Five Things You Need to Know: Unemployment Rate Declines, Unenjoyment Rate Increases
More people may be without jobs, but at least they're not happy about it.
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Unemployment Rate Declines, Unenjoyment Rate Increases
The U.S. lost jobs in February at the fastest pace in five years even as the unemployment rate fell, according to the Labor Department. Nonfarm payrolls fell 63,000 in February after falling 22,000 in January. Meanwhile, the unemployment rate declined slightly from 4.9% to 4.8%.
Wait, did you say the unemployment rate declined? How did that happen?
The unemployment rate is calculated using a separate household survey. The slight drop was triggered by a 450,000 decline in the size of the labor force, not a rise in employment. In other words, more people dropped out of the workforce last month and simply stopped looking for work.
Also of interest in the report was the large increase over the past 12 months in the number of people working part time for economic reasons. According to the Bureau of Labor Statistics, this category includes people who would like to work full time but were working part time because their hours had been cut back or they were unable to find full-time jobs. That number, 4.9 million, was largely unchanged month over month, but was up by 637,000 over the past year.
The unemployment rate may have edged lower, but the unenjoyment rate continues to increase.
2. Term Auction Facility Expansion
The Federal Reserve plans to increase its loans to banks this month as part of the ongoing Term Auction Facility operations. The Fed increased to $50 billion each from $30 billion the amount intended for auctions of funds planned for March 10 and March 24. What are these Term Auction Facilities and what does the increase mean?
In order to understand it, let's step back to last November for a moment and consider again why cash-strapped banks were not lined up at the Fed's Discount window to fill their pockets.
The Fed's Discount rate is the cost of money available to Big Banks through the Fed's Discount "window." The Fed is considered the lender of last resort for banks, which usually borrow from each other. So the stigma from borrowing publicly through the Fed's Discount window is pretty severe. In fact, it's severe enough that some capital-starved banks have been selling off stakes to outside investors under less attractive terms. The Discount window is really the Payday Loan shop for banks, although the lending terms are far more attractive than Payday Loan terms. The problem is, who wants their neighbors to see them standing in line at the Payday Loan shack?
Put another way, the Discount window is really the Payday Loan shop for banks, although the lending terms are far more attractive than Payday Loan terms. The problem is, who wants their neighbors to see them standing in line at the Payday Loan shack?
To get around this stigma, and to broaden the types of collateral banks could pledge, the Fed introduced the Term Auction Facility operations in December. The TAF's allow banks to borrow anonymously. How many banks are using it? A lot. The most recent auction included 72 banks.
3. Unprecedented? Hardly
In the statement released today on the Term Auction Facility expansion, the Fed noted (as they did back in December) that there is global coordination among central banks to ease credit conditions. "The Federal Reserve is in close consultation with foreign central bank counterparts concerning liquidity conditions in markets," the statement concluded at the bottom. Gobal coordination. Wow. Some have said today that we are seeing something unprecedented. But are we really? To understand the present credit market conditions in context, we need to go back to... Shhhhh... don't say this too loudly... 1930.
What happened in 1930? The formation of the Bank for International Settlements (BIS). The BIS essentially laid the groundwork for global coordinated liquidity facilitation. After the end of World War I there was a deep distrust among countries, which magnified the global credit contraction conditions. Debt was massive at that time. Global markets seized up.
According to Gianni Toniolo, author of "Central Bank Cooperation at the Bank for International Settlements, 1930-1973," Montagu Norman, governor of the Bank of England, wrote a letter in 1925 to his counterpart at the Federal Reserve Bank of New York, Benjamin Strong, saying, "I rather hope that next summer, we may be able to inaugurate a private and eclectic Central Banks' 'Club,' small at first, large in the future." That "hope" eventually became the BIS.
Calm down, conspiracy theorists. The purpose was less nefarious than pragmatic. How can borrowing and lending begin again if no one wants to borrow or lend? Just as hyperinflations don't distinguish between productive and non-productive capital avenues, neither do deflationary credit contractions. It is easy to say with righteous indignation Just let the markets run their course!... until we are part of the course over which those markets are trampling.
There's just one little problem. The BIS was initially a failure. Among the first loans the bank intermediated were packages to Austria and Germany, neither of which helped those countries avoid financial crises. What is important is not that the BIS failed to stop financial crises, but why. The answer is that markets eventually chew through fiscal and monetary intervention in spite of us. So frequently - in fact, almost always - the cure is far worse than the disease. Just something to think about.
4. Washington Begins Public Floggings of Rich CEOs
Just caught the following Bloomberg headline flying by on the wire: Lawmakers Criticize Wall Street Executives on Pay. We looked up at the television and, sure enough, there was former Citigroup (C) CEO Chuck Prince testifying before the House Oversight and Government Reform Committee. Also scheduled to be publicly flogged for their pay packages by the committee were Stan O'Neal, formerly of Merrill Lynch (MER), and current CEO of Countrywide (CFC), Angelo Mozilo.
"There seem to be two different economic realities operating in our country,'' waxed Henry Waxman (D-CA) and chairman of the committee holding the hearings. "Most Americans live in a world where economic security is precarious. But our nation's top executives seem to live by a separate set of rules," Waxman fumed.
Wait just a minute, Tom Davis (R-VA) shot back. "Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual,'' he said. "In the end, it won't answer the questions that need to be answered about corporate responsibility and economic stability.''
5. Why Can't We Be Friends?
All this talk of "public flogging" and partisan disagreement in Washington is tough to take. It's enough to make a person stop and think, Hey, how is it that people can find so much to disagree about in politics? Is it simply the case that Waxman is a Democrat and Davis is a Republican? How can reasonable people find it so difficult to reach common ground on a relatively simple issue like corporate executive pay?
Perhaps the answer lies elsewhere. For example, take a look at Representative Davis' friends:
Now, take a look at Representative Waxman's friends:
Hmm, let's see, one of these guys is against the "public flogging" of former CEOs from Banks and Securities firms such as Citigroup, and the other guy is in favor of the public floggings. Wonder why?
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