The reasons behind the racial disparity in refinancing align with documented evidence about other inequities in housing, Keys said during an interview with Wharton Business Daily on SiriusXM. (Listen to the podcast above.) Structural racism built into both public policy and the private sector has led to longstanding asymmetry in income, credit scores, loan-to-value ratios and other risk factors that inhibit refinancing for minorities.
The coronavirus pandemic is exacerbating the problem, Keys said, because Black and Hispanic households are more likely to experience job loss than white households. The U.S. unemployment rate in May dropped to 5.8%, yet it was 7.3% for Hispanics and 9.1% for Blacks.
“Some of this may be a function of just measuring incomes and employment disruptions, but I think there is another factor, which is related to just how tight mortgage credit is right now,” Keys added. “Mortgage credit is perceived as being very tight. It can be a hard time to get a loan, and there are a lot of hoops to jump through when you’re refinancing.”
Author(s): Benjamin Keys interviewed on Wharton Business Daily
Over the past two weeks, activist hedge fund investor Engine No. 1 scored a victory for the climate change movement by wresting three board seats at ExxonMobil with the support of the “Big Three” institutional investment firms BlackRock, Vanguard, and State Street. But the episode also marks a failure in ExxonMobil’s “corporate diplomacy” because of its inability to convincingly demonstrate that it is committed to mitigating climate risks and protecting its long-term business value, according to Wharton management professor Witold Henisz.
Engine No. 1 has only a 0.02% stake in ExxonMobil, but the climate risk issues it pushed for were sufficient to get the three big investment firms on its side. In explaining its stance, BlackRock stated that the energy major needs “to further assess the company’s strategy and board expertise against the possibility that demand for fossil fuels may decline rapidly in the coming decades.” BlackRock CEO Larry Fink had reiterated his company’s commitment to combating climate change in his 2021 annual letter to CEOs; in his 2020 letter to CEOs, he had said that “climate risk is investment risk.”
Decentralized Finance — or DeFi — has experienced explosive growth in the past year. But in order for DeFi to fulfill its promise as a disintermediated ecosystem that helps rather than harms, “now is the time to evaluate its benefits and dangers,” write Wharton legal studies and business ethics professor Kevin Werbach and David Gogel, a recent Wharton MBA graduate, in the article that follows. Werbach is author of the book The Blockchain and the New Architecture of Trustand leads Wharton’s Blockchain and Digital Asset Project. Werbach and Gogel recently collaborated with the World Economic Forum to create the Decentralized Finance (DeFi) Policy-Maker Toolkit, providing guidance to regulators and blockchain watchers everywhere.
The market experienced explosive growth beginning in 2020. According to tracking service DeFi Pulse, the value of digital assets locked into DeFi services grew from less than $1 billion in 2019 to over $15 billion at the end of 2020, and over $80 billion in May 2021. Novel business models such as yield farming — in which holders of cryptocurrencies earn rewards for providing capital to various services — and aggregation to optimize trading across exchanges in real-time are springing up rapidly. Innovations such as flash loans, which are either repaid or automatically unwound during the course of a transaction, open up both new forms of liquidity and unfamiliar risks.
The concern with this exercise is its reliance on past returns. With interest rates near zero, significant economic growth is needed to generate market returns close to those experienced over the last 100 years – approximately 11% per annum. To explore the implications of different future investment performance, let’s repeat the process above by reducing the average return of historical stock returns while maintaining the same risk (i.e., volatility).
Panel A shows that as the return on Lena’s savings increases, i.e., we move from left to right along the horizontal axis, the value of investing the money relative to paying off the mortgage early increases. At a 3% savings return, the cost of her mortgage, Lena would be indifferent between saving extra money and paying down her mortgage early because both options lead to similar average savings balances after 30 years. Savings rates higher (lower) than 3% lead to higher (lower) savings for Lena if she invests her money as opposed to paying down her mortgage early. For example, a 5.5% average return on savings, half that of the historical return, leads to an extra $57,000 in after-tax savings if Lena invests the $210 per month as opposed to using it to pay down her mortgage more quickly.
Panel B illustrates the relative risk of the investment strategy. When the return on savings is 3%, the same as the cost of the mortgage, the choice between investing the money and paying down the mortgage comes down to a coin flip; there is a 50-50 chance that either option will lead to a better outcome. However, if future average market returns are 5.5%, for example, the probability that investing extra money leads to less savings than paying down the mortgage early is only 26%. For average returns above 6.5%, the probability that investing the extra money is a bad choice is zero. In other words, there hasn’t been a 30-year historical period in which the average stock market return was below 3%, even when the average return for the 100-year period was only 6.5%.
About 2.3 million women have exited the U.S. labor force since the pandemic began, compared with about 1.8 million men, according to government data. Many were driven out by layoffs in food service, health care, and hospitality — sectors that employ a majority of women and that have been most affected by the economic slowdown. Others left their jobs voluntarily, forced to stay home and care for children suddenly unable to attend school or daycare.
As a result, female participation in the workforce has dropped to 57%, a level not seen since 1988. The situation is dire enough that U.S. President Joe Biden called it “a national emergency.” With schools reopening and vaccines becoming more widely available, there is light at the end of the pandemic tunnel, but questions remain about whether working women will recover from such a deep setback.
Smith-McLallen: In a broad sense, what the nonessential business closure policy did was to create a situation that limited interpersonal contact for nonessential workers who were staying at home. But it also limited contact for essential workers who were perhaps commuting with fewer people, for example, and not necessarily exposed to all of the people who were staying at home. That secondary protective effect was very effective at reducing cases.
Another thing about that secondary protective effect is we might think that if there would have been no nonessential business closure — if the nonessential workers had gone out to work — their infection rates would have been the same as we observed among the essential workers. There would be no difference. That’s what the results of our study speak to. However, there is a real possibility that the rates for everyone would have been considerably higher, even higher than what we observed in the essential worker population, just because of the increased contact and exposure across the board.
What I think policymakers should take from this research is that with new strains of the virus being discovered, if we reach a point where we need to aggressively limit contact and transmission, nonessential business closure policies can be effective. And now we can quantify just how effective they can be.
At the current pace of around 1.5 million doses per day, PWBM said it expects economic recovery “to continue but proceed gradually through the middle of year,” with employment rising to nearly 152 million in July and four-quarter real GDP growth of around 5% in the third quarter. Averaging over the full year of 2021, PWBM projected that raising the rate of daily vaccinations to 3 million or more would increase employment by nearly 1 million and real GDP growth by about a third of a percentage point.
The effects on the labor market that PWBM projected are largest in the summer, “which is when how quickly you’re able to vaccinate people makes the biggest difference,” said Arnon. At 2 million vaccinations a day, say, by the end of the year, most of the people who want it would have been vaccinated, he noted.
Last summer, I saw a dramatic expansion of Federal Reserve liquidity, government support, and the money supply. I said then, ‘This liquidity is going to go into the stock market, and then it’s going to go into the economy once people feel comfortable with beginning their normal activities again’ — and that is exactly what is happening.
I think this year is going to be a great year for the economy, a much bigger expansion than a lot of people believe. I think it’s also going to be a year of inflation. Not dramatic inflation, but a lot more than what we have been used to — 3%, 4%, perhaps even 5%. This is going to be good for the stock market because I do not think that the Federal Reserve is going to tighten credit into 2022, maybe not into 2023. We’re going to keep low short-term interest rates and a hot economy, so inflation will begin to increase, and the stock market will be pushed ahead because corporate profits are going to be very strong.
The loser is going to be the bondholder because interest rates on the long-term bond are going to rise. We’re going to see the 10-year bond rise to 2% by the end of the year, maybe even 3% by the end of 2022.
Wharton Business Daily: What are your thoughts on the move by Congress to allow people to be able to dip into their 401(k) accounts? You are not a fan of that idea in general.
OliviaMitchell: That’s true. This got started in March 2020, when the CARES Act was passed by Congress, allowing people who had 401(k) accounts and who were younger than age 59.5 to access up to $100,000 from their retirement accounts without paying the 10% penalty. Congress permitted this in the throes of COVID and then they allowed the income taxes on those withdrawals to be spread over three years unless the money was repaid to the account. That option ended in December 2020.
Congress passed a new bill in December that did not extend penalty-free access to everyone, but it did permit people who experienced federally declared disasters, aside from COVID, to withdraw some of their 401(k) money. So, there are still eligible people who, in 2021, can withdraw up to $100,000 from their retirement accounts without penalties. Again, they can spread it over three years for tax purposes. In general, this is not a good idea.