Euro Crisis Makes Fed Lender of Only Resort as Funding Ebbs

The Federal Reserve, chastised by Congress for lending money to foreign institutions including a Libyan-owned bank, is once again the lender of last resort for banks around the world it knows little about.

Three years after the collapse of Lehman Brothers Holdings Inc., money-market borrowing rates for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to euro-zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data.   Read more»

Recalling “King Dollar” Distortions

“Since lecturing Japanese officials in the late 1990s and early 2000s about how they should deal with their nation’s economic malaise, Mr. Bernanke has made clear his mindset about post-bubble economics: Keep experimenting as long as the economy is stumbling and inflation is muted…  In a 2000 paper, Mr. Bernanke cited President Franklin Roosevelt and ‘his willingness to be aggressive and to experiment—in short to do whatever it took to get the country moving again’ even though some of those policies failed.’”  Wall Street Journal (John Hilsenrath), September 23, 2011

“Inflation hawks, including Paul Volcker… often invoke the supposed lessons of history, to the effect that inflation is always harmful and always gets out of control.  But that’s a selective reading of history, and it skips the most relevant examples… And this is the relevant history we should be looking at: this isn’t your father’s slump, it’s your grandfather’s slump. Volcker, I’m sorry to say, is worrying about refighting the 1970s when we’re actually refighting the 1930s.”  New York Times (Paul Krugman), September 19, 2011

Before we get through all of this, I expect Dr. Bernanke and U.S. Federal Reserve doctrine to be fully discredited.  I fear Dr. Krugman has lost him mind.     Read more»

Doug Noland’s Credit Bubble Bulletin

[Selected Notes]

September 23 – Bloomberg (Sapna Maheshwari):  “The Federal Reserve’s ‘Operation Twist’ is failing to ignite the corporate bond market as its second round of quantitative easing did in November, showing the central bank may be running out of tools to revive the economy.  Relative yields widened to a two-year high, a benchmark index of credit-default swaps rose and new sales ground to a halt after the Fed said it will buy $400 billion of long-term debt to cut borrowing costs and avert a recession.”

One month Treasury bill rates ended the week at negative one basis point and 3-month bills closed at zero.  Two-year government yields were up 5 bps to 0.21%. Five-year T-note yields ended the week down 5 bps to 0.86%. Ten-year yields declined 22 bps to 1.83%.  Long bond yields sank 41 bps to 2.90%….An index of investment grade bond risk rose 15 bps to 141 bps.  An index of junk bond risk surged 65 bps to 720 bps.   Read more»

Fed Has Broken Banks and Doesn’t Know It

Washington policy makers have broken the back of the US banking system and don’t even know it, analyst Dick Bove said.

As the Federal Reserve  has embarked on its latest effort to stimulate the economy, Bove, the vice president of equity research at Rochdale Securities, said the central bank instead has further sapped banks’ ability to bring about needed growth.   Read more»

Monetary Moves Have Lost Their Magic

“It would be better for the world if central banks stopped trying.”

Financial markets are tiring of the Federal Reserve’s love offerings. The U.S. central bank has long been able to soothe nervous investors with rate cuts or newly-printed money. But markets spurned Wednesday’s announcement of the Twist, an operation to lengthen the maturity of $400 billion of the Fed’s $1.7 trillion U.S. Treasury.   Read more»

Fed’s twist moves hurts company pension plans

The Federal Reserve’s ‘Operation Twist’ to bring down bond yields and stimulate the economy is likely to cause pain for the nation’s largest pension funds, already struggling with funding shortfalls from the recent stock market decline.

Hit both by falling stock prices and falling bond yields, the 100 largest pension plans of public U.S. companies have assets covering only 79 percent of their liabilities as of the end of August, down from 86 percent at the end of 2010, according to consulting firm Milliman Inc.

Already approaching its all-time low of 70.1 percent in August, 2010, the funding ratio could fall below 60 percent within two years if equities stagnate and rates decline further, Milliman projected.   Read more»

Bizarre Love Triangle

Along with volatility in stocks and historically low yields in bonds, investor attention has recently been drawn to currencies. This is due to the currency wars that broke out in 2010 and have expanded lately. The recent Brazilian decision to cut interests rates to halt the appreciation of the real and the Swiss decision to peg the franc to the euro are both examples of countries cheapening their currencies against others, or at least halting their appreciation. The world is now in a beggar-thy-neighbor phase, last seen in the 1970’s and before that the 1930’s, where countries steal economic growth from neighbors by currency depreciation to cheapen exports.   Read more»

A Little Inflation Can Be a Dangerous Thing

In all the commentary about Ben S. Bernanke’s recent speech in Jackson Hole, Wyo., little attention has been paid to six crucial words: “in a context of price stability.” Those words concluded a discussion by Mr. Bernanke, the Federal Reserve chairman, of what tools the central bank could consider appropriate to promote a stronger economic recovery.

Ordinarily, a central banker’s affirming the importance of price stability is not headline news. But consider the setting. There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.

So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.   Read more»

Is Social Security a Ponzi Scheme?

Ever since Rick Perry derided Social Security as a Ponzi scheme, economists and other pundits have jumped into the fray.  Progressive blogger Matt Yglesias says it’s “nuts” for anyone to talk like this, because Social Security merely relies on future economic growth — just like a private pension plan.  Free-market economist Alex Tabarrok responded to Yglesias with links to arch-Keynesians (and Nobel laureates) Paul Samuelson and Paul Krugman, both comparing Social Security to a “Ponzi game.”

In the present article I have three aims: First, I will point out that the critics are right; to the extent that Social Security “worked,” it was because of its resemblance to a classic Ponzi scheme. Second, I will show how private-sector retirement planning operates nothing like this. Third, I will defend the good name of Charles Ponzi from the scurrilous comparisons — what he did was nothing like the racket known as Social Security.   Read more»

Delta One

“Policymakers have orchestrated a huge dilemma.  The ongoing simultaneous global expansion of debt and marketable instruments, along with the policy-induced reflation of global risk markets, has created an unprecedented accumulation of market-related risk.”

“For a long time now, I’ve believed that inexpensive and readily available “flood insurance” was the key to ongoing Credit and risk market Bubbles.  Cheap insurance distorts market perceptions…The world would look differently today had AIG been allowed to fail back in 200…”

The ECB and leading global central banks implement additional emergency (dollar) liquidity operations; UBS reports a $2bn loss from a “rogue trader” operating within its “Delta One” derivatives trading unit; and the S&P500 surges 5.4% during “quadruple witch” expiration of equity options and futures.  Just another week in the markets.

The Federal Reserve released the Q2 2011 Z.1 “flow of funds” Credit report today.  Total non-financial borrowing expanded at a 3.0% annualized rate to a record $36.517 TN.  Total system Credit ended the quarter at $52.554 TN, having doubled since the beginning of 1998.     Read more»