Daily Archives: October 12, 2010 @ 2:27 pm (Tuesday)

Weber Says ECB Should Start to Phase Out Bond Purchases ‘Now’

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>   
>   (email exchange)
>   
>   On Tue, Oct 12, 2010 at 1:17 PM, Kevin wrote:
>   
>   Warren
>   
>   I am interested in your views on this development
>   
>   It would strike me as either blather or a dramatic reversal of fortune for
>   the continent
>   
>   Any thoughts?
>   

Weber has been against it from day one, which tells me he doesn’t get it at all. For now he’ll keep getting over ruled, but that can change down the road when ECB management turns over.

Yes, if this were to happen in this kind of economy it could all head catastrophically south very quickly again, and, as before, not end until the ECB resumes writing the check.

The problem is he doesn’t understand that inflation and currency weakness would follow from excess spending by the national govts, which is both not the case and under control of the ECB while they are funding. Instead he thinks the bond purchases per se somehow matter, though with no discernible transmission channel.

Weber Says ECB Should Phase Out Bond Purchases ‘Now

By Gabi Thesing and Christian Vits

October 12 (Bloomberg) — European Central Bank Governing
Council member Axel Weber said the ECB should stop its bond-
purchase program and signaled that it’s time for officials to
show how they will withdraw other emergency measures.

“As the risks associated with the Securities Markets
Program outweigh its benefits, these securities purchases should
now be phased out permanently,” Weber said, according to the
text of a speech delivered in New York today.

“As regards the two dimensions of exit consisting of
phasing-out non-standard liquidity measures and normalizing our
clearly expansionary monetary policy, there are risks both in
exiting too early and in exiting too late,” Weber said. “I
believe the latter are greater than the former.”

Weber’s comments are the strongest so far from any official
on how the ECB will withdraw its emergency stimulus measures.
They come as governments and banks in some euro nations such as
Ireland and Portugal struggle to convince investors about their
financial health and as other major central banks signal their
willingness to add more stimulus to their economies.

The remarks also come less than a week after ECB President
Jean-Claude Trichet’s last policy statement, when he declined to
comment on the timing of the ECB’s exit strategy.

The bond purchases were opposed by Weber when they were
started in May as part of a strategy to keep the euro region
together after the Greek crisis threatened to undermine the
currency. The ECB stepped up its bond purchases at the end of
September, buying 1.38 billion euros ($1.9 billion) in the week
to Oct. 1, as tensions reemerged in Portugal and Ireland.

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Unfunded state and local pensions

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Not to worry – as long as they keep full allocations to equity markets the coming doubling of equity prices over the next few years will bail them out.

Provided the political leadership doesn’t get too serious about federal govt deficit reduction with tax increases and spending cuts.

US Cities Face Half a Trillion Dollars of Pension Deficits

By Nicole Bullock

October 12 (FT) — Big US cities could be squeezed by unfunded public pensions as they and counties face a $574 billion funding gap, a study to be released on Tuesday shows.

The gap at the municipal level would be in addition to $3,000 billion in unfunded liabilities already estimated for state-run pensions, according to research from the Kellogg School of Management at Northwestern University and the University of Rochester.

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Comments on China’s temporary hike of Reserve Requirements

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The lesson should be changing reserve requirements for a non convertibility currency, as the yuan is domestically for all practical purposes, doesn’t alter liquidity, but does alter balance sheet composition and pricing necessary to hit return on equity targets.

And looks to me more like their stealth inflation problem hinted at previously hasn’t yet been reigned in to their satisfaction?

  • 50bp hike in RRR for six large banks, valid for two months
  • the unusual temporary move reflects the central bank (PBoC)’s concern over strong lending appetite and hot money inflow
  • the PBoC is likely to follow up with more measures based the effectiveness of current policy
  • a lesson to the developed country on how difficult it is to rein in excessive liquidity

According to Reuters, China has raised reserve requirements by 50 basis points for six large commercial banks to 17.5%. It is reported that the move is only temporary and will be in place for two months. However there is no official statement from the central bank yet.

These six banks account for around 40% of China’s total lending and nearly 50% of the total bank assets. The 50bp hike in reserve requirement ratios will lock up about CNY150 bn of deposits.

We think the unusual temporary measure reflects the PBoC’s concern over excessive liquidity in the domestic economy on the backdrop of a robust growth. The total banking lending from January to August has reached 76% of the full-year target (CNY7.5 trillion), which means the monthly lending needs to be below CNY450 bn. However the domestic credit demand still seems to be very strong. Another possible reason for this move is the mounting evidence that the hot money is flowing back due the increasing pressure on the yuan appreciation.

The PBoC move speaks of the problems in managing a generous liquidity policy and stands as both a warning and a contrast to those other central banks considering a further round of quantitative easing. Once a generous liquidity policy is in place, it becomes difficult to wean dependent companies off the cheap and easy liquidity flow. Whereas the PBoC is not “pushing on a string” and there is genuine demand for this liquidity, the warning to the US federal reserve is clear. Even for economically well-administered economies, the latter stages of generous liquidity policies become very difficult to manage. Zombie (cheap liquidity dependent) companies, potential asset bubbles and the intractability excess liquidity are all legacy issues central banks
considering QE2 must consider.

Except that those are not the result of QE, but of what is functionally fiscal support for zombies, and the only effect zombies have on the real economy is that they waste valuable labor hours. Unfortunately no one seems to know how to keep fiscal drag low enough to sustain full employment so they see political benefit to useless employment.

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