De-Politicizing the Fed

Federal Reserve Chairman Ben Bernanke was confirmed by the Senate yesterday and will now serve another four-year term as Fed chair. It may seem odd that a Democratic president would re-nominate someone originally nominated by a Republican to such a crucial government position, but it's actually been quite a long time since a president tried to change a Fed chairman put into office by the opposing party. Here are the last few men to hold the job:

Bernanke, first appointed by Republican Bush in 2006, re-appointed by Democrat Obama in 2010.

Alan Greenspan, first appointed by Republican Reagan in 1987, re-appointed by Republican Bush, Democrat Clinton, and Republican Bush before retiring in 2006.

Paul Volcker, first appointed by Democrat Carter in 1979, re-appointed by Republican Reagan.

G. William Miller, first appointed by Democrat Carter in 1978, left the Fed to serve as Carter's Treasury Secretary.

Arthur Brown, first appointed by Republican Nixon in 1970, but Carter chose to replace him with Miller in 1978. That makes it over 30 years since a president failed to re-nominate a Fed chair initially appointed by the opposing party.

The Bonds of Taxes

This year, for the first time ever, taxpayers can receive their refunds from the IRS in the form of a savings bond, or even in a good old U.S. Treasury Bond, for up to $5,000. Or you can have the money directly deposited in your IRA. The idea is that your refund can end up helping out the U.S. Treasury while also going directly to work as part of your portfolio.

There are rumors and emails going around, though, insisting that the savings-bond plan has become the default option for IRS refunds. According to one such email, "the IRS has decided that all refunds due clients will be paid in US Savings Bonds unless you choose to 'opt out.'"

This is not true. To get your refund in a savings bond, or in any other of the unconventional forms, you have to "opt in," by filling out IRS Form 8888. If you don't, you'll get a check or a direct deposit of any refund due you, just as in years past. No one is going to be surprised by receiving a savings bond from the IRS.

Consumer Confusion

Consumer confidence is up a tick in January, according to the Conference Board's Consumer Confidence Survey, which is the granddaddy of all these surveys. Although it's not usually reported this way, because the numbers don't actually represent anything, the number stands at 55.9, up from 53.6 in December.

But one thing you can keep in mind is that the standard, based on where consumer confidence registered in 1985, is 100. Now, 1985 was a pretty good year, as we had fully emerged from the recession in the early part of that decade, but it's kind of sad to think we're barely halfway as confident as we were back then.

Where we are at this point, in 2010, is in a bit of a muddle. The number of respondents who said business conditions were good increased in January; unfortunately, so did the number of respondents who said business conditions were bad. The number of people expecting there to be fewer jobs in the months ahead decreased, but the number of people expecting there to be more jobs in the months ahead also decreased. The bottom line is: Consumers don't know what to expect from this economy.

The Housing Market: Back to Square One?

You may have heard that the housing-sales figures released yesterday showed the biggest drop in existing-home sales in 40 years. It's actually a little worse than that: The National Association of Realtors reported that seasonally adjusted existing-home sales showed their largest monthly drop since they began keeping such records in 1968. So it's impossible to know for sure, but this could have been the biggest one-month drop ever.

But let's get a little perspective: The reason existing-home sales fell so much is that they had been artificially pumped up by the $8,000 first-time homebuyers tax credit. That was originally scheduled to expire in November, although it's been extended, so much of the homebuying public rushed to get their purchases done before then. And even that precipitous drop only took the existing-home market back to where it had been in August. In other words, it's not December that was the outlier, but the fall months that preceded it.

Indeed, for the entirety of 2009, sales of occupied U.S. homes rose for the first time in four years. The cost of that was that prices fell by more than 12 per cent last year, the most they've fallen in a single year since the 1930s. Those annual figures bear much more significance than the monthly changes.

The Tech Quandary

Google continued a curious phenomenon when it unveiled its earnings last week. Like a lot of other tech companies this quarter, Google reported very strong earnings, up roughly fivefold from the year previous, exceeding even the analysts' estimates. But the stock still slipped by 5.7 percent on Friday.

The same thing happened with Advanced Micro Devices, which lost 12 percent of its value on Friday after posting another strong earnings report. Earlier in the week, Intel, you'll remember, blew past the analysts' estimates to post revenue of 40 cents a share, a whopping tenfold increase from the year earlier. For that performance, investors repaid the company by driving the stock down by nearly 10 percent last week.

Are investors expecting too much from these tech companies, or from this market? Are there countervailing forces bringing their stocks down to earth? Or do earnings reports not carry the same weight they used to? It's hard to say, but it's a phenomenon worth watching.

Bank Shot

President Obama proposed yesterday that banks should be prohibited from owning their own proprietary trading desks, among other restrictions. The idea here is that many large banks are now operating with infusions of cash from the American taxpayer. That gives them the opportunity to invest that money into various securities - but if they lose money on those investments, they can expect the American public to bail them out, since many of them are in the familiar "too big to fail" category. That creates a no-lose situation for the banks.

So the administration doesn't want banks to gamble with taxpayer money. But what then do we do about an institution like Goldman Sachs? Goldman is best known as an investment bank, except that in September 2008, it and Morgan Stanley officially changed their charters to become bank holding companies, freeing them up to build up their assets through retail deposits. That was supposed to help them avoid the leverage-heavy failures suffered by the likes of Bear Stearns and Lehman Brothers, who financed many of their transactions through bond deals. But the proprietary trading desk remains a big moneymaker for Goldman Sachs.

It was a totally different environment back then, a very dangerous one for the investment banks. Bear Stearns and Lehman had just collapsed; Merrill Lynch was on its way out. When Goldman announced its switchover, its stock was at $120; it was at $170 before Obama's announcement. The change away from calling itself an investment bank may have been a boon in the short term. But depending on where Obama's proposal goes, it may cause problems in the future.

The FHA Clamps Down

The Federal Housing Administration has tightened the rules for lending to homeowners, raising mortgage insurance premiums and requiring larger down payments for buyers with poor credit records. In addition to offering home loans of its own, the FHA also insures mortgages offered by other lenders, so the reach of these new rules is wider than it might otherwise appear.

These tighter regs might have prevented some of the damage that's been done to the housing market in previous years. It might have eliminated some of the rampant speculation that caused investors to buy eight or ten houses in Arizona and Florida, and might have kept people who really had no business getting an expensive mortgage out of the housing market. It might have tamped down the bubble before it had a chance to get out of control.

Now, of course, it's a bit late for all that. The bubble has blown up and popped. One side effect of these rules is that it will make it a bittougher for people to get mortgages, further slowing the housing recovery, although most lenders have already tightened their lending standards. This is a good first step toward preventing the next bubble - whenever that might have been.