Washington Economic Group Think:Harvard and MIT Economists Think Big (Government That Is)

Washington has always been quick to trumpet the benefits of diversity--- except in the case of economic thought. This month President Obama replaced the Chairman of the White House Council of Economic Advisors (CEA), Alan Krueger, with Harvard trained economist Jason Furman.  Professor Krueger, who earned his Ph.D. at Harvard, heads back to Princeton University to join soon to be ex-Fed Chairman Ben Bernanke who obtained his Ph.D. from MIT.  

Since the beginning of the millennium, there have been 10 CEA Chairmen with none acquiring his/her doctorate in economics beyond the gates of Harvard or MIT. Thus, the White House appears to value homogeneity of educational experience among its economic policy advisors.   

Moreover, even the faculty members teaching future economic advisors are drawn heavily from this Cambridge, Massachusetts enclave. Of almost 90 faculty members in the combined economic departments of Harvard and MIT, 64 percent received their doctorates from either Harvard or MIT. 

In addition to gaining lucrative federal policy advisory positions, these Boston/DC beltway economists have been very effective at landing federal subsidies. For example, more than 95 percent of current Harvard and MIT economics faculty members have received National Science Foundation Grants (NSF). 

In this economist’s view, the White House and the nation suffer by drafting a disproportionate share of economic policy advisors from a 5 mile radius of downtown Boston.   Ernie Goss

Is There a Bubble in U.S. Stock Prices?

Since the Federal Reserve’s Quantitative Easing programs (QE) were launched in October 2008, the stock market, as measured by the Dow Jones Industrial average, has soared by 10.9 percent, compounded annually.

During this same period of time, U.S. GDP expanded by 2.4 percent, wages and salaries advanced by only 1.4 percent, employment climbed at a pace of less than 0.1 percent, and profits increased by approximately 7.6 percent (all compounded annually). The soaring stock price growth, compared to these other economic benchmarks, has forced investors to wonder if the stock market has come too far too fast.

Stock price growth depends on three factors, all which swung in the direction of higher stock prices: 1) higher profits, 2) lower risk free interest rates (U.S. Treasuries), and 3) lower risk. It can be argued that the prime factor driving the stock market higher has been record low interest rates generated by the Fed’s aggressive monetary expansion led by its three bond buying programs, termed QE1, QE2 and QE3.

These programs have pushed rates into record low territory with the 10-year U.S. Treasury yield (interest rate) hovering around 1.8 percent. The rock bottom yields have incentivized investors to abandon safe, low yield investments such as certificates of deposit and money market funds and to embrace higher risks, higher yielding stocks.

My “back of the envelope” calculations indicate that if the Fed allows rates to rise by as little as one percent, the Dow will decline by as much as 6.0 percent assuming profits and risks unchanged. Should rates rise back to their pre-QE1 level, the Dow will slump by 12.7 percent.

Thus, investors need to be on guard for unexpected rate hikes or upturns in risks such as a European debt eruption. Both changes would put downward pressure on stock prices taking air out of the Fed inflated stock bubble.

So is there a bubble in U.S. stock prices?  Not as long as interest rates remain at record lows

Ernie Goss

Too Big to Fail Banks Raise Risks and Hurt Economy

At the height of the U.S. financial crisis in 2008, Goldman Sachs and Morgan Stanley, two of the largest investment banking firms in the world, requested a  Federal Reserve (Fed) “bailout.”  A portion of this “relief” consisted of classifying Goldman and Morgan as bank holding companies thus allowing both firms to borrow from the Fed discount window with Goldman borrowing $782 billion and Morgan $107 billion.  Even foreign banks, such as the Royal Bank of Scotland and Swiss giant UBS AG got into the action, each borrowing over $75 billion from the Fed.  

The Fed labeled these firms with assets over $50 billion as “too big” to fail.  In addition to this Fed policy, the U.S. Congress passed Dodd-Frank in 2010 but emasculated the bill’s Volcker Rule.  Both actions provide “big” banks with a competitive advantage since the fixed cost required to adhere to Dodd-Frank are a much larger burden for community banks and abandoning the Volcker rule allows big banks with trading operations to undertake speculative investments in hedge funds and private equity rather than traditional lending activities.

What have been the unintended consequences of all of this big bank support?  Investors have overinvested in these behemoth institutions since their continued life is guaranteed even as they undertake excessive speculative activity. 

 From the beginning of the recession until the end of 2012, the Fed’s 34 too big to fail banks grew in size by an average 14.8 percent while the remaining 1,680 commercial banks actually declined in size by an average of 4.2 percent. Thus, Congressional and Fed actions have actually ballooned systemic risks and undermined community banks that provide a lending lifeline to small businesses and agricultural borrowers.  Ernie Goss.

Government Bailouts & the Economic Recovery: Never Has So Much Been Done to Achieve So Little

A year after the start of the recession, the Bush Administration launched a $168 billion stimulus package in 2008, which was followed by the Obama 2009 stimulus package of $787 billion.  Meanwhile, the Federal government ran average yearly deficits (also a stimulus) of $936 billion average for 2008 and 2009 (the Bush deficits), and $1.15 trillion per year for the last four years of the Obama Administration. 

On top of the stimulus spending, taxpayer dollars bailed out AIG, Bank of America, Citigroup, GM, Chrysler, Fannie Mae, Freddie Mac.  Simultaneously, the Federal Reserve reduced short-term interest rates to practically zero percent, pushed long-term U.S. Treasury bond rates- adjusted for inflation--into negative territory--and bailed out non-banks such as Goldman Sachs and Morgan Stanley with ultra-low interest rate loans. 

As part of this effort, the Fed launched three bond buying programs, labeled QE2 and QE3, and have thus far purchased almost $3 trillion in U.S. Treasury bonds.   But rather than sparking spending by consumers and businesses, these Fed “cheap money” and government over-spending policies have pushed investors into riskier ventures such as farmland and U.S. stocks and bonds.

What did the U.S. economy get for it?  Since the recovery began in 2009, annualized GDP growth has been 2.1%, significantly less than the historical average of 3.5%.  The most recent growth number was a puny 0.1%, or almost back in recessionary territory.  Moreover since the beginning of the recover, annual wage growth has been less than one percent while the current unemployment rate remains almost three percentage points over the rate at the beginning of the recession.

In terms of the nations most recent recession, it can be successfully argued that, “Never has so much been done to achieve so little.”  Ernie Goss.

Nearly 95% of Bush Tax Cuts Made Permanent: More Loopholes Added But Little Debt Reduction

For years, Democrats and some Republicans have argued that a substantial portion of today's mammoth debt of $16.3 trillion should be pinned on the Bush-tax cuts of 2001 and 2003. Yet in January of this year, these same policymakers made 95 percent of these cuts permanent. The proponents of this action contend that it will bring fairness to the tax code and reduce the budget deficit. It fails miserably on both counts.


First, the tax rate hikes on those making more than $400,000 will only reduce the federal debt by less than 8 percent over the next decade. Second, the Obama administration argued that the higher rate on the "rich" would insure they pay their "fair share." White House communications director Dan Pfeiffer reported in a tweet that the tax would "act as a kind of AMT." Let's hope not!


In 1969 the Minimum Tax was passed to be rebranded in 1982 as the Alternative Minimum Tax (AMT). The original goal was to hook 155 high-income households that paid no federal income taxes. Currently more than half of AMT tax collections come from taxpayers making between $150,000 and $200,000 and it is estimated that by 2015 over 50 million Americans will pay the AMT. Unfortunately, millionaires continue to thwart the original intent of the AMT and will likewise sidestep the Obama tax hike with the burden falling on thousandaires some time in the near future.


Furthermore, despite adding tax loopholes in the recently passed tax bill for Hollywood moviemakers, NASCAR track owners and Puerto Rican rum producers, President Obama is now calling for the elimination of certain tax deductions for high-income individuals. Only tax preparers at H&R Block can appreciate the onerous tax code that the administration continues to litter with subsidies and tax favors for preferred groups.
Ernie Goss

The Federal Reserve Continues to Bail Out the Federal Government: Unmatched Debt Buying Supports Federal Overspending

Since 2008, the U.S. federal government has run yearly deficits in excess of $1 trillion and has expanded its debt to $16.4 trillion. Despite this borrowing binge, interest rates on U.S. debt hover at record lows. Why? To paraphrase former Wyoming Senator Alan Simpson, U.S. debt is the healthiest horse in the glue factory. That is, investors are lending to the U.S. Treasury because all other options are more risky. But it goes beyond this.

 During its 100 years of operations, the Federal Reserve (Fed) never matched its current aggressive monetary expansion activity. Since December 2008, the Fed has held its short term interest rate at close to 0%. Furthermore, the Fed has launched three bond buying programs, termed quantitative easing 1, 2 and 3 (QE1, QE2 and QE3). When the Fed Launched QE1 in November 2008, the yield (market interest rate) on U.S. 10-year U.S. Treasury bonds was 3.3 percent. QE3 was inaugurated in September 2012 with the Fed currently purchasing $85 billion per month of long-dated Treasury bonds and mortgage backed securities with the result of driving the rate on U.S. Treasury bonds to 1.8 percent.

At this point in time, the Fed holds more than $3 trillion in bonds, or approximately 18 percent of total U.S. federal debt. By buying U.S. Treasury bonds and keeping interest rates artificially low, the Fed has incentivized the U.S. government to borrow and overspend. When the Fed begins to sell these bonds, which they will, interest rates will move in the opposite direction. A return to pre-QE1 interest rates would cost U.S. taxpayers as much as $240 billion per year. Who will bear this guaranteed added burden?
Ernie Goss

Rural Mainstreet Index Highest Level Since 2007: Ethanol Shutdowns Expected

December Survey Results at a Glance:

· Rural Mainstreet Index climbs for a fourth straight month and is at its highest level since June 2007.

· Almost 25 percent of bankers expect shutdowns and/or temporary closures of ethanol plants in their area.

· On average, bankers report a 15 percent growth in cash rents on farmland over the past 12 months.

· Bank CEOs are reporting significant increases in borrowing to purchase farmland and farm equipment.

For Immediate Release: Dec. 20, 2012

OMAHA, Neb. – For a fourth straight month, the Rural Mainstreet economy expanded according to the December survey of bank CEOs in a 10-state area.

Overall: The Rural Mainstreet Index (RMI), climbed to a healthy 60.6, its highest level since June 2007, and was up from 57.5 in November. The index ranges between 0 and 100 with 50.0 representing growth neutral.

Creighton University economist Ernie Goss said very strong agriculture commodity prices and lower energy prices boosted the Rural Mainstreet business activity for the month. “This is the healthiest reading that we have recorded since well before the national economic recession began in 2007,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Farming: The farmland-price index continues to show very brisk growth though the December reading dipped slightly to 82.5 from November’s 83.9. This is the 35th consecutive month that the farmland-price index has risen above growth neutral. “The Federal Reserve’s cheap money policy is pushing agriculture land prices higher.

This month bankers were asked how much cash rents for farmland changed over the past 12 months. On average, bankers reported a 15 percent increase in cash rents over the past year,” said Goss.

“As a result of higher corn prices and lower ethanol fuel prices, 23.2 percent of bankers expect shutdowns or temporary closure of ethanol plants in their area. On the other hand, only 3.6 percent of bankers expect an increase in 2013 ethanol revenues from 2012 for ethanol plants in their area,” said Goss.

The farm-equipment-sales index bounced to 67.0 from 60.4 in November. “With solid financial footing, farmers remain optimistic about future agriculture economic conditions and are expanding their purchases of farm equipment,” said Goss.

In order to reduce costs, the 2012 drought and higher corn prices have forced ranchers to cut the size of their animal stocks. On average, the drought forced a 14.8 percent reduction in livestock herds.

Banking: After moving below growth neutral for two straight months, the loan-volume index expanded to 62.1 from November’s weak 47.8 and October’s 44.2. The checking-deposit index advanced to 75.8 from November’s 75.1, while the index for certificates of deposit and other savings instruments declined to 40.2 from 45.5 in November. “Bank CEOs are reporting significant increases in borrowing to purchase farmland and farm equipment,” said Goss.

Like other bankers Larry Winum, president of Glenwood State Bank in Glenwood, Iowa, is very disappointed that Congress has failed to at least agree to vote on the TAG (transaction account guarantee) two-year extension bill (S.3637). Said Winum, “The Senate’s inability to vote on an extension of bank funded FDIC coverage for noninterest-bearing accounts only benefits the large banks and hurts the majority of community banks and their small business customers.”

Hiring: December’s hiring index expanded to 53.5 from 53.0 in November. “Despite recent gains in Rural Mainstreet jobs, the region’s employment level is down by 3 percent from pre-recession levels,” said Goss.

Confidence: The confidence index, which reflects expectations for the economy six months out, expanded to 55.5 from November’s much lower 45.6. “Improvements in retail sales, home purchases and lower energy prices boosted banker’s economic outlook,” said Goss.

Home and retail sales: The December home-sales index slipped to a still healthy 61.3 from November’s 62.0. The December retail-sales index soared to 59.0 from November’s 51.5.

Each month, community bank presidents and CEOs in nonurban, agriculturally and energy-dependent portions of a 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy. Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.