MONEY Economy

Is Inflation Really Dead?

201409_TBQ_1
Joe Pugliese

Pimco Chief Economist Paul McCulley explains why you don't have to worry about rising prices—and why Forrest Gump had it right.

Paul McCulley, 57, retired from Pimco in 2010 but returned as chief economist in May. Pimco runs almost $2 trillion, including Pimco Total Return, the world’s largest bond mutual fund. McCulley coined the term “shadow banks” in 2007 to explain how Wall Street could trigger a financial panic.

MONEY assistant managing editor Pat Regnier spoke to McCulley in late July; this edited interview appeared in the August 2014 issue of the magazine.

Q: Is inflation really dead?

A: Inflation, which is below 2% per year, may very well move above 2%. In fact, that is very much the Federal Reserve’s objective. So it will move up, but only from below 2% to just above 2%. But in terms of whether we will have an inflationary problem, I don’t think we have much to worry about. Back in my youth, in the days of Paul Volcker at the Fed in the early 1980s, inflation was considered the No. 1 problem. Now I’m not even sure it’s on the top 10 list, but it for darned sure ain’t No. 1.

Q: What’s holding inflation down?

A: First, we’ve had very low inflation for a long time, and there’s inertia to inflation. The best indicator of where inflation will be next year is to start from where it is this year. We won the war against inflation. It’s that simple.

Second, we still have slack in our economy, in both labor markets as well as in product markets. Companies have very little pricing power—as an aside, the Internet is a reinforcing factor because consumers can find the price of everything. And we have too many people unemployed or underemployed for workers to be running around demanding raises.

Finally, the Fed has credibility, so expectations of inflation are low. Unmoored expectations could foster higher inflation, as companies try to anticipate higher costs. Fed credibility is a bulwark against that. Unlike 30 years ago, the Fed has had demonstrable success in keeping prices stable by showing it is willing to raise short-term rates to slow growth and inflation.

Q: What about quantitative easing, in which the Fed buys bonds with money it creates? Doesn’t that create inflationary pressure?

A: I’ve been hearing that song for the last five years. And inflation has yet to show up on the dance floor. People say, “The Fed’s been printing money. It’s got to someday show up in higher inflation.” My answer, borrowing from the famous economist Forrest Gump, is that money is as money does. And it ain’t doin’ much.

Q: You mean money isn’t getting out of banks into the broader economy to drive up prices?

A: Yeah. I mean the Fed has created a lot of money, but it’s done so when the private sector is in deleveraging mode, meaning people are trying to get out of debt. There has been low demand for credit, so the inflationary effect of money creation has been very feeble.

Q: You’ve said that a low-inflation world also means low yields and low fixed-income returns. Why?

A: People my age—I’m 57—remember the days of double-digit interest rates and double-digit inflation. But as the Fed’s fought and won its multidecade war against inflation, interest rates have come down. And it has been a glorious ride for bond investors from a total-return perspective because when interest rates fall, bond prices go up, so you earn more than the stated interest rate.

But now inflation is actually below where the Fed says it should be. So there’s nowhere lower that we want to go on inflation to pull interest rates down further. Now what you see is what you get, which is low stated nominal yields. In fact, rates will drift up in the years ahead, which is actually negative for the prices of bonds.

Q: What does this mean for how I should be positioning myself as a bond investor?

A: First and foremost is to set realistic expectations that low single digits is all you’re going to get from your bond allocation.

New normal

Q: Is there anything I can do to get better yields?

A: For bond investors, what makes sense right now is to be in what Pimco Total Return Fund manager Bill Gross calls “safe spread” investments. These are shorter-duration bonds—meaning they are less sensitive to interest rate changes—that also pay out higher yields than Treasuries do. These could be corporate bonds or mortgage-related debt. They can also be global bonds.

Q: Pimco says investors should also hold some TIPS, or Treasury Inflation-Protected Securities. Why would I own an inflation-protected bond in a low-inflation world?

A: It’s a diversification bet in some respects. But also, the Fed’s objective is 2% inflation, higher than it is now. What’s more likely? That the Fed misses the mark by letting inflation fall to 1%, or by letting inflation hit 3%? I think 3% to 4% is more likely. TIPS protect you against the risk of 3% to 4% inflation. The Fed has made clear that if it’s going to make a mistake, it wants to tilt to the high side, not the low.

Q: Why wouldn’t the Fed just aim for the lowest possible inflation rate?

A: When the next recession hits, do you want a starting point of inflation in the 1% zone? No. A recession pulls down inflation, and then you are in the zero-inflation or deflation zone.

Q: And deflation is bad because … ?

A: Because then people with debt face a higher real burden of paying it off.

Q: How much time does Pimco spend guessing what the Fed will decide? Pimco Total Return lagged in 2013 when the Fed signaled an earlier-than-expected end to quantitative easing.

A: You’ve asked me a difficult question because I wasn’t here. But I was here for the entire first decade of the 2000s, and I know a lot about the firm. I can tell you the firm spends a huge amount of time and, more important, intellectual energy in macroeconomic analysis, including trying to reverse-engineer what the Fed’s game plan is. Fed anticipation is a key to what Pimco does. You don’t always get it right, but not for a lack of effort.

Q: You argued the 2008 crisis was the result of good times making investors complacent. With Fed chair Janet Yellen talking about high prices for things like biotech stocks, is complacency a danger again?

A: I don’t worry too much about irrational exuberance in things like biotech. It doesn’t involve the irrational creation of credit, as the property bubble did. Think of the Internet and tech bubble back in 1999. It created a nasty spell, but it didn’t lead to five years in purgatory for the economy either.

TIME energy

Dropping Oil Prices Threaten Moscow’s Budget

Oil refinery in Ufa, Russia, seen in April 2014.
Oil refinery in Ufa, Russia, seen in April 2014. Andrey Rudakov—Bloomberg/Getty Images

Russia has seen its economy boom with the price of oil. But if the cost of crude falls, Moscow could struggle to make ends meet

This article originally appeared on OilPrice.com

Oil and gas are at the heart of the Russian economy and are largely responsible for keeping Moscow’s government budget in balance. But the recent decline in the price of oil from the North Sea and Texas has now spread to Urals crude, giving President Vladimir Putin one more economic headache.

The price of Urals crude fell just below $100 per barrel on Aug. 18, an 18-month low. On Aug. 19, it dropped to less than $97 per barrel. These declines coincided with similar drops in the price of Brent crude from the North Sea and U.S. oil.

The reasons are fairly easy to recognize. First, the United States has been on a drilling tear, extracting oil at record levels to increase its supply at a time when demand is waning. Second, though more tentative, is that conflicts in North Africa and the Middle East are so far not interfering with oil production in these regions.

This oil production boom raises problems for Moscow. Two-thirds of Russia’s exports are oil and gas, accounting for fully half of the central government’s revenues. That means that so far this year, every dollar drop in the price of Russian oil means a cut of about $1.4 billion in revenues.

This comes as Russia’s oil industry joins its defense and finance sectors as targets of sanctions by the European Union and the United States over Moscow’s unilateral annexation of the Crimean peninsula in Ukraine and its suspected role in the fighting between Ukrainian forces and pro-Russian separatists.

Some analysts say the effects of the lower oil prices may not be lasting unless the drop in oil prices fall further in coming years. Vladimir Kolychev, the chief economist at VTB Capital, a global investment firm with headquarters in Moscow, says brief dips have less of an impact on Russia’s budget than the average cost of oil over an entire year.

“The first thing to remember is that the oil price projected by the finance ministry is … $104 average for the year – that still looks conservative,” Kolychev told Reuters. “Even if the oil price falls to $90, we’ll still have $105 average.”

As an example, Kolychev calculates that Russia’s budget would balance if oil’s average price fell to $103 per barrel.

Even if Moscow can tame its budget, it seems clear that Russia’s oil sector will feel the pain from the one-two punch of Western sanctions and lower prices. Vedomosti, a Russian financial journal, reported Aug. 14 that government-owned Rosneft, Russia’s largest oil company, has asked Moscow for more than $40 billion in debt relief because of the sanctions.

That’s a sharp reversal from just a month ago. Western sanctions were imposed on July 15, and three days later, Rosneft officials shrugged them off, saying the company would continue to pursue its plans and reap profits. In fact, a week after that statement, Rosneft CEO Igor Sechin boasted that the company’s revenues were soaring.

 

TIME Food

The Surprising Reason ‘Pink Slime’ Meat Is Back

Beef to Tomato Send July 4 Food Cost to Record
Ground beef is portioned onto trays at a supermarket meat department, July 2, 2014. Daniel Acker—Bloomberg/Getty Images

It has something to do with the weather

The attention was damning. In 2012, ABC News ran an 11-segment investigation on a low-cost meat product critics called “pink slime,” a moniker coined by a former USDA employee who argued the filler wasn’t really beef.

In an attempt to steer the public away from it, celebrity chef Jamie Oliver “recreated” it on his TV show by throwing beef scraps into a washing machine and dousing the results with ammonia. Soon, social media feeds were blanketed with photos supposedly of the product that made the meat look like soft-serve strawberry ice cream.

The backlash was intense. Though the USDA considers the product safe for human consumption, fast food giants like McDonald’s, Burger King and Taco Bell publicly renounced it and public schools around the country stopped serving it for lunch. By May 2012, Beef Products, Inc,, the South Dakota-based inventor of the product, was on the brink of collapse—closing three of its four plants and laying off 700 employees.

What a difference two years makes.

On Aug. 18, BPI reopened one of its shuttered plants. While production is nowhere near pre-freak-out levels, when the product BPI calls “lean finely textured beef” was estimated to be in 70% of the ground beef sold in the U.S., the company has been gradually regaining business. The reason is the same one that made finely textured beef successful in the first place: it’s cheap. And lower costs are particularly attractive to processors facing record high prices for ground beef. According to the U.S. Department of Labor, the average price of ground beef in June was $3.88, up 14% from last year.

For that, you can thank the sustained drought that has gripped much of the American West and Great Plains, including cattle producing regions of Kansas, Oklahoma, Nebraska and Texas.

“The main issue is the drought,” says Dan Hale, an animal science professor at Texas A&M University. “A lot of the U.S., especially parts that raise cattle, have experienced a severe drought. And those animals are no longer available for producing calves that we can in turn generate for beef trimmings.”

In the summer of 2012, more than 50% of the country was considered in moderate or extreme drought. Those conditions forced ranchers to rush cows to slaughter, which led to fewer calves in the following years and lower head of cattle overall. Meanwhile, demand for beef kept rising, pushing prices higher along with it. With supply down, prices up and memories of the “pink slime” moment fading, the market for finely textured beef is growing again.

BPI makes its product by spinning discarded beef scraps in a centrifuge to separate the lean, edible trimmings and then treating the result with ammonium hydroxide meant to kill food-borne pathogens like E. coli. Processors blend it with other cuts as a cost-saving measure and the product can account for as much as 10% of the meat in a package of ground beef.

“If you can utilize more of the animal, that helps mitigate some of the low supply numbers,” says Lee Schulz, an agricultural economics professor at Iowa State University.

BPI remains embroiled in a a $1.2 billion defamation lawsuit against ABC News over the network’s coverage of its product. The company is now producing close to 1 million lbs. a week. of lean finely textured beef—down from nearly 5.5 million lbs in 2012. But BPI is optimistic that the worst days are behind it. The newly opened Kansas plant will work with global meat processor Tyson Foods, collecting its raw beef trimmings and shipping them to a BPI facility in Nebraska that will process the scraps into profit.

“BPI continues to experience growth and remains confident this growth will continue,” Craig Letch, BPI’s director of food quality and food safety, said in a statement. “This is certainly a step in the right direction.”

TIME Infectious Disease

Ebola’s Untold Tragedy: Foreign Families Are Fleeing

The exodus of industry and families from West Africa could have severe implications

Health care is dire in Ebola-affected countries in West Africa. But one of the lesser recognized tragedies is the fact that international families—families of diplomats, missionaries or business people—have fled the country either by choice or at strong recommendation from their homeland. If they don’t return, some fear that their exodus could cripple the countries’ growing economies.

“The health situation in terms of direct risk of infection [for the average person] is really not that bad, but its effects are immense,” says Jeff Trudeau, the director of The American International School of Monrovia (AISM), which has lost well over half of its expected students for the start of the 2014 school year, and has delayed its start date to October. Right now, he’s only 50% confident they will open then.

In Liberia, the government closed public schools. Private schools are subject to fewer regulations and some remain open. However, even if AISM wanted to open on time, it simply no longer has students to fill its chairs. AISM and similar international schools in West Africa cater to kids who come from countries with specific educational standards, typically children of missionary families, diplomats, and international businesses. Last year, 16 embassies were represented at the international school in Liberia.

Closed schools are a serious problem for children’s education, but closures in countries like Liberia and Sierra Leone have implications even beyond lost learning opportunities. Trudeau says the country of Liberia, where he lives, has greatly improved in terms of economy and industry in the last few years. Two years ago, AISM only had 70 students, but as the school season neared this August, AISM was expecting to welcome 150. Trudeau says his school has also lost 20% of its teachers.

“Liberia entered a period of prosperity, and we grew last year,” says Trudeau. It’s reflective of how things improved security-wise and economically. Parents felt comfortable bringing their kids to Liberia.”

Trudeau says that if the school can’t open in October, and doesn’t open until, say, January, they will probably have fewer than 50 students. The other students will, by that time, likely have enrolled in other schools in their home countries or elsewhere.

Similar U.S. Embassy-funded schools in Sierra Leone and Guinea are also struggling. The American international school in Sierra Leone remains closed, and though the school in Guinea is open, it has only 50 students—a 50% reduction in their expected class.

In the wake of the outbreak, kids are left without parents and people are dying of otherwise preventable diseases due to lack of medical attention, Doctors Without Borders has written in TIME. So far, Ebola has infected 2,615, killing 1,427. But the aftermath won’t simply be a clean-up, but also a catch-up—to gain back the momentum they made in the last few years.

“There are three things a country needs to be successful: security, health care, and education,” says Trudeau. “Education is our direct responsibility. If we can attract top-quality people to return to Liberia, we can help them rebuild and restore. Unfortunately, without health care, you can see how quickly this is lost. No matter how well you’ve done in security and education, without health care, it doesn’t work.”

MONEY Housing Market

POLL: What’s the Best Thing About Where You Live?

There are probably lots of great things about your town. But if you had to pick just one, what would it be?

 

MONEY Federal Reserve

The Big Takeaway From Yellen’s Speech. It’s About Jobs

At Jackson Hole, Yellen is greeted by demonstrators who want the Fed to push for more jobs John Locher—AP

Fed Chairman Janet Yellen says the weak economy has room to improve. But many Americans may never get back to work.

Federal Reserve chairm Janet Yellen gave a much-anticipated speech at the Fed’s annual Jackson Hole, Wyo. symposium Friday. The transcript isn’t exactly beach reading. Fed officials, wary of spooking antsy stock and bond traders, can be almost maddeningly obscure. But anyone who’s following the stock market — or looking for a job — should pay attention.

Five years after the financial crisis, the Federal Reserve is still taking extraordinary measures to prop up the economy, including buying up bonds and holding interest rates near zero. Those measures can spur growth as long as the economy isn’t running at full capacity. But once it is, the fear is that they can spur too much inflation.

Officials at the Fed, including the presidents of the regional banks and members of the committee that sets rates, are split into two broad camps. Inflation “hawks” believe it’s time to start weaning the economy from aid. “Doves” favor continued intervention. Earlier this week the release of the minutes of a Fed meeting in late July showed the hawks pressing their point, emphasizing that the economy was improving and raising questions about whether the much-anticipated return to normal interest rates should begin.

Yellen is widely considered a dove. That means on Friday Fed watchers were looking for signs she might be trying to rebut the argument that the economy is running near full tilt. In the event, she seemed to give ammunition to both hawks and doves.

Here are the speech’s highlights:

Yellen starts off both cheering the recovery and reminding us how far we may still have to go.

The unemployment rate, at 6.2 percent in July, has declined nearly 4 percentage points from its late 2009 peak. Over the past year, the unemployment rate has fallen considerably, and at a surprisingly rapid pace. These developments are encouraging, but it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover.

That’s pretty dovish.

But in the bulk of her speech she explains reasons why it’s hard to get a read on the labor market, starting with the fact so many people have been out of work for so long.

Consider first the behavior of the labor force participation rate, which has declined substantially since the end of the recession even as the unemployment rate has fallen. As a consequence, the employment-to-population ratio has increased far less over the past several years than the unemployment rate alone would indicate, based on past experience. For policymakers, the key question is: What portion of the decline in labor force participation reflects structural shifts and what portion reflects cyclical weakness in the labor market?

That’s subtly hawkish. Here’s why: Usually, when the unemployment rate falls more people start looking for work. This time that hasn’t happened to the extent one might expect. The worry is, if there’s a big group of workers who just aren’t going to come back into the work force—because they are just too discouraged, or they don’t have the skills for the current jobs on offer, or maybe because they’ve been replaced by new technology—then maybe there isn’t as much “slack” in the economy as the low participation numbers suggest. Even with a comparatively high number of people working, employers could start to feel pressure to raise wages (creating inflationary pressures) to attract and retain the workers who’ve stayed in the labor force.

Yellen doesn’t answer whether this “structural” worry is justified, but she does flesh out the problem further.

….the rapid pace of retirements over the past few years might reflect some degree of pull-forward of future retirements in the face of a weak labor market.

Translation: Many baby boomers who lost their jobs may simply have decided to retire, rather than seek to reboot their careers.

But then Yellen goes a bit dovish again. She points out that wage growth has in fact been sluggish. That suggests at least some extra slack.

Over the past several years, wage inflation, as measured by several different indexes, has averaged about 2 percent, and there has been little evidence of any broad-based acceleration in either wages or compensation.

In other words, the Fed is still playing wait-and-see. For investors, that suggests more of the fairly bullish status quo: low rates and a slow unwinding of the “quantitative easing” bond-buying program. For people hoping for the job market to come roaring back, the Yellen’s speech sounds a somewhat discouraging note. It suggests that the economy could have shifted into a permanently slower mode, with fewer jobs. Or, at any rate, that there are many at the Fed who are willing to live with that to ensure inflation stays low.

TIME Companies

Here’s How Much Banks Have Paid Out Since the Financial Crisis

Bank of America's new settlement with the Justice Department is among the largest

The Bank of America deal announced Thursday, the government’s largest-ever settlement with a single company, means the nation’s second-biggest bank will shell out $16.65 billion over allegations that it knowingly sold toxic mortgages to investors.

The landmark agreement is a win for the government—particularly the Department of Justice, which spearheaded the probe—after drawing criticism for its sometimes weak response to the financial crisis in 2008. The sum surpasses Bank of America’s entire profits last year and is significantly higher than the $13 billion it offered during negotiations in July.

But the deal also caps a string of settlements that the Justice Department and other regulators have imposed on banks in the wake of the recession. Since the crisis, the six largest banks by assets have paid more than $123.5 billion in settlements over faulty mortgages, according to previous data from SNL Financial and incorporating the latest settlement. Authorities have forced the banks to pay the majority of that amount, and more deals are likely: Goldman Sachs and Wells Fargo are both reportedly on deck.

Here are seven of the largest government settlements:

$25 Billion
Wells Fargo, J.P. Morgan Chase, Citigroup, Bank of America, Ally Financial
February 2012

In what President Barack Obama called a “landmark” settlement, five of the nation’s largest banks agreed to a $25 billion settlement with 49 states and the feds to end an investigation into faulty foreclosure practices (Oklahoma reached a separate deal). Most funds were directed toward mortgage relief.

$16.65 Billion
Bank of America
August 2014

The settlement announced on Aug. 21 includes $7 billion for consumer relief, such as mortgage modification and forgiveness, and $9.65 billion in cash. But the deal doesn’t absolve the Charlotte-based bank of future criminal claims or claims by individuals.Bank of America has paid more than $60 billion in losses and legal settlements spawning from troubled mortgages—the most of any bank.

$13 Billion
J.P. Morgan Chase
November 2013

The largest U.S. lender agreed to what was then a record-setting settlement with the Justice Department over its role in the sale of the mortgages. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior,” Holder said at the time.

$11.6 billion
Bank of America
January 2013

The bank, which acquired the mortgage lender Countrywide Financial in 2008, agreed to a $11.6 billion settlement over claims that it and Countrywide improperly sold mortgages to Fannie Mae.

$9.5 billion
Bank of America
March 2014

Ahead of the Justice Department settlement, Bank of America agreed to pay $9.3 billion to settle additional allegations that it sold faulty mortgages to Fannie Mae and Freddie Mac.

$9.3 Billion
Thirteen Banks
February 2013

Federal regulators finalized a deal with thirteen lenders — including the three largest — for faulty processing of foreclosures. The sum allowed for borrowers who went through foreclosure to access up to $125,000.

$7 Billion
Citigroup
July 2014

Citigroup, the third-largest bank, and the Justice Department announced the deal in July amid allegations that the company misled investors about the mortgage-backed securities. The settlement, which included about $2.5 billion for consumer relief, surprised some analysts by its size, but was a harbinger of what was in store for Bank of America in the coming weeks.

TIME Economy

Banking Is for the 1%

Can’t get credit? You aren’t the only one. Why banks want to do business mainly with the rich

The rich are different, as F. Scott Fitzgerald famously wrote, and so are their banking services. While most of us struggle to keep our balances high enough to avoid a slew of extra fees for everything from writing checks to making ATM withdrawals, wealthy individuals enjoy the special extras provided by banks, which increasingly seem more like high-end concierges than financial institutions. If you are rich, your bank will happily arrange everything from Broadway tickets to spa trips.

Oh, and you’ll have an easier time getting a loan too. A recent report by the Goldman Sachs Global Markets Institute, the public-policy unit of the finance giant, found that while the rich have ample access to credit and banking services six years on from the financial crisis, low- and medium-income consumers do not. Instead, they pay more for everything from mortgages to credit cards, and generally, the majority of consumers have worse access to credit than they did before the crisis. As the Goldman report puts it, “For a near-minimum-wage worker who has maintained some access to bank credit (and it is important to note that many have not in the wake of the financial crisis), the added annual interest expenses associated with a typical level of debt would be roughly equivalent to one week’s wages.” Small and midsize businesses, meanwhile, have seen interest rates on their loans go up 1.75% relative to those for larger companies. This is a major problem because it dampens economic growth and slows job creation.

It’s Ironic (and admirable) that the report comes from Goldman Sachs, which like several other big banks–Morgan Stanley, UBS–is putting its future bets on wealth-management services catering to rich individuals rather than the masses. Banks would say this is because the cost of doing business with regular people has grown too high in the wake of Dodd-Frank regulation. It’s true that in one sense, new regulations dictating how much risk banks can take and how much capital they have to maintain make it easier to provide services to the rich. That’s one reason why, for example, the rates on jumbo mortgages–the kind the wealthy take out to buy expensive homes–have fallen relative to those of 30-year loans, which typically cater to the middle class. It also explains why access to credit cards is constrained for lower-income people compared with those higher up the economic ladder.

Regulation isn’t entirely to blame. For starters, banks are increasingly looking to wealthy individuals to make up for the profits they aren’t making by trading. Even without Dodd-Frank, it would have been difficult for banks to maintain their precrisis trading revenue in a market with the lowest volatility levels in decades. (Huge market shifts mean huge profits for banks on the right side of a trade.) The market calm is largely due to the Federal Reserve Bank’s unprecedented $4 trillion money dump, which is itself an effort to prop up an anemic recovery.

All of this leads to a self-perpetuating vicious cycle: the lack of access to banking services, loans and capital fuels America’s growing wealth divide, which is particularly stark when it comes to race. A May study by the Center for Global Policy Solutions, a Washington-based consultancy, and Duke University found that the median amount of liquid wealth (assets that can easily be turned into cash) held by African-American households was $200. For Latino households it was $340. The median for white households was $23,000. One reason for the difference is that a disproportionate number of minorities (along with women and younger workers of all races) have no access to formal retirement-savings plans. No surprise that asset management, the fastest-growing area of finance, is yet another area in which big banks focus mainly on serving the rich.

In lieu of forcing banks to lend to lower-income groups, something that’s being tried with mixed results in the U.K., what to do? Smarter housing policy would be a good place to start. The majority of Americans still keep most of their wealth in their homes. But so far, investors and rich buyers who can largely pay in cash have led the housing recovery. That’s partly why home sales are up but mortgage applications are down. Policymakers and banks need to rethink who is a “good” borrower. One 10-year study by the University of North Carolina, Chapel Hill, for example, found that poor buyers putting less than 5% down can be better-than-average credit risks if vetted by metrics aside from how much cash they have on hand. If banks won’t take the risk of lending to them, they may eventually find their own growth prospects in peril. After all, in a $17 trillion economy, catering to the 1% can take you only so far.

TIME Money

Bank of America To Pay Record $16.65 Billion Fine

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

$7 billion of it will go to consumers faced with financial hardship

Updated: 10:14 a.m.

The Justice Department announced Thursday that Bank of America will pay a record $16.65 billion fine to settle allegations that it knowingly sold toxic mortgages to investors.

The sum represents the largest settlement between the government and a private corporation in the United States’ history, coming at the end of a long controversy surrounding the bank’s role in the recent financial crisis. In issuing bad subprime loans, some observers say, the bank helped fuel a housing bubble that would ultimately burst in late 2007, devastating the national and global economy.

“We are here to announce a historic step forward in our ongoing effort to protect the American people from financial fraud – and to hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy,” Attorney General Eric Holder said at a news conference announcing the settlement.

Since the end of the financial crisis, the bank has incurred more than $60 billion in losses and legal settlements. Of the latest settlement, $7 billion will go to consumers faced with financial hardship. In turn, the bank largely exonerates itself from further federal scrutiny.

However, not all is forgotten. The New York Times reports that federal prosecutors are preparing a new case against Angelo Mozilo, the former chairman and chief executive officer of Countrywide Financial, which Bank of America acquired in mid-2008. As the country’s largest lender of mortgages, Countrywide Financial purportedly played a large role in distributing toxic loans. Mozilo has already paid the Securities and Exchange Commission a record $67.5 million settlement.

TIME energy

Germans Happily Pay More for Renewable Energy. But Would Others?

Germany solar power
Germany has become a world leader in solar power Photo by Sean Gallup/Getty Images

Germany has embraced subsidies for renewable energy, but not every country is willing to bear the economic burden

This article originally appeared on OilPrice

While Germany is breaking world records for the amount of sustainable energy it uses every year, German energy customers are breaking European records for the amount they pay in monthly bills. Surprisingly, they don’t seem to mind.

In the first half of 2014, Germany drew 28 percent of its power generation from renewable energy sources. Wind and solar capacity were hugely boosted, now combining to generate 45 terawatt hours (TWh), or 17 percent of national demand, with another 11 percent coming from biomass and hydropower plants.

This proves that Germany’s controversial Energiewendepolicy is on target to meet highly ambitious goals by 2050 — as much as a 95 percent reduction in greenhouse gases, 60 percent of power generation from renewables, and a 50 percent increase in energy efficiency over 2010.

All well and good, but the economics of renewable energy don’t usually allow for such a smooth transition. As part of the Energiewende, the costs of associated subsidies have been passed on to German customers, who pay the highest power bills in Europe.

Fifty-two percent of the power bill for retail businesses in July 2014 is now made up of taxes and fees. The average bill for a household has reached 85 euros a month, 18 euros of which is the renewable energy levy. The reaction to such fees should have been furious.

It hasn’t been. A 2013 survey revealed that 84 percent of Germans would be happy to pay even more if the country could find a way to go 100 percent renewable.

So how can this model of high targets, high fees and high public support find traction in other countries? The answer is, with difficulty.

Germany’s national engagement toward renewable energy came after a period of prolonged public education, opening up to locally owned wind and solar infrastructure, and investment support. To be sure, other major countries are finding success in the renewable sphere, but not in quite the same way.

While renewable installations in the U.S. may account for 24 percent of the world’s total, they only accounted for 13 percent of the country’s power generation. This compares to Germany, which has more than 12 percent of global installed renewable capacity, but takes 28 percent of its power from it. Spain, China and Brazil trail behind, with 7.8 percent, 7.5 percent and 5 percent of global capacity respectively.

Brazil’s model has similarities to Germany’s, with the government carrying out public auctions for contracts and putting out favorable investment terms for foreign companies looking to set up renewable energy projects. Spain was doing well as wind became its largest source of power generation in April 2013, but economic woes have seen Madrid begin to double back on its commitments.

Political gridlock in Washington, D.C. means renewable energy in the U.S. has been boosted by state and private efforts. Arizona now has the biggest solar power plant in the world, while California has the largest geothermal plant in the country.

In Mexico, the country’s solar potential and the improving cost-effectiveness of PV technology has seen projects like the 30MW Aura Solar I crop up. But the national electricity regulator, CFE, has been slammed for taking up to six months to connect residential PV installations to the grid.

Perhaps the most ambitious plans come from China, which is busy working to transform its reputation from an energy pariah to a respected renewable leader. However, these are being mandated at a central level, with little to no attention being paid to the opinions of the Chinese public.

And there’s the rub. The German public is a willing participant in the government’s efforts, happy to face higher bills in exchange for a cleaner and more energy-efficient future, paying an average of 90 euros a month in 2013. It is true that Germans’ power bills are the highest in Europe, but the trade-off is known, increases are announced and negotiated months in advance, and surprises are few.

In the UK, which was proud of having among the lowest electricity rates in the EU, the government has been hard-pressed to explain to customers just why Scottish Power, Southern Electric, and British Gas have all raised prices, while the Labour Party has promised a 20-month price freeze if it wins 2015 elections.

The UK has left its coal and nuclear infrastructure to stagnate, reversed Blair-era commitments to renewable sources and opened vast swathes of the country to fracking exploration.

Ask them, and Germans might tell you that a pricey electricity bill might actually save everyone from a few headaches down the line.

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