MONEY Jobs

The Economy is Improving, but May Face a New Speed Limit

empty cubicles
Get ready for Boomers to leave the work force. Getty Images

The recession is gradually ending, but we're about to enter a world where fewer and fewer people work.

While it might not feel like it yet, the economy is getting better. On Thursday, the Bureau of Economic Analysis announced the U.S. economy grew faster than expected in the second quarter of this year.

Here’s the thing, though. Even as employers add jobs, we’re about to enter an era with the lowest percentage of working Americans since 1973. Below is a Congressional Budget Office projection, from a new set of charts they’ve released here, showing the labor force participation rate—the number of people working or looking for a job—through the year 2024. As you can see, despite the economic recovery, it has a distinctly downward trend.

Screen Shot 2014-08-29 at 12.06.20 PM
Source: Congressional Budget Office.

Why doesn’t a better economic climate mean more workers? The boomers, largest generation in American history, is on the cusp of retirement, and will soon begin to drop out of the workforce in even greater numbers. Over time, this will have an dampening effect on the economy—though by how much is disputed. The CBO predicts that GDP growth will average around 2.2% per year, noticeably less than the growth we got used to in the 1980s and 1990s.

Another way to visualize the change is something called the dependency ratio, which measures the proportion of the population that aren’t of working age (below 18 or over over 65). As FiveThirtyEight’s Ben Casselman points out, that number is about to increase from 59% in 2010 to 75% in 2030.

Screen Shot 2014-08-29 at 12.05.20 PM
Source: U.S. Census.

As you’ll notice from the above chart, we’ve been a demographically fortunate nation of late, but we’re about to lose that tailwind. On the other hand, this country has faced big demographic changes before: Look the at the jump in the dependency ratio from the 1950s to the 1960s. Back then, an increasingly prosperous nation spent part of its wealth on kids. Those kids grew up and made the economy even larger, and soon we’ll have to spend part of that prosperity on their retirement.

MONEY Banks

Bank of America Is Paying Up for the Mortgage Mess, But Who Will Get the Money?

Affordable housing construction
Kiet Thai—Getty Images

The banks has agreed to provide billions of dollars in "consumer relief." Here's what that actually means.

Last week, Bank of America agreed to pay almost $17 billion dollars in a settlement with the Justice Department. The settlement is about what Bank of America (and Merrill Lynch and Countrywide, which BoA later acquired) disclosed to investors about mortgage-backed securities, not about how it treated homeowners. Nonetheless, a large portion of the settlement—$7 billion—will be used for consumer relief.

So who will actually see some of that money? Bank of America can pay off its new obligation in four ways:

Reducing the principal or modifying payments on some mortgages. Mortgage modification isn’t anything new—the government has had programs to encourage banks to do this for years, though they’ve been criticized as too little or too late. However, compared to past settlements, the BoA deal does break some ground by targeting the relief. For the first time, 50% of principal reductions will go to borrowers in the areas hardest hit by the housing crisis. The Office of Housing and Urban Development has published an interactive map of these areas here. The settlement also gives the bank incentives to prioritize FHA and VA loans.

Bank of America’s agreement with the government also provides more substantial aid than previous settlements in certain cases. For example, BoA is required to provide $2.15 billion in principal forgiveness, which consists of lowering underwater mortgages to 75% of the property’s long term value, and reducing the mortgage’s interest rate to 2%.

“Those borrowers who do get assistance through the settlement are getting pretty substantial assistance,” says Paul Leonard, founder of the Center for Responsible Lending.

In addition to principal reduction, BoA will receive credit toward the settlement amount by forgiving mortgage payments, allowing for delayed payments, or extinguishing some second liens and other debts.

Who actually gets this help, though, is up to BoA. “Bank of America still gets to make all the final calls,” Leonard explains. “Even if I’m a borrower in default in a hardest hit area, who would seem like natural candidate for assistance, there is no entitlement to me.” As for the timetable, the bank has until 2018 to provide this aid, although the agreement includes incentive to finish early. BoA suggests anyone in serious hardship call 877-488-7814 to see if they qualify for an existing program.

More low and moderate income lending. For low-income Americans, first time homebuyers, or those who lost their home in a short sale or foreclosure, it can be extremely difficult to get a loan—even with a good credit. This settlement offers BoA credit for giving mortgages to these groups, or those in hardest hit areas, as long as they have respectable FICO score.

Building affordable rental housing. It’s also hard to find cheap rental housing, and financing for such development is scarce. As part of BoA’s agreement with the Justice Department, the bank will provide $100 million in financing for construction, rehabilitation or preservation of affordable rental multi-family housing. Half of these units must be built in Critical Family Need Housing developments.

Getting rid of blight and preventing future foreclosures. One side effect of the housing crisis was the large number of abandoned or foreclosed homes plaguing neighborhoods across the nation. BoA will earn credit for demolishing abandoned homes, donating properties to land banks, non-profits, or local governments, and providing funds for legal aid organizations and housing counseling agencies. The bank will also receive credit for forgiving the principal of loans where foreclosure isn’t being pursued.

Housing advocates say they’ll be keeping an eye on how quickly BoA and other banks that have agreed to consumer relief act on these programs. One worry is that by going slowly they could end up paying off the settlements with modifications and lending they would have done anyway. “If the promised relief arrives, as written, then it will bring a measure of relief that is badly needed by a lot of communities out there,” acknowledges Kevin Whelan, national campaign director of Home Defenders League. “But compared to the damage these institutions caused, it’s not really a large amount of money.”

Related:
What Bank of America Did to Warrant a $17 Billion Penalty
How to Get a Mortgage When Your Credit is Bad
Behind on Your Mortgage? You May Be Eligible for Some Help

MONEY Odd Spending

WATCH: We Try Out NYC’s First Bitcoin ATM

The Bitcoin crypto-currency may be the wave of the future, but MONEY's Jacob Davidson finds that using it to buy lunch can be a hassle right now.

MONEY

3 Ways to Get Online When Your Internet Is Down

Teen using laptop, tablet and smartphone
Dina Marie—Getty Images

What to do if your internet service cuts out? Here are 3 ways to prepare so you'll always have a way to connect.

Early Wednesday morning, a massive Time Warner Cable outage left customers across the country without internet access. While the cable company reports most service was restored by 6 a.m., data from downdetector.com, a website that tracks internet outages, showed nearly 10,000 complaints at the height of the blackout. Time Warner services about 11.4 million high-speed internet customers nationwide.

So what do you do if your internet goes down and you absolutely, positively need to get online? You can’t just run to Starbucks in your pajamas if the outage hits in the middle of the night, as this one did, so the best strategy is to plan ahead. Putting one of these backup methods in place ahead of time will keep you connected the next time your ISP decides to cut out.

1. Tethering. As any smartphone user knows, wired internet isn’t the only internet available. As long as you have a working cellular data connection, you can transfer your phone’s internet access to your laptop or desktop computer via a method called tethering.

Both Android and iOS phones can tether, although the costs may differ. The only option for iPhone users is to purchase a tethering plan from your carrier, which can add around $20 a month to your bill. On Android, it’s possible to tether for free by installing third party apps, but carriers may add a charge if they notice increased data usage. For more, check out these iOS and Android tethering guides.

2. Mobile Broadband. Mobile broadband is similar to tethering in that you’re using cellular data to get your computer online. But instead of through your phone, it works via a separate device that provides a mobile internet connection, generally by generating a wifi hotspot.

One advantage to mobile hotspots is that many offer prepaid plans. For example, Verizon offers plans for its 4G LTE Jetpack that allow users to buy as little as a week of service at a time. Another service called Karma provides pay-as-you-go internet for $14 per gigabyte. That means if your internet cuts out unexpectedly, you can jump on your hotspot’s wifi for a relatively small fee. However, the devices themselves can cost around $100 for the initial purchase.

3. Public Wifi. If all else fails, there’s always mooching off Starbucks or other free wifi locations. Apps for Android and iOS provide maps of publicly available wifi hotspots that can work in a pinch. But most people don’t know their internet or cell provider might also provide a network of wireless hotspots.

Optimum, AT&T, and other ISPs provide maps of their wifi locations. In some cases, access is included in your pre-existing internet or cell service contracts. In other cases, wifi access might require an additional subscription. Services like Boingo also offer a mixture of free and paid-wifi hotspots, and map apps to help locate them.

 

MONEY College

Don’t Bash Ivy Leaguers: They’re Just as Greedy as Everyone Else

140826_FF_IVYLEAGUE
Michael Burrell—Alamy

In Excellent Sheep, William Deresiewicz slams the Ivy League for having a "finance-first" culture. But it's not just Harvard grads who run to high paying industries, it's everyone.

College entrants, beware. Choosing your dream school might be the worst decision you’ve ever made. That’s the message from William Deresiewicz, author of the recently released book Excellent Sheep. The ex-Yale professor’s latest work blasts the Ivy League, and other similarly prestigious schools, for turning young, idealistic learners into the titular livestock, who end their time in college by wandering aimlessly toward Goldman Sachs.

The heart of the argument, which Deresiewicz summarized last month in an article for The New Republic, rests on the fact that about a third of Ivy Leaguers go into big business (namely finance and consulting) and not his preferred areas, which include the clergy, the military, politics, and academia. Schools like Harvard may teach their pupils, sure, but all they learn are the “analytic and rhetorical skills that are necessary for success in business and the professions.”

In contrast, Deresiewicz says, public and lower-ranked schools like Wesleyan, Sewanee, and Mount Holyoke “have retained their allegiance to real educational values.”

So should Harvard‘s freshman class start filling out transfer applications? Not so fast. A closer look at the book’s claims reveals a sobering truth: Ivy Leaguers might be greedy little sheep eager to join the ranks of Wall Street—but no more so than students outside their hallowed halls.

In fact, the Ivy League simply is not unique in the way Deresiewicz wants it to be. Yes, it is true that 20% to 30% of elite college grads go into finance or consulting. But at Reed, a school Deresiewicz specifically uses as a model for a less money-hungry higher education, 28% of students went into business and industry—a category that includes consulting, finance, and other profit-heavy sectors—based on its 2014 alumni database.

That’s compared with 27.3% of Yale students who went into consulting or finance in 2012, 24.5% of last year’s Princeton class employed in finance, insurance, or professional services (including consulting), and 22% of Brown’s class of 2013 that entered finance, banking, or consulting. (These categories vary slightly since there is no standard method among colleges of grouping professions.)

Many public schools are no different. UCLA, a top ranked state institution, reports that 32% of its graduates go into business or consulting. Penn State, another public institution Deresiewicz mentions favorably, has even named its career services center after Bank of America. For those with an aversion to these industries, there aren’t many academic oases left.

Why do such a large portion of graduates everywhere rush to join the Morgan Stanleys of the world? Because they pay well and offer plenty of jobs. The financial services industry alone accounts for 7.9% of the economy and over $1.2 trillion; it’s so large that no small group of schools could ever hoard a significant share of it. According to data from NACE International and the U.S. Census, finance and insurance offer the 5th most jobs and the highest average salary of any sector.

Shockingly, students at Reed and UCLA seem about as likely to want a sustainable career and high incomes as their peers at Harvard. (And what’s wrong with that again?)

It’s also incorrect to assume that students at Ivy League schools are any less likely to go into more charitable trades. One might be surprised after reading Deresiewicz’s article to learn that the largest employer of recent Columbia graduates is not Goldman Sachs or J.P. Morgan, but Teach For America. Princeton, which has a reputation for sending grads straight to Wall Street, recently announced 22.6% of the 2013 graduating class is employed in the nonprofit sector.

Does this mean Ivy League schools aren’t often annoying and pretentious? Not at all (I should know, I went to one). But it does mean we shouldn’t label them as educationally deficient because their graduates behave just like everyone else. As MONEY’s own college rankings show, there are plenty of great schools, both in and outside the ancient eight. Choose based on educational quality, price, and yes, how employable students are after they graduate. And by those measures, the Ivies do pretty well.

MONEY home prices

Slowing Price Gains Reveal Little Exuberance for Homes

140826_REA_HousePricesSlow
Dimitri Vervitsiotis—Getty Images

Looking ahead, the rate of home price growth may slow even further, especially if mortgage rates increase.

While housing prices continue to rise, the rate of that growth nationally slowed in June, according to a leading gauge of the real estate market.

The S&P/Case-Shiller Home Price Indices showed that home prices throughout the country increased 6.2% since last year. Meanwhile, separate indexes that track 10 and 20 large U.S. cities showed gains of 8.1% during the same time period.

Though decent, those gains were a far cry from the double-digit growth in home prices late last year. Moreover, all three indexes showed deceleration from the prior month, and every city measured experienced lower year-over-year price growth.

“Home price gains continue to ease as they have since last fall,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices. “For the first time since February 2008, all cities showed lower annual rates than the previous month. Other housing indicators — starts, existing home sales and builders’ sentiment — are positive. Taken together, these point to a more normal housing sector.”

Blitzer also cautioned that an increase in interest rates, which Federal Reserve chair Janet Yellen hinted at last week, may mean further deceleration if they lead to higher mortgage rates.

“Bargain basement mortgage rates won’t continue forever,” he said. “Recent improvements in the labor markets and comments from Fed chair Janet Yellen and others hint that interest rates could rise as soon as the first quarter of 2015. Rising mortgage rates won’t send housing into a tailspin, but will further dampen price gains.”

To be sure, home prices are still going up across the board. All cities reported higher prices for the third consecutive month, and price growth in markets such as Dallas and Denver has continued unabated.

Nationally, average home prices in June are back to Spring, 2005 levels. But city composites are still roughly 17% down from their peak prices in June/July of 2006.

MONEY

Don’t Worry About Inflation Yet, Say Economists

A group of 257 economists say the Federal Reserve is right to keep interest rates low.

A new study shows economists believe the Federal Reserve is doing the right thing by keeping interest rates low.

According to the August Economic Policy Survey, published semiannually by the National Association for Business Economics, 53% of the association’s 257 members said monetary policy was on the right track, while only 39% felt policy was too stimulative.

There has been concern from some quarters that the Fed’s consistently low rates are flooding the market with cheap credit, pushing up the cost of goods. Inflation already appears to have reached the Federal Reserve’s target of 2%, and some, like Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, think the central bank must act far in advance to prevent prices from rising too quickly.

The Fed has countered that employment and the real estate market must recover further—neither area is back to pre-recession levels—before upping interest rates becomes a viable option. Raising rates while the economy is still weak has the potential to stall GDP growth if businesses once again become reluctant invest money in jobs and capital. MONEY’s Taylor Tepper previously explained how Sweden’s premature interest rate hike has put the brakes on what was once Europe’s most encouraging economic comeback.

For now, at least, economists at the NABE seem to have taken the Federal Reserve’s side.

“Most panelists do not see inflation being a major concern in the coming years,” said Peter Evans, chair of the NABE Policy Survey Committee. “The majority of NABE panelists believe that inflation will be at or near 2% in 5 years.”

However, that support may not be permanent. Evans says the central bank’s approval rating inside NABE has edged downward since last year. All eyes remain on the Fed as it gradually winds down its quantitative easing program and watches the job market for signs of improvement. If inflation picks up, the bank may have to act—or risk a much less favorable approval rating from experts 12 months from now.

MONEY financial crisis

What Bank of America Did to Warrant a $17 Billion Penalty

A protester holds up a sign in front of the Bank of America as a coalition of organizations march to urge customers of big banks to switch to local credit unions in San Diego California November 2, 2011.
Mike Blake—Reuters

It's the biggest settlement ever between a corporation and the U.S. government. Here's what it reveals about how bankers inflated the housing bubble.

Bank of America has agreed to pay $16.65 billion dollars in penalties—the largest settlement ever between the U.S. government and a private corporation—for its role in the financial crisis. As Attorney General Eric Holder said Thursday morning, the payout will help “hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy.”

So what did Bank of America actually do? As part of the settlement, the Justice Department has issued a 30-page “Statement of Facts,” signed by the bank, detailing the actions Bank of America is paying for today. The document includes events that took place at Merrill Lynch and Countrywide, which Bank of America later acquired. It’s full of e-mails and statements from employees and executives, which often make for infuriating, if sometimes grimly funny, reading.

Here’s what happened. In the years leading up to the financial crisis, Bank of America and Merrill Lynch sold various securities based on home loans. If the buyers paid their loan back, investors made money, but if too many defaulted, investors lost. To make sure investors knew what they were getting into, the two companies were required to report to investors on how safe these loans actually were.

The problem? Both BoA and Merrill, the statement says, knew with increasing certainty that many of their loans were troubled or at least likely to be risky, and didn’t fully disclose this.

At Merrill, one consultant in the company’s due diligence department complained in an email:

[h]ow much time do you want me to spend looking at these [loans] if [the co-head of Merrill Lynch’s RMBS business] is going to keep them regardless of issues? . . . Makes you wonder why we have due diligence performed other than making sure the loan closed.

The Merrill email pales next to the almost-cartoonish cynicism on display in some Countrywide emails. In addition to selling mortgage-backed securities, Countrywide was on the front lines giving mortgages to home buyers. Justice Department documents suggest that the company increasingly offered loans to almost anyone who walked in the door. What mattered was whether the loan could later be sold to someone else. Wrote one exec:

My impression since arriving here, is that the company’s standard for products and Guidelines has been: ‘If we can price it [for sale], then we will offer it.’

In an email from 2007, another executive reflected that:

[W]hen credit was easily salable… [the desk responsible for approving risky loans] was a way to take advantage of the ‘salability’ and do loans outside guidelines and not let our views of risk get in the way.

Because why should a mortgage company care about risk?

But what makes Countrywide special isn’t just that they gave out a lot of bad loans, it’s that they sold those bad loans to others while keeping the good ones for themselves. In a 2005 email, the Countrywide Financial Corporation (CFC)’s chairman—not named in the statement, but it was Angelo Mozilo—wrote that he was “increasingly concerned” about a certain adjustable rate loan. He feared that the average borrower was not “sufficiently sophisticated to truly understand the consequences” of their mortgage, making them increasingly likely to default. He wrote:

…the bank will be dealing with foreclosure in potentially a deflated real estate market. This would be both a financial and reputational catastrophe.

So what did Countrywide do about it? Sell the products on the secondary market, and keep only the mortgages given to more qualified buyers. According to the settlement document, Countrywide’s public releases “did not disclose that certain Pay-Option ARM loans included as collateral were loans that Countrywide Bank had elected not to hold for its own investment portfolio because they had risk characteristics that [Countrywide Financial Corporation] management had identified as inappropriate for [Countrywide Bank].”

In another email, this time from 2006, CFC chairman Mozilo explicitly spelled out this policy to the president of Countrywide Home Loans, writing:

important data that could portend serious problems with [Pay- Option ARMs]. Since over 70% have opted to make the lower payments it appears that it is just a matter of time that we will be faced with a substantial amount of resets and therefore much higher delinquencies. We must limit [CB’s retained investment in] this product to high ficos [credit scores] otherwise we could face both financial and regulatory consequences.

What do you know? Looks like those “financial and regulatory consequences” happened anyway.

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