(an interoffice email)
>
> Office Depot (ODP): Announced today that it sees erosion of sales and
> earnings in the 4th quarter of 2007 due to housing problems, especially in
> FL and CA. These two states account for 28% of ODP’s North American sales.
>
First actual weak report for December I’ve seen, though housing related sales have been down for quite a while and at least so far been ‘replaced’ by rising exports.
♥
| Survey | n/a |
| Actual | 2.5% |
| Prior | 22.5% |
| Revised | n/a |
Looking very firm. Possible evidence housing may have bottomed.
Affordability is up with prices flat to down, rates down, and nominal income growing.
Yes, I’ve heard the stories about multiple applications, but even if relevant it’s been the case for several months.
| Survey | -$58.4B |
| Actual | -$57.8 |
| Prior | $-56.5B |
| Revised | -$58.1B |
Points to higher gross exports as oil prices were higher.
| Survey | 2.0% |
| Actual | 2.7% |
| Prior | 1.8% |
| Revised | 1.4% |
| Survey | 11.0% |
| Actual | 11.4% |
| Prior | 9.6% |
| Revised | 9.0% |
First a series of very high inflation numbers coming this week.
| Survey | -$95.0 |
| Actual | -$98.2 |
| Prior | -$75.0 |
| Revised | n/a |
A 17 billion December 1 payment counted for November this year as it fell on a weekend; so, only about a 10 billion over last year. When this goes up in earnest, it is coincident with a slowdown. Watch this number closely!
♥
Senate approves $650M alternative energy billBy MARC LEVY
HARRISBURG, Pa. – Builders of wind farms, owners of coal-fired power plants and buyers of hybrid cars and solar panels would be among those who benefit from a $650 million compromise bill approved Wednesday by the state Senate to promote cleaner energies and conservation.
The measure was approved 44-5 on the Senate’s last day of business for the year. It calls for tax credits, rebates, loans and grants over a decade or more in an effort to cut electricity bills and pollution and make Pennsylvania a destination for a booming renewable and cleaner energy industry.
(snip)
The Senate also passed two biodiesel bills Wednesday. One would require that biodiesel be added to each gallon of diesel sold in Pennsylvania in increasing amounts as in-state production of biodiesel reaches certain levels. The other would raise the in-state biodiesel production subsidy from 5 cents to 75 cents a gallon _ at a cost of about $5 million _ and expand an existing rebate program on purchases of gas-electric hybrid vehicles to other vehicles that burn alternative fuels.
This retains the link between fuel and food as we ‘burn up our food supply’ as we turn it into fuel. Makes fed’s inflation fight that much tougher, as the monetary system will get used whatever fuel can be produced will get used.
“This is a wonderful start and is a great way to end our calendar year with what I think is a great success under our belt,” said Sen. Mary Jo White, the Venango County Republican who was a sponsor of all three bills.
♥
(Reuters article)
Big Banks Lower Outlook, Overshadowing Fed Plan
Three major U.S. banks said they expect more write-downs and loan losses in the fourth quarter, eroding investor enthusiam over a Federal Reserve plan to ease the global credit crunch.
The warnings from the three banks, Bank of America, Wachovia and PNC Financial Services Group, triggered a selloff in financial stocks and reversed a huge rally in the markets.
Nell Redmond / AP
Executives of all three spoke at a Goldman Sachs conference in New York.
Lewis said Bank of America is likely to be profitable in the quarter but expects to set aside $3.3 billion for losses and write-downs.
Loss less than ¼’s earnings.
“While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing,” Lewis said.
Wachovia’s Thompson told the conference his bank was facing “as tough an environment as I’ve ever seen” and did not know when the credit crunch would be over.
Thompson said Charlotte, North Carolina-based Wachovia had boosted its loan loss provision for the fourth quarter to about $1 billion from a previous $500 million to $600 million.
He said fourth-quarter losses from commercial and consumer mortgages, leveraged finance and structured products, including subprime-backed mortgage securities, had reached about $1.4 billion, similar to the
level seen in the third quarter.
Pittsburgh-based PNC now expects to report earnings of 60 to 75 cents a share for the quarter, or between $1.00 and $1.15 excluding items. Analysts on average had expected PNC to report earnings of $1.33 a
share before items.
Still profitable as well.
The changes reflect a write-down of $1.5 billion in commercial mortgage loans, weak trading results amid market volatility and a higher provision for credit losses stemming from residential real estate development, it said.
Bank of America’s Lewis said he had hoped that the Federal Reserve would cut rates by half a point rather than the quarter point cut it made Tuesday “because the capital markets are still so fragile.”
Can’t blame him for trying!
Lewis said in response to analysts’ questions that the bank hopes to sell off some of its 9 percent stake in China Construction Bank starting in 2008 and is “talking to the Chinese to see what level they would be comfortable with us holding.”
Wachovia’s Thompson said despite the difficult environment, he expected to grow earnings in 2008. He added that the bank might consider raising capital next year in a “relatively inexpensive form,”
such as a preferred stock offering.
Seems to me these losses are ‘well contained’ and not threatening to interrupt business or aggregate demand.
♥
I’m mainly interested in LIBOR over the turn as an indicator or how the new international facility is doing.
Also watching to see when higher oil means higher inflation and higher rates, vs. higher oil currently meaning econ weakness and lower rates. Maybe next week after this weeks inflation numbers are out.
GC has lost some of it’s flight to quality bid on term repos. The market is higher across terms as a result of the treasury announcement. Expectations of future rate cuts have not been priced out of the market I will follow up shortly with an AGCY and MBS runs.
| GC TSY | Last Night | Now | Change |
| O/N | 4.60 | 4.23 | -0.37 |
| 1wk | 4.12 | 4.12 | 0 |
| 2wk | 4.03 | 3.95 | -0.08 |
| 3wk | 3.7 | 3.75 | 0.05 |
| 1mo | 3.7 | 3.76 | 0.06 |
| 2mo | 3.68 | 3.74 | 0.06 |
| 3mo | 3.63 | 3.71 | 0.08 |
| 6mo | 3.62 | 3.67 | 0.05 |
| 9mo | 3.52 | 3.56 | 0.04 |
| 1yr | 3.42 | 3.46 | 0.04 |
* 1wk – 2wk seasonal add need “window dressing” balance sheets
♥
Note they’ve also added the international arrangements as per my discussion earlier today.
The same recommendations suggested in August.
7 Lending by the Federal Reserve
The Federal Reserve’s authority to extend loans is a potentially powerful tool with
which it can stimulate aggregate demand. Loans to depository institutions can help spur credit extensions to households and firms. If depository institutions are unwilling or unable to lend to firms and households, direct loans by the Federal Reserve to firms and households could provide the financing needed for economic recovery- although such lending is subject to the restrictions discussed below.
The above has the causation backwards. In the banking system, loans ‘create’ deposits, which many incur reserve requirements.
In the first instance, new reserve requirements are functionally an ‘overdraft’ in the bank’s reserve account at the fed. Since an overdraft *is* a loan, as a matter of accounting loans create both deposits and any resulting new required reserves. What the fed does is set the price of the reserves (the rate of interest), which influences bank lending decisions, but doesn’t directly control bank lending.
Therefore, all fed lending to member banks is generally to replace ‘overdrafts’ in reserve accounts. At the end of each statement period, overdrafts are booked as loans from the fed’s discount window, which are 50 bp over the fed fund rate and also carry a ‘stigma’ of implying the bank is having financial difficulties. That’s why banks are willing to bid up funds above the discount rate when trading each other,
7.1 Lending to Depository Institutions
As shown in table 7.1, lending to depositories is authorized under several sections of the Federal Reserve Act: Advances are authorized under sections 10B, 13(8) and 13(13), while discounts are authorized under sections 13(2), 13(3), 13(4), 13(6) and13A.78 In recent decades, the Federal Reserve has extended credit to depositories only through advances (under sections 10B and 13(8)) and has not made any discounts. The broadest and most flexible authority under which the Federal Reserve can extend loans to depositories is Section 10B, under which the restriction on collateral is only that the Reserve Bank making the advance deems the collateral to be “satisfactory”.
Yes, and this makes perfect sense. All bank collateral is limited to what the federal regulators deem ‘legal’ along with regulated concentration and gap limits. Also, banks can issue federally guaranteed liabilities; so, functionally the government is already funding what they deem legal assets. So, for the fed to provide another channel for this process, to assist ‘market functioning’, changes nothing of substance regarding risk for the government.
The collateral can be promissory notes, such as corporate bonds and commercial paper- instruments that cannot be purchased by the Federal Reserve.
But, as above, instruments that are categorized as bank legal by federal regulation, and can already be funded via government insured deposits.
Currently, Reserve Banks accept as collateral various types of promissory notes of acceptable quality including state and local government securities, mortgages covering one- to four-family residences, credit-card receivables, other customer notes, commercial mortgages, and business loans. Apparently, even equity shares would be legally acceptable as collateral if a Reserve Bank found them to be acceptable as collateral.
78The differences between discounts and advances are discussed briefly below and in more detail
in Section 2.1 of Small and Clouse (2000).
59
Table 7.1
Credit Instruments Used in Discounts or Advances
Borrower Credit Instrument
Depositories
10B Advances* Depository’s time and demand notes secured \to the
satisfaction of [the] Reserve Bank.” * *
13(8) Advances Depository’s promissory note secured by U.S Treasury,
U.S.-guaranteed, U.S. agency, or U.S. agency-guaranteed
securities, or by credit instruments eligible for discount or purchase.
13(2) Discounts * * * Notes, drafts and bills of exchange meeting \real bills” criteria.
13(4) Discounts * * * Bills of exchange payable on sight or demand which grow out of the shipment of agricultural goods.
13(6) Discounts * * * Acceptances which grow out of the shipment of goods
(section 13(7)) or for the purpose of furnishing dollar exchange as required by the usages of trade (section 13(12)).
13A Discounts * * * Notes, drafts, and bills of exchange secured by agricultural paper.
IPCs * * * *
13(13) Advances IPC’s promissory notes secured by U.S. Treasury, U.S. Agency or U.S. agency-guaranteed obligations.
13(3) Discounts Notes, drafts, and bills of exchange endorsed or otherwise secured to the satisfaction of the Reserve Bank, in unusual and exigent circumstances”, and provided the IPC cannot secure adequate credit elsewhere or is in a class for which this determination has been made.
Notes: All advances and the financial instruments used as collateral in all discounts except section 13(discounts are subject to maturity limitations. Section 13(14) authorizes discounts and advances to branches and agencies of foreign branches, subject to limitations.
*Section 10A provides for advances to groups of member banks.
* * Advances to undercapitalized and critically undercapitalized institutions are subject to limitations listed in section 10B.
* * * Must be endorsed by a depository institution.
* * * * Depository institutions are corporations and thus qualify for lending authorized for IPCs.
60
Even though the Federal Reserve can extend credit to depositories through advances secured by a wide array of instruments, there may be limitations regarding the extent to which the Federal Reserve can take onto its balance sheet the credit risk of a private-sector security pledged as collateral{whether the security is pledged as part of an advance or a discount. With an advance, the loan is extended on the basis of a promissory note issued by the depository. During the course of the advance, should the ability of the depository to repay the advance come under question (for example, because the collateral is in default) the Federal Reserve would look to the depository first for repayment: The credit risk of the collateral therefore remains with the depository.79 In a discount, the depository does not issue its own note to the Federal Reserve, but the depository must endorse the security that is discounted (as indicated by the triple asterisks in table 7.1). Again, the credit risk of the underlying collateral stays with the depository institution, and the only risk the Federal Reserve takes onto its balance sheet is the risk that the depository will default.80
79In a similar vein, the Bank of Japan recently has undertaken repurchase agreements in commercial paper but has acted to protect its balance sheet from the credit risk of the issuer of the commercial paper:
The Bank recommends commercial paper (CP) operations (purchase of CP with resale agreements) in order to ensure smooth market operations.
CP will be purchased from financial institutions, securities companies, and tanshi companies (money market dealers) which hold accounts with the Bank. The CP is to be endorsed by the seller, and to have a maturity of 3 months or less from the day of the Bank’s purchase. Purchase is to be made under competitive bidding, and the period of the purchase is to be 3 months or less. (See Quarterly Bulletin (1996), page 100.)
In September of 1998, the Bank of Japan held, through repurchase agreements, about 35 percent of the outstanding stock of commercial paper in Japan. See Table VII in Economic Statistics Monthly
(See various dates).
80Discounts under sections 13(2), 13(4) or 13A for a bank require a \waiver of demand, notice and protest by such bank as to its own endorsement exclusively”, which is discussed by Hackley (1973)
(pp. 22). The effect of this waiver is to make the endorsing bank primarily liable because the Reserve Bank would not have to demand payment by the issuer of the discounted paper before proceeding against the bank. To further limit its credit-risk exposure, the Federal Reserve presumably would also take a \haircut” on the discount by extending funds that are significantly less than the value of the discounted instrument. Additionally, the Federal Deposit Insurance Corporation Improvement
61
To the extent the credit risk of the collateral remains with the depository, lending to depositories may do very little to lower the credit-risk premiums charged by depositories in making new loans to private-sector borrowers. Credit risk premiums could be a major factor holding down credit expansion and economic recovery should nominal rates on Treasury bills be at or near zero and should the economy be weak.
In private-sector markets, credit risk can be managed through the use of credit- risk options. And, in some circumstances, the Federal Reserve’s incidental powers clause is consistent with the Federal Reserve using options.81 However, the view that the Federal Reserve could not accept the credit risk of the collateral used in discount window loans may leave little scope for the Federal Reserve to write credit-risk options in order to take that credit risk of the balance sheets of depositories and onto its balance sheet.
But even if Federal Reserve loans to depositories leave credit-risk premiums unchanged, such loans may provide some liquidity for the financial instruments used as collateral helping to lowering private-sector interest rates by reducing implicit liquidity premiums.
7.2 Lending to Individuals, Partnerships, and Corporations
Although the Federal Reserve currently does not make loans to individuals, partnerships, and corporations (IPCs), the Federal Reserve has the authorization to bypass depositories and make such loans under sections 13(3) and 13(13) of the Federal Reserve Act- as shown in table 7.1. However, lending under these authorities is subject to very stringent criteria in law and regulation, and such lending has not taken place since the Great Depression. For example, advances, under section 13(13), are limited
Act of 1991 (FDICIA), through its \prompt corrective action” provisions has imposed restrictions on depository institutions in weak capital condition. Among those restrictions are limitations on access to the Federal Reserve’s discount window.
81See footnote 46 for a discussion of the Federal Reserve’s recent use of options, and see Section 4 of Small and Clouse (2000) for a discussion of the Federal Reserve’s authority to engage in options.
62
to those “secured by direct obligations of the United States or by any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, an agency of the United States.”
Because IPCs with such collateral could easily sell it in the open market, section 13(13) advances may not have much effect(unless done at subsidized rates) in stimulating aggregate demand.
In contrast, private-sector instruments may lack the liquidity of Treasury debt and, therefore, Federal Reserve loans that use them as collateral may provide liquidity and help stimulate the economy. Also, in a \credit crunch”, such direct loans would circumvent depository institutions and the \non-price” terms of credit imposed by them. Hence, we shall focus on section 13(3) discounts of:
“notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are endorsed or otherwise secured to the satisfaction of the Federal Reserve bank: … ”
Because notes, drafts, and bills of exchange include most forms of written credit instruments, section 13(3) provides virtually no restrictions on the form a credit instrument must take in order to be eligible for discount.82 And by merely requiring that the discount be \secured to the satisfaction of the Federal Reserve bank …”, there is no restriction on the use of funds (such as for \real bills” purposes) for which the discounted security was originally issued.
However, in making section 13(3) loans directly to IPCs, the Federal Reserve must impose standards that are much more stringent in comparison to those used in lending to a depository. Such lending to IPCs is authorized only in “unusual and exigent circumstances.” In particular, the statute requires that a loan can be extended only to IPCs for which credit is not available from other banking institutions.83 Activation
82The distinctions between notes, drafts, and bills of exchange are discussed in detail in Small and Clouse (2000).
83The Federal Reserve’s Regulation A (Section 201.3(d): Emergency credit for others) species that advances to IPCs would be contemplated only in situations in which failure to advance credit would adversely affect the economy.
63
of this authority requires the affirmative vote of five of the seven governors of the Federal Reserve Board.
Section 13(3) further requires that the collateral be “endorsed or otherwise secured to the satisfaction of the Federal Reserve bank …” As interpreted by Hackley (1973):
… it seems clear that it was the intent of Congress that loans should be made only to credit-worthy borrowers; in other words, the Reserve Bank should be satisfied that a loan made under this authority would be repaid in due course, either by the borrower or by resort to security or the endorsement of a third party.84
If binding, this restriction could seriously curtail the effectiveness of such loans in stimulating aggregate demand in an environment of elevated credit risk and risk aversion.
But even if the Federal Reserve were able to accept private-sector credit risk onto its balance sheet, any social benefits to the Federal Reserve lending directly to the private sector would need to be balanced against the potentially serious drawbacks associated with placing the Federal Reserve squarely in the process allocating credit within the private sector. The information available to the Federal Reserve about nonbank credit would in many cases be inadequate to reliably assess credit risks{ and there is little reason to believe the Federal Reserve could assess credit risks more accurately than do private intermediaries. Problems with adverse-selection could lead to the Federal Reserve lending to precisely those credit risks that it most severely underestimates. After the credit is extended, the Federal Reserve may not be well situated to monitor the ongoing activities of the recipients of the funds to ensure the activities are consistent with the terms of the contract. Some of these problems might be addressed through the Federal Reserve using credit-ratings from private sector firms.
Moreover, such programs could develop important political constituencies that might make the programs difficult to dismantle once the immediate aim of policy|
84Hackley (1973), page 129.
64
namely providing a short-run economic stimulus- had been achieved.
♥
(an interoffice email)
> – any chance they would take discount window rate down intra-meeting (or before year end)
seems they don’t have to with this new ‘facility.’
> – have u evaluated the “loan auction” story?
Seems a lot like ‘standard’ repo apart from accepting pretty much anything as collateral from member banks in good standing. This should allow any member bank to fund itself a the ‘stop’ of the auctions, and I’m guessing that stop will be maybe 25 over funds, just to have some semblence of a ‘penalty rate’ though with no ‘stigma.’
Non member banks will still need to borrow from member banks, most likely, and so to the extent they are in the libor basket the libor settings could stay higher than otherwise. Not sure how all that will settle out.
But member banks using the Fed as ‘broker of last resort’ means borrowing and lending with the Fed will keep the names of other banks off their books over year end, and may make room for member bank/non member bank lending. Hard to say, but prospects look pretty good for this to clear up the year end log jam. Also, the ECB could do same with a $ facility which would also help.
Keep me posted if you hear anything, thanks.
♥
looks a lot like the recommendations Karim emailed to them:
An article in the Financial Times:
Fed officials have dusted down this proposal and adapted it to address the current credit market crisis.
Vincent Reinhart, a fellow at the American Enterprise Institute and former chief monetary economist at the Fed, says this kind of auction facility would allow the Fed to provide funds directly to a much larger group of banks than the limited number of primary dealers who participate in open market operations, against a wide range of collateral, without the stigma of the discount window.
“I think it would be very positive,” he says. Banks in need of liquidity could acquire funds relatively anonymously, while the large number of participants with direct access to Fed money would encourage arbitrage to exploit the gap between cheap Fed money and high interbank rates.
Moreover, the Fed could auction funds at whatever term it wanted to in order to target liquidity at particular term markets – for instance, the market for one-month loans. It would have the option of either auctioning a fixed amount of funds, or offering to supply whatever funds were needed at a target rate.
The intended interest rate spread over the Fed funds rate is not known. If the Fed decided to auction loans at or only slightly above the Federal funds rate, it would risk subsidising weaker banks, which normally pay a premium to borrow in the interbank market.
However, Mr Reinhart says this could be dealt with by varying the amount of collateral required in return for loans based on the creditworthiness of the bank seeking funds.
♥
(an email with Randall Wray)ÂÂÂ
On Dec 11, 2007 10:49 PM, Wray, Randall <WrayR@umkc.edu> wrote:
> Warren: very respectfully, I suggest you might reconsider both your model of the fed’s reaction function as well as the likely course of the “real” economy.
>
> Whatever the fed might have said about “fighting inflation” back last summer is not relevant to near- and medium-term policy. The fed is scared nearly out of its mind about financial mkts and spill-over to the “real economy”. Further, it realizes all inflation pressures are in sectors over which it has no control, and that are just “relative value” stories. Yes, there can be some feed thru effects to nominal values, but the Fed can’t do anything about it. Inflation will not enter the Fed’s decision making in the near and medium term. Yes, they will continue to pay lip-service to it, since their whole strategy of inflation management relies on expectations. But they are far more concerned with asset prices, financial markets, and, less importantly, economic performance.
Already agreed. As Karim says it, they want to put the liquidity issue to be first, then worry about inflation.
I’m guessing that the ‘new’ liquidity facility they just announced that will be used to set rates over year end for member banks with a greatly expanded list of acceptable collateral may do the trick.
If so, much of the ‘fear’ is gone, and it’s back to the more traditional and ‘comfortable’ inflation vs the economy, which is a
whole different ball game.
>
> The “markets” are also scared out of their minds. Maybe they are all completely wrong, and you are the lone voice of reason. Maybe nothing is going to spill-over into the real sector. But it is worth considering that MAYBE they are correct.
I do give that some weight. Maybe 25%? And with govt, pensioners, and indirect govt sectors not going to slow down, the rest has to slow down quite a bit just to get to 0 real growth. In fact, I see the biggest chance of negative growth coming with ok nominal growth but a high deflator due to statistical variation. Nominal shows no signs of slowing, and it is a monetary economy.
 My continuing point, however, is that it’s not happening yet, nor is anything I’m seeing that is yet showing actual weakness, apart from so far anecdotal statements about retail sales, and the .2 nominal personal spending number last reported. I have also seen nothing but low gdp forecasts getting revised up continuously. Maybe that changes. However, if demand does weaken, I’m not sure it would be due to the financial losses as I still see no ‘channel’ from that to the real economy, apart from CNBC scaring people into not spending, and that is not a trivial effect! But so far there doesn’t seem to anything reducing personal income, and borrowing power seems reasonable if the desire is there for (now cheaper) homes, cars, computers, etc. with a non trivial amount coming from export earnings, which seem to be going parabolic.
> In any case, it will probably help you to predict what mkts are doing if you consider that they REALLY believe we are headed for a hard crash, and that this is not just media manipulation. They could be completely wrong. But at least we can predict their behavior.
I hear you, and in fact that has been my explanation of why they 50 in Sept, and then 25 in Oct- blind fear of the unknown/crash landing. But how does that explain yesterdays outcome? It was at the very low end of expectations. They even were stingy on the discount rate spread, which costs them nothing in terms of inflation. All you can say is they were trying to avoid moral hazard risk, which indicates a lot less fear of hard landing than previously, along with reasonably
harsh language on inflation to ‘explain’ to the markets the stinginess of their actions?
>
> I do agree with you that there will be a reversal tomorrow, and after every disappointment at the Fed’s actions. But that is froth. Mkts have to take profits where they can find them–and after 300 points down, the mkt looks cheap. Yes, mortgages are being made. Yes, investment banks will buy-out insurers (to minimize losses–even if the insurers eventually go bankrupt), and so on. You get profits where you can, or you lose all of your business.
Right, a basic driver of capitalism. The old ‘fear vs greed’ pendulum.
>But massive losses and write-downs will continue. Maybe they are
wrong to do it; maybe it is just paper shuffling; but it is worth
considering that after a few trillion dollars of losses, there could
be a real effect on the economy.
Sure, but you know as well as anyone the real economy is a function of agg demand. And there’s been no credible channel discussed of how agg demand gets reduced that’s showing up anywhere in the data. To the contrary, the non resident sector has suddenly become a source of demand for US output that’s already more than made up for the outsized
and sudden drop from the housing sector, as the bid for housing from sub prime borrowers vanished. That’s an example of a major demand channel vanishing that could have taken the economy down, but was coincidentally rescued by the foreign sector. The present value gains from the new export demands are roughly offsetting the pv losses from the sub prime bid vanishing. Hence, equity markets are up about 10% for the year.
The siv’s, the spv’s the junior tranches, and the super senior tranches all have massive negative present values. Yes, if we can ride it out, in 10 years they could all come back. As keynes said, life is too short.
We don’t have to ride out anything if our purchasing power is unchanged at the macro level, and we can sustain demand for our output.
>
> Even if all we are interested in is to predict what the fed and mkts are going to do, it is worth considering that the Fed BELIEVES it is fighting a Fisher-type 1930s debt deflation that will bring down the whole economy, and that most in the mkts also believe that is a plausible outcome.
Agreed!
>They might all be crazy. But they can be self-fulfilling.
yes, as above.
>So far as I know, EVERY former fed official who is now free to speak
is projecting more rate cuts and recession and maybe worse. That
includes mister inflation hawk Larry Meyer (for whom I TA-ed). The
notion that inflation is a problem just is not going to get traction.
maybe not. but they all blow with the wind- especially the media- and after this weeks inflation numbers we’ll have a better idea.
>
> I could be wrong, but I’m not paid to be right! I view it all as a bemused spectator. However, millions of Americans WILL lose their homes. Maybe they shouldn’t have them. I do not know, but I do lean toward the view that they should and that policy ought to aim for protecting home ownership. In any case, I find it very hard to believe that will have no effect on the economy.
We’ve already had the effect, as above, and it’s been offset by export earnings, at least so far. Maybe ‘millions’ will lose ownership, but they won’t be unemployed and homeless. They will rent, or get owner financing, or get bailouts from relatives, etc. Mtg rates are down from last summer, affordability is up, and employment is relatively high as well.
The only thing to fear is CNBC itself.
Thanks!!!
Warren
> L. Randall Wray
> Research Director
> Center for Full Employment and Price Stability
> 211 Haag Hall, Department of Economics
> 5120 Rockhill Road
> Kansas City, MO 64110-2499
> and
> Senior Scholar
> Levy Economics Institute
> Blithewood
> Bard College
> Annandale-on-Hudson, NY 12504
Thanks – sounds very similar to what we recommended to them – Fed acting as ‘broker of last resort’ between member banks in good standing. This will get the fed member banks over year end where the liquidity issues are currently concentrated.
Not sure why they didn’t announce this at the meeting to reduce vol after the statement.
http://www.ft.com/cms/s/0/6bcfd8ee-a80d-11dc-9485-0000779fd2ac.html?nclick_check=1
The Federal Reserve is set to overhaul the way it provides liquidity support to financial markets, following a negative reaction to Tuesday’s interest rate cut.
US stocks fell sharply after the central bank cut rates by only 25 basis points to 4.25 per cent and failed to offer a clear signal of more to come.
The overhaul, which could be announced as early as Wednesday, is likely to take the shape of a new liquidity facility that will auction loans to banks. This would allow the Fed to provide liquidity directly to a large number of financial institutions against a wide range of collateral without the stigma of its existing discount window loans.
The idea is that this would ease severe strains in the market for interbank loans, and help restore more normal conditions in credit markets generally.
However, it is unclear whether the new initiative will win over investors disappointed by Tuesday’s announcement. Many had hoped for a 50bp cut in the main interest rate, or at least a 50bp reduction in the discount rate, and a stronger indication of further cuts in the pipeline.
Dominic Konstam, head of interest rate strategy at Credit Suisse, said: “The Fed disappointed the market in lots of ways.”
The S&P 500 closed down 2.5 per cent at 1,477.65, after being up 0.4 per cent before the decision was released. The yield on the two-year Treasury note was at 2.92 per cent, down from 3.14 per cent.
The sell-off spread to Asia and Europe on Wednesday. Shares in Hong Kong led the retreat, with the Hang Seng index falling 705.78 points or 2.4 per cent to 28,521.06, while the Nikkei 225 slumped 112.46 points or 0.7 per cent to 15,932.26.
In Europe, banks and companies with heavy US exposure led fallers. The FTSE 100 was down 61.6 points or nearly 1 per cent, while the Dax 30 shed 48.51 points or 0.6 per cent to 7,960.91. The CAC 40 in Paris fell 64.96 or 1.1 per cent to 5,659.80.
The Fed said the deterioration in financial market conditions had “increased the uncertainty surrounding the outlook for economic growth and inflation”.
But while it dropped its assessment that the risks to growth and inflation are “roughly balanced”, the Fed did not say that it now thinks the risks to growth outweigh the risks to inflation.
It offered no assessment of the balance of risks, saying it would act “as needed” to foster price stability and sustainable economic growth. This formula in effect means the Fed is keeping its options open.
Investors could infer a willingness to consider future rate cuts, but the signal was weaker than many had expected. This reflects the fact that the Fed remains more concerned about the risks to inflation than most investors.
The Fed said “incoming information suggests that economic growth is slowing” reflecting an “intensification of the housing correction” and “some softening in business and consumer spending.” It acknowledged that “strains in financial markets have increased in recent weeks”.
However, the US central bank made almost no changes at all to its language on inflation, reiterating that “energy and commodity prices, among other factors, may put upward pressure on inflation”.
Eric Rosengren, a committee member and president of the Boston Fed, dissented in favour of a 50bp cut. At the last meeting, Tom Hoenig, president of the Kansas City Fed, dissented in favour of no cut.
Money market traders had earlier priced in a decline in Libor when it sets on Wednesday. Later, those expectations reversed and one-month Libor is seen at 5.21 per cent on Wednesday, up from an estimate of 4.96 per cent and above Tuesday’s setting of 5.20 per cent.
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