VoxEU wrote an article regarding elevating the FHLB, refining and adjusting its purpose, and discussed a little bit about its importance.  I am so happy to see it getting some light shed on it.  The FHLB is a silent but powerful support system to our banks.

Mark Thoma, an econ professor of The University of Oregon, picked up on the article.  He had no comment or much knowledge on the FHLB system, which proves the lack of understanding even in the academic, “in-the-loop” circles.

Here was my comment to his post, for education purposes:

I’m happy to see that this article is starting to get around. It had been surprising that there hasn’t been any publicity in regards to the FHLB’s importance to the banking system.

The way that the FHLB is set up is, in the best of terms, “all-encompassing.” In order for a bank to borrow term advances/loans from the FHLB, it has to pledge it’s mortgage portfolio. The amount you can borrow depends on the type of loan (conforming, jumbo, “subprime”, 2nd home, etc) that is pledged, and there are separate haircuts for each.

The FHLB can impose adjustments to haircuts to different loans. During the height of the crisis, this became a concern because the majority of many banks’ wholesale funding is from the FHLB. An increase in haircuts equal a decrease in borrowing capacity. Also, an increase in defaults or slips in status of loans equal decreases in borrowing capacity.

It’s troubling when borrowing is limited further because the FHLB is the cheapest wholesale funding out there compared to brokered deposits, term repo agreements and other wholesale options. Banks can borrow overnight often below the fed funds effective rate, as well as cheap longer term funding up to 20 years. Constricting this sources forces banks to use brokered deposits to fund loans or investments, which is expensive both in terms of rates paid as well as FDIC assessments.

On top of this, the FHLB requires banks to buy stock in order to be a member. How much stock a bank has also limits the amount it can borrow. If banks want to borrow more against the loans you pledged, they will have to buy a % in stock. I know some (maybe all) banks have stopped paying dividends on stock.

The FHLB also issues debt, which is very common for a bank’s investment portfolio to hold, and is viewed the same way as other GSEs.

Essentially, banks are often shareholders, borrowers and lenders to the FHLB. When regional home loan banks have issues, i.e. Seattle or Atlanta, it’s a cause for great concern to the longevity of the banks which are supported by the HLBs.

I was a nervous rising HS freshman.  How awkward I was…

I love growing up.  Or, rather, growing into myself.

Very interesting opinion article from the Grey Lady: http://www.nytimes.com/2010/07/19/opinion/19douthat.html?ref=opinion

This long week has zapped my creative thinking.

It’s been a _long_ while since I’ve posted.  Slowly, but surely, the writing bug has gotten to me.

An opinion article on the NYT has circled around the econ blogosphere: Economics Behaving Badly. It’s an interesting article that sort of legitimizes behavioral economics while putting it in its place.   The following quote summarizes it pretty well:

Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.

But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.

A lot of popular reading in economics is a stem off of behavioral economics, e.g. Freakonomics, More Sex is Safer Sex, Naked Economics (hmm, interesting set of titles there).  I’ve started to loath this sort of reading as it’s merely showing study after study of correlations yet asserting causation.

One thing a behavioral economist might say, going along with the aforementioned example in the quote, is in order to encourage consumers to stop smoking, increase the taxes on smoking (or perhaps, subsidy cessation tools).  But I have to ask, it is an expensive habit but does the expense really encourage people to stop smoking?  I ask this honestly because I’m not sure if money would be the first reason rather than health.

Man, I’m way too zonked to go any further.

Good for me, bad for a lot of others.

http://baselinescenario.com/2010/04/28/wake-the-president/

Just a quick comment: I received a second Census form yesterday.  After I’ve sent in the first one weeks ago.  This makes me question the integrity of the Census.

We did not escape CNBC’s spell: http://nyti.ms/aiVi2J

http://www.boston.com/news/local/massachusetts/articles/2010/02/19/dc_digging_bostons_plowmen/

Discount rate has changed! Up to a 50 bps variance from the Fed Funds rate, so now at .75% No real effect – just makes it more expensive for banks to borrow from the Fed, and not a lot of that is going on.

Google the word “recursion” and “the loneliest number” as well.   While you’re at it, how about googling “the answer to life, the universe, and everything”, “once in a blue moon”, and “ascii art”.  Fun [geeky] times.