Paddy Hirsch is a Senior Editor at Marketplace. He is the author of the book Man vs Markets, Economics Explained, Pure and Simple, and he is the creator and host of Marketplace Whiteboard, a video explainer of financial and economic terms.

Hirsch joined Marketplace in 2007, just as the credit crunch that preceded the 2008 financial crisis began to take hold.  As editor of the New York Bureau and the entrepreneurship desk, he spearheaded Marketplace’s financial markets coverage throughout the crisis and as the economy fell into recession. He was awarded a Knight Fellowship at Stanford University in 2010, and he returned to Marketplace in July of 2011, when he was appointed Senior Producer of Marketplace Money. He published his first book, Man vs Markets, in August 2012.

Hirsch got his start in journalism with an internship at the BBC in Glasgow, Scotland. He became a field producer for CNBC in Hong Kong and later was a consultant to the Open Broadcast Network in Bosnia. He has been an editor for Direct Capital Markets, Institutional Investor Newsletters, Standard & Poor’s, and the Vietnam Economic Times. Prior to becoming a journalist, he served as an officer in the Royal Marines.

Hirsch attended Campbell College in Belfast and received a bachelor’s degree in French and International Studies from the University of Warwick. He is a Knight Fellow and was a Webby honoree in 2009.

 

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Features by Paddy Hirsch

Why the Qualified Mortgage could be our best defense against another financial collapse

God bless the Volcker Rule. While it's been out there, taking withering fire from Wall Street's big guns, the hero of the hour has managed to evade the enemy and escape almost unscathed. I'm talking, of course, about the Qualified Mortgage. It's taken some flak from lobbyists and it's the subject of a hearing in the House Financial Services Committee, but otherwise the qualified mortgage is in good shape and ready to defend America.

Q. This is our hero? If so, what exactly is the Qualified Mortgage?

 It's a mortgage that will meet certain standards, designed to protect borrowers.

Q. What kind of standards?

For a mortgage to be qualified, it can't include certain features:

  • It can't extend more than 30 years.
  • If it's larger than $100,000, it can't carry more than 3 percent in upfront points and fees.
  • It can't have interest-only payments or payments that are less than the full amount of interest so that the home loan debt grows each month.
  • It can't be a "balloon loan", where the borrower has to make a big payment when the loan matures.
  • It can't drive a borrower's total debt load above 43 percent of his or her monthly income. (Unless it's backed by Fannie Mae, Freddie Mac, or a federal housing agency like FHA or the VA.)

Q. Sounds good for borrowers. How do lenders feel about it?

Quite positive. Qualified mortgages come with legal protection for lenders, too. Depending on which type of qualified mortgage they make (there are two types), they're insulated frm borrowers filing lawsuits.

Q. Does this mean lenders will be able to get away with anything?

No. If lenders break any consumer law related to the handling of the mortgage etc, they are still liable.

Q. Why does this make the qualified mortgage such a hero?

Because many economists and analysts reckon that the financial crisis was in large part caused by lenders making "toxic" loans to consumers: loans that were almost guaranteed to fail. The qualified mortgage goes a long way from preventing lenders extending loans to anyone with a pulse. It creates a regulatory barrier to indiscriminate lending and reckless borrowing.

Q. But not all the way? 

No. Lenders can - and do - still make interest-only loans, and loans that drive the borrowers debt to income ratio above 43 percent. But they won't have robust legal protection from borrowers if things go wrong.

Q. Is it going to be harder to get a loan now?

For someone with poor credit, almost certainly. Although the CFPB says that 92 percent of the mortgages in the market today are qualified mortgage compliant. So we're on the right track. The qualified mortgage is all about keeping us there.

Why Janet Yellen should worry about 6.7% unemployment

Unemployment is down to 6.7 percent.

Ordinarily, that should be cause for celebration: The number of people out of work is falling, and we're getting close to the magic number of 6.5.

A 6.5 percent unemployment rate has become the signal for the Federal Reserve to start unwinding some of its extraordinary support for the economy.

But the people over at the Fed aren't popping corks just yet. Remember the Fed's dual mandate: to ensure maximum employment and stable prices (control of interest rates is No. 3). And while  the unemployment number did indeed fall in December, very few jobs were created. As we've been hearing all day, this means that large numbers of people are dropping off the unemployment rolls. They've been out of work for so long, or there's so little hoping of getting work, that they've given up looking.

And that's a whole new headache for Janet Yellen. The unemployment rate was 7 percent in November. Having dropped to 6.7 percent in December, it's not inconceivable that the rate could fall to 6.5 percent in January.

U6

 

Per Ben Bernanke's pledge, that should trigger the Fed to begin dismantling all the extraordinary support the economy has had up until now. But the fact that we're not creating many jobs should give Yellen pause. This month's number implies we're creating a large and growing body of long-term unemployed, and the "jobless" number is providing a smokescreen for what amounts to a timebomb at the heart of the American economy.

Yellen needs to be careful: Raising interest rates and withdrawing support for the economy at this point could be the match that lights the fuse.

Explainer: the charitable tax deduction

If you give $1,000 to charity, that reduces your taxable income by $1,000, because there’s less for the government to tax.
Posted In: whiteboard, Charity

What you should do if you’re a Target shopper

News of the theft of tens of millions of credit and debit card numbers and associated data is causing confusion amongst customers and prompting lots of questions:

Q. How many cards have been affected?

Roughly 40 million.

Q. I shop at Target. Has my data been stolen?

It depends when you shopped there. The breach appears to have occurred over the Thanksgiving weekend. If you shopped at Target between Nov. 27 and Dec. 15, yes, your data may have been stolen.

Q. OK, now I’m worried. I bought a pack of onesies for my cousin’s new baby. What do I do now?

1. Don’t panic. 

2. Check your credit card statement. Most card companies will call if they see unusual spending on your account. But because it’s the holidays, they may miss something. So check. Either call your card company and ask them to run down any expenditures since Nov. 26, or go online and check there.

3. Pay attention to the details. Thieves often run a test on a stolen card, charging a small amount to see if the card works and if you notice.

4. Call your card company.Let them know you shopped at Target during the time in question. Ask them what their policy is. My card company has a recorded message telling me right up front that they’re aware of the data breach, that I’m not liable for fraudulent charges and that they’re tracking my card spending.

5. ...But don’t rely on your card company. Keep checking your account. If you don’t have online access, get it. That way you can check your account every couple of days or weeks. Make it a routine.

Q. OMG! There’s a charge for $6,000 worth of gasoline bought in Alaska! I live in Chicago! What do I do now?

1. Don’t panic!

2. Call your card company. Inform them about the charge, and ask for your account to be reviewed, and the charge reversed.

3. Call a credit bureau. You don’t have to call all three. Just get one of them to put a fraud alert on your account.

Q. Does a fraud alert mean my card is canceled?

No. A fraud alert makes it harder to extend credit to you. Anyone wishing to take out a loan under your name will have to prove they are you. The alert lasts 90 days, and the credit agency you notify will call the other agencies.

Q. I’m still kind of wigged out about this. Should I just say 'to hell with it!', and cancel my card?

Before you do this, speak with your credit card company. They will talk you through your situation. If after that you’re still feeling squirrely, then go ahead and cancel your card. Your card company will send you a new card in a few days and then you can spend the holidays changing your account details with everyone you do business with.

Does the taper mean it's going to be more expensive to borrow?

In a word, no.

At least, not yet. And even then, not by much.

The Federal Reserve announced today that it's tapering off its quantitative easing program: Buying just $75 billion of bonds, instead of $85 billion, starting in January. But it also committed to holding interest rates down, saying it will keep the "exceptionally low" target range for the federal funds rate to between 0 and 0.25 percent. What's more, the Fed said it expects to keep rates that low rate:

"[W]ell past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal."

This means that the interest rate that banks charge to lend to each other will stay low.

But what does it mean for you and I?

It means that the interest rate that lenders charge people like us to borrow money to buy cars, houses and educations will not move by very much for quite some time. Even if unemployment drops below 6.5 percent, which some observers reckon could happen next year, the Fed will keep those rates low. 

Wanna buy a bitcoin? Here's how...

Fidelity Investments contradicted a report today that said the company was offering customers the chance to put bitcoin into their IRAs.

The manager of Bitcoin Investment Trust said in an interview that Fidelity customers would now be able to invest their retirement money in his fund.

I'm a Fidelity customer, so I called to ask about this, and was told the company does not have any such arrangement.

A few hours later Fidelity announced: "On an individual basis, we allowed an investor to invest in that Bitcoin Investment Trust. We are no longer allowing that.”

Never mind. Still interested in buying a little bitcoin?

Q. You betcha! How can I get some of that action?

A. Well, before we get to that, do you understand what bitcoin is?

Q. Ummm….? [silence]

A. Fortunately, there are a lot of good explainers of what bitcoin is and how it works out there.

Try this video:

(Bitcoin Explained from Duncan Elms on Vimeo.)

This written explainer:

"A Bitcoin is a unit of currency, launched in 2009, that only exists online and isn't controlled by any kind of central authority, like the US Federal Reserve. You can send Bitcoins to anyone who has a web connection (or hand someone your hard drive containing the currency.)"

This infographic:

Bitcoin infographic  
by bpalacio@mac.com.
Explore more infographics like this one on the web's largest information design community - Visually.
 

Q. OK, so I'm ready dip my toe in the waters. What's the first step to buy some?

Well, there are a number of ways:

1. You can sell some stuff and ask for bitcoin in return, instead of dollars.

2. You can buy bitcoin "over the counter," which means buying them with cash from another party in a face-to-face transaction, in the same way that you might buy baseball cards. Or diamonds.

3. You can sign up with a company, like LocalBitcoins, BitBrothers or CrypXchangewhich will help you buy bitcoin in a direct over-the-counter transaction. They may charge a facilitation fee.

4. You can use your phone to buy bitcoin. Definitely a fee.

5. You can use a gift card. Most definitely a fee.

6. You can sign up for Second Life and use Second Life Lindens (that’s the virtual world currency) to buy bitcoin.

7. You can buy Bitcoin through an exchange like Coinbase.com, Blockchain.info and MtGox.com. If you do it this way, you have to pay the exchange a fee, just as you pay a stock exchange when you trade securities.

8. You can make Bitcoin part of your retirement account by investing in SecondMarket’s Bitcoin Investment Trust. But there’s a $25,000 investment minimum, and you have to pay a bunch of fees – as much as 5 percent – just as you do in any fund.

Who is Stanley Fischer?

Stanley Fischer is the man tipped as the leading candidate to succeed Janet Yellen at Vice Chairman of the Federal Reserve when she ascends to replace Ben Bernanke.

Q. Great, that's why I'm hearing his name today. But who is he, really?

A. Mr. Fischer is the former governor of the Bank of Israel. He’s been a deputy head of the IMF, a vice chairman at Citigroup, chief economist at the World Bank, a professor of economics at MIT, and an advisor to many central bankers, including Bernanke. He’s 70 years old.

Q. Okay, former Israeli central banker. Does that mean he's Israeli, and does that matter?

A. Indeed he is. He was made an Israeli citizen when Prime Minister Ariel Sharon asked him to head Israel’s central bank in 2005, but he has retained his American citizenship. And besides, nationality doesn’t seem to matter much when it comes to heading central banks these days: The governor of the Bank of England, for example, is Canadian.

Q. So, Fischer's stepping into the fiscal fire. What's his leanings: Is he a devotee of Keynes or Hayek?

A. Neither. A profile in the Washington Post says he identifies with both sides, and is an architect of so-called “New Keynsian” economics.

Q. So what does that mean he thinks of the taper and quantitative easing?

A. It’s hard to say. Fischer has stated that he thinks the financial crisis proves that Keynsian economics is still very important. That includes the aggressive use of monetary policy, which is what all this bond-buying is about. But during the financial crisis, he moved aggressively to raise interest rates in Israel, so it’s possible that he might, were he appointed to the Fed, argue for an aggressive tapering of the program.

Why all eyes are on HENRY this holiday season

HENRY is back. And he's worrying retail analysts who keep an eye on consumer spending.

Who is Henry?

HENRY is a classification of consumer. It stands for High Earners, Not Rich Yet. It covers people who earn between $100,000 and $250,000 a year. Not too shabby, but not Fortune 500 CEO, either.

Why are HENRYs such a big deal?

Because they support a key part of the retail market. They don’t patronize super high-end boutiques or stores like Barneys, and they’re not such a problem for stores like Target or Wal-Mart, or even Macy’s. But HENRYs do a lot of shopping at mall stores like Bloomingdales, Nordstrom and Tiffany, and they’re the mainstay of the "modest luxury" market, which includes brands like Coach, Ralph Lauren and Cole Haan.

OK, so they’re important. What are they doing that’s bothering investors?

It’s what they’re not doing: shopping. Mall traffic is way down over the last month; big chains like Saks and Nordstrom have been marking products down by 40 percent since before Thanksgiving, and analysts are worried that HENRYs will stay frugal through the key holiday shopping season.

But these people make a lot of money. What’s stopping them from shopping?

In a word: uncertainty. Consumers in this class of earners tend to own their homes and are invested in the stock market, so they’ve seen the value of their assets rise as stocks have gained and the real estate market has come back. But the "wealth effect" of that recovery hasn’t translated into increased confidence in the economy. These people got poorer on paper during the downturn, and now that their net worth is about back to where it was before the Great Recession, they’re going to do everything in their power to make sure that doesn’t happen to them again. They’re not confident that the economy is going to stay on the upswing, so they’re being extra conservative, saving more and spending less, and steering clear of luxury unless it’s being offered at a steep discount.

What does that mean for retailers?

It means this is going to be a tough holiday season for them. They’re going to have to work hard to get the attention of HENRYs, via email and social media, and snail mail, of course. HENRYs can expect a barrage of advertising, touting this discount and that price cut, right through the holidays. We’ve already heard that companies have in general stocked up on too much inventory during the last quarter, so getting rid of the stuff they have on hand will be a priority. That means they’ll be selling it cheap, and as quick as possible.

Sounds like a recipe for some great holiday and New Year sales.

Count on it.

Sysco's trust issues

Q. What? Sisqo’s having trouble in his private life?

A. No, I'm not referring to rap musicians who have no faith in others; I'm talking about the merger of two food distribution companies, Sysco and US Foods.

They're the two biggest firms in their industry, which means their merger is likely going to encounter the antitrust police.

Q. The antitrust police? What is this, "Minority Report?"

A. OK, they’re not really police. A bunch of regulators from the Federal Trade Commission are likely to examine this merger, to make sure that a Sysco/US Foods behemoth isn’t going to take over the whole food distribution business and cut everyone else out of the picture.

Q. That sounds fair. Is this standard operating procedure in a modern capitalist society?

A. Actually, antitrust law, also known as anti-monopoly law, has been around in some form since Roman times at least, and it’s used to make sure that the markets are places where both buyers and sellers can do business fairly. The idea is to make sure that smaller businesses won’t get unfairly squeezed out by a monopoly that’s cornered the market, and consumers won’t get gouged by a seller because there’s nowhere else to buy.

Q. Is this like my annual physical -- a quick process? Or more like open-heart surgery?

A. It depends. Sometimes the process is very quick, but the Sysco/US Foods merger could be under antitrust scrutiny for a while. The American Airlines/U.S. Airways merger, which formally happened today, spent several months under the regulatory microscope before it was cleared for takeoff, and Sysco’s CEO said he fully expects the FTC to scrutinize the deal.

Q. What are the chances of the deal going through?

A. Pretty good. The new company would have a 30-35 percent market share, but there are as many as 15,000 food distribution companies in the U.S., so the pie is still pretty big. Reuters spoke with several antitrust experts who said the FTC may insist Sysco sell some parts of its business before it gives the deal the green light.  

Why Quiznos could go from toasty to just plain toast

Quiznos isn't making enough money to afford the interest payments on its debt.

QIP Holdings, as the company that runs Quiznos is formally known, bought some breathing room today, by coming to an agreement with its lenders, to whom it owes roughly $600 million. Those talks were sparked by Quiznos failure to make an interest payment on one of its loans, an event that could have led to those lenders calling its loan and taking possession of the business.

And unless Quiznos can find a way to keep current on its debt, the company could go under.

If that happens it won't be the first time. The company nearly went bust in 2012, and was only saved by the involvement of a private equity company and its lenders' willingness to take a haircut on their investment. Specifically, the lenders forgave $305 million of the company's debt, reducing it to $570 million from $875 million. And they only agreed on the condition that the company go through a turnaround process, with a new executive in charge. 

But the turnaround hasn't worked. The Wall Street Journal reports that the company has whiffed on a number of performance targets, also known as covenants. The company's lenders could put the company into bankruptcy, if they wanted to, but bankruptcy is a messy business, involving all sorts of lawyers and judges and court reporters, all of which can get very expensive.

So Quiznos gets to soldier on, but with the odds stacked against it. It's competitors' sandwiches are often cheaper; it's franchises fail at a high rate; and that hudge debt burden has to be serviced every month. That's a lot of money going out the door before anything else can be paid for.

Some of the investors in this deal must be thinking Quiznos is toast.

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