Posted on Wed, Jun 10, 2009
At Efinancialblog we keep a watchful eye on all things financial, especially the insurance industry.
The recent federal intervention in the financial services industry is well known when it comes to banks. An underreported fact is that, as of last month, the Treasury Department has also extended bailout funds to help bolster America’s insurance companies. While federal bailout funds were originally approved to help banks alleviate toxic loans, the Treasury Department has used such funds to help industries such as the auto industry and now the insurance industry significantly strengthen their financial status.
One such insurance company is The Hartford Financial Services Group Inc. Hartford announced that the Treasury Department determined they were eligible for $3.4 billion from the Troubled Asset Relief Program. Additionally, Allstate Corp., Ameriprise Financial Inc., Principal Financial Group Inc. and Prudential Financial Inc were also determined to be eligible for bailout money, though the amounts have not yet been disclosed.
Some insurance companies are reporting surpluses, such as MetLife, and have declared that they are not going to ask for bailout money.
While they are not banks, insurance companies have been negatively affected by the financial crisis. Stock portfolios for many institutional investors have decreased significantly in value and life insurers own roughly 18% of all corporate bonds in America. Moreover, life insurers have seen their own stocks drop dramatically, so there was reason to be concerned they could fall below federal requirements for liquid assets. These are the factors that made the insurance companies eligible for bailout money.
Treasury Secretary Timothy Geithner told a congressional oversight panel recently that the TARP fund Congress approved last October now has $110 billion left in the fund that has not been committed.
Do you think bailout money should be used for insurance companies? How should the Treasury spend the last 110 billion dollars? As always, your comments are welcome!
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Posted on Sat, Feb 14, 2009
The Chinese New Year has begun with fireworks and celebration. This year marks “The Year of the Ox.” People born in the “Year of the Ox” are said to be patient, speak softly, and inspire confidence in others. Perhaps the children of this “Year of the Ox” will acquire those characteristics, qualities which are so important to turning the corner in our national economic recovery.
We hope for the strength and patience that are necessary to pull together as a people and create a renewed sense of purpose. Indeed, without the patience to withstand economic adversity, we risk losing the resolve and commitment to see our way through the challenges we face and press forward to the dawn of a new day, and a new era, in our nation’s economic revival.
“The Year of the Ox” symbolizes the inner strength and power to engender progress and create confidence. It is confidence that is needed to generate the momentum needed for recovery.
In this “Year of the Ox,” will our elected politicians be able to truly speak less and listen more? Will they plow ahead with the quiet determination of the Ox? A new commitment in this new year is the way towards the future. Let us “speed the plow” and harvest what we sow together. Tell us, what does “The Year of the Ox” symbolize to you?
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Posted on Mon, Dec 15, 2008
Throughout history, nations have relied upon and gone to war over, the resources they need to run their economies. These resources have evolved from water, to farmable land, to the ever more volatile resource of oil. Energy is the life force of a modern economy. In the current equation, oil adds up to both convertible heat in a building furnace or combustion in an automotive engine to drive transportation.
Like all finite resources, our oil supply is subject to the market forces of supply and demand. The commodity is on a trajectory to skyrocket in price, be it in the short term or long, and must be weighed against more economical alternatives.
Just as important as the economic impacts are the environmental benefits. The right energy policy can spark the dynamism of our economy through long-term investment in renewable energy. We can create potentially millions of jobs, starting with a 21st- century economic recovery plan that puts Americans to work building wind farms, solar panels, and fuel-efficient cars. At the same time, we can reduce the carbon emissions that threaten to warm the planet through the creation of greenhouse gases in the ozone layer.
Shifting from an oil based economy would also cut our dependence upon foreign entities for our economic survival. Imagine all the money Americans would have saved this summer if gas was less than $4 a gallon. If we do not need as much gas, the money saved could be funneled into our national economy, increasing our economic strength. Energy = economy if you do the math.
How do you think America’s energy policy has affected our economy? How could new energy sources transform the economic landscape? Energize us with your ideas!
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Posted on Wed, Nov 05, 2008
Yesterday, Barack Obama was elected to become the 44th President of the United States, with at least 349 electoral votes and about 52% of the population. Given the protracted length of the political campaign season, the American people have at least some idea of the policies that will shape the economic landscape over the next four years. Clearly, with change as a mandate, it is safe to say there will be some fundamental shifts ahead in our economic outlook. At the same time, new initiatives will be constrained by a large national deficit.
The expectation of greater cohesiveness in political circles and the notion of heightened government regulation may instill the necessary confidence to stimulate the lending and spending of money in the current economic environment. The steps a government takes are also reassuring to outside investors such as the refuge international investors have found in a strengthening U.S. dollar.
Will the Obama presidency be able to turn around the economy, and how quickly? Will investments in a national transportation infrastructure and alternative energy programs be part of the greening of America? And how might the U.S. government and president Obama buttress the automotive industry to save energy, jobs and the economy? What’s your view?
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Posted on Wed, Oct 29, 2008
The $700 billion dollar federal bailout plan is revolutionary in size and scope, including the involvement of the federal government in the banking system as preferred, albeit non-voting, shareholders. Many have been fearful that a mismanaged cash infusion would line the pockets of well-off bankers rather than benefit the financial well-being of the average American on “Main Street.”
According to a recent New York Times article, the additional funds are, thus far, not being used to foster increased lending but, in large measure, to buy up other banks. JP Morgan Chase is a case in point, receiving $25 billion dollars from the Treasury and using the funds to acquire smaller, ailing banks.
Such activity is not only being condoned by the U.S. Treasury, but actually encouraged. Treasury Secretary Paulson, among others, has promulgated tax code that allows the costs of mergers to be tax deductible, so taxpayers are footing the bill for large banks to pursue acquisitions, a macroeconomic benefit with far less obvious benefit to the average citizen.
Critics and cynics are given to wonder whether fewer banks are an asset or a liability for the US economy? Or is a consolidation of smaller, insolvent banks a smarter solution than simply buying up toxic loans and assets? If America behaved like England in this crisis, conditions of the bailout would require that any money given to banks be applied towards loans. Without these sorts of guarantees, will people lose faith in an economy that is doing poorly? We invite your discussion.
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Posted on Fri, Oct 24, 2008
Is fractured government, divided government and political gridlock responsible for America’s financial problems? Based on recent congressional testimony, the answer that is suggested is affirmative.
In the House Oversight Committee, chairman Henry Waxman, and chairman of the SEC, Christopher Cox, exchanged pointed views on congressional breakdown while Allen Greenspan, former Chair of the Federal Reserve, and Tom Davis, senior Republican on the House Oversight Committee, pointed fingers at political parties, complaining about their responsibility for the economic collapse.
Waxman assigned blame to other congressional committees that failed to act in time, and the former Republican controlled House of Representatives. The congressional watchdog asserted the need for tougher regulations on businesses and more oversight.
For instance, Waxman blamed the Federal Reserve for failing to curb aggressive lending practices, the SEC for allowing credit rating agencies to operate under lax standards and the Treasury for opposing ”responsible oversight” of financial derivatives.
Chairman Cox had a different take on the situation. Instead of assigning blame to a particular party, he assigned blame to politicians in general. Their constant fighting allows real problems to slip through the cracks. Responsibility in Congress was not correctly divided, he asserted..
Cox claimed that the organization of Congress itself is posing a major economic problem. The committees of Congress are fractured instead of unified, working separately on issues which require similar regulation and coordination. There is the banking and financial services committees, which regulate banking, insurance and securities, and the agriculture committees, which regulate futures. Cox believes these groups need to work together. ”This jurisdictional split threatens to forever stand in the way of rationalizing the regulation of these products and markets,” Mr Cox said.
Alan Greenspan sought to eschew personal responsibility by insisting that the policies of the Federal Reserve under his leadership had 40 years of evidence to back them up. He remarked that the past has shown that financial institutions will check themselves, even if other aspects of the economy do not. He claims that no one could have seen this collapse coming that far in advance.
Lastly, Republican law makers claimed that it was not a lack of market solutions that caused the current problem, but the “mish-mash of regulations and regulators, each with too narrow a view of increasingly integrated national and global markets.”
Echoes of “Government is the problem,” seemed to resonate in the halls of Congress, and yet effective government regulation could be America’s best choice going forward.
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Posted on Tue, Oct 21, 2008
History is a great teacher.
Over 70 years ago, economist John Maynard Keynes lived through the troubles of the Great Depression and came up with a solution for such a crisis. What did Keynes’ figure out?
During the Great Depression, monetary policy became ineffective and institutional failures were triggered by falling asset prices. Keynes opposed the conventional wisdom of the time. He was not content to think that the economy would self-correct. Instead, Keynes realized that during economic downturns, people and businesses alike have a propensity to save.
In a time of financial crisis, the great irony is that saving can have a negative effect on a poor economy. When individuals save, they aren’t buying products from businesses, and businesses lose revenue. The same is true for businesses: if organizations save their money, instead of investing in new technology, materials products and labor, other companies lose revenue. It is a vicious cycle that tends to exacerbate the problems of an economic downturn.
As an economist, Keynes studied incentives in an effort to understand how to overcome the tendency to save. What he realized is that instead of attempting to keep people from saving, the government should inject money into the economy to compensate for the absence of regular investment. Thus, during recessions, Keynes recommended the government “deficit spend.” If the government worries about receiving enough revenue, he posited, then it will be highly inhibited in how it loosens capital, and therefore will not be able to stimulate the economy out of trouble.
This should be positive news for those who are worried today. Not only do we seem to have the knowledge as to how to get out of this potential recession, but the solution has already begun to be implemented. The bailout package, while it may have its flaws, represents the fundamentals of Keynes’ theory. The infusion of capital is an attempt to stimulate us out of this crisis.
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Posted on Fri, Oct 17, 2008
In the past week, the Dow Jones Industrial Average, one of the barometric indicators of upward or downward pressure in the American stock market, has been rising and falling like a red balloon caught in a windstorm. Many feel as tossed and tumbled as that helpless balloon, asking themselves “What’s next?” and “When will the wind change?”
According to the Chairman of the Federal Reserve, Ben Bernanke, the key is for that metaphorical balloon to settle back down to earth. “Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away.” This is promising news for mid-to-long-term investors who have held on the wind tunnel that is the US economy the past two weeks, and suggests that stock market investors might be better off keeping that long term view.
At the very least, bank depositors can rest assured about their savings in FDIC protected accounts The Treasury has used much of the first 250 billion dollars, endowed to it by the government bailout, to make direct investments n banks to provide necessary liquidity and reinforce financial stability.
Given the likely recovery of the economy, and the government’s historic investment in banks, why is the market fluctuating like a balloon? There is a cycle to the way the stock market tends to behave, although even that can be less than predictable. The conventional wisdom, is that people who are fearful of the economy sell their stocks. As stock price drop, the price attracts a number of new investors, which causes, in turn, a n upturn. As the world turns, and news headlines worsen about the economy, stock prices can sink again. It is a cycle that is often described as more psychological than anything else.
Do you believe that “confidence” in the economy is the single biggest issue confronting the turnaround? Are you of a mind to conserve or spend? Is our national economic drinking glass half-empty or half-full? Comments are open.
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Posted on Thu, Oct 09, 2008
Over these last several, angst-ridden days, the red hot political topic has been the financial crisis that looms large over the American landscape. The $700 billion dollar bailout authorized by Congress begs a great many questions of the American taxpayer and, so far, this “perfect financial storm” has provided precious few answers.
Will the $700 billion relief plan bridge the chasm, or does it address just the tip of a titanic iceberg? Should the American taxpayer be held responsible for Wall Street institutions or is the rescue effort a question of survival, fundamental to buttressing America’s economic foundation? Is there a stimulus to energize market confidence and is it psychological, political or financial?
The actions of the U.S. Treasury and the Federal Reserve appear on the face of it to be justifiable. The entities which the government has moved to protect have been those whose failure would trigger a chain reaction in both our domestic and the world’s global economy. As some would theorize, when a debt-fueled investment bubble bursts, financial institutions look to divest their bad debts. When every financial portfolio has the same goal, at the same time, turmoil can ensue.
Economists also calculate that the problem can only be solved if someone is willing to buy up, or pay off the debt that banks and investment companies are desperately trying to liquidate. The U.S. Treasury seems to be the ideal actor to perform this function, since it is, practically speaking, the only institution with enough buying power to handle the size of the transaction. The US government is also the only administrative body capable of organizing such a monumental effort at a systematic level.
Another looming question is the issue of regulation. Lawmakers of both parties have made it clear they do not want to give Wall Street a “blank check,” nor do legislators wish to sanction excessive amounts of money that may go end up as executive salaries or severance packages. Finally, the trillion dollar question is whether the bailout is merely a band-aid? How can the government and the fragile , fractured mortgage market protect future homeowners who see the value of their assets diminish and face default and foreclosure.
These are the hot topics that confront all of us in the days ahead. We invite your comments.
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