When the federal government bailed out the banks a year ago it was with the expectation that taxpayer money would be recycled back into the economy in the form of more loans. We all know how that didn’t play out according to Washington’s plans.  But now that the recession has been unofficially deemed over and the economy seems to have stepped back at least a few feet from the financial-crisis cliff, are lenders following the script (finally) and opening the spigot? More

You'd think the subprime bust would mean no more mortgages for borrowers with little skin in the game. Well, it doesn't.

While most lenders have tightened standards for down payments — usually requiring at least 10% down and 20% for the best rates — the Federal Housing Administration has continued to offer loans to borrowers putting down as little as 3.5%. On Thursday the House Financial Services Committee is considering whether to boost the minimum down payment requirement to 5%.

I think the move is overdue, especially since FHA mortgage defaults are at a record high and the agency's reserve fund is at a record low. More

Now that the home buyer's tax credits are back up and running through May, the next bit of housing-related economic stimulus is focused on homeowners who are willing to spend money to make their homes more energy efficient. More

Personal finance from around the Web Tuesday:

• The Federal Reserve is proposing new rules to protect gift card consumers from exorbitant fees and and expiration dates.  While the exact date these new rules will go into effect remains unknown, it most likely won't be until next summer — after the upcoming gift-card season. [Federal Reserve, Bucks]

• Online microlending has been all the rave in recent years. One of the most popular is Kiva, which allows you to make loans to low-income entrepreneurs in developing countries. But it is no longer practical for it to be true "person-to-person lending." [My Money Blog]

• With the passing of the health care reform bill comes the passing of a 5.4 % surtax aimed at high-income tax returns. The Tax Foundation has created a map that shows the top tax rates in different states under the new plan. [Tax Policy Blog]

• The number of people taking the standardized Law School Admission Test has skyrocketed. In late September, 60,000  people took the test — a worrisome number, since law jobs are shrinking. [Most Strongly Supported]

• Wondering what has happened to the transportation stimulus package? The California Transportation Department reports it has been allocated $2 billion into federal highway funds. But only 2.5 % of that money has been spent yet.  California is not alone, but sometimes slow and steady wins the race. [Freakonomics]

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A looming shift in Federal Reserve policy could send the 30-year fixed mortgage to 6% or higher, up from Monday’s rock-bottom rate of 5.02%. For all the hullaballoo about the stimulative impact of last week’s decision to extend the $8,000 First-Time Home Buyer Tax Credit and create a $6,500 credit for current homeowners, a sharp rise in the bellwether mortgage rate could muck up a housing recovery. More

More or less buried in the massive debate over what our health care system should look like is a provision to create a national long-term care insurance program. The Community Living Assistance Services and Supports (CLASS) Act would allow people to pay an average $65 a month and, after five years, be eligible for between $50 to $100 a day in benefits. Insurers oppose the CLASS Act — clearly, it would cut into their sales of long-term care insurance, which haven’t been all that great to begin with. Other criticisms of the act: The government doesn’t need to be expanding programs even further than it already is, and low benefits would give people a false sense of security.

While $100 is better than nothing, I can tell you from experience that it doesn’t cover very much. More

The lobbyists for the National Association of Realtors sure earned their fee this go-round. Not only did Congress agree to extend through April, 2010 the existing $8,000 tax credit for first-time home buyers scheduled to expire at the end of this month, but now we’re going to all pay for existing homeowners to have a similar tax break.  In the new bill President Obama was slated to sign today — the housing credit legislation was  tacked onto legislation extending unemployment benefits — existing homeowners will be able to claim a $6,500 tax credit if they buy a new home they intend to use as their primary residence.

Congress also decided to swing the door wide open for more Americans to get in on both tax breaks More

Last month, Sen. Jon Kyl (R-Ariz.) introduced a health-reform-bill amendment that would have prevented the federal government from requiring insurers to offer any particular medical benefits. "I don’t need maternity care," he said. "And so requiring that to be in my insurance policy is something that I don’t need and will make the policy more expensive."

Michigan Democrat Debbie Stabenow zinged back: "I think your Mom probably did."

The left side of the blogsphere loved this. Democrats used it as fundraising opportunity.

Politicians are probably best advised to stick to a rigorous pro-motherhood line. But Kyl's point was really just an extension of a view about health insurance that a lot of Americans hold. More

Bruce Bartlett is a man of strong opinions. A supply-side economist even before the Reagan Revolution, he served in two Republican administrations and then as a policy wonk and gadfly at conservative think tanks. But in recent years he's gotten fed up with Republicans who've turned supply-side economics into a crude and sometimes cynical faith in tax cuts as the solution to whatever ails us. Meanwhile, many conservatives have gotten fed up with him: his highly critical book on George W. Bush got him fired from the conservative think tank he was working at a couple of years ago.

I spoke with him recently about his new book The New American Economy, which among other things suggests that we could learn a thing or two from economist John Maynard Keynes — yep, the guy who thought government spending was the only way to pull economies out of deep depressions. The interview, which appears in the November issue of Money, has just been posted online.

We were only able to fit a portion of our wide-ranging discussion into the tight confines of the print magazine, so I thought I'd share some more of it here on the blog. More

When the Obama Administration announced the Making Home Affordable program in February, it estimated that the refinancing part of the program, known as HARP, could help as many as four million to five million homeowners with little or no equity (and even up to 5% underwater) refinance into less costly loans. So far it hasn’t exactly played out to expectations. Through July just 60,000 or so homeowners have landed a refi through HARP.

That makes it unlikely that HARP will come anywhere close to delivering on the administration’s goal by the time the program’s current authorization runs out in June 2010. (Its sister program, Home Affordable Modification Program, or HAMP, is authorized through 2012.)

While Treasury has the power to extend HARP past next year's deadline — which won't really help unless Treasury can also arm-twist lenders into doing these deals — a handful of other crisis-induced rule changes will need  Congressional action to be extended beyond this year. More

Money market funds have long been a refuge for investors seeking safety and liquidity. But ever since the market meltdown, money funds have been under siege. Last September Reserve Primary Fund, which had invested in suddenly worthless Lehman Brothers commercial paper, "broke the buck"—that is,  allowed its net asset value to fall below a $1 per share. That led to panic, as frightened investors began pulling their savings out of these funds. In the end, the federal government stepped in to offer a temporary guarantee for the $3.6 trillion in money fund assets.

The panic subsided—and the federal guarantee expires in two weeks—but the regulatory scrutiny is still underway. The Security and Exchange Commission has proposed money fund rule changes that include higher credit quality and shorter maturities. But the most controversial notion, which is not in the proposed rules but was offered up for public comment, is a so-called  floating NAV, which would mean that a fund's net asset value per share would be free to move up and down, instead of being pegged at $1 per share. More

Here's my suggestion for solving the nation's healthcare crisis — the one that I would propose at one of those town-meeting shoutfests if I could get in a word edgewise: Make sure that members of Congress are living with the same health benefits that the rest of us are.

As reported recently by the Los Angeles Times, you see, senators and members of the House of Representatives enjoy a health insurance program that insulates them from the costs, problems and worries suffered by millions of uninsured and underinsured Americans. Like other government workers, they have their choice of ten different health plans, while 85% of companies offering a health plan to their employees offer a single option. They pay a modest $300 a month for family coverage, according to the Times. And — in stark contrast to the difficulties faced by cancer survivors or diabetes sufferers who try to get health insurance on the individual market — they don't have to worry that pre-existing medical conditions will prevent them from getting coverage or sorely limit their coverage if they do manage to get a policy.

With such cushy benefits, it's easy for members of Congress to get all passionate about the theoretical issues surrounding health care funding and the social safety net, while ignoring the practical realities what it's like to go broke paying for catastrophic or chronic medical expenses. So let's help them focus their minds and best intentions on the problem at hand.

What we'll do is randomly select senators and representatives to live with a particular quality of health care in the same proportion as the rest of Americans. Forty-six million Americans — 18% of the non-elderly population (in other words, too young to qualify for Medicare) — don't have health insurance at any one time, according to the U.S. Census. So 18% of members of Congress — 18 senators and 78 representatives — will start walking around uninsured. Very quickly, one supposes, they'll be a lot more nervous crossing the street and a lot more worried when a family member starts running a temperature during flu season.

But that wouldn't give Congress a complete taste of the anxiety that Americans feel about their health care — the knowledge that even if you do have affordable health insurance, you could lose it at any moment. All it takes is a job loss or an employer who decides it's just too expensive to provide insurance as a benefit. So, because by one estimate one-third of the non-elderly went without health insurance over 2007 and 2008, we'll make sure that 33 senators and 145 representatives randomly lose their health coverage for a time over each two-year session of Congress. That averages out to roughly a year without health insurance for all those lucky congressmen and congresswomen and their families. Again, let's hope for their sake that they don't choose that year to come down with an expensive medical condition.

Finally, let's make sure that an appropriate number of congressmen feel the financial pain felt by those for whom having health insurance doesn't protect them from financial pain. Seventeen percent of employees with coverage through their employer (see page 7) ended up paying more than 10% of their after-tax income on health expenses such as premiums, co-pays and co-insurance. A whopping 53% of people purchasing non-group private insurance paid more than 10% of their income on health care. So, with the number of people getting health insurance through their employer declining on a regular basis, let's split the difference and dock 10% of the after-tax pay of 35% of congressmen — 35 senators and 152 representatives — and call it a day.

What do we end up with? Two-thirds of elected officials in the legislative branch who either have no health insurance or have reason to be unhappy about it. As the Samuel Johnson quote goes, "(W)hen a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." If congressmen knew that their own physical and financial health were at stake, I'm sure they'd solve the health care problem faster than you can say, "Tea party."

Maybe it’s a sign that recession really is easing: Once again we’re hearing arguments that you can save a lot less for retirement than the financial services industry would have you believe.

The last time this argument got much traction was in early 2007, when the housing market was still bubbling. Now John Rekenthaler, the well-respected vice president of research at Morningstar, has re-introduced this notion in a recent blog post entitled “The 80% Myth.” Writes Rekenthaler, “The financial services industry misleads the everyday investor by selling the notion that an 80% replacement rate of pre-retirement income is required for a successful retirement.”
As proof, Rekenthaler cites own parents, who retired at age 50 and have lived contentedly for nearly 30 years on just 50% of their pre-retirement income. They don’t eat out often or drink Starbucks, but they have traveled the world over. If his parents had aimed for 80% of pre-retirement income as the prerequisite for retiring, he notes, they might have had to work until age 70.

A modest income may work well for his parents. And it’s certainly true that the average retiree makes do with not that much. The median income for households headed by retirees is just $25,000 a year, according the Federal Reserve’s 2007 Survey of Consumer Finances (the most recent data available). That’s just about half the median income for all families, which is $47,000.

But does that mean aiming for an 80% income replacement ratio is really excessive? Consider that the past three decades have been extremely kind to retirees (2008 aside), who have benefited from strong GDP growth, low inflation, lower taxes, and bull markets in both equities and bonds. That’s undoubtedly helped many of them get by, along with a big boost from Social Security — the largest single source of income for people 65 and older, accounting for 40%.

Future retirees, however, face a very different economy than earlier generations. The problems with funding Social Security are serious. Moreover, given the trillions of dollars in debt being racked up by the U.S. government's  bailout efforts, many economists say higher tax rates are inevitable. Meanwhile, forecasts for economic growth and investment returns are lower.
And then there’s the problem of soaring healthcare costs. A recent study by the Employee Benefit Research Institute found that a typical 65-year-old male retiring in 2009 would need savings of anywhere from $68,000 to $173,000 to cover health insurance premiums and out-of-pocket expenses in order to have a 50-50 chance of affording those bills. To have a 90% chance, you would need to set aside $134,000 to $378,000. Women, who tend to live longer, need even more. The current healthcare reform efforts in Washington may slow the rate of increases, but that remains to be seen.

In the end, 50% or 80% of pre-retirement income targets are only rough rules of thumb. The only way to be sure you’re setting aside enough money for your needs is to draw up a realistic retirement budget — something that only becomes possible when you’re actually closing in retirement. But if you add up the economic challenges ahead, it seems pretty clear that it’s better to set your savings target high rather than low. The consequences (and the likelihood) of saving too much are small, while the consequences of saving too little could be disastrous. And by saving a lot now, we can all learn to live on less, which looks to be good practice for the years ahead.

When the Obama administration proposed a new government agency solely devoted to protecting consumers who buy financial products, government officials knew they’d be facing opposition from Wall Street, banks and the financial services industry. But who knew that some of their most vocal opponents would come from the government itself?

That opposition became crystal clear when Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corporation Chief Sheila Bair and several other regulators showed up on Capitol Hill last Friday. Testifying before the House Financial Services Committee, they seemed more interested in protecting the powers of their own agencies than in making changes to the financial system.

First up at Friday's hearings, Treasury Secretary Tim Geithner reiterated the need for a Consumer Financial Protection Agency, saying the economic crisis shows that the current financial system “failed in its most basic responsibility” to supply credit and protect consumers. "I think it's very hard to look at that system and say that it did anything close to an adequate job of what it was designed to do," Geithner told the committee. Hard to disagree with that assessment, considering the record number of home foreclosures, bad mortgage loans and rising credit card defaults in the past year.

The proposed CFPA would take over consumer protection powers currently spread throughout several government agencies, including the Fed, the FDIC, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. That doesn't sit too well with the chiefs in charge of those organizations. Following Geithner’s testimony, Bernanke said consumer protection responsibilities should stay with the central bank, arguing that the Fed’s bank supervisory powers go hand in hand with consumer protection. John Bowman, acting director of the OTS, and John Dugan, head of the OCC, both said enforcement of consumer protection should remain within their agencies. While FDIC chair Sheila Bair endorsed the creation of the CFPA and said that the CFPA should be able to write new enforcement rules, Bair said that federal banking regulators such as the FDIC should retain authority to supervise insured institutions.

Geithner's response: "With great respect to the Chairman and other supervisors who are reluctant to do this, they are doing what they should, which is defend the traditional prerogatives of their agencies. I think frankly all arguments should be viewed through that prism."

It’s been a tough going for the CFPA this summer. House Financial Services Committee Chairman Barney Frank (D-Mass.) delayed plans to mark up the bill  to create the new agency until after Congress returns from its summer recess in September. Frank said he believes the CFPA bill has enough support to win approval but agreed to slow down to give the opposition a chance to weigh in. Meanwhile, Republicans have proposed an alternative that would strip the Fed of its regulatory role and abolish the OCC and the OTS. In their place would be a single regulator for depository institutions, which would include an office focused on consumer protections. Unlike the administration's plan, the GOP-envisioned regulator would have no authority over nonbank institutions, such as mortgage brokers.

All this has moved the CFPA off the fast-track that Barney Frank talked about just a few weeks ago and gives industry lobbyists more time to work on defeating the proposal for a consumer financial watchdog.

This is a critical time for the Obama Administration’s proposed Consumer Financial Protection Agency, a centerpiece of its financial market reforms.

The CFPA, officially proposed in June, is under fierce attack by the financial services industry, the U.S. Chamber of Commerce and a growing number of business groups. Those forces scored a few points Tuesday when House Financial Services Committee chairman Barney Frank announced that his committee is delaying consideration of the CFPA until September. Frank originally aimed to have the committee approve the legislation by early August.

Though some lobbyists proclaim to be backing the administration’s plans for financial reform, they’re adamantly against an agency that will have consumer financial interests as its sole focus. Steve Bartlett, head of the Financial Services Roundtable, told The New York Times that his group has a dual goal: to support comprehensive reform and to kill the CFPA.

The need for the CFPA also took a hit from Federal Reserve chief Ben Bernanke, who weighed in testifying before the Senate Banking Committee Wednesday, arguing that the Fed should keep its consumer protection powers instead of transferring them to the CFPA. Bernanke also suggested that Congress beef up the Fed's consumer protection role.

Consumer groups are fighting back and recruiting their own allies from the financial services world to support the CFPA. On Wednesday, Rep. Frank joined Americans for Financial Reform for a press conference on Capitol Hill to make the economic case for the new agency. Bennett Freeman, an executive at Calvert Investments, and Tim Duncan, founder of Story Street Wealth Management, were on hand to support the call for the CFPA.

Meanwhile, Elizabeth Warren, who originated the idea for a consumer financial product safety commission two years ago and is expected to become its chief — if and when the agency is created — posted a YouTube video Monday to bring her case for the CFPA directly to the public. She also testified before Congress on the need for the agency earlier this month. And on Monday, Warren published an article in Baseline Scenario debunking three myths about the proposed agency.

Where do you stand on the need for a consumer financial watchdog? Do you think the Obama administration is doing enough to make sure its proposed CFPA becomes a reality? Or is it a misguided effort?