Just Explain It: Why the Fiscal Cliff May Trigger a Recession

Lawmakers in Washington appear to be making little to no progress in avoiding the impending so-called fiscal cliff.  House Speaker John Boehner, R-Ohio, said Friday the negotiations are "almost nowhere." On Thursday Boehner rejected a proposal from the Obama administration saying that the Democrats need to "get serious about real spending cuts."
President Obama's offer continues to call for higher taxes on the wealthy and an extension of the payroll tax cut.   But Republicans say they will not agree to a plan that raises taxes.
As the country continues to head toward the fiscal cliff, this Just Explain It helps to make sense of what it is.
On December 31st, most of us would like to be thinking about a prosperous new year ahead…drinking bubbly and singing Auld Lang Syne with friends.  But there's a chance we could be singing a different tune if President Obama and Congress don't agree on measures to avoid the fiscal cliff.
First, let me explain what the fiscal cliff is.
The fiscal cliff refers to the potentially disastrous situation the U-S faces at the end of this year.  At midnight on December 31st, a number of laws are set to expire.  If the President and the Republicans don't reach an agreement before then, Americans could face broad government spending cuts and tax increases on January 1st.   The combined amount would total over 500 billion dollars. Those 500 billion dollars equal about three to four percent of the nation's entire gross domestic product.  This is what's referred to as the fiscal cliff.
If there isn't a resolution, here are the specifics of what will happen.
Taxes would go up for almost every taxpayer and many businesses. The Bush-era tax cuts, which tax relief for middle and upper-class tax payers, would be a thing of the past.  So would President Obama's payroll tax cut which added about a thousand dollars a year to the average worker's income.
Government spending would be slashed.  That means less money for most military, domestic and federal programs.  $26 billion in emergency unemployment-compensation would be gone. Medicare payments to doctors would be reduced by $11 billion. Federal programs would take the biggest hit.  They stand to lose a total of $65 billion.
If the fiscal cliff isn't avoided, some investors will be hit hard.  Those who receive qualified dividends could see the tax rate on those dividends go from 15% to almost 40% in 2013.
Many business owners believe going over the fiscal cliff will cripple the economy, triggering a deep recession.  They fear demand for their products or services will decrease because consumers will have less money to spend.  It also means that they won't be able to afford new hires or expand their businesses.   Since most Americans would be paying more in taxes, they'd be less inclined to make big purchases, like a home or a new car.
None of this is set in stone, but that's part of the problem.  Markets, businesses and people in general hate uncertainty. The fear of the unknown facing us at the beginning of next year is exactly why so many people are so worked up over the fiscal cliff.
Did you learn something? Do you have a topic you'd like explained?  Give us your feedback in the comments below or on twitter using #justexplainit.

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Decent jobs report despite slowdown in hiring pace

WASHINGTON (Reuters) - The pace of U.S. job growth slowed a bit in December, keeping the unemployment rate steady at 7.8 percent, but details of the Labor Department's U.S. employment report were fairly encouraging.
* Nonfarm payrolls increased 155,000, but job gains for the previous month were revised up to show 15,0000 more positions created than previously reported.
* Construction employment rebounded strongly, gaining 30,000 jobs after sagging 10,000 in November, reflecting increased residential construction activity as the housing market recovery gains traction.
* Manufacturing payrolls gained 25,000 after rising 5,000 in November. Manufacturing working hours increased, a positive sign for a sector that has been cooling in recent months. That helped to lift the overall average workweek to 34.5 hours from 34.4 hours in November.
* With workers putting in more time, the average hourly earnings increased 0.3 percent after rising by the same margin in November.
* More people entered the labor force, a sign of confidence in the jobs market, keeping the unemployment rate elevated. The household survey also showed a modest increase in employment, but more people reported they did not have jobs.
* The bad news is that government shed 13,000 jobs in December after a loss of 10,000 the prior month.
* Temporary help jobs, often seen as a harbinger for permanent hiring, fell in December and retail employment declined by 11,300 jobs after a hiring spree the previous months.

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Bank of America, other banks move closer to ending mortgage mess

CHARLOTTE/WASHINGTON (Reuters) - Bank of America Corp announced more than $14 billion of legal settlements over bad mortgages it sold to investors and flaws in its foreclosure process, taking the bank a step closer to ending the home loan problems that have dogged it for years.
About $3 billion of Bank of America's Monday's settlements were part of a larger $8.5 billion deal between 10 big mortgage lenders and regulators to end a loan-by-loan review of foreclosures mandated by the government.
Bank of America shares touched their highest level in nearly two years as investors called it a good step toward ending the company's multiple legal woes. The shares later retreated to close down 0.2 percent at $12.09.
Analysts have estimated that Bank of America has paid out some $40 billion for mortgage settlements since the crisis began. Most of those losses stem from its 2008 purchase of Countrywide Financial, once the largest subprime lender in the United States.
But the bank is moving closer to the day when it can stop worrying about mortgages and start focusing on growth, analysts and investors said.
"It's a step in the right direction in terms of trying to put these issues behind the company," said Jonathan Finger of Finger Interests Ltd, a Houston, Texas-based investment firm that owns 1.1 million of the bank's shares.
Besides the multibank foreclosure settlement, the second largest U.S. bank also announced about $11.6 billion of settlements with government mortgage finance company Fannie Mae to end allegations the bank improperly sold mortgages that later soured, and to resolve questions about foreclosure delays.
Bank of America had already set aside money to cover most of those settlements. The deal with Fannie wipes out 44 percent of the buy-back requests the bank faced as of the end of the third quarter. It also eliminates possible future repurchase requests on about $300 billion in loans.
Bank of America's home loan problems are far from over, though. It still needs court approval for an $8.5 billion settlement with private investors and it is locked in litigation with insurer MBIA Inc over mortgage-related claims.
The agreement also does not end a lawsuit the U.S. Justice Department brought against the bank last year over Countrywide and Bank of America loans sold to Fannie Mae and Freddie Mac, the agency said. The suit accuses Countrywide and Bank of America of causing losses to taxpayers of more than $1 billion.
"I think there is still quite a lot of litigation to go, and I don't think we'll see the end of this for some time," said Thomas Perrelli, a former top Justice Department official, speaking of industry wide legal issues stemming from the financial crisis.
BANKS SETTLE
The settlement Bank of America, Citigroup Inc, JPMorgan Chase & Co, Wells Fargo & Co and five other banks entered with regulators pays out up to $125,000 in cash to homeowners whose homes were being foreclosed when the paperwork problems emerged.
About $3.3 billion of the $8.5 billion settlement with the Office of the Comptroller of the Currency will be in cash, with the rest in changes to the terms of loans or mortgage forgiveness.
In April 2011, the government required banks that collect payments on mortgages, known as servicers, to review whether errors in the foreclosure process had harmed borrowers.
The review focused on foreclosures from 2009 and 2010 and looked at processes, including "robo-signing," where servicer employees or contractors signed documents without first reviewing them.
That loan-by-loan review proved slow and expensive, the OCC said.
The reviews had already cost more than $1.5 billion. They turned up evidence that around 6.5 percent of the loan files contained some error requiring compensation, but most of those errors involved potential payouts much less than $125,000, OCC officials said.
Other banks involved in the settlement include MetLife Bank, Aurora Bank FSB, PNC Financial Services Group Inc, Sovereign Bank NA, SunTrust Banks Inc and U.S. Bancorp.
Wells Fargo said its portion of the cash settlement will be $766 million, which will result in a $644 million charge when it reports fourth-quarter earnings on Friday. The bank said it will spend another $1.2 billion on foreclosure prevention actions, which will not result in additional charges.
Citigroup, which reports earnings next week, said it will take a $305 million charge for its cash payment portion of the settlement, while existing reserves would cover $500 million in loan forgiveness and other actions.
Housing advocates said they viewed the settlement as a positive move as it ends a flawed review process and provides some money, if limited, to consumers. But some advocates and lawmakers expressed dissatisfaction with the pact and suggested hearings could follow.
"I remain concerned that banks continue to avoid full accountability, and I believe that borrowers deserve more answers and transparency than the Federal Reserve and the OCC are currently willing to provide," said Elijah Cummings, the top Democrat on the House Oversight committee.
BOFA SELLS SERVICING RIGHTS
For Bank of America, the Fannie Mae deal was the much larger of Monday's agreements.
Fannie Mae and sibling Freddie Mac essentially buy mortgages from banks and package them into bonds for investors. But during the mortgage boom, banks sold loans to the two companies that Fannie Mae and Freddie Mac say should never have been sold because, for example, borrowers had misstated their income. The two mortgage finance companies are pushing banks to buy back the loans.
On Monday, Bank of America also said it was selling the rights to collect payments on about $306 billion of loans to Nationstar Mortgage Holdings and Walter Investment Management Corp. Reuters first reported on Friday that Bank of America was talking to Nationstar and Walter Investment.
Investors appear to have decided the bank is on the right track as its shares hit their highest level since May 2011 on Monday. When Warren Buffett came to the bank's rescue in August 2011 with a $5 billion investment, he received warrants for 700 million shares of stock at $7.14 per share.

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