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Archives of November 2010
Fed Considered Long-Term Rate Target in Secret
Robin Harding, www.ft.com, 11/23/2010
The US Federal Reserve considered a radical change to its monetary policy at an unannounced meeting in mid-October that could have committed it to buying an unlimited amount of securities, according to the minutes of its November meeting.
At the October 15 meeting, held by video conference, the Fed discussed whether it should target a long-term interest rate, suggesting this could be an option if inflation continued to fall in the face of the central bank’s new $600 billion round of quantitative easing, nicknamed QE2. But the meeting rejected the policy change. Read more»
Will the Next Fiscal Crisis Start in Washington?
Sheila C. Bair, www.washingtonpost.com, 11/26/2010
Two years ago the United States experienced its worst financial crisis since the 1930s. The crisis began on Wall Street, where misguided bets on risky mortgage loans resulted in enormous losses that few anticipated. More than 4 million jobs were lost in just six months after the peak of the crisis. There is hardly one Main Street in America not still feeling its effects.
Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That’s more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit. Read more»
What’s Really Behind Bernanke’s Easing?
My guess is that the Fed chairman knows that we still have too many banks overstuffed with toxic real estate loans and derivatives.
Andy Kessler, online.wsj.com, 11/19/2010
Federal Reserve Chairman Ben Bernanke’s $600 billion quantitative easing program has been roundly criticized in this country and around the world. So why is he doing it? Does he know something the rest of us don’t?
Mr. Bernanke claimed earlier this month in a Washington Post op-ed that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.” But, as Mr. Bernanke must know, the Japanese have been trying to influence their stock market for 20 years, with little effect on their economy. It is also unlikely, as some claim, that the Fed chairman is whipping up a stealth stimulus or orchestrating a currency devaluation. He knows these have been tried and are more likely to destroy jobs than create them.
I have a different explanation for the Fed’s latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.
The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way.
Doug Noland’s Credit Bubble Bulletin
www.prudentbear.com, 11/19/2010
[Selected News Notes]
November 16 – Bloomberg: “Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30% more for clothes as surging cotton prices boost costs. ‘It’s a little terrifying to deal with cotton suppliers now,’ said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients. Cotton futures in China have surged more than 70% this year…”
November 17 – Bloomberg (Jody Shenn and John Gittelsohn): “Home ownership may be falling out of reach for more Americans as lenders toughen their standards for Federal Housing Administration-insured loans beyond what the agency itself requires. Mortgage lenders… have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings.”
November 17 – Wall Street Journal (Michael Aneiro and Stu Woo): “America’s strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market. The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations.”
Ideological and Hostile
Doug Noland, www.prudentbear.com, 11/19/2010
The Geithner/Bernanke “global rebalancing” gimmick…has no chance of rectifying our deep structural impairment nor resolving global imbalances. It does, however, increase the odds of a crisis of confidence in our debt markets and currency.
Our policymakers are acting to the detriment of our Creditors. They speak in a tone that does not inspire confidence and may likely antagonize…My premise has been that the markets will inevitably discipline Washington. This may occur after it works its way up the food chain.
With Eurozone tensions on the rise, Wednesday’s headline from the Financial Times read “Anger at Germany boils over.” “Bernanke Fires Back, Takes Aim at China,” was how the Wall Street Journal titled its analysis of the Fed Chairman’s speech this morning in Frankfurt. Paul Krugman also takes direct aim at Germany and China – and throws in the Republicans – with his “Axis of Depression” piece in today’s New York Times. In a troubled backdrop beckoning for level-headed analysis and cooperation, the mood has turned decidedly ideological and hostile.
Dr. Bernanke has compiled speeches and academic papers that will be scrutinized for generations to come. He added one more to his list this morning. Global policymakers – already deeply skeptical – will not be impressed. Officials from the “developing” economies are sure to be displeased. The Chinese must be incensed – and it is difficult for me to discern how this will work to our advantage. We’re the big debtor and importer. In no way does our policymaking qualify as the “moral high ground.” Indeed, most would argue we’ve been permanently disqualified. QE2 was one step too far – it crossed the line.
The Bernanke Fed has boxed itself in a corner. QE2 has been poorly received at home and abroad. Yet with this policy having succeeded in inflating global markets, there will be no turning back from our monetary experiment.
Doug Noland’s Credit Bubble Bulletin
www.prudentbear.com, 11/12/2010
[Selected News Notes]
November 8 – Bloomberg: “Chinese Vice Finance Minister Zhu Guangyao said the U.S. Federal Reserve’s decision to pump $600 billion into the economy might ‘shock’ emerging markets by flooding them with capital. The first round of quantitative easing, as the Fed policy is termed, in 2009 was justified because the global economy lacked liquidity, Zhu told reporters… With a recovery now under way, new purchases of Treasuries to inject funds into the financial system may be destabilizing, he said. ‘Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,’ Zhu said. The U.S. ‘has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.’”
November 9 – Bloomberg (Barry Porter): “Asian economies may need to turn to capital controls as quantitative easing by the U.S. threatens to spur asset bubbles in the region’s stock, currency and property markets, the World Bank said. Any curbs should be ‘targeted,’ temporary and tailored to address specific problems, Sri Mulyani Indrawati, a World Bank managing director, said…This could include countries tying up funds for as long as a year to help limit hot-money, she said.”
The Official Start of QE2
Doug Noland, www.prudentbear.com, 11/12/2010
…[T]he potential for rising global yields and a less accommodating liquidity backdrop would more severely impact the most heavily indebted. As such, I take particular interest in this week’s jump in yields for the UK, Spain, Italy, U.S. Treasurys and American municipal bonds.
Has quantitative easing – on this, the initial trading day of QE2 – turned counterproductive?
There are a couple key facets of my thesis worthy of some extra focus today, the official start of QE2: First, in the post-Greek crisis world – with parallels to the subprime eruption in the spring of 2007 – the markets are increasingly keen to structural debt issues. Second, inflationary pressures have gained significant momentum in China, Asia and the “emerging” economies, more generally.
In the world of structural debt problems, the European debt crisis turned more acute this week. Ireland’s 10-year yields surged to almost 9% yesterday (from about 5% in early-August), before declining 76 bps today on more conciliatory talk from European officials. Prior to today’s bond rally, Portuguese yields were up another 50bps (to 7.0%) this week and Greece yields were another 15 bps higher (to 11.60%). Recalling the 2007-08 experience in U.S. mortgage finance, the initial policy response to the European peripheral debt crisis may have bought some time but has had little effect on underlying structural debt problems.
Read more»
Ben Bernanke’s Impossible Dream
Alan Renolds, online.wsj.com, 11/09/2010
Federal Reserve Chairman Ben Bernanke may be an excellent economist, but he is not a very good bond salesman. Since his Aug. 27 speech at an annual Fed symposium in Jackson Hole, Wyo., he’s been telling us that he thinks inflation is too low and long-term interest rates are too high. In a quixotic effort to “maximize employment,” he’s begun purchasing up to $600 billion worth of long-term Treasury obligations to push inflation up and bond yields down.
If it worked as planned, this would flatten the yield curve, meaning it would narrow the spread between short-term and long-term interest rates. Since banks make money by borrowing short and lending long, the effect would be to discourage bank lending. That seems an unpromising way to stimulate the economy. But the whole notion of simultaneously raising inflation and lowering bond yields presumes bond buyers are docile fools.
Fed Global Backlash Grows
By JONATHAN WEISMAN
NEW DELHI—Global controversy mounted over the Federal Reserve’s decision to pump billions of dollars into the U.S. economy, with President Barack Obama defending the move as China, Russia and the euro zone added to a chorus of criticism.
China’s Dagong Lowers U.S. Credit Rating on Fed Easing
By Joshua Fellman and Ye Xie
(Adds company background, comment in 5th, 6th paragraphs.)
Nov. 10 (Bloomberg) — China’s Dagong Global Credit Rating Co. reduced its credit rating for the U.S. to A+ from AA, citing a deteriorating intent and ability to repay debt obligations after the Federal Reserve announced more monetary easing. Read more»