About Burlingame's Easton Addition

The Federal Reserve remains conflicted. Ben Bernanke and other members of the FOMC have made no secret of their intention to end the Fed's quantitative easing program. Most of the lending facilities will expire early this year and the Mortgage Backed Securities (MBS) purchase program is expected to wind down a the end of March. Ending the Fed's unconventional easing measures is an essential precondition for any subsequesnt tightening. The Fed cannot start tightening policy unitl it stops easing.

The switch from easing to tightening will not be instantaneous. The Fed wil need to review the economy's performance in the absence of quanitative easing and there is some discussion that MBS purchase will continue beyond March 31. The uncertainty contributed to the earlier run up in Treasury yields and mortgage rates.

The Dawn of Another Conundrum

Treasury yields retreated slightly this past week as weaker economic news, including last Friday's employment number and December's weak retail sales report, have cause investors to scale back theri expectations for economic recovery. Growth is still expected to strengthen over the coming year, which should boost private credit demand. Treasury yields are also being lifted by expectaions federal borrowing needs will remain exceptionally large, with the 2010 Federal Budget deficit expected to be around $1.4 trillion. On the plus side, core inflation is expected to moderate, with our current forecast calling for the year-to-year change in the core CPI to decelerate to 1.1 percent by year end.

Bond yields remain relatively high compared to inflation and consensus inflation expectations. Apparently, there is a reluctance to fully embrace the improving core inflation figures. Some of that skepticism is justified. Much of this year's expected improvement in core inflation will likley result from moderating housing costs, which are imputed from rent data. Measures of market=driven price changes are not likely to be as bond market friendly. Moreover, with global demand reviving, core inflation is likely to accelerate earlier than in past recoveries.

Steps You Can Take to Build Credit, Get a Card

Sacramento Bee, by Claudia Buck

January 17, 2010

Gone are the days when credit card companies barraged you like a love-struck suitor. Today, bruised by economic losses and consumer defaults, many credit card companies are spurning the customers they once wooed. And if you've got a dinged-up credit score or no credit history, getting a new credit card is next to impossible. We know one young man -- a recent college graduate with a decent-paying job and no major credit dings -- who's been turned down for a credit card repeatedly, even from department stores like Macy's.

"Credit is still tight, so issuers are not approving as many people with no credit or bad credit as they did 18 months ago when the economy was good," said Bill Hardekopf, founder of LowCards.com. "It is a very big challenge for them." Those with bad credit have long had trouble getting credit cards or finding cards with affordable interest rates. But those with no credit are in an altogether different category. Typically it's either "young students or the 'under-banked' population -- people who don't have a long history with traditional banking services," said Kenneth Lin, CEO of CreditKarma.com, a San Francisco-based consumer Web site.

"Absence of credit is distinctive," known in the industry as a "thin file," according to Lin. He said it could be newly arrived immigrants or those who have stayed away from traditional banking for loans and financial transactions. Often it's college students, sharing expenses with roommates or getting financial support from parents, who don't have any record of paying bills.

Ironically, the stingier credit card climate is coming ahead of -- or perhaps because of -- next month's installment of the federal Credit CARD Act, which creates more consumer protections by limiting how credit card issuers can impose payments and fees. In the wake of those protections, which started rolling out last summer, a number of credit card companies have hiked interest rates, slashed credit limits and initiated annual fees.

How should you begin your search for a credit card?

Start small. "Do what I had to do when I got out of college: get a store credit card from Sears or a gas card," like Chevron or Texaco, said Ben Woolsey, spokesman for Creditcards.com. But don't make it a hobby. Multiple applications and rejections for a credit card can hurt your credit score. That's why Woolsey and other credit card experts say the best option is a "secured credit card," which is backed by your own deposit. Typically, you open the card with a minimum of $200 or $300, which is your monthly limit for charging on that card, unless you add more money. Some secured cards will let you deposit up to $10,000. The deposit, which earns interest, is not used to pay off your monthly credit card balance, however. It's there as security for the card issuer, in case you default. When you close the account, your deposit is refunded. If you're considering a secured credit card, do some comparison shopping because annual fees and charges vary widely. For example, two of Lin's favorites -- the Orchard Bank MasterCard and the Public Savings Bank Visa -- have very different fees and charges. Orchard's MasterCard has no application fee and a $35 annual fee (waived the first year); Public Savings' Visa card has a one-time $79 application fee but no annual fee. After a year or so of regular payments, you can typically upgrade to a regular credit card with better rates and more flexibility. When you pull it out of your wallet, a secured card looks just like a regular credit card. And because it's backed by money you've set aside, it works similar to a debit card. But secured cards have a distinct advantage that debit cards don't: credit history. Every time you make a payment with a secured card, it's reported to one or more of the three credit reporting bureaus. So assuming you pay it off on time each month, you'll start to build a solid credit history. And what's so great about having a good credit history? That's what leads to your credit score, that oft-cited number between 300 and 850 that affects what interest rate you'll pay for a home mortgage, car loan, etc. The higher your score, the lower you'll pay. If you're a young adult or someone just starting out in financial life, it could save you big bucks over your lifetime. But whatever credit card you get, follow the same game plan: Always pay on time and always try to make at least the minimum payment. The days of credit card offers dropping like ripe fruit may be over, and that may not be so bad, says Joe Ridout of Consumer Action, the San Francisco-based consumer advocacy group.

"Everyone agrees that credit card companies extended more credit than people needed or even merited," said Ridout. Returning to "saner levels," where the ability to charge is more in line with income, will better serve consumers, he added. "There's no doubt it'll cause short-term pain for many borrowers, but over the long term ... there'll be less of an incentive to get in over your head and buy more than you can actually afford."

CREDIT CARD TIPS

With an estimated 1,000-plus credit cards out there, picking the right one can be mind-boggling. Here are some tips:

DECIDE YOUR TYPE Pick a credit card based on how you use it. Bill Hardekopf of Lowcards.com offers this: If you pay off your full balance each month, get a card with the best rewards (cash, airline miles, etc.) for your lifestyle. * If you carry a monthly balance, look for the lowest interest rate. If you have bad or no credit, look for a secured card. (Be sure it reports to the credit bureaus; otherwise, your good payment history won't get recorded.)

CHECK YOUR REPORTS Get a copy of your credit report from one of the three credit reporting bureaus at www.annualcreditreport.com. Check that everything is accurate. If not, your credit score, which is derived from those reports, could be inaccurate.

KNOW YOUR SCORE You can obtain your three-digit credit score for free, but it's often attached to a sign-up for a fee-based credit monitoring service. But you can get an estimated range of your credit score -- for free -- at sites like bankrate.com or myfico.com. Search for "FICO Score Estimator." Knowing your score will help you compare credit card rates.

COMPARE, COMPARE Not all credit cards are alike. Annual fees, interest rates and special terms apply. Be sure to read the fine print. Use credit card comparison sites, such as: bankrate.com, lowcards.com, creditcards.com or cardratings.com.

How to Teach Kids About Money

Time Magazine, By Barbara Kiviat

January 25, 2010

Today's conventional wisdom isn't working. What will?

Of all the lessons taught by the financial crisis, the most personal has been that Americans aren't too slick with money. We take out home loans we can't afford. We run up sky-high credit-card debt. We don't save nearly enough for retirement.

In response, proponents of financial-literacy education are stumping with renewed zeal. School districts in states such as New Jersey and Illinois are adding money-management courses to their curriculums. The Treasury and Education departments are sending lesson plans to high schools and encouraging students to compete in the National Financial Capability Challenge that begins in March.

Students with top scores on that exam will receive certificates--but chances for long-term benefits are slim.

As it turns out, there is little evidence that traditional efforts to boost financial know-how help students make better decisions outside the classroom. Even as the financial-literacy movement has gained steam over the past decade, scores have been falling on tests that measure how savvy students are about things such as budgeting, credit cards, insurance and investments. A 2008 survey of college students conducted for the JumpStart Coalition for Personal Financial Literacy found that students who'd had a personal-finance or money-management course in high school scored no better than those who hadn't.

"We need to figure out how to do this the right way," says Lewis Mandell, a professor at the University of Washington who after 15 years of studying financial-literacy programs has come to the conclusion that current methods don't work. A growing number of researchers and educators agree that a more radical approach is needed. They advocate starting financial education a lot earlier than high school, putting real money and spending decisions into kids' hands and talking openly about the emotions and social influences tied to how we spend.

One promising example of new thinking is found on Chicago's South Side. At the Ariel Community Academy, financial education starts in kindergarten with books like A Chair for My Mother (the moral: if you want to buy something, save money first) and quickly becomes hands-on. Each entering class at Ariel--a K-8 public school that has partnered with a local money-management firm since the mid-1990s--is entrusted with a $20,000 investment portfolio, and by seventh grade, kids are deciding what to buy and sell (profits help pay for college). Last year, for the first time, the eighth-grade class graduated with less than the original $20,000. Talk about a teachable moment: stocks don't always go up.

Other initiatives are tackling such real-world issues as the commercial and social pressures that affect purchasing decisions. Why exactly do you want those expensive name-brand sneakers so badly? "It takes confidence to take a stand and to think differently," says Jeroo Billimoria, founder of Aflatoun, a nonprofit whose curriculum, used in more than 30 countries, aims to help kids get a leg up in their financial lives. "This goes beyond money and savings."

That approach might have helped in the recent housing bubble. Buyers didn't just need to know how different sorts of mortgages worked; they also needed the fortitude to choose a 30-year fixed rate when everyone around them was buying a bigger house with a riskier loan.

Amid such a complicated landscape, some experts question whether there could ever be enough education to adequately prepare Americans for financial life. A better solution, these critics contend, is to reform the system.

"What works is creating institutions that make it easy to do the right thing," says David Laibson, a Harvard economics professor who, like Mandell, has decided after years of research that education isn't a silver bullet. One idea being discussed in Washington is the automatic IRA. Employers would have to enroll each worker in a personal retirement-savings account unless that worker decided to opt out.

Yet even the skeptics are slow to write off financial education completely. More than anything, they say, we need to rigorously study the financial decisions of alumni of programs like Ariel and Aflatoun and compare them with those of peers who didn't get the same sort of education. "Until you have experimental evidence, it's all a little speculative," says Michael Sherraden, a professor at Washington University in St. Louis who is conducting a seven-year, randomized, controlled study on whether giving children bank accounts inculcates the habit of saving--a program already being tried on a large scale in the U.K. Yes, good, solid research like this takes a lot of time and resources. But if what we're doing right now isn't working, it's in our own best interest to figure out what does.

Fed Policies Likely to Stay as Economy Finds Footing

Central bank wants more sustainable recovery before changing tack

Wall Street Journal, By Jon Hilsenrath

January 18, 2010

Although Federal Reserve officials expect the economy to grow too slowly this year to bring the jobless rate down substantially, they are likely to conclude at their Jan. 26-27 meeting that there isn't much more they can do about it.

That means sticking to their stated plan to end purchases of mortgages at the end of March, roll back emergency lending programs in February and maintain the vow to keep interest rates exceptionally low for at least several more months.

"I think that we are going to be waiting for the economy to improve in a strongly sustainable fashion and until that happens, then it's unlikely that we would be changing policy," Charles Evans, president of the Federal Reserve Bank of Chicago, told reporters this past week.

High unemployment is one of several issues that nag at Fed officials as they attempt to gradually pull away from their role as the economy's chief rescuer.

Job seekers line up Tuesday at a career fair in Hallandale, Fla. High unemployment is among concerns for Federal Reserve policy makers.

They also are antsy that the housing recovery could stall when they finish buying $1.25 trillion of mortgages in March; the Fed now holds $919 billion worth. Eric Rosengren, Boston Fed president, said through a spokesman that the Fed's mortgage purchases have helped to push mortgage rates down by between a quarter and three-quarters of a percentage point. But when it stops buying, rates likely won't go up by a like amount because the Fed will be holding onto its portfolio rather than selling it down aggressively.

Many Fed officials believe the rise in mortgage rates will be less than half a percentage point and thus won't seriously hurt the housing recovery. A Wall Street Journal survey of economists finds nearly two-thirds predict rates will climb less than half a percentage point when the Fed buying stops.

Fed officials are leaving open the possibility of more mortgage-buying if the economy and housing market falter. But if the economy performs as the Fed expects, most officials appear inclined to let the program run out.

"There is a desire to phase out these purchase programs as soon as it makes sense and there are stated dates for doing that," Dennis Lockhart, president of the Atlanta Fed said in a recent interview.

Fed officials worry about the risks of expanding their mortgage holdings. The more securities they buy now, the harder it will be to reduce the portfolio later. Additional purchases could cause investors to lose faith in the Fed's ability to fight inflation, trigger a sharp drop in the dollar or a surge in commodity prices. That could lead to higher mortgage rates. The Journal's survey of economists showed that nearly three out of four expect the Fed to let the program expire on schedule.

The Fed is inching toward the exit door in other ways as markets regain their footing. A range of now little-used emergency lending programs expires Feb. 1, including those that offer short-term loans to industrial companies and Wall Street brokers and provide a backstop to money-market mutual funds.

The Fed also could soon raise the rate it charges banks for emergency loans, the discount rate. The Fed has cut this rate to 0.5% from 6.25% in August 2007 to encourage banks to come to it directly for funds. As markets have stabilized, banks are borrowing from it less, meaning the Fed could be in a position to start tightening terms on these loans.

The discount rate is less important than the federal-funds rate, which banks charge each other for overnight loans. Fed officials see a discount-rate increase mostly as a signal of the shift away from rescue lending, not a step toward raising interest rates more broadly.

Officials are deep into discussions about how to manage the mechanics of broader interest-rate increases, even though that moment still looks to be many months away. The Fed's first step will involve a change in rhetoric, altering its description of the economy and, eventually, its vow to keep interest rates low for "an extended period."

When they want to raise interest rates, Fed officials will have at least two new levers to pull. They could drain some of the $1 trillion they have poured into the financial system. Or they could raise a rate they pay banks directly for money that is kept on reserve with the Fed. Raising that interest rate on reserves would push banks to tighten lending or raise rates on loans they make to others. Either step would tighten financial conditions and could help push up the benchmark fed-funds rate.

Fed officials haven't decided which step to take first. With worries about housing and unemployment lingering, they aren't inclined to hurry the decision.