunct scholar at the Cato Institute.

…One possible reason: U.S. companies are getting bigger. And that means workers have fewer employers to pick from.”, Justin Lahart, “The Big Business of Small Wage Gains”, Wall Street Journal

“So, if you want to increase your wages you need lots of smaller firms competing for your talents, rather than a few big firms. I can tell you for a fact, as a mid-size bank, when trying to recruit top-notch talent from the Too Big to Fail Banks, Wall Street, and consulting, accounting, and law firms, I had to pay (a lot) more than they could make at those firms. That only make complete economic sense, but our government creates more and more laws and regulations, and these rules and their costs to comply with them, nearly always benefit big business and crony capitalists over smaller firms. Let’s see, you can have higher paying American jobs or a bunch of regulation and a few big businesses that are often Too Big to Fail, but you can’t have both. Gee, I wonder which one America should choose?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Heard on the Street

The Big Business of Small Wage Gains

Employers’ Consolidation Pushes Down on Pay Gains

By Justin Lahart

When it comes to wage gains, U.S. workers are increasingly playing the role of David to a corporate Goliath.

Hiring has picked up and the unemployment rate has fallen sharply over the past year. But for reasons that economists and policy makers are struggling to understand, wages have continued growing by only about 2% annually. This indicates that, despite a labor market that is clearly tightening, companies don’t have to pay up to attract workers.

One possible reason: U.S. companies are getting bigger. And that means workers have fewer employers to pick from.

New figures from the Labor Department on Wednesday showed that as of the first quarter, businesses with 500 or more employees counted 46.3% of U.S. private-sector workers on their payrolls. A decade ago this was at 44.2%. Most of the increase came at the expense of businesses with fewer than 50 employees. Those saw their share of employment slip to 28.4% from 30.2% over the same period.

The expanded presence of large companies in the job market amounts to decreased competition for workers, points out Ben Herzon of economic forecasting firm Macroeconomic Advisers. For a rough analogy, think of a town with a few hardware stores, a couple of appliance stores and a lumberyard. Those businesses all, to some degree, compete for workers. But if a Home Depot opens and those other retailers close, people in the town will have fewer employment options and won’t be as able to demand higher wages as a result.

Something like that may be happening across the entire economy as small firms represent a smaller share of employment. And that drop in small-firm employment owes a lot to a decline in startup activity.

New-business formation has been steadily falling since the 1990s. In the aftermath of the recession, that decline intensified. Wednesday’s Labor Department figures show there were 213,000 newly formed establishments in the first quarter. That wasn’t much more than the 207,000 that formed in the first quarter of 2004, when there were 6.6 million fewer workers on private-sector payrolls. New firms are also smaller now, averaging 3.6 employees versus 4.8 in 2004

The decline in startup activity has come about as many traditional sources of funding for new firms have dried up. Banks are still hesitant to loan to new businesses; for many people, mortgaging the house for funding is no longer an option.

What’s going on in Silicon Valley may seem heated, but angel investors, who put money in early-stage firms, have yet to fund companies like they did before the recession. They invested $10.1 billion in the first half of this year, according to the Center for Venture Research at the University of New Hampshire, compared with $11.9 billion in the first half of 2007.

The handful of rapidly growing startups that go on to become very large have long been seen as a key to U.S. job growth. But competition for workers from the many smaller successes, from corner dry cleaners to tiny accounting firms, are also important.

Without more of them, the labor market may need to get far tighter than it used to for wages to really heat up.

…Federal regulations now cost the U.S. more than 12% of gross domestic product, or $2 trillion annually, according to the National Association of Manufacturers. The average manufacturing firm spends almost $20,000 per employee per year on complying with federal regulations. For manufacturers with fewer than 50 employees, the per-employee cost rises to almost $35,000.With this level of regulatory cost, it is no wonder that U.S. economic growth is so meager.”, J. Christopher Giancarlo, Commissioner, U.S. Commodity Futures Trading Commission, “Now Federal Job-Killers Are Coming After Derivatives”, Wall Street Journal

Opinion

Now Federal Job-Killers Are Coming After Derivatives

A benign-sounding ‘advisory’ has the potential to send thousands of financial-services positions overseas.

By J. Christopher Giancarlo

Nearly six years ago, in the aftermath of the 2008 financial crisis, a giant sign was hung from the rafters of the U.S. Chamber of Commerce building, which directly faces the White House. The sign was composed of one word: J-O-B-S. It was a reminder that, despite all the challenges the new Obama administration faced, the ultimate test by which it would be judged would be job creation. It was a statement that Americans—just as they always have been—were ready to work hard to bring the U.S. economy back from the brink, provided that barriers were not placed in their way.

The official U.S. unemployment rate has indeed fallen steadily during the past few years, but the economic recovery has created the fewest jobs relative to the previous employment peak of any prior recovery. The labor-force participation rate recently touched a 36-year low of 62.7%. The number of Americans not in the labor force set a record high of 92.6 million in September. Part-time work and long-term unemployment are still well above levels from before the financial crisis.

Worse, middle-class incomes continue to fall during the recovery, losing even more ground than during the December 2007 to June 2009 recession. The number in poverty has also continued to soar, to about 50 million Americans. That is the highest level in the more than 50 years that the U.S. Census has been tracking poverty. Income inequality has risen more in the past few years than at any recent time.

New Jersey Gov. Chris Christie recently pointed out that the bigger problem today is not income inequality, it is “opportunity inequality.” He is right. The opportunity in America to work in a full-time job has been diminished over the past few years in an economy that Christine Lagarde , the head of the International Monetary Fund, has called the “new mediocre.”

Unfortunately, federal regulators are not helping matters. One particular action by a little-known federal agency, the Commodity Futures Trading Commission, poses a serious threat to jobs in the U.S. financial-services industry in cities across the country. I know this because I became a CFTC commissioner in June, seven months after the new regulatory action was proposed.

In November 2013, the CFTC issued a benign-sounding “Staff Advisory Notice,” which imposed flawed and overly complex rules on trading activity in swaps and other derivatives between non-U.S. businesses whenever anyone on American soil “arranged, negotiated or executed” the trade. The additional red tape is causing many overseas trading firms to consider cutting off all activity with U.S.-based trade-support personnel.

This damaging advisory was hurriedly issued a year ago by CFTC staff without the vote of a single commissioner. My fellow commissioner and former acting chairman, Mark Wetjen, even said its issuance was not the “right decision.” The advisory jeopardizes the role of bank sales personnel in U.S. financial centers, including those in New York, Boston and Chicago. It will likely have a ripple effect on jobs directly tied to financial institutions, as well as thousands of jobs with vendors who cater to the needs of the U.S. financial-services industry.

In other words, this CFTC staff advisory is a direct threat to thousands of U.S. jobs. In September I called for its withdrawal. Just last week the CFTC delayed its effective date for the fourth time. When a regulatory action needs four delays, that’s a clear sign it is not workable.

With 10 million fewer Americans working full-time today than six years ago, it is not in the nation’s economic interest for Washington regulators to cause good-paying, full-time jobs to be eliminated. This overreach is just one of many in a regulatory environment that has become a major drag on the U.S. economy. Federal regulations now cost the U.S. more than 12% of gross domestic product, or $2 trillion annually, according to the National Association of Manufacturers. The average manufacturing firm spends almost $20,000 per employee per year on complying with federal regulations. For manufacturers with fewer than 50 employees, the per-employee cost rises to almost $35,000.

With this level of regulatory cost, it is no wonder that U.S. economic growth is so meager. It will take years to loosen Washington’s grip on the economy, but the CFTC could set a good example by scrapping its advisory and replacing it with proper rules that do not prevent American workers from supporting vibrant global derivatives markets. Otherwise, New York and other U.S. financial centers will give up valuable jobs to cities like London and Singapore that are only too happy, and eagerly waiting, to take them.

Mr. Giancarlo is a commissioner at the U.S. Commodity Futures Trading Commission. This commentary was adapted from a speech he will deliver Thursday at the U.S. Chamber of Commerce in Washington.

“This $350 billion ($58 billion times 6 years) was essentially taken from savers by the Federal Reserve and transferred to borrowers in the form of lower rates…..it also indirectly helped bail out housing, the banks, Fannie, Freddie, FHA, mortgage insurers, etc..”, Mike Perry, former Chairman and CEO, IndyMac Bank

Opinion

Raise Interest Rates, Make Grandma Smile

With the Fed’s near-zero policy, households headed by someone 75 or older have lost $2,700 annually in interest income.

By Charles R. Schwab

For America’s 44 million senior citizens, plus tens of millions of others who are on the threshold of retirement, last month marked a watershed moment that is worth celebrating. At the end of October, the Federal Reserve announced the first step in returning to a more normal monetary policy. After nearly six years of near-zero interest rates and quantitative easing, the Fed is ending its bond-buying program and has signaled a plan to eventually begin raising the federal-funds rate, raising interest rates to more normal levels by 2017.

U.S. households lost billions in interest income during the Fed’s near-zero interest rate experiment. Because they are often reliant on income from savings, seniors were hit the hardest. Households headed by seniors 65-74 years old lost on average $1,900 in annual income over the past six years, according to a November 2013 McKinsey Global Institute report. For households headed by seniors 75 and older, the loss was $2,700 annually.

With a median income for senior households in the U.S. of roughly $25,000, these are significant losses. In total, according to my company’s calculations, approximately $58 billion in annual income has been lost by America’s seniors since 2008.

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Retirees depend on income from their savings for basic living expenses. Without that income, many seniors have taken on greater risk to increase the potential yield on their savings, or simply spent down their nest eggs. After decades of playing by the rules, putting off spending and socking away money, seniors have taken it on the chin. This strikes a blow at the core American principles of self-reliance, individual responsibility and fairness.

Their lost income affects all Americans. Seniors make up 13% of the U.S. population and spend about $1.2 trillion annually—a big chunk of America’s $11.5 trillion consumer economy. In general, seniors spend more than their income, withdrawing each year from accumulated savings, and so their interest earnings get spent right back into the economy.

This makes for a potent multiplier effect. My company estimates that the $58 billion in annual interest income lost by seniors over the past six years would have boosted GDP by $115 billion a year during this period. In a $17 trillion economy that amounts to an additional 0.7% of GDP growth, by no means inconsequential—a 1% increase in GDP typically leads to an increase of more than a million jobs.

Normalized interest rates are also good for the economy broadly. Total short-term interest-bearing assets are today close to $11 trillion. Based on that, a 1% increase in interest rates will generate over $100 billion in increased income. And there is ample room to raise rates. Today the one-year return on a CD is just north of 1%. In a more normal environment, the annual return on a one-year CD has been about 6.15%. As interest rates begin to normalize, increased personal income will drive spending, economic growth and jobs.

Will more historically normal interest rates have negative impacts on others? The cost of homeownership may be higher and borrowing in general will be more expensive. But these costs are largely born by middle-class and higher-income families and they will see that impact lessened over time through inflation. But is it fair that seniors subsidize cheaper credit for others? Most people wouldn’t think so.

So celebration is in order. First, because the famine for savers and seniors over the past six years may soon be over. And second, because good news for savers is good news for the economy and job seekers. Savings are closely tied to investment and growth. The more savings people have, the more money there is to spend or invest, and the faster the economy grows.

Because it creates a direct shot of consumer income that in turn becomes consumer spending, the return of normal market-based interest rates will increase the velocity of money in ways that the policies of the past six years have not. That is a good reason to encourage the Fed to be even more aggressive and normalize monetary policy as quickly as possible. But today, let’s celebrate the Fed’s first steps in that direction and the monetary benefits they’ll have for seniors and savers.

Mr. Schwab is founder and chairman of the Charles Schwab Corp.