The Business Desk with Paul Solmantag:www.pbs.org,2007-10-02:/newshour/businessdesk/92009-12-08T17:25:57ZMovable Type Pro 4.24-enWelcome to the New Making Sen$e with Paul Solmantag:www.pbs.org,2009:/newshour/businessdesk//9.22692009-12-08T17:21:29Z2009-12-08T17:25:57ZPaul Solman: A belated welcome to you here at the redesigned Making Sen$e with Paul Solman Web site. We are, like the Internet through which we operate, a work in progress. Heraclitus was right in observing that you can't step...Business Desk AdminAre Credit Unions Insured by the Government?tag:www.pbs.org,2009:/newshour/businessdesk//9.22402009-12-07T17:30:59Z2009-12-07T17:40:09Z Question: From the standpoint of government-backed insurance, are deposits in credit unions equally secure as those in FDIC-insured banks? Paul Solman: Yes. See my recent answer to this question in a Pocket Change feature with Boston University professor Zvi...Business Desk Admin
**Question:** From the standpoint of government-backed insurance, are deposits in credit unions equally secure as those in FDIC-insured banks?
**Paul Solman:** Yes. See my recent answer to this question in a "Pocket Change":http://www.pbs.org/newshour/insider/business/jan-june09/pocketchange_05-05.html feature with Boston University professor Zvi Bodie. We discussed "NCUSIF":http://www.ncua.gov/, the National Credit Union Share Insurance Fund and its role in protecting deposits in most credit unions. And in May, President Obama signed a law that includes provisions that extend the $250,000 Federal Deposit Insurance Corporation & National Credit Union Administration limit to the end of 2013. In 2014, they're currently slated to return to $100,000 per individual account.
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The Story Behind the Nov. Jobs Numberstag:www.pbs.org,2009:/newshour/businessdesk//9.22152009-12-04T17:59:01Z2009-12-04T18:14:06Z Paul Solman: Good jobs data dominate the headlines this morning: Unemployment holding pretty much steady at long last; dramatic downward revision in last month's number of lost jobs; average hours up. The NYT on its website: U.S. Economy Lost...Business Desk Admin
**Paul Solman:** Good jobs data dominate the headlines this morning: Unemployment holding pretty much steady at long last; dramatic downward revision in last month's number of lost jobs; average hours up.
The NYT on its website: U.S. Economy Lost Only 11,000 Jobs in November. Lead paragraph on Bloomberg News:
_Employers in the U.S. cut the fewest jobs in November since the recession began and the unemployment rate unexpectedly fell, signaling the recovery is lifting the labor market out of the worst slump since World War II._
"Shockingly good," said NewsHour senior producer Murrey Jacobson on the phone to me about today's numbers. And he wondered about the better-than-expected news in the context of the story we've been reporting on the plight of older workers. That story will debut later today on our newly revised Making Sen$e site. (The news today for older workers? Those 55 and older are in one of the two age categories that saw unemployment RISE in the latest numbers. The other category? Workers age 20-24.)
But besides the fact that older workers are still being laid off, those already unemployed are out of work for a longer and longer period, today's report said. Last month, over 50 percent of the older unemployed were out of work for at least 27 weeks -- a new record.
As Nigel Gault, chief domestic economist at IHS Global Insight, put it to the New York Times' Javier Hernandez this morning:
_"You create this class of people who essentially become permanently unemployed and can't get back in....You have people who have lost contact with the labor market, whose skills are not relevant for jobs for the future, who employers regard with skepticism because they have been out of work for so long."_
One further point, though based more on anecdata than any hard numbers: Companies have cut their ranks so deeply, so steadily, that those who are left can't work any harder. This would explain why "productivity" shot up a stunning 8 percent in the 3rd quarter of 2009, 13 percent in manufacturing. U.S. firms were making the same or more with less -- less workers, that is.
You can also understand why firms aren't hiring: the warnings of another downturn as stimulus money slows; health care so expensive and new legislation concerning it not yet passed. But eventually, today's data suggest, firms will have to start adding jobs.
As to why the unemployment number went DOWN, while jobs shrank too? It's the old story: people leaving the workforce "voluntarily." Remember, if someone didn't look for work in the past 12 months, s/he drops from the labor rolls entirely. With long-term unemployment making history, it should come as no surprise that the drop-out rate continues to rise as well.]]>
Who Cares If Wall Street Execs Quit?tag:www.pbs.org,2009:/newshour/businessdesk//9.21982009-12-03T20:54:27Z2009-12-03T21:01:52Z Question: Why are so many people concerned that if there are controls put on the remuneration of top people in the financial industry, that these people will leave? Aren't they the prime causes of the financial crisis in the...Business Desk Admin
**Question:** Why are so many people concerned that if there are controls put on the remuneration of top people in the financial industry, that these people will leave? Aren't they the prime causes of the financial crisis in the first place? Who cares if they leave? Can their replacements do any worse?
**Paul Solman:** I'm not sure how many people are concerned. I'm only sure they're pretty much all from the financial industry itself. THEY care if they leave. And they've spend an awful lot of money gaining access to Congresspeople via campaign contributions to be able to make their case in person. What can they possibly say, you might wonder? Here's a stab:
'_We WEREN'T the prime causes of the crisis. You WON'T find better replacements. And_ -- my personal favorite, heard often in defense of the AIG bonuses -- _only WE know the ins and outs of the complicated deals we made, so only WE can unwind them._'
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How Many Board Members at Bailed-Out Wall St. Firms Kept Their Jobs?tag:www.pbs.org,2009:/newshour/businessdesk//9.21812009-12-02T18:49:10Z2009-12-02T18:52:28Z Question: How many people on the Board of Directors at AIG, Citi, B of A, and Goldman Sachs kept their jobs and their salaries (in percentage terms) after receiving billions in bailout funds? Paul Solman: I don't know, but...Business Desk Admin
**Question:** How many people on the Board of Directors at AIG, Citi, B of A, and Goldman Sachs kept their jobs and their salaries (in percentage terms) after receiving billions in bailout funds?
**Paul Solman:** I don't know, but surely more than most of us taxpayer/bailer-outers would be comfortable with. The administration's excuse is that it simply didn't have the manpower to run these institutions, especially given Republican obstructionism in filling slots at Treasury. One common counter: In the climate that prevailed during the crisis, there would have been no trouble finding replacement bankers for those at the failing firms.
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Isn't Currency Control a Protectionist Policy?tag:www.pbs.org,2009:/newshour/businessdesk//9.21752009-12-01T15:54:19Z2009-12-01T16:17:04Z Question: One of the commentators on the Newhour recently said that China does not want to devalue its currency for fear of decreasing the attractiveness of its export products and increasing unemployment in China. But the Chinese president recently...Business Desk Admin
**Question:** One of the commentators on the Newhour "recently said":http://www.pbs.org/newshour/bb/asia/july-dec09/asiatour_11-19.html that China does not want to devalue its currency for fear of decreasing the attractiveness of its export products and increasing unemployment in China. But the Chinese president recently seemed to be preaching the virtues of free trade and non-protectionist policies. Isn't currency control an indirect protectionist policy?
**Paul Solman:** Wait. You mean a president of a country seemed to be saying something in public that was at odds with his true intentions? I'd suggest yelling 'Stop the presses!' if they weren't already grinding to a halt on their own.
(Just for the record, the commentator, "Yasheng Huang":http://web.mit.edu/yshuang/www/, "said":http://www.pbs.org/newshour/bb/asia/july-dec09/asiatour_11-19.html that China does not want to REvalue its currency -- making its currency, and thus its exports priced in Chinese currency, more expensive in American dollars.)
To answer your possibly rhetorical question: Yes, currency control IS an indirect protectionist policy.
But what's more interesting is all the talk these days of China in economic trouble and, therefore, in no position to REvalue its currency, for fear of accelerating a downturn. The proponents of this view are known as the China bears. I hereby dub them The Pandas. Among them numbers one of my favorite economic analysts, Albert Edwards of Societe Generale, as well as Jim Chanos, the extremely astute short seller who brought Enron's problems to light and (See Politico's "Is China Headed Toward Collapse?":http://www.politico.com/news/stories/1109/29330.html for further details.)
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Is the UK Breaking Up Big Banks?tag:www.pbs.org,2009:/newshour/businessdesk//9.21722009-11-30T17:53:23Z2009-11-30T18:05:17Z Question: Why is the United Kingdom breaking up big banks that got bailed out? Are they wrong? Paul Solman: The UK seems committed to one interesting idea in the wake of the crisis, but it doesn't appear to be...Business Desk Admin
**Question:** Why is the United Kingdom breaking up big banks that got bailed out? Are they wrong?
**Paul Solman:** The UK seems committed to one interesting idea in the wake of the crisis, but it doesn't appear to be breaking up its big banks. It's true that Mervyn King, Governor of the Bank of England (their Fed), "made headlines":http://blogs.telegraph.co.uk/finance/edmundconway/10081367/mervyn_king_banks_cannot_be_too_big_to_fail/ this summer with statements about ending too-big-to-fail.
"There has been pressure in the higher echelons of the Bank of England to dismantle banks that are too big to fail," "wrote Reuters blogger Peter Millership":http://blogs.reuters.com/uknews/2009/11/25/too-big-to-fail-guerrilla-central-banking-and-the-last-resort/ a few days ago in reference to King's much-heralded remarks, "but in government this so far has had little resonance."
Indeed, Millership's blog post was about the recent revelation that during the crisis the UK had "secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget." Using the defense budget metric, that would be secret U.S. loans of half a trillion or more, on top of TARP and the rest.
So what HAS the UK done that might be instructive? It's "pushed":http://www.guardian.co.uk/business/2009/aug/27/turner-tobin-tax-economic-policy the idea of an international "Tobin tax" on financial transactions to make them more expensive and thus, presumably, discourage them. "Paul Krugman wrote about this in Friday's New York Times":http://www.nytimes.com/2009/11/27/opinion/27krugman.html. It's well worth a read.
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Ask Paul a Questiontag:www.pbs.org,2009:/newshour/businessdesk//9.22112009-11-30T16:32:19Z2009-12-04T16:46:49ZThe Business Desk is about the basics of economics, and it lives on questions from readers like you. Paul's mantra: There are no stupid questions. So, please ask away on all things business and economics. Just use the form directly...Business Desk Admin
The Business Desk is about the basics of economics, and it lives on questions from readers like you. Paul's mantra: There are no stupid questions.
So, please ask away on all things business and economics. Just use the form directly to the right. We look forward to hearing from you.
Student Questions: The Gap Between Rich and Poortag:www.pbs.org,2009:/newshour/businessdesk//9.21582009-11-27T15:27:18Z2009-11-24T15:38:29Z Editor's note: This week, the Business Desk continues to feature questions from students in three high schools around the country. Question: Why is the financial gap between rich and poor continuing to get wider? -- Stephanie, senior, Carle Place...Business Desk Admin
_**Editor's note:** This week, the Business Desk continues to "feature":http://www.pbs.org/newshour/businessdesk/2009/11/paul-solman-goes-back-to-schoo.html questions from students in three high schools around the country._
**Question:** Why is the financial gap between rich and poor continuing to get wider? -- _Stephanie, senior, Carle Place High School, Carle Place, N.Y._
**Paul Solman:** In America, you mean? Numerous explanations are given. Let me count the ways.
1) "Skilled" Americans have more to sell to the rest of the world; "unskilled" Americans have less, because they're competing with similarly unskilled workers the world over, who are willing to take less for their work.
2) Because of communications technology, the highly skilled can make more than ever, since they can sell their goods or services the world over.
3) Because the tax code has become so much less progressive. When Ronald Reagan became president in 1980, the top marginal rate (on the highest income earners) was 70 percent. It went as low as 28 percent, and today it's 35 percent. The capital gains tax on investment income has gone down too. If you tax rich people less, they'll keep more of what they earn and move away from the rest.
There's a nice graph on Wikipedia that depicts what's happened to America's income distribution the past 60 years.
Here's Frank Levy, an economist who has long studied income distribution, writing for the Library of Economic and Liberty's Concise Encyclopedia of Economics:
"The 1990s and early 2000s witnessed the establishment of a growing body of work, increasingly precise, describing how the income distribution has changed.
The distribution of pretax income in the United States today is highly unequal. The most careful studies suggest that the top 10 percent of households, with average income of about $200,000, received 42 percent of all pretax money income in the late 1990s. The top 1 percent of households, averaging $800,000 of income, received 15 percent of all pretax money income.
In the longer view, the path of income inequality over the twentieth century is marked by two main events: a sharp fall in inequality around the outbreak of World War II and an extended rise in inequality that began in the mid-1970s and accelerated in the 1980s. Income inequality today is about as large as it was in the 1920s."
The distribution of wealth, by the way, is even more unequal.]]>
Student Questions: The Recession and the Middle Classtag:www.pbs.org,2009:/newshour/businessdesk//9.21572009-11-26T15:24:09Z2009-11-24T15:27:07Z Editor's note: This week, the Business Desk continues to feature questions from students in three high schools around the country. Question: What can the average middle class person do to improve their finances during a recession? -- Melissa, senior,...Business Desk Admin
_**Editor's note:** This week, the Business Desk continues to "feature":http://www.pbs.org/newshour/businessdesk/2009/11/paul-solman-goes-back-to-schoo.html questions from students in three high schools around the country._
**Question:** What can the average middle class person do to improve their finances during a recession? -- _Melissa, senior, Carle Place High School, Carle Place, N.Y._
**Paul Solman:** How does anyone improve their finances EVER? By spending less than they earn. By specializing so that you'll have skills to sell according to what I call "The Golden Rule of Work": "Do unto others in exchange for what you would have them do unto you." That is, success in any economy is selling your fellow citizens something they can't buy at a better price, given the quality, from someone else.
Now as a practical matter, WHO you know tends to be more important than WHAT you know, if only because getting the opportunity to show what you CAN do almost always involves a measure of trust at first. That's why admission to a prestigious college is so valuable: who you're going to know as a result of having gone there. Plus the pedigree that itself bestows a level of trust.
**Question:** Ben Bernanke says that the recession is over. When will the middle class see the results of the end of the recession? -- _Pranav, senior, Carle Place High School, Carle Place, N.Y._
**Paul Solman:** "Middle class" is a category into which almost all Americans put themselves these days. So let's say you're asking when the recession will end for "most Americans" (all save the poorest and very richest).
My answer? Not for quite awhile. How, I ask myself, could it be otherwise? Most Americans spent more than they earned -- for years. Now they've got to cut back because they've come to their senses. And lenders won't extend them more credit -- certainly not at attractive interest rates.
But consumer spending is a huge part of our economy, so if it goes down -- as it has been -- the economy is unlikely to pick up much.
The rest is the economy is BUSINESS spending, GOVERNMENT spending, and selling more abroad (in exports) than we import. Business spending isn't likely to grow much given how many Americans -- nearly 30 million -- are unemployed and underemployed. And now that the stimulus package has come under so much criticism, no matter how unjustified some of the criticism may be, it's hard to see how more government spending should be expected.
As for more exports and fewer imports stoking the domestic economy, well, America is still running a trade DEFICIT of several hundred billion dollars a year, so that isn't helping any.
One final piece of pessimism. The economic growth reported recently (at an annual rate of 3.5 percent) reflected the "cash for clunkers" buy-a-car-now! program, increased government spending (including an 8 percent rise for defense), and a build-up of inventories (goods produced for sale, but not yet sold). How sustainable is any of that?]]>
Student Questions: A Global Currency and Getting Out of a Recessiontag:www.pbs.org,2009:/newshour/businessdesk//9.21562009-11-25T15:19:05Z2009-11-24T15:23:37Z Editor's note: This week, the Business Desk continues to feature questions from students in three high schools around the country. Question: Would the world economy be better if all countries used the same currency? -- Kevin, senior, Carle Place...Business Desk Admin
_**Editor's note:** This week, the Business Desk continues to "feature":http://www.pbs.org/newshour/businessdesk/2009/11/paul-solman-goes-back-to-schoo.html questions from students in three high schools around the country._
**Question:** Would the world economy be better if all countries used the same currency? -- _Kevin, senior, Carle Place High School, Carle Place, N.Y._
**Paul Solman:** Interesting question, Kevin. Yes, the world economy might be better off with a single currency. Think of the convenience: You never have to change money from one currency to another. Think of the savings: You don't have to pay middlemen (currency traders) for the service; countries don't have to maintain their own separate mints, spend money to police counterfeiting, etc.
In fact, Europe now has one currency instead of several dozen. And the International Monetary Fund has created a world currency for use by countries, though not individuals.
But think of the problems. Say the United States is in a deep recession and the rest of the world isn't. Hard to imagine, maybe, but not impossible, right? Tens of millions of Americans decided to specialize in the wind turbine industry, let's say -- designing them, manufacturing them, installing them, advertising them -- and then suddenly, oh, I don't know, it turns out that turbines so disrupt weather patterns that great droughts and monsoons alternate everywhere and the industry has to be shut down at once.
America is a democracy. With so many laid off, the United States feels the need for a stimulus package. But investors won't lend it the money, given America's huge strategic mistake: its investment in wind. How will we ever pay back the lenders?
Historically, the other option would be to create more dollars, which we'd use to maintain or re-employed those out of work. But how can we do that if there ARE no dollars and we don't have the ability to print (or electronically generate) more of the new currency?
In other words, if a country doesn't have its own currency, it's got a lot less control over its own economic destiny. This might be a good thing in the long run. But, as a famous English economist said almost 100 years ago: "In the long run, we're all dead."
**Question:** What are different ways to get the country out of a severe recession? -- _Amanda, senior, Carle Place High School, Carle Place, N.Y._
**Paul Solman:** One way is the way we've chosen to go: Spend our way out of the hole. It sounds odd, maybe, but think of it like this. Your classmate, Anthony, suddenly loses his job due to the recession, through no fault of his own. (We all know Anthony works his tail off at Carle Place Virtual Reality, the video game designer where he was employed testing new products.)
Without an income, Anthony can no longer afford to take his dog for training at Pranav's K-9 Kompound. That forces Pranav to lay off Kevin, who in turn can no longer to buy those superb discount subs you sell at Amanda's Four-Dollar Footlongs. This is the famous, and famously feared, downward spiral of recession. How to stop it, turn it around?
A stimulus package! It includes money for education grants, one of which might go to Carle Place Virtual Reality to teach economics to high school students via a video game featuring some respected elder -- let's say that bald senior citizen with the mustache on public TV: Call of Duty 5: Way Old Warfare.
Anthony gets his job back, takes the dog to Pranav's again. He hires Kevin; Kevin is back in the market for $4-foot-longs, and the spiral is back in the upward direction.
Now some folks would prefer more tax cuts (there are plenty already in the current stimulus package) and less outright government spending. "Let the people decide how to spend their own money," is how the argument goes.
The counter-argument is that tax cuts won't get people to spend these days; they're too afraid to. Instead of spending, they'll simply save the money, or pay down their debts instead. That won't get the economy moving in the right direction.
The argument for this approach? It's worked in the past. In the long run, confidence returns and economic growth again takes off.
The argument against doing nothing was made by a famous English economist who said, in the long run... You can finish the sentence yourself.]]>
Student Questions: Obama's Economic Policiestag:www.pbs.org,2009:/newshour/businessdesk//9.21552009-11-24T15:13:16Z2009-11-24T15:18:31Z Editor's note: This week, the Business Desk continues to feature questions from students in three high schools around the country. Question: What changes has President Obama made to American economic policy? -- Anthony, senior, Carle Place High School, Carle...Business Desk Admin
_**Editor's note:** This week, the Business Desk continues to "feature":http://www.pbs.org/newshour/businessdesk/2009/11/paul-solman-goes-back-to-schoo.html questions from students in three high schools around the country._
**Question:** What changes has President Obama made to American economic policy? -- _Anthony, senior, Carle Place High School, Carle Place, N.Y._
**Paul Solman:** It's hard to say, isn't it? I mean, we'll never get to run the experiment a second time, with a different president, much less a different Congress or Federal Reserve to see what changes could be made, would have been made absent Obama.
If you read history, you'll find the greatest experts disagreeing about the effect previous presidents had on economic policy.
I don't mean to duck the question, though. President Obama is clearly on one side of a great divide in economic thinking: the side of greater control of markets, more regulation, a more progressive tax system, greater sharing. This marks a major change from the economic theory that's been in control of American policy for most of the time since 1981 and the coming of Ronald Reagan: freer markets, less regulation, a less progressive tax system. Democratic President Bill Clinton leaned the country back in the somewhat more government-oriented direction, but he too emphasized DE-regulation and free markets. George W. Bush then pushed this philosophy even further -- until the crisis of 2008. At that point, he lurched back the other way, or allowed his Treasury Department to do so.
So my answer is: President Obama has made a major change in the U.S. economic policy of recent decades, though it's not clear any other president, faced with crisis, might not have done the same.
Obama has not, however, gone as far as many of his supporters wished (and many of his opponents feared). He did NOT nationalize U.S. banks, meaning he did not declare them bankrupt and take them over. That would have punished those who ran them (executives), those who owned them (stockholders), and those who loaned money to them (bondholders). Instead, the government loaned money to the banks on favorable terms (to them).
Nor did the president push as hard as many wanted him to push -- for a bigger stimulus package (more government spending); for tougher limits on greenhouse gases; for more universal health care.
On the other hand, he has taken steps to address all three problems -- unemployment, global warming, health care -- with government solutions. That's a major change in economic strategy.]]>
Exactly Who Is the FDIC?tag:www.pbs.org,2009:/newshour/businessdesk//9.21542009-11-23T21:58:39Z2009-11-23T22:07:02Z Question: Exactly who is the FDIC? Who sits on the board? Who do they answer to? What crystal ball do they use to make their decisions? What authority, if any, do they have over banks, large or small? How...Business Desk Admin
**Question:** Exactly who is the FDIC? Who sits on the board? Who do they answer to? What crystal ball do they use to make their decisions? What authority, if any, do they have over banks, large or small? How does the fact that the federal government owns stock in the major banks impact the decisions by the FDIC?
**Paul Solman:** One at a time. The board members are listed on the "FDIC's website":http://www.fdic.gov, as is so much more about this government agency that you might want to put off reading it until you're on a long plane flight.
The "corporation" answers to Congress, which created it in 1933 to prevent future bank panics.
The crystal ball is manufactured by Madame Arbitrage of Grenoble, France, after a design by Margaret Hamilton, aka the Wicked Witch of the West. The FDIC consults economic data as well - mainly, the solvency of the banks it insures. Do they have sufficient capital to stay in business and pay back depositors if they ask for their money? If a bank has made too many bad loans, it may well not. In that case, the FDIC is empowered to take it over and run the bank itself, in order to get back as much money as possible, with as little disruption as possible. And no panic.
Banks insured by the FDIC are under its jurisdiction.
What impact does government ownership have? Well, when the FDIC takes over a bank, that is COMPLETE government ownership. By contrast, the stakes the Treasury so famously and controversially took in the likes of Citigroup and Goldman Sachs were minority shares - in financial institutions with lots more than just FDIC-insured deposits, and sometimes with no insured deposits at all.
Here's my "recent interview with FDIC Chair Sheila Bair":http://www.pbs.org/newshour/bb/business/july-dec09/fdic_11-13.html, and a "special web-exclusive video":http://www.pbs.org/newshour/businessdesk/2009/11/seven-questions-for-sheila-bai.html in which she answers several of the questions submitted by YOU, Business Desk readers.
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Should the Gov't Anchor Its Economic Rescue to the Middle-Class Homeowner?tag:www.pbs.org,2009:/newshour/businessdesk//9.21472009-11-20T22:37:24Z2009-11-20T22:45:06ZQuestion: I remember a person, whom I believe was an economics professor at Columbia University, who during the financial crisis proposed that the government anchor their financial rescue strategy to the middle class homeowner, rather than government investment in 'too...Business Desk Admin
**Question:** I remember a person, whom I believe was an economics professor at Columbia University, who during the financial crisis proposed that the government anchor their financial rescue strategy to the middle class homeowner, rather than government investment in 'too big to fail' commercial banks. Have you heard of any such proposal? Whatever became of it?
**Paul Solman:** Many many people have made this argument, Mr. Morrissey. Indeed, many continue to make it. We put the question of so-called "loan modifications" to the "head of the FDIC":http://www.pbs.org/newshour/bb/business/july-dec09/fdic_11-13.html just last week. (This was in a section that didn't make air.)
_**Paul Solman:** Has the administration done enough on loan modification? On helping the homeowner?_
_**Sheila Bair:** Well, I think they're doing what they can do. They are looking, as we are now, as to whether more relief needs to be provided for folks who are having trouble with their mortgages because they've lost their jobs. When this started, it was the mortgage itself that was creating the problem - they were bad mortgages. They were unaffordable mortgages. So you could restructure them into an affordable product._
_Now, if somebody loses their job, it's much more difficult to fix that through loan modification. But providing some lower payments or suspension for some period of time is something, I think, we should pursue. We try to encourage that in the loan modification programs we [at the FDIC] have as part of our failed bank sales. I think the protocol that they use now, which is one we developed at IndyMac, is really focused on the affordability of the payment._
_**PS:** This is at IndyMac, which the FDIC took over._
_**SB:** Right, IndyMac._
_**PS:** The FDIC took over IndyMac, a California Bank and then_ -
_**SB:** And started restructuring the stress loans, right [because] we then owned them...And we did that because it was also a good business thing to do. Because if we could restructure the loans and getting them performing again, we felt we could get a better price for them than if we just let them go into foreclosure. But that protocol was based on affordability. I think, now, some of these loans are so deeply under water that more has to be done in terms of principal reduction._
_And that's harder because a lot of them are still on these securitizations. And the securitizations - they allow you to reduce payments through interest rate reductions or extending the amortization, which is what we did at IndyMac. Many of them prohibit though, prohibit the servicer from actually reducing the principal amount. [The servicer is one of the dozen or fewer major financial institutions that collect payments on mortgages - the company you and I make our payments to.] So that's a harder thing to do._
_**PS:** So there's a mortgage._
_**SB:** Right._
_**PS:** It's in a pool. People own shares of the pool._
_**SB:** Yes, yes._
_**PS:** Then people even own shares of those shares._
_**SB:** That's exactly right._
_**PS:** And so you can't go to all of them and say, hey, wait a second, can we renegotiate this?_
_**SB:** Right. Well, that's right. Some of the servicing agreements, what they call the pooling and servicing agreements, do give servicers the ability to reduce principal payments. But most do not. So yes, you would have to go get all the investors to agree - the majority of the investors to agree, which would be hard to do._
Who Regulates the Student Loan Industry?tag:www.pbs.org,2009:/newshour/businessdesk//9.21442009-11-19T23:39:08Z2009-11-19T23:42:40Z Question: Who regulates the student loan industry to stop the practice of gouging young people with excessive interest charges added to their principal when they "defer" payment ...the govt doesn't pay the interest and the loans mushroom. Paul Solman:...Business Desk Admin
**Question:** Who regulates the student loan industry to stop the practice of gouging young people with excessive interest charges added to their principal when they "defer" payment ...the govt doesn't pay the interest and the loans mushroom.
**Paul Solman:** As best I can tell, it's the Department of Education. The main initiative to stop the "gouging" is a bill "proposed":http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-on-Higher-Education/ by President Obama in the spring, passed by the House in September, and now making its way through the Senate. It would make all student lending a direct responsibility of the Dept. of Education, rather than what we currently have: a private student loan industry that's federally guaranteed.
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