…according to the Bank for International Settlements. As Raghuram Rajan, the Reserve Bank of India’s governor, put it earlier this year in an interview with Bloomberg Television, “Borrowing in dollars is like playing Russian roulette, especially if you’re borrowing relatively short term.” Much of the time it will work out fine, but when the value of the dollar rises, suddenly companies find that they need more of their local currency to pay back the dollars that have since gained in value. And rise the dollar has. Since the Federal Reserve signaled in summer 2013 that it would wind down its “quantitative easing” policy of buying billions of dollars in bonds using newly created money — that the gusher of dollars flowing into the global financial system would come to an end, in other words — the dollar is up 25 percent against a basket of commonly used international currencies.”, Neil Irwin, “How a Rising Dollar Is Creating Trouble for Emerging Economies”, New York Times

“Time and again, The Federal Reserve’s monetary policies have distorted economic activity, not just here in the U.S., but around the world….often with disastrous consequences. It couldn’t be more clear that The Federal Reserve is the source not of financial stability, but of volatility and instability.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Monetary Policy

How a Rising Dollar Is Creating Trouble for Emerging Economies

Neil Irwin

In India, it is a leading electric utility, Jaiprakash Power Ventures, selling off facilities and negotiating with lenders to avoid a default, having increasing its debts thirtyfold in six years.

In China, it is one of the country’s largest real estate developers, the Kaisa Group, threatening to pay only 2.4 cents on the dollar to its creditors in the face of corruption investigations and a mass resignation of executives, leaving countless would-be Chinese home buyers stuck in the middle of a multibillion dollar standoff.

And in Brazil, a wave of bankruptcies among sugar producers has been driven not just by falling sugar prices, but also by debts that they owe in United States dollars, which are becoming more expensive practically by the day compared with the Brazilian currency.

These are all parts of the same story: The soaring value of the American dollar is rippling across the globe. As it rises, it is threatening emerging economies where companies have taken on trillions’ worth of dollar-based debt in recent years. The dollar rally has been driven by decisions by the Federal Reserve, which begins a two-day policy meeting on Tuesday. In fact, anticipation of the Fed meeting, where officials are expected to signal that interest rate increases could be near, has driven the dollar even higher in the last couple of weeks.

In effect, as Fed policy makers sit around a mahogany table in Washington to try to guide the United States economy toward prosperity, their actions are having outsize, often unpredictable impacts across the globe, owing to the dollar’s central role in the global financial system.

Years of low-interest-rate policies from the Fed have encouraged companies in these fast-growing economies to borrow dollars because they could do it more cheaply than if they took out loans in their local currencies, like the Indian rupee or Brazilian real. So they did: By September 2014 there were $9.2 trillion of such dollar loans outside the United States, up 50 percent since 2009, according to the Bank for International Settlements.

Emerging Market Currencies Have Fallen Versus the Dollar

Percent change from May 1, 2013, versus United States dollar

As Raghuram Rajan, the Reserve Bank of India’s governor, put it earlier this year in an interview with Bloomberg Television, “Borrowing in dollars is like playing Russian roulette, especially if you’re borrowing relatively short term.” Much of the time it will work out fine, but when the value of the dollar rises, suddenly companies find that they need more of their local currency to pay back the dollars that have since gained in value.

And rise the dollar has. Since the Federal Reserve signaled in summer 2013 that it would wind down its “quantitative easing” policy of buying billions of dollars in bonds using newly created money — that the gusher of dollars flowing into the global financial system would come to an end, in other words — the dollar is up 25 percent against a basket of commonly used international currencies.

“Now that the dollar has strengthened and rates are on the rise, it presents a risk and a challenge to many emerging markets in that their debts have become more onerous, more burdensome,” said Hung Tran, an executive managing director at the Institute of International Finance, an association of global banks. “The challenge for authorities in emerging market countries is to understand to what degree their corporate sector is naked or exposed.”

Companies in emerging markets that are primarily exporters might be O.K. After all, their revenue is in dollars, and so it should keep pace with rising debt service obligations. But for those focused domestically, like real estate developers or electric utilities, a more expensive dollar can make it much more costly to service debts. Money coming in is in a local currency like the Indian rupee or the Malaysian ringgit, and it suddenly takes a lot more of them to pay debts owed in dollars.

Hyun Song Shin, who heads research at the Bank for International Settlements, argues that a rising dollar has an effect of tightening the supply of money across the global economy. A Malaysian company doing business with a South Korean company will frequently carry out transactions in dollars, not ringgits or won. Dollars will now be available on more stringent terms. Clearly, decisions made by Janet Yellen, the Fed chairwoman, and her colleagues in Washington can have a big effect on transactions even when no American companies are involved.

An escalator outside the Sinopec Tower in Guangzhou, China, a flagship property of the struggling Kaisa Group. Credit The New York Times

In some economists’ ears, that creates echoes of the crises that crushed East Asian economies in the late 1990s and Latin American economies in the early 2000s. In those cases, there was also a currency mismatch that sent the economies of South Korea, Indonesia, Thailand and Argentina into a tailspin.

The biggest difference this time around is that private companies, not governments, have incurred debt in a currency not their own. What is likely to follow are bankruptcies, layoffs and cost-cutting for individual companies that borrowed too aggressively. A vicious cycle of economic collapse and government austerity measures is harder to imagine.

And indeed, the rising dollar and falling emerging-market currencies cut both ways for the economies in question. Even as companies that gorged on dollar debt run into trouble, falling currency values make exporters more competitive on global markets. The International Monetary Fund projects that emerging economies worldwide will grow 4.3 percent this year, compared with 2.4 percent for the advanced economies.

In a wide-ranging speech last fall wrestling with the global impact of Federal Reserve policy, Stanley Fischer, the vice chairman of the Fed (and former governor of the Bank of Israel, where he grappled with powerful spillover effects from the Fed’s actions firsthand), discussed the risks emerging markets faced as rising interest rates in the United States drove up the dollar.

“It does not seem that the overall risks to global financial stability are unusually elevated at this time, and they are very likely substantially less than they were going into the financial crisis,” Mr. Fischer argued. “Nevertheless, it could be that some more vulnerable economies, including those that pursue overly rigid exchange rate policies, may find the road to normalization somewhat bumpier.”

This, he said, makes clear communication about the Fed’s intentions all the more important. With the central bank’s meeting this week and the day of tighter money in the United States inching ever closer, the multitrillion-dollar question for the global economy is, Just how many of these companies will ride out the bumps, and how many more will crash?

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A version of this article appears in print on March 17, 2015, on page B1 of the New York edition with the headline: How a Strong Dollar Creates Trouble Elsewhere

…Yields on the highest rated slice of the Santander bond were 1.02 percent, compared with the equivalent Treasury bond yield of 0.12 percent, according to Empirasign Strategies, a market data firm. In short, investors could earn about eight times as much yield, while ostensibly taking the same amount of risk……Delinquencies on auto loans have been rising, more Americans are losing their cars to repossession, and inquiries have begun into the subprime auto industry’s lending practices. Nevertheless, Santander Consumer USA had little trouble last week finding buyers for its latest bond deal made up of auto loans to borrowers with deeply tarnished credit. Many of the loans bundled into the $712 million deal went to borrowers with significantly lower credit scores than in many of Santander’s past bond deals. Moody’s Investors Service expects losses as high as 27 percent on the bond, much larger than the 17 percent loss that the ratings firm had projected on a bond that Santander sold last year.”, Michael Corkery and Jessica Silver-Greenberg, “Many Buyers for Subprime Auto Loan Bundle”, New York Times

“It’s similar to what happened with pre-crisis subprime and nonconforming mortgage securities. The Fed’s distortion of rates (lower for safer bonds like U.S. Treasuries), results in investors knowingly taking on bigger and bigger risks to stretch for yield. These sophisticated investors, both pre and post crisis, weren’t fooled by anyone regarding the risks of the loans backing these securities  (the securities fraud allegations were bogus and not proven). And it’s also clear that when these investors stop buying securities backed by these riskier loans, lenders stop originating them. (P.S. I also think it’s more than a little rich that the former FDIC Chair Sheila Bair had so criticized the banking industry for its lending practices and “abusing borrowers”, yet she now sits on Banco Santander’s board….a big U.S. subprime auto lender, whose U.S. parent just flunked the Fed’s stress test!!!)”, Mike Perry, former Chairman and CEO, IndyMac Bank

Many Buyers for Subprime Auto Loan Bundle

By MICHAEL CORKERY and JESSICA SILVER-GREENBERG

Santander Consumer has been riding a broad resurgence in subprime auto lending. Credit Joe Raedle/Getty Images

Delinquencies on auto loans have been rising, more Americans are losing their cars to repossession, and inquiries have begun into the subprime auto industry’s lending practices.

Nevertheless, Santander Consumer USA had little trouble last week finding buyers for its latest bond deal made up of auto loans to borrowers with deeply tarnished credit.

Many of the loans bundled into the $712 million deal went to borrowers with significantly lower credit scores than in many of Santander’s past bond deals. Moody’s Investors Service expects losses as high as 27 percent on the bond, much larger than the 17 percent loss that the ratings firm had projected on a bond that Santander sold last year.

Risks in the market may be multiplying, and some lenders are pulling back. But Santander’s latest deal shows that Wall Street’s appetite for subprime auto loans remains as strong as ever.

“You do deals when there is demand,” said Christopher R. Donat, an analyst with the investment bank Sandler O’Neill. “And this deal indicates that there is demand out there for subprime auto paper.”

It’s easy to see the attraction for investors. Yields on the highest rated slice of the Santander bond were 1.02 percent, compared with the equivalent Treasury bond yield of 0.12 percent, according to Empirasign Strategies, a market data firm. In short, investors could earn about eight times as much yield, while ostensibly taking the same amount of risk.

A spokeswoman for Santander Consumer declined to comment on the deal, which sold out in a matter of hours on Thursday.

The deal came a day after the auto lender’s parent company, Santander Holdings USA, which is owned by the Spanish financial giant Banco Santander, flunked the Federal Reserve’s annual stress test for the second consecutive year.

Still, Santander Consumer, which is based in Dallas, has been riding a broad resurgence in subprime auto lending.

Over all, auto loans to subprime borrowers — typically people with credit scores at or below 640 — have more than doubled since the financial crisis.

One reasons for the surge: Investors like mutual funds and insurance companies, which have struggled to find high-yielding debt investments while the Fed keeps interest rates near zero, have been buying billions of dollars of bonds like Santander’s most recent deal.

Last year, such securitizations increased 28 percent from 2013 and were up 302 percent since 2010, according to Thomson Reuters IFR Markets.

Amid the rapid growth in the auto loan market, regulators have raised concerns about whether growing competition among lenders is fueling lax lending standards. Federal and state prosecutors are looking into whether car dealerships have been falsifying borrowers’ loan applications to help them qualify to buy a car.

Santander Consumer is among the lenders that have received subpoenas from federal and state authorities requesting information about its securitizations.

Santander Holdings USA, the parent company, has struggled with regulatory issues of its own. As part of the banking stress test, the Fed analyzed the auto lender, as well as Santander’s retail banking operations in the United States.

It is not clear what role, if any, Santander Consumer’s auto business played in the Fed’s decision to reject the bank’s broader capital plan.

The Fed found that Santander Holdings had ample capital to weather severe economic shocks.

But the Fed failed it on qualitative concerns, citing “critical deficiencies” in areas including “risk identification and risk management” in the bank’s capital planning. Santander Consumer USA, which was started as a regional subprime lender before most of the company was acquired by Banco Santander in 2006, has developed a reputation for deftly managing the risks of lending to troubled borrowers.

Investors say Santander uses a series of algorithms to predict a borrower’s chance of default — a system that goes beyond a bank’s traditional method of risk assessment.

In its latest bond deal, according to the ratings firm Standard & Poor’s, roughly 13 percent of the loans went to borrowers without FICO credit scores, one of the most common predictors.

“Those who are putting their faith in Santander are looking at how these algorithms have performed in the past,” said Mark Palmer, an analyst with BTIG, a broker dealer.

Still, the investors that scooped up last week’s bond deal — large asset management firms — were afforded some protections.

As part of the deal, Santander agreed to take the first 25 percent of any losses that the bond might suffer, according to Moody’s. In a deal last year, Santander agreed to take 10 percent of the losses.

For Santander, the latest bond represented a shift.

Santander has always made loans to borrowers with very tarnished credit. But the lender has usually financed those loans through private deals or held them on its books, instead of tapping the public market, according to a person briefed on the matter.

The latest bond deal was the first time that it has publicly sold securities backed by auto loans with such low credit quality since the financial crisis. The timing of the deal was driven by two factors: investor demand and a desire by Santander to free up more capital.

The lender was hearing from investors, the person briefed on the matter said, who were clamoring for more bonds to scoop up, especially those with higher yields.

The highest-yielding and lowest-rated slice of the bond was the first to sell out, the person said.

A version of this article appears in print on March 16, 2015, on page B1 of the New York edition with the headline: Many Buyers for Subprime Loan Bundle

…These non-U.S. banks weren’t originating American subprime and Alt-A home loans, so their national real estate bubbles and busts (and banking collapses) must have been triggered by something else? And if there bubbles and busts were triggered by something else, wouldn’t it be logical that the U.S.’s was also (as I have so thoroughly described/discussed on this blog)?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Markets

German Banking Association Bails Out Real-Estate Lender

Decision Follows Austria’s Move to Halt Debt Repayments from Heta

By Eyk Henning

FRANKFURT—Germany’s private-banking association has jumped in to save real-estate lender Duesseldorfer Hypothekenbank AG from collapse, in the latest sign of how Austria’s decision to halt debt repayments from Heta Asset Resolution is reverberating through Europe’s financial system.

“The private bank association’s deposit insurance is providing a guarantee and shields [the bank from losses on] Heta bonds in order to remove acute risks. The goal is to take over Duesseldorfer Hypothekenbank,” the association, known as BdB, said.

BdB’s move means the planned sale of the real-estate lender, known as Duesselhyp, by U.S. financial investor Lone Star to a consortium of investors won’t go through.

It also represents the second time the BdB is rescuing Duesselhyp, after a first bailout in 2008.

Ratings firm Fitch last week said such an event could occur after Austria’s Financial Market Authority announced it would halt debt repayments from nationalized Heta, the wind-down vehicle established to sort out the unwanted assets of defunct lender Hypo Alpe Adria.

The regulator previously discovered a €7.6 billion ($7.98 billion) capital gap on €18 billion in assets.

Fitch said the German banking sector stands to lose up to 10% of its net profit this year following Austria’s decision, adding that Duesselhyp will need fresh capital to avoid failure.

The German finance ministry said Monday it welcomes the Duesseldorfer Hypothekenbank decision but doesn’t expect problems relating to Heta to spill over to other German banks.

“We don’t see such a development….I think this concerns an isolated case, which was solved over the weekend by private banks in Germany in a convincing manner,” ministry spokesman Martin Jaeger said.

Other German lenders affected by Heta are regionally owned lender NordLB, which last Friday said it has a total €380 million outstanding to Heta.

Another regionally owned bank, Bayerische Landesbank, has €2.35 billion in unsecured credit lines outstanding to Heta—the largest exposure of all German banks.

Although these aren’t directly affected by the moratorium for bond payments, officials have said BayernLB will have to write down some of its exposure to Heta, denting last year’s results.

State-owned real-estate lender Deutsche Pfandbriefbank said this month that it had to book €120 million in provisions to cover potential losses from its exposure to Heta, reducing its preliminary 2014 pretax profit by about 70% to €54 million.

The Opinion Pages

Skills in Flux

David Brooks

Several years ago, Doug Lemov began studying videos of excellent teachers. He focused not on their big strategies but on their microgestures: How long they waited before calling on students to answer a question (to give the less confident students time to get their hands up); when they paced about the classroom and when they stood still (while issuing instructions, to emphasize the importance of what’s being said); how they moved around the room toward a student whose mind might be wandering.

In an excellent piece on Lemov for The Guardian, Ian Leslie emphasizes that these subtle skills are often not recognized or even discussed by those who talk about education policy, or even by those who evaluate teachers.

Leslie notes that the Los Angeles school system tabulated the performance of roughly 6,000 teachers, using measures of student achievement. The best performing teacher in the whole system was a woman named Zenaida Tan. Up until that report, she was completely unheralded. The skills she possessed were invisible. Meanwhile, less important traits were measured on her evaluations (three times she was late to pick up students from recess).

In part, Lemov is talking about the skill of herding cats. The master of cat herding senses when attention is about to wander, knows how fast to move a diverse group, senses the rhythm between lecturing and class participation, varies the emotional tone. This is a performance skill that surely is relevant beyond education.

This raises an important point. As the economy changes, the skills required to thrive in it change, too, and it takes a while before these new skills are defined and acknowledged.

For example, in today’s loosely networked world, people with social courage have amazing value. Everyone goes to conferences and meets people, but some people invite six people to lunch afterward and follow up with four carefully tended friendships forevermore. Then they spend their lives connecting people across networks.

People with social courage are extroverted in issuing invitations but introverted in conversation — willing to listen 70 percent of the time. They build not just contacts but actual friendships by engaging people on multiple levels. If you’re interested in a new field, they can reel off the names of 10 people you should know. They develop large informal networks of contacts that transcend their organization and give them an independent power base. They are discriminating in their personal recommendations since character judgment is their primary currency.

Similarly, people who can capture amorphous trends with a clarifying label also have enormous worth. Karl Popper observed that there are clock problems and cloud problems. Clock problems can be divided into parts, but cloud problems are indivisible emergent systems. A culture problem is a cloud, so is a personality, an era and a social environment.

Since it is easier to think deductively, most people try to turn cloud problems into clock problems, but a few people are able to look at a complex situation, grasp the gist and clarify it by naming what is going on.

Such people tend to possess negative capacity, the ability to live with ambiguity and not leap to premature conclusions. They can absorb a stream of disparate data and rest in it until they can synthesize it into one trend, pattern or generalization.

Such people can create a mental model that helps you think about a phenomenon. As Oswald Chambers put it, “The author who benefits you most is not the one who tells you something you did not know before, but the one who gives expression to the truth that has been dumbly struggling in you for utterance.”

We can all think of many other skills that are especially valuable right now:

Making nonhuman things intuitive to humans. This is what Steve Jobs did.

Purpose provision. Many people go through life overwhelmed by options, afraid of closing off opportunities. But a few have fully cultivated moral passions and can help others choose the one thing they should dedicate themselves to.

Opposability. F. Scott Fitzgerald wrote, “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” For some reason I am continually running across people who believe this is the ability their employees and bosses need right now.

Cross-class expertise. In a world dividing along class, ethnic and economic grounds some people are culturally multilingual. They can operate in an insular social niche while seeing it from the vantage point of an outsider.

One gets the impression we’re confronted by a giant cultural lag. The economy emphasizes a new generation of skills, but our vocabulary describes the set required 30 years ago. Lord, if somebody could just identify the skills it takes to give a good briefing these days, that feat alone would deserve the Nobel Prize.

A version of this op-ed appears in print on March 17, 2015, on page A27 of the New York edition with the headline: Skills in Flux.

…Moynihan was absolutely right to emphasize the consequences for low-income children of changing family structure. Partly because there is often only one income coming into a single-parent household, children of unmarried moms are roughly five times as likely to live in poverty as children of married couples. Causation is difficult to tease from correlation. But efforts to do that suggest that growing up with just one biological parent reduces the chance that a child will graduate from high school by 40 percent, according to an essay by Sara McLanahan of Princeton and Christopher Jencks of Harvard. They point to the likely mechanism: “A father’s absence increases antisocial behavior, such as aggression, rule-breaking, delinquency and illegal drug use.” These effects are greater on boys than on girls…….So let’s learn from 50 years of mistakes. A starting point is to acknowledge the role of families in fighting poverty. That’s not about being a moralistic scold, but about helping American kids.”, Nicholas Kristof, “When Liberals Blew It”, New York Times

“Why has it taken so long to admit obvious error in this tragic viewpoint (which caused our government’s policies to be grossly wrong and hurt so many poor minority children, especially boys and young men)? Because the mainstream politicians and press squelched any dissent (in this case by false claims of racism). On so many issues these days it seems like the “mainstream” view is or could be wrong and yet so many won’t even consider any other facts or viewpoints. Like the true, root-causes of the 2008 financial crisis. That’s why it so important to read and listen (with an open mind and beyond the mainstream media) to viewpoints that you might think are wrong and/or even despise. Facts and others’ views don’t bite!!! But squelching views and dissent does serious damage and is frankly against everything for which America stands. Personally, while I am a libertarian (and tend toward conservative), I come at everything with an open mind and when presented with facts that clearly refute my view, I apologize or admit I was wrong (if appropriate) and change my view. That’s exactly how I became an Independent (and now vote mostly Republican), after more than 20 years as a Democrat.”, Mike Perry, former Chairman and CEO, IndyMac Bank

The Opinion Pages | Op-Ed Columnist

When Liberals Blew It

Nicholas Kristof

Fifty years ago this month, Democrats made a historic mistake.

Daniel Patrick Moynihan, at the time a federal official, wrote a famous report in March 1965 on family breakdown among African-Americans. He argued presciently and powerfully that the rise of single-parent households would make poverty more intractable.

“The fundamental problem,” Moynihan wrote, is family breakdown. In a follow-up, he explained: “From the wild Irish slums of the 19th-century Eastern seaboard, to the riot-torn suburbs of Los Angeles, there is one unmistakable lesson in American history: a community that allows large numbers of young men to grow up in broken families … never acquiring any stable relationship to male authority, never acquiring any set of rational expectations about the future — that community asks for and gets chaos.”

Liberals brutally denounced Moynihan as a racist. He himself had grown up in a single-mother household and worked as a shoeshine boy at the corner of Broadway and 43rd Street in Manhattan, yet he was accused of being aloof and patronizing, and of “blaming the victim.”

“My major criticism of the report is that it assumes that middle-class American values are the correct values for everyone in America,” protested Floyd McKissick, then a prominent African-American civil rights leader.

The liberal denunciations of Moynihan were terribly unfair. In fact, Moynihan emphasized that slavery, discrimination and “three centuries of injustice” had devastated the black family. He favored job and education programs to help buttress the family.

But the scathing commentary led President Lyndon Johnson to distance himself from the Moynihan report. Scholars, fearful of being accused of racism, mostly avoided studying family structure and poverty.

In 1992, Vice President Dan Quayle stepped into the breach by emphasizing the role of the family in addressing poverty, including a brief reference to Murphy Brown, a television character who was a single mom. Liberals rushed to ridicule Quayle for sexism and outdated moralism, causing politicians to tread this ground ever more carefully.

The taboo on careful research on family structure and poverty was broken by William Julius Wilson, an eminent black sociologist. He has praised Moynihan’s report as “a prophetic document,” for evidence is now overwhelming that family structure matters a great deal for low-income children of any color.

In 2013, 71 percent of black children in America were born to an unwed mother, as were 53 percent of Hispanic children and 36 percent of white children.

Indeed, a single parent is the new norm. At some point before they turn 18, a majority of all American children will likely live with a single mom and no dad.

Photo

Detroit, 2013 Credit Andrew Burton/Getty Images

My point isn’t to cast judgment on nontraditional families, for single parents can be as loving as any. In fact, when one parent is abusive, the child may be better off raised by the other parent alone. And well-off kids often get plenty of support whether from one parent or two.

One kind of nontraditional household does particularly well. One study found that children raised by same-sex couples excelled by some measures, apparently because the parents doted on their children — most gay couples don’t have unwanted children whom they neglect.

Yet Moynihan was absolutely right to emphasize the consequences for low-income children of changing family structure. Partly because there is often only one income coming into a single-parent household, children of unmarried moms are roughly five times as likely to live in poverty as children of married couples.

Causation is difficult to tease from correlation. But efforts to do that suggest that growing up with just one biological parent reduces the chance that a child will graduate from high school by 40 percent, according to an essay by Sara McLanahan of Princeton and Christopher Jencks of Harvard. They point to the likely mechanism: “A father’s absence increases antisocial behavior, such as aggression, rule-breaking, delinquency and illegal drug use.” These effects are greater on boys than on girls.

Conservatives shouldn’t chortle at the evidence that liberals blew it, for they did as well. Conservatives say all the right things about honoring families, but they led the disastrous American experiment in mass incarceration; incarceration rates have quintupled since the 1970s. That devastated families, leading countless boys to grow up without dads.

What can be done?

In line with Moynihan’s thinking, we can support programs to boost the economic prospects for poorer families. We can help girls and young women avoid pregnancy (30 percent of American girls become pregnant by age 19). If they delay childbearing, they’ll be more likely to marry and form stable families, notes Isabel Sawhill of the Brookings Institution.

So let’s learn from 50 years of mistakes. A starting point is to acknowledge the role of families in fighting poverty. That’s not about being a moralistic scold, but about helping American kids.

I invite you to sign up for my free, twice-weekly newsletter. When you do, you’ll receive an email about my columns as they’re published and other occasional commentary. Sign up here.

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A version of this op-ed appears in print on March 12, 2015, on page A29 of the New York edition with the headline: When Liberals Blew It.

CFO Journal

The Big Number

2%

The global default rate for junk-rated borrowers in 2014

Fewer risky corporate borrowers defaulted on their bonds and loans last year at the lowest rate since 2007.

The speculative-grade default rate, which tracks so-called junk-rated issuers, fell to 2% last year, down from 3% a year earlier, according to Moody’s Investors Service. That’s the lowest since the 1% recorded in 2007, which was a more than quarter-century low. The historical average default rate among junk-rated companies is 4.5%.

Moody’s predicts the default rate will rise to 2.7% this year, as expected increases in interest rates by the Federal Reserve, weak economic growth abroad and geopolitical concerns diminish investors’ appetite for risky debt.

The recent low default rates reflect the economy’s strength in the U.S., home to the lion’s share of rated defaulters, as well as near-historic lows in interest rates and easy access to refinancing capital.

“A series of shocks to interest rates” could push unemployment higher and curb the economy in a worst-case scenario, according to Albert Metz, managing director for credit policy research at Moody’s. Even in a darker-than-expected future, he said, the speculative-grade default rate “doesn’t get really near the recent peak,” of just over five years ago, when it topped 13%.

Moody’s assumes in its best-case projections that U.S. unemployment ends the year at 5.2%. On Friday, the Labor Department said unemployment fell to a better-than-expected 5.5% in February.

The number of junk defaults fell by a quarter last year to 51, but their total dollar value jumped to nearly $68 billion, thanks to the bankruptcy of Energy Future Holdings Corp. in the spring.

— Maxwell Murphy

Corrections & Amplifications

Risky corporate borrowers defaulted on their bonds and loans last year at the lowest rate since 2007. An earlier version of this article incorrectly stated that fewer defaulted last year than in 2007.

…“The government is exposed to market risk when the economy is weak because borrowers default on their debt obligations more frequently and recoveries from borrowers are lower,” explained the Congressional Budget Office in a report last year. “When the government extends credit, the associated market risk of those obligations is effectively passed along to taxpayers, who, as investors, would view that risk as having a cost.” They sure would. CBO reported that while the Department of Education’s four largest student-loan programs were expected to yield an official savings of roughly $135 billion from fiscal 2015-2024, the programs would likely cost taxpayers $88 billion under fair-value accounting practiced outside the Beltway. An official $14 billion projected taxpayer gain at the Export-Import Bank was revealed as a $2 billion projected loss. And the official $63 billion bonanza expected from the Federal Housing Administration’s single-family mortgage guarantee turned out to be a $30 billion taxpayer shellacking.”, The Wall Street Journal Editorial Board

Review & Outlook

Ending Federal Loan Fraud

Republicans don’t need Obama’s signature to retire this scam.

‘We’ll try and balance the budget in a 10-year period,” said Senate Budget Chairman Mike Enzi (R., Wyo.) in January. “And we hope to do it without gimmicks and bad accounting.” That last point is crucial. Avoiding behavior that would get a private citizen sent to prison seems a reasonable aspiration for elected officials, and Mr. Enzi has a perfect opportunity to start cleaning up the government’s books.

This year’s congressional budget outline can move Washington toward more honest accounting by creating new rules for the Congressional Budget Office. President Obama ’s signature isn’t required, and since budget resolutions can’t be filibustered, reformers don’t need Democratic votes.

Senate Budget Chairman Mike Enzi (R., Wyo.) Photo: Associated Press

A great place to start is the accounting for federal lending programs which deliberately understates their risks. Readers may have noticed that every time federal student-loan subsidies expand, liberals like Senator Elizabeth Warren (D., Mass.) hail it as a taxpayer windfall. She gets away with this because administrative expenses and market risk aren’t included in the loan cost estimates.

“The government is exposed to market risk when the economy is weak because borrowers default on their debt obligations more frequently and recoveries from borrowers are lower,” explained the Congressional Budget Office in a report last year. “When the government extends credit, the associated market risk of those obligations is effectively passed along to taxpayers, who, as investors, would view that risk as having a cost.”

They sure would. CBO reported that while the Department of Education’s four largest student-loan programs were expected to yield an official savings of roughly $135 billion from fiscal 2015-2024, the programs would likely cost taxpayers $88 billion under fair-value accounting practiced outside the Beltway.

An official $14 billion projected taxpayer gain at the Export-Import Bank was revealed as a $2 billion projected loss. And the official $63 billion bonanza expected from the Federal Housing Administration’s single-family mortgage guarantee turned out to be a $30 billion taxpayer shellacking.

Mr. Enzi’s office says he supports fair-value accounting for federal credit programs. His House counterpart, Rep. Tom Price (R., Ga.), has been shining a light on this government racket for years. Now they can do something about it by using the budget resolution to require that CBO practice honest accounting in official scores of legislation.

The list of taxpayer-friendly measures that President Obama will sign before he leaves office is short. The new Republican majority in Congress should seize the opportunity for reforms they can execute on their own.

“As Milton Friedman said, the arguments for capitalism are subtle and sophisticated, while the arguments for collectivism are simple and emotional. There are at least four cornerstones of limited-government, private-property, market-price economies that create prosperity but that are not intuitively obvious and require analysis and thought to appreciate.”, Douglas Coate, “Improving the GOP’s Free-Market Pitch”, The Wall Street Journal

Opinion

Improving the GOP’s Free-Market Pitch

Capitalism’s virtues don’t easily reduce to sound bites, but that isn’t a reason to give up.

By Douglas Coate

As an economics professor, I have sympathy for market-oriented Republican candidates who at times seem unable to explain their economic philosophy in sound-bite form. As Milton Friedman said, the arguments for capitalism are subtle and sophisticated, while the arguments for collectivism are simple and emotional. There are at least four cornerstones of limited-government, private-property, market-price economies that create prosperity but that are not intuitively obvious and require analysis and thought to appreciate.

One is Adam Smith ’s idea of the invisible hand. Smith argued that individuals in market economies, although motivated by self interest, will be guided by an invisible hand to take actions that benefit society as a whole. A farmer works hard to grow wheat at the lowest possible cost. When he tries to sell his wheat at a high price, however, he discovers that other farmers have also worked hard to grow wheat at low cost and competition with them pushes prices down close to production costs.

This is not the outcome planned for by our self-interested farmer and his competitors, but it is great for the rest of us who get cheap food.

A second is trade. Trade between people within and across countries leads to the division of labor. People can specialize in what they do best and trade with others for what the others do best. This makes everyone more productive and more prosperous.

Photo: Corbis

This holds even for trade between peoples of highly developed countries and peoples of less-developed countries. We all have a comparative advantage in something because of differences among us and in the resources we command. Self-sufficiency at the individual or country level may be a romantic ideal, but it also means subsistence living.

A third is the market-price system. From property rights and trading come market prices as suppliers and demanders interact based on the information and resources each possess. These prices in turn guide our plans and actions as consumers or producers.

A high-school graduate makes the decision of whether to go to college or not based on the information reflected in prices. What is the price or wage of a college graduate in the labor market? What is the price or wage of a high-school graduate? What is the price of a college education? A factory owner in a market economy chooses how labor intensive or capital intensive to make his production process by looking at the wages of workers and their skills alongside the prices of the different production technologies he could use.

A factory manager in the old Soviet economy, not blessed with a market-price system, relied on the information or allocations of a central planner to guide his use of workers and machines in the production process. But the central planner was largely playing a guessing game. He did not have market prices to keep him up to date on the skills of workers in different locations and on the technologies available to them.

The fourth is that the productive resources of land, labor and capital are guided to their best use. This results from the constant feedback provided by the profit-and-loss system and from the lack of discrimination when governments are hands off.

Labor, the most important resource in market economies with educated work forces, is fully utilized, for example, because employers hire the best workers they can at prevailing wages to maximize their profits. And it is in their best interest to treat them well thereafter so they won’t leave. Any differences in wages by characteristic, such as race or gender, that do not reflect productivity, are quickly arbitraged away in the pursuit of profit. Why hire men if women are cheaper?

The counters to these arguments are that our economic system should not be based on selfishness but on caring, that international trade leads to the exporting of jobs to low-wage countries, that the best and brightest should be assembled to plan our economy because the plans of ordinary people reflected in market prices are not informed, and that discrimination and unfair treatment are everywhere if employers are free to hire, fire, pay and promote without oversight.

Nice sound bites, appealing to the emotions, and probably characteristic of too much of the K-12 and college education in this country. But, to paraphrase Friedrich Hayek, “these views lead us down the road to serfdom.” For peaceful and prosperous lives, based on personal responsibility and voluntary cooperation, capitalism is the way.

Unfortunately, I am not sure how best a political candidate might argue for capitalism and limited government in a sound bite. Maybe by borrowing from Gary Becker : “Over the past 25 years, a billion people have escaped poverty as their countries moved away from command and control, toward capitalism and freedom.”

Mr. Coate is professor of economics at Rutgers University, Newark.

…if anyone was openly and shamelessly mocking the criminal-justice system, it was so much of the media itself, credulously accepting or sanctimoniously promoting the double fable of Ferguson: that a “gentle giant” had been capriciously slain by a trigger-happy cop; and that a racist justice system stood behind that cop. At least half that fable was put to rest last week by an exhaustive Justice Department report. It demolishes the lie that Brown was shot in the back, along with the lie that he was surrendering to Mr. Wilson, hands in the air, when he was shot. It confirms that Brown physically assaulted the officer, who had good grounds to fear for his life. And it confirms that eyewitnesses either lied to investigators or refused to be interviewed out of fear of local vigilantes., Bret Stephens, “Ferguson, Lies, and Statistics”, The Wall Street Journal

“This is similar to the incorrect populist narrative about the causes of the 2008 financial crisis. This blog is dedicated to revealing the truth about this major event.”, Mike Perry, former Chairman and CEO, IndyMac Bank

GLOBAL VIEW

Ferguson, Lies and Statistics

Here’s a story for the media: a community in which honest people are afraid to tell the truth.

Attorney General Eric Holder speaks about the Justice Department’s findings in the Ferguson investigations, March 4, in Washington, D.C. PHOTO: GETTY IMAGES

By BRET STEPHENS

Darren Wilson has been exonerated, again, in last August’s shooting death of Michael Brown, and that ought to be as much a vindication for the onetime Ferguson, Mo., police officer as it is a teachable moment for the rest of America.

It won’t be. The story line has failed, so the statistics have been put to work.

That the claims made against Mr. Wilson were doubtful should have been clear within days of Brown’s death, and again in November after a grand jury, having heard from some 60 witnesses, declined to indict the officer—an outcome one outraged commentator denounced as having “openly and shamelessly mocked our criminal justice system and laid bare the inequality of our criminal jurisprudence.”

Yet if anyone was openly and shamelessly mocking the criminal-justice system, it was so much of the media itself, credulously accepting or sanctimoniously promoting the double fable of Ferguson: that a “gentle giant” had been capriciously slain by a trigger-happy cop; and that a racist justice system stood behind that cop.

At least half that fable was put to rest last week by an exhaustive Justice Department report. It demolishes the lie that Brown was shot in the back, along with the lie that he was surrendering to Mr. Wilson, hands in the air, when he was shot. It confirms that Brown physically assaulted the officer, who had good grounds to fear for his life.

And it confirms that eyewitnesses either lied to investigators or refused to be interviewed out of fear of local vigilantes.

“Witness 109 claimed to have witnessed the shooting, stated that it was justified, and repeatedly refused to give formal statements to law enforcement for fear of reprisal should the Canfield Drive neighborhood find out that his account corroborated Wilson.”

Witness 113 “gave an account that generally corroborated Wilson, but only after she was confronted with statements she initially made in an effort to avoid neighborhood backlash. . . . She explained to the FBI that ‘You’ve gotta live the life to know it,’ and stated that she feared offering an account contrary to the narrative reported by the media that Brown held his hands up in surrender.”

Now there’s a story for the media: A community in which honest people can’t tell the truth for fear of running afoul local thugs enforcing “the narrative reported by the media.” Or is that more of a story about the media?

But let’s move to the other Ferguson fable, which is the Justice Department’s allegation, in an unfortunate second report, of systemic racism in the Ferguson police department.

For a flavor of this claim, it’s worth noting an incident recounted in the report, in which a Ferguson man was killed “after he had an ECW [Taser] deployed against him three times for allegedly running toward an officer swinging his fist.” The man “had been running naked through the streets and pounding on cars that morning while yelling ‘I am Jesus.’ ”

According to the Justice Department, this incident is an example of “overreliance on force when interacting with more vulnerable populations.”

This isn’t to say that the report doesn’t uncover more serious problems, including a number of racist emails in the department, policing that seems needlessly obnoxious or aggressive, and a municipal government desperate to prosecute every minor violation of the law in order to maximize city revenues—in effect, using cops as taxmen.

But this only demonstrates the journalistic truism that you can always find the “story” you’re looking for. Using ticket revenue and other fines to raise revenues is one of the oldest municipal tricks in the book, so much so that the Federal Reserve Bank of St. Louis even published a paper about it in 2006. “As local tax bases have been exhausted and public opposition to increases in local tax rates have increased over time, local governments face increased pressure to find alternative sources of revenue,” noted economists Thomas Garrett and Gary Wagner.

That turns out to be as true in Milwaukee, Nashville and Washington, D.C., as it is in Ferguson. So are we talking about institutional racism or just the usual government bloodsucking?

Then there’s the report’s abuse of statistics, notably of the fact that African-Americans are 67% of Ferguson’s population but are disproportionately arrested for crime.

Is this racism? The Missouri Statistical Analysis Center notes that in 2012 African-Americans, about 12% of the state’s population, constituted 65% of murder arrests and 62% of murder victims. To suggest that the glaring statistical disproportion between relative population size and murder rate is somehow a function of race would be erroneous and offensive. Yet tarring a police force as racist for far smaller statistical discrepancies is now one of the privileged “truths” of 21st century America.

The lesson of Darren Wilson is that there is no truth in narrative. And the lesson of Ferguson is that there is no truth in statistics. There is truth in fact. There is truth in reason. There is truth in truthfulness. Nothing less.

…nationwide HPA in their HECM model!!! And yet post-crisis, the private sector was blamed for not foreseeing the nationwide housing bubble and predicting the housing bust!!! What a crock of hypocrisy!!! Unlike FHA, private sector mortgage lenders (like IndyMac Bank) rapidly changed their lending assumptions/models and standards, avoiding billions in additional losses (for lenders and borrowers alike) that might have occurred in 2007-2010, before the housing recovery took hold.”, Mike Perry, former Chairman and CEO, IndyMac Bank

From:
Sent: Monday, March 9, 2015 3:53 PM
To: Michael Perry
Subject: RE: Hey…..

Mike – the current pricing model has a constant 4.00% annual HPA.

——– Original message ——–

From: Michael Perry

Date:03/09/2015 1:34 PM (GMT-08:00)

To:

Subject: RE:

Thanks…really appreciate it. mp

From:
Sent: Monday, March 9, 2015 1:30 PM
To: Michael Perry
Subject: RE: Hey…..

Mike – let me do some digging on that one. Yes, it was 4.2% pre-crisis. The pricing was set in 1989 (first year originating HECM’s) and had not been updated until +/- 2009.

From: Michael Perry [mailto:mperry@raubhil.com]
Sent: Monday, March 9, 2015 3:49 PM
To:
Subject: RE: Hey….

I am really familiar with this document, as I did a study of this and the forward fund reports a few years ago.

I see home price appreciation discussion in the text and the appendix and the Moody’s forecast (to calculate the value of the fund), but I don’t see anywhere a discussion of what FHA uses in their reverse mortgage model to calculate maximum loan amount?

They used to use 4.2% pre-crisis? Do you know what they use today for new loans?

From:
Sent: Monday, March 9, 2015 12:11 PM
To: Michael Perry
Subject: RE: Hey…..

Hi Mike – great to hear from you!

The original HECM model assumed a straight line 4.2% annual HPA. There were a lot of problems with the HECM insurance fund as the product LTV’s were mis-priced badly. As a result there are projected losses in the fund that triggered multiple revisions to the product pricing including the HPA assumptions. I have attached the latest actuarial report. While longer than you are probably interested in, the HPA discussions begin around page 20.

Hope this helps and let’s get together for coffee soon.

Good luck on your application!

Take care,

From: Michael Perry [mailto:mperry@raubhil.com]
Sent: Monday, March 9, 2015 2:34 PM
To:
Subject: Hey…..

It’s been a long time and I hope you guys are well.

Quick question if you don’t mind.

As I recall, FHA’s HECM assumed 4% annual home price appreciation to calculate its maximum loan amount for a prospective borrower.

Post-crisis did they change this assumption? If so, to what?

Where can I find this on their website.

This is unrelated to the reverse mortgage biz….I am building a Home Buying Application and it would be one data point in regards to “future values” of home prices. Best, mike