Category: Chris Papagianis
Rosen and Papagianis: Another view: ’08 Obama would like Ryan budget
| August 30, 2012 | 11:53 am | Chris Papagianis, Jeff Rosen | No comments

Published for the Des Moines Register, August 29, 2012,

As President Obama enters the stretch in his re-election campaign, and with Mitt Romney’s selection of House Budget Committee Chairman Paul Ryan as his running mate, it is useful to flash back to 2008 and the points the president made about the growing federal debt on his way to defeating Sen. John McCain in 2008.

The first key concern that candidate Obama raised in 2008 is the overall level of debt caused by federal deficit spending. When he was running for president in 2008, Obama complained that federal debt had increased under President Bush by $4 trillion, about which he said, “That’s irresponsible. It’s unpatriotic.”

Fast forward to 2012, where the total U.S. debt has increased from $10.6 trillion when Obama took office, to more than $15.9 trillion today, an even bigger debt increase, of $5.4 trillion in much less time.

The Ryan budget proposal would directly address the debt that has been exploding because of the record annual federal deficits since 2009. When candidate Obama was campaigning in 2008, the federal deficit for the prior year had been $160 billion. About a month after his inauguration in 2009, President Obama pledged to “cut the deficit we inherited in half by the end of my first term in office,” as the fiscal year 2008 deficit had swelled to $460 billion during the recession, and was growing, particularly after passage of the president’s near-trillion dollar “stimulus” plan.

But he did not cut the deficit in half. Under President Obama, annual federal deficits have reached a record, eclipsing more than $1 trillion in each of the last three years and will do so again this year.

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Papagianis: More to the financial crisis than just subprime
| July 13, 2012 | 9:25 am | Chris Papagianis | No comments

Published for Reuters, July 12th, 2012

Just as the recession in the early 2000s became linked with the bursting of the tech bubble, for many the financial crisis in 2008 has been synonymous with the blow-up of subprime mortgages.

But there was more to 2008 than that.

Gary Gorton, an economist at Yale, recently published an analysis that shows how well some subprime mortgage-backed securities have performed over the past few years – a very counterintuitive conclusion. Citing one of his graduate students, Gorton explains that AAA/Aaa-rated subprime bonds issued in the peak bubble years (when mortgage underwriting was arguably the weakest in history) were only down 0.17 percent as of 2011. In other words, the highly rated subprime bonds – or toxic assets so associated with the financial crisis – have experienced only minimal losses since the bubble popped.

Of course, that bond statistic ignores the numerous costs borne by the federal government in response to the crisis. For example, the mortgage giants Fannie Mae and Freddie Mac required more than a $150 billion bailout, and the Federal Reserve dropped and held interest rates to historical lows, in part so that millions of homeowners could refinance their mortgages (often into new mortgage products that were also backed by taxpayers through another government program). That is, it’s important to acknowledge that subprime mortgage products have done relatively well partly because of post-crisis government interventions that were costly for taxpayers.

Nevertheless, the subprime bonds’ better-than-expected performance can help us think through the broader role of highly rated securities in the financial crisis. In particular, it helps focus our attention away from the assets themselves (as it now appears that some subprime securities held up surprisingly well) and toward how the assets were financed using leverage and risky holding structures.

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Papagianis: Three disturbing trends in commercial banking
| March 14, 2012 | 11:48 am | Chris Papagianis | No comments

Published for www.reuters.com, March 13, 2012

The recession officially ended in July 2009, and yet the speed and scope of the subsequent recovery have been disappointing. Recent economic data have been encouraging, but there are three ominous trends in the consumer banking space that signal the waters ahead may be choppy.

1. No new banks were chartered in 2011

The Financial Times reported recently that not one new, or de novo, bank was created in 2011. (The FDIC actually lists three new bank charters for 2011 — the lowest number in more than 75 years — but they all involved bank takeovers of other failed banks.) What are some of the possible implications?

First, investors are clearly still gun-shy about banking. The dearth of new small banks is also a negative sign for small businesses generally, as they are particularly dependent on small banks for loans. Since most employment growth in the U.S. comes from small businesses that use external finance to grow into large businesses, a decline in these businesses’ access to loans could limit future employment growth as well.

The dominant narrative in 2011, like the 2010 version, was one of bank failures and distressed acquisitions. The FDIC reports that about a hundred banks failed and another hundred were absorbed this past year. But industry consolidation has been prevalent since the 1990s, as this excellent image-graphic from Mother Jones (where you can click on the image to enlarge it) reveals.

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Overall, the number of banks declined by 15 percent in the past five years, to 7,357, while revenues decreased for the fourth consecutive year, to $737 billion. Although this is partly due to the Federal Reserve’s low-to-zero interest-rate policy, which reduces interest income, non-interest income also fell in 2011 for the second consecutive year.

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Papagianis: Obama Doubles Down on Housing
| February 8, 2012 | 1:09 pm | Chris Papagianis | No comments

Published for www.economics21.org, February 6, 2012

Last week, President Obama gave a speech highlighting his administration’s response to the ongoing crisis in the housing market. The speech material can be broken down into two broad categories: 1) a review of existing government programs (including some modest programmatic tweaks) to boost mortgage modification and refinancing opportunities; and 2) a new refinancing proposal meant to help more struggling, or at-risk, families not currently eligible for the government’s signature programs.

Before diving into these two categories, it’s important to acknowledge the broader economic and political backdrop. The collapse in home values over the past five years helped spark a financial crisis, which then morphed into a broader recession with a historic number of job losses and massive declines in wealth. Today, the U.S. government finds itself either owning or guaranteeing about 72% of all outstanding (first lien) mortgages. The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac cover roughly 56% of the market by themselves, with the third leg of the government’s housing stool – the Federal Housing Administration – responsible for about 16% (including VA loans). Banks and other private mortgage investors are responsible for remainder. In raw numbers, the government stands behind 40 million first liens, with the private sector covering around 13 million.

Category One: Obama’s “Current” Housing Programs

When Obama took office three years ago, he decided that his Administration would start spending significant taxpayer resources to try and fix the housing market. He tapped TARP and allocated $50 billion to create the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP).

HAMP is the government’s main mortgage modification program. It uses taxpayer dollars to pay or incentivize banks, lenders, and servicers to help up to three to four million at-risk homeowners avoid foreclosure. This program is open for all borrowers regardless of whether the mortgage is owned by the government or by a private institution, as long as the borrower meets some basic underwriting requirements. By almost all accounts, HAMP’s record over the past three years has been one of disappointment. The program has helped only a small fraction of its original target, and more than half of those that did receive help are re-defaulting on their HAMP modified mortgage.

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Papagianis: Put Fannie and Freddie on Federal Books
| January 23, 2012 | 9:36 am | Chris Papagianis, Phillip Swagel | No comments

Post published for www.bloomberg.com, January 22, 2012

When Congress voted on Dec. 23 to fund a temporary extension of the payroll-tax holiday in part by requiring Fannie Mae (FNMA) and Freddie Mac (FMCC) to increase their fees, it effectively ended the fiction that the two mortgage-financing giants are part of the private sector.
Lawmakers should now recognize budgetary reality and put the firms’ liabilities on the government balance sheet and include their spending in the federal budget. The purpose of doing so shouldn’t be to keep the firms as part of the government, however. Rather, it should be to motivate reform that leads to a housing system driven by private capital.

When Fannie and Freddie — known as government-sponsored enterprises — were put in conservatorship as their finances deteriorated in September 2008, officials didn’t put them on the budget. Adding their roughly $1.5 trillion in debt and $3.5 trillion in mortgage guarantees to the gross U.S. debt might have raised questions about the country’s financial stability and exacerbated the financial crisis then under way (even though the $5 trillion of liabilities were matched by nearly as much in assets). And conservatorship was only intended to be temporary.

Three years later, with the government now using the firms as cash cows to pay for activities unrelated to housing — and with everyone from the president to Congress to the Federal Reserve looking to dictate their refinancing standards and other activities — the White House’s assertion that Fannie and Freddie aren’t government agencies is no longer tenable.

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Papagianis and Gupta: The War For U.S. Capital Markets
| September 30, 2011 | 2:25 pm | Chris Papagianis | No comments

Published for Forbes, September 29, 2011

The private sector is fighting the government for control of capital markets, and the government is winning. The most recent data from the Federal Flow of Funds reveal that Uncle Sam stands behind over 58% of the mortgage market – a hike of 13 percentage points since 2006.

It is not easy to gain 13 percentage points of market share in an $11 trillion market.  The stunning growth in governmental backing has come about thanks largely to federal dominance of mortgage finance since the financial crisis.  Despite the fact that management failures at the GSEs resulted in more than $160 billion in losses for taxpayers, Fannie Mae, Freddie Mac and the FHA underwrite well over 90% of all new mortgages today. In short, each passing day moves us closer to a world where nearly all mortgage finance – past and present – will be handled by government-backed institutions.

This trend in mortgage finance is troubling, but unfortunately the government is also growing its hold over the other major aspects of financial markets.  Households hold another $2.4 trillion in consumer credit, primarily consisting of student loans, credit cards, and auto loans.

In the last two years, the government has made a play for these slices of the capital markets as well.  The new health law (PPACA) included a provision that basically nationalized the student loan sector.  The government now owns $355 billion in student loans, which is more than a 300% increase in the stock of government-backed student loans since 2004. The Dodd-Frank Act established a Consumer Finance Protection Agency with little to no congressional oversight over its sweeping powers to impose new regulations.  Then there’s the CARD Act, which introduced new command-and-control price caps on credit card products.

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Papagianis: A Plan to Help Avoid the Next Crisis: Market-Based Risk Indicators
| June 13, 2011 | 10:35 am | Chris Papagianis | No comments

Published for economics21.com, June 13th, 2011

By Christopher Papagianis and Arpit Gupta

The Dodd-Frank bill failed to address the key issues of prudential regulation that sparked the crisis. Instead, the FDIC was granted unlimited bailout capacity moving forward. Policymakers need to fundamentally rethink the value of regulatory capital ratios and discretionary bank interventions. Market-based metrics of bank performance that guide the recapitalization process may provide a far more robust and durable mechanism for preventing and handing future financial crises.

Charles Calomiris and Richard Herring have created a useful guide to thinking about Basel III and the Dodd-Frank bill. They note that the Dodd-Frank bill failed to address the key issues of prudential regulation that sparked the crisis and instead granted the FDIC unlimited bailout capacity moving forward. To help remedy this situation – and to help prevent the next crisis – they suggest adding Contingent Convertible (“CoCo”) securities to the regulatory toolkit.

Calomiris and Herring identify the key failures in the regulatory system – that bank risks were not clearly identified, and that banks were not recapitalized in a timely fashion. Internally, banks did not face sufficient incentives to address the risks on and off of their balance sheets, and ultimately taxpayer dollars were used to cover the capital gap generated by banking losses.

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Papagianis: House Financial Services Committee Testimony
| March 31, 2011 | 3:16 pm | Chris Papagianis | No comments

Statement by Christopher Papagianis
Managing Director of the New York City office of e21: Economic Policies for the 21st Century
Before the Subcommittee on Capital Markets and Government Sponsored Enterprises
“Immediate Steps to Protect Taxpayers from the Ongoing Bailout of Fannie Mae and Freddie Mac”
March 31, 2011

Chairman Garrett, Ranking Member Waters, and Members of the Committee, thank you for the opportunity to testify on the important topic: “Immediate Steps to Protect Taxpayers from the Ongoing Bailout of Fannie Mae and Freddie Mac.” I am the Managing Director of the non-profit think tank e21: Economic Policies for the 21st Century (a.k.a Economics21). We aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law. Drawing on the expertise of practitioners, policymakers, and academics, our mission is to help foster a spirited debate about the way forward for democratic capitalism. We are supportive of free markets while recognizing the need to devise and implement a reasonable structure of law and regulation that will help ensure our markets avoid catastrophic events in the future. We are therefore focused on developing policies that advance market performance and implementing rules to prevent market malfunction.

Previously, I was Special Assistant for Domestic Policy to President George W. Bush. In this role, I helped guide the collaborative process within the Executive Branch to develop and implement policies, legislation, and regulations across numerous agencies, including the Departments of Treasury and Housing and Urban Development.

Full testimony here

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Papagianis: Do Money Market Mutual Funds Make Sense Anymore?
| December 3, 2010 | 12:44 pm | Chris Papagianis | No comments

Published for economics21.org, December 3rd, 2010:

Households, small businesses, and large corporations need places to park money on a short-term basis to pay future bills and meet unexpected cash needs. Ideally, these short-term cash surpluses could earn interest in the interim so as to reduce the opportunity cost of maintaining these idle cash balances. Unfortunately, there are very few financial instruments that allow conversion into cash at par (face value) under all circumstances. An investment in Treasury bonds, for example, may have no credit risk, but could still result in capital losses. For example, a $10,000 investment in a 5-year Treasury note with a 5% coupon rate priced at par would be worth only $9,573 in the event that interest rates increased by 1%. Should the holder of the security need to convert the instrument to cash to settle some debt, he or she would suffer a 5% loss. On large enough positions, even small movements in rates could lead to losses.

For this reason, households and businesses tend to rely on deposits in bank accounts to manage short-term cash reserves. Checking accounts allow full withdrawal at par on demand; savings accounts generally allow full withdrawal at par with some potential delays; and certificates of deposit (CDs) often require some nominal discount to par in the event of withdrawal before some agreed-upon maturity. While checking accounts are far and away the most liquid, they rarely pay much if any interest. Conversely, CDs provide competitive interest rates but require more thoughtful liquidity management because of their withdrawal restrictions.

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Testimony: Papagianis before the House Financial Services Committee- The Future of Housing Finance
| September 29, 2010 | 10:41 am | Chris Papagianis | No comments

September 29th, 2010

Chairman Frank, Ranking Member Bachus, and Members of the Committee, thank you for the opportunity to testify on the important topic of the future of housing finance. I am the Managing Director of the non-profit think tank e21: Economic Policies for the 21st Century (a.k.a Economics21). We aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law. Drawing on the expertise of practitioners, policymakers, and academics, our mission is to help foster a spirited debate about the way forward for democratic capitalism. We are supportive of free markets while recognizing the need to devise and implement a reasonable structure of law and regulation that will help ensure our markets avoid catastrophic events in the future. We are therefore focused on developing policies that advance market performance and implementing rules to prevent market malfunction.

Previously, I was Special Assistant for Domestic Policy to President George W. Bush. In this role, I helped guide the collaborative process within the Executive Branch to develop and implement policies, legislation, and regulations across numerous agencies, including the Departments of Treasury and Housing and Urban Development.

Over the last year, a consensus has started to emerge that the main goal in addressing housing finance reform should be to promote the efficient allocation of credit to financing single-family and multi-family housing.    Fundamental to this objective is a restructuring of our housing finance system, which includes resolving the conservatorships of the Government Sponsored Enterprises (GSEs) and rationalizing all of the other ways the government subsidizes housing.

Full testimony here

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