You might never expect that the biggest threat to the economy would have to do with having too much money in the bank, but according to this financial expert that is just the case. Find out why he believes that the excess reserves in the US banking system could be the undoing of our economy.
Why Excess Reserves Are Bad For The US Economy
Is keeping loanable money in the Federal Reserve really hurting us in the long run? What do you think? Tell us in the comments below.
Ackman’s Hot Streak Continues, Dumps Berkshire, Says ‘We Can Be More Nimble’
Bill Ackman’s hot streak continues. This comes after he announced that his Pershing Square hedge fund has returned an average of 25% this year. It also trounces the average hedge fund return of -7%. Additionally, this reveals that it sold its $1 billion stake in Warren Buffett’s Berkshire Hathaway. The fund first invested in Berkshire less than a year ago and only weeks took a larger stake in the conglomerate.
Completely exiting the Berkshire position surprised many on Wall Street, as Ackman has long admired Buffett as a mentor. He recently said that Buffett had built Berkshire “to withstand a global economic shock like this one.”
It appears that Ackman, like many, may have felt frustrated by the lack of activity from Berkshire during the recent market downswing. Berkshire’s cash balance has ballooned to $137 billion. Many, including Ackman, had likely expected a portion of that cash to be used to scoop up bargains during the late-February selloff. The said selloff took markets down nearly 30%.
Instead, Berkshire stood pat, and that appears to have been enough for Ackman to pull the plug on his investment. While discussing the exit, Ackman said that due to Pershing’s smaller size compared to Berkshire, “we can be much more nimble… and so our view was generally we should take advantage of that nimbleness, preserve some extra liquidity in the event that prices get more attractive again.”
Pershing Square’s success over the last two years had thrust Ackman back into the spotlight. This, perhaps, turned the chapter on a period where he became more famous for his misses than his home runs.
He was invested in Valeant Pharmaceuticals as it collapsed. He also famously squabbled on live TV with fellow billionaire Carl Icahn over Herbalife. Then, he gave a nearly 3-hour-long presentation explaining why he thought the company runs as a pyramid scheme. He finally exited his $1 billion short position at a loss.
Ackman’s current hot streak started last year, when Pershing Square returned 58.1%. This is its best annual return since the hedge fund was founded in 2004. After years of letting others make the firm’s investment decisions, Ackman took back the reins in 2018 with a back-to-basics strategy he learned from Buffett.
He returned the fund to a strategy that invests in simple, predictable, cash flow positive companies. He said, “It’s very hard to lose money by buying great businesses if you pay a fair price. For a while there, we forgot that our main job was to make money, so we woke up, and now we’re back in the money making business.”
Making money is exactly what Ackman did earlier this year. He did so with “the single best trade of all-time,” as what many calls it. He correctly predicted that the coronavirus would wreak havoc on our economy. Because of this, Ackman made a $27 million bet that netted his firm a $2.6 billion profit in less than two months as the markets crashed.
Now, his war chest is full again. It appears that Ackman is ready to buy should asset prices come down again.
Biden Is Latest Dem to Support Ridiculous Free Housing Proposal
Presidential candidate Joe Biden is the latest Democrat to throw their support behind the ridiculous idea that housing should be free
During an appearance yesterday, Biden said he agrees with “forgiving” both mortgage and rent payments. He says this as the country struggles with the coronavirus pandemic and 38 million Americans are without a job.
“There should be rent forgiveness and there should be mortgage forgiveness now in the middle of this crisis. Not paid later, forgiveness. It’s critically important to people who are in the lower-income strata.” said Biden
Tara Raghuveer, housing campaign director at People’s Action, a political network devoted to grassroots organizing, aired her opinion. She said, “The tenant is the most vulnerable person in the economy right now.”
She added, “The alternative to not canceling the rent is complete bottoming out of the market. And tens of millions of people literally never financially recovering from this moment.”
Calls for Housing Relief
Biden’s call for rent and mortgage relief echoes efforts by Minnesota Rep. Ilhan Omar. Omar introduced legislation that would bar landlords and lenders from collecting monthly payments. It would also impose late fees “through the duration of the pandemic.”
Under Omar’s plan, renters and mortgage borrowers who skip payments wouldn’t need to pay back anything once the rent and mortgage forgiveness policy ended. And any lender or landlord who violated the plan would face penalties.
Correctly, housing industry experts point out that allowing renters to skip payments also needs to consider the consequences of the landlords not being able to pay their own mortgages on the property.
“If multifamily landlords, particularly the small mom and pop landlords who own just maybe one to four units can’t make their mortgage payments and can’t stay in business, those are affordable units that are going to be lost to the private market,” said Flora Arabo, the national senior director of state and local policy at Enterprise Community Partners.
“Rent forgiveness without rental subsidies could be pretty catastrophic for tenants,” Arabo said.
Omar’s plan addresses these concerns, supporters say. It does so because it creates a fund for landlords and lenders so that they could recoup any losses.
Not surprisingly, Raghuveer’s organization, People’s Action, worked with Omar in drafting the bill. The organization threw in more stipulations for landlords to collect those funds. These include providing information on their revenues, refraining from discrimination based on the source of income, and other tenant protections.
Biden’s support for the rent and mortgage forgiveness plans doesn’t really mean much. However, the biggest problem with these free housing proposals is that they demonize landlords. They let the tenants immediately skip payments, but force the landlords to deal with bureaucracy and red tape to receive relief funds.
According to the Census Bureau, individual investors own nearly 75% of our nation’s rental units, not massive corporations. Those mom and pop landlords likely aren’t any more sophisticated than their tenants. They would also find themselves in the same dire financial situation should they lose the ability to collect rent.
Bob Pinnegar, president and CEO of the National Apartment Association, said in a recent interview, “Rent cancellation proposals do not adequately address the problem and fail to recognize that many property owners are in the same dire situation as their residents — substantial loss of income amid ongoing financial obligations.”
Study: Staying Unemployed Means More Money Than Heading Back to Work
The coronavirus pandemic shut down our nation’s economy. Since it started, more than 38 million Americans have become unemployed and filed for benefits.
As the number of out-of-work Americans climbed every week, a common belief was that while the numbers look bad, they remain temporary. As quickly as a bar, restaurant, or retail store closed down and laid off its employees, they would just as quickly bring those workers back as soon as the businesses reopened.
More and more states start to ease their restrictions and allow certain businesses to reopen. So now, we should soon see a dip in the unemployment rate. This happens as employers rehire employees, at least according to expectations.
But what happens when line cooks or laundry staff can make more money every week by not working?
It looks like we are about to find out.
Earning More Money By Not Working
According to researchers from the University of Chicago, two-thirds (68%) of jobless workers would bring home more money from their state unemployment insurance and $600 weekly supplement from the federal government. They take home more from these sources compared to what they would earn working a full-time job.
The researchers also found that 20% of unemployed workers would receive benefits that were at least double their lost earnings. They also estimated that the median earnings-replacement rate was 134% of lost wages.
Surprisingly, it’s not just blue states that are paying benefits that exceed lost wages. It is actually happening in every state. Unemployment benefits range from 129% of lost wages in Maryland to 177% in New Mexico.
Take Lainy Morse, a preschool teacher in Portland, Oregon. The child care center she works at closed two months ago. Now, with her extra $600 in weekly benefits, she’s in no hurry to go back to work.
“It’s terrible to say, but we’re all doing better now,” she told NPR during a recent interview. “It’s hard to think about going back to work in this pandemic and getting paid less than we are right now when we’re safe and at home in quarantine.”
Proposals and Debates
During the initial debate of the CARES Act, several Republican lawmakers pointed out that many workers can make more money while unemployed. They proposed an amendment that would cap unemployment benefits at the worker’s previous wage level and nothing more.
However, Treasury Secretary Steven Mnuchin said that if lawmakers propose another relief bill, it would need to address limiting unemployment benefits. “We do need to fix the quirk that, in certain cases, we’re actually paying people more than they made,” he said.
The challenge for lawmakers, and employers, is how to get people to return to work when the monetary incentive is to not head back to work.
There is a monetary limit to unemployment benefits. Also, the extra $600 in supplemental income will expire at the end of July. So at some point, there won’t be a financial benefit to staying unemployed. But if the coronavirus pandemic continues to rage into the summer, don’t expect workers who earn more money while unemployed to quickly rush back to work.
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