Category Archives: Interest Rates

Re: change of govt = change of practice

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On Dec 5, 2007 11:50 PM, Wray, Randall wrote:
> Bill: thanks. Yes I think the data are overwhelming for very serious problems, for deep recession, and for rate cuts.
the problems to the real economy aren’t showing up yet

  1. exports have been more than filling the housing gap- as long as foreigners continue the move to ‘spend their hoard’ of $US we can probably muddle through for quite a while.
  2. housing feels like it’s bottomed and won’t be subtracting from gdp. mtg rates are lower than in august and banks are pushing hard to loan directly without the securitization process and are keeping the (wider) spreads for themselves.
  3. none of the losses so far have been anything more than rearranging financial assets and have not resulted in business interruption in the real economy.
  4. unlike the 30’s, we are not on the gold standard. If we had been on it, instead of the run up in gold prices of recent years the same relative value changes would have instead been evidenced by a massive deflation (gold held constant), outflows of gold from the govt, and maybe higher rates to keep that from happening, eventual devaluation (1934), and more powerful motivation for trade wars- all like the 1930’s and other standard gold standard collapses. So comps with the 1930’s can be highly misleading. With today’s non convertible currency the ‘adjustments’ are very different and the financial stresses tend to be more removed from main street. Note the s and l crisis, the crash of 87, the 98 credit crisis had relatively minor effects on gdp. Loans create deposits unconstrained by the gold supply, and capital is likewise both endogenous and not constrained by gold. Instead, all is constrained by income, and govts are pretty good at sustaining that at least at modest levels during slowdown with countercyclical tax structures leading the way, and lots of ‘off balance sheet deficit spending’ leaking out all over the world. This includes massive state bank lending from China, to even the eurozone (though that may be catching up with them under current arrangements), and budget deficits around the world sufficient for the moment to keep things muddling through.

> there is a very large body of evidence to indicate this is the worst situation seen in the US since the 1930s. It is a good time for >pragmatism and for throwing out silly rules. Central bankers are doing what they can. Unfortunately, as we all know only too well, the importance of fiscal policy is not understood.

Right, while I would cut rates to 0, I would also offset the resulting fiscal drag but cutting social security taxes. Irony is current rate cuts in isolation tighten the fiscal balance.
(http://www.epicoalition.org/docs/Forstater_Mosler_article.pdf)

Also, I’m thinking a world wide cap on the $ price of imported crude and domestic gasoline prices might be a short term path to price stability and a long term path to using less of it as costs of production rise and it can’t be sold profitable.

Just in the beginning stage of this concept!

Meanwhile, I don’t think any slowdown will cut net demand for crude sufficiently to take away Saudi and Russian pricing power for at least the next 6 months. and if they simply spend their income here the higher prices won’t slow gdp, just hurt our real terms of trade and keep upward pressure on cpi which is starting to spill over to core, and which the Fed won’t ignore as it climbs past 4, 5 and 6%.

warren

>There isn’t too much reason to be optimistic. As they say, we live in
interesting times, that are making us long for boring. See you in
January.
>
> 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
>
> ________________________________
>
> From: Warren Mosler [mailto:warren.mosler@gmail.com]
> Sent: Wed 12/5/2007 8:13 PM
> To: Bill Mitchell
> Subject: Re: change of govt = change of practice
>
>
>
>
> Hi Bill, good info, thanks very much!
>
> warren
>
> On Dec 5, 2007 3:48 PM, Bill Mitchell wrote:
> > dear warren
> >
> > history was made yesterday – the RBA published the minutes of their
> > meeting
> > on Tuesday where they spell out their reasoning on rates (no change).
> > This
> > is the first time they have done that and it follows the election
> > campaign where
> > Rudd made a big point of returning honesty and transparency to his govt
> > after
> > the bad howard years of lying and covering up anything that moved.
> >
> > So you can see the minutes tell you that a further rate rise is now not
> > inevitable
> > despite inflation being above the magic upper bound of 3 and despite
> > them expecting
> > it to remain that way for at least 6 months more.
> >
> > They are now saying that world trends are for lower interest rates to
> > cope with the
> > worsening credit crisis.
> >
> > So: (a) their strict Inflation Targetting is being violated by “other
> > concerns”
> > (b) they think the US is heading for recession.
> >
> > local commentators last night said the Fed will lower by 0.5 next week
> > after BOC went
> > down this week and BOE is heading that way too.
> >
> > anyway, today the CofFEE conference starts – 2 days.
> >
> > see you
> > bill

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MBA Mortgage Applications Index for Nov. 30 shows lower rates

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interesting how mtg rates are lower than at the Oct 31 fed meeting.

U.S. MBA Mortgage Applications Index for Nov. 30 (Table) 2007-12-05 07:00 (New York)
By Terry BarrettDec. 5 (Bloomberg) — Following is a summary of U.S. mortgage activity from the Mortgage Bankers Association.

Nov 30 Nov 23 Nov 16 Nov 9 Nov 2 YoY%
—— Weekly Change (SA) —– -NSA-
Markt Index 22.5% -5.2% -3.6% 5.5% -1.6% 24.2%
Purchases 15.2% -4.9% -2.0% 4.8% 0.0% 9.5%
Refinancing 31.8% -4.9% -5.0% 6.4% -3.2% 38.8%
Fixed Rate 26.9% -3.9% -3.9% 3.9% -1.1% 4.2%
Adjust Rate -2.8% -11.9% -1.9% 15.1% -5.0% -39.7%
           
—– Contract Interest Rates —– Yr Ago
FRM 30-Yr 5.82% 6.09% 6.18% 6.19% 6.16% 5.98%
FRM 15-Yr 5.38% 5.69% 5.72% 5.76% 5.77% 5.66%
Balloon 7-Yr 5.23% 5.50% 5.35% 5.32% 5.26% 6.08%
Balloon 5-Yr 5.88% 6.28% 6.26% 6.10% 5.86% 6.58%
ARM 1Yr Tsy 6.28% 6.24% 5.97% 5.98% 5.94% 5.79%
FHA 203(b) 5.97% 6.06% 6.12% 6.21% 6.22% 6.10%
           
—– Apps (NSA)   —–  
Total            
Average Loan Size $242.0 $245.7 $244.6 $243.7 $241.6 $244.3
Number Change 51.5% -25.5% -5.2% 4.2% -2.4% 3.7%
$ Volume Change 49.2% -25.2% -4.9% 5.1% -3.5% 6.0%
Purchases            
Average Loan Size $239.0 $240.5 $234.5 $233.9 $234.0 $239.0
Number Change 37.2% -18.7% -5.5% 2.1% -1.6% -1.3%
$ Volume Change 33.9% -16.6% -5.3% 2.0% -3.6% 0.3%
Refinancings            
Average Loan Size $243.6 $251.9 $254.6 $253.3 $249.5 $249.7
Number Change 64.9% -32.3% -5.0% 6.4% -3.2% 9.2%
$ Volume Change 63.6% -33.0% -4.5% 8.0% -3.3% 12.3%
           
—– Indexes (SA) —–    
Market Index Level 791.8 646.3 681.7 707.3 670.6 681.7
Purchases 464.3 403.2 424.1 432.6 412.7 412.9
Refinancings 2761.3 2093.0 2199.9 2315.7 2176.1 2249.0
Fixed Rate 733.8 578.4 602.1 626.7 603.3 609.8
Adjust Rate 2016.6 2074.3 2533.2 2401.9 2085.9 2194.9
           
Conventional Index 1138.4 933.5 977.4 1017.0 960.0 982.2
Conventional Purchase 695.4 609.8 639.3 653.9 622.7 625.9
Conventional Refinance 3006.1 2283.3 2371.1 2503.6 2336.2 2433.2
Conventional FRMs 101.6 831.0 857.5 895.9 859.4 875.0
Conventional ARMs 2919.3 3035.1 3435.9 3602.1 3024.6 3181.8
           
Govt Index 214.0 167.4 188.7 190.8 188.0 180.7
Govt Purchas 133.9 107.9 116.4 116.4 112.7 108.5
Govt Refi 1475.9 1093.5 1304.1 1331.1 1339.8 1283.7
Govt FRMs 204.3 157.6 176.6 178.1 176.7 168.0
Govt ARMs 428.3 383.7 454.9 468.1 436.4 460.8

NOTE: March, 16 1990=100. Contract interest rates assume a 20% down payment. Average loan size is in thousands.

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Bank capital NOT a constraint on lending

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Here’s the response to Jan’s (Goldman) concern about lost capital constraining lending.

Bank capital grows endogenously- it’s not a constraint on lending apart perhaps from the very near term.

Banks ‘know’ the cost of capital, and the roe’s they need to make to pay for new capital.

For example, if Citi paid 11%, and they can leverage it 15 times, that’s about a .75% ‘add on’ to their cost of funds for funding loans.

With floating fx, the causation is ‘loans create deposits’ and this applies to availability of bank capital as well.

So it’s all about price, not quantity, for both loans and capital.

And banks currently do have a lot of ‘room’ for lending with current capital levels.

Like the recession, this all reminds me of the sign that says ‘free beer tomorrow.’

High oil won’t hurt gdp us as long as the producers are spending their income here.

It will hurt our standard of living and help theirs- real terms of trade and all that.

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FreddyMac house prices fall

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NOTE THE HEADLINE BELOW VS THE STORY-PRICES ARE STILL UP YEAR OVER YEAR:

Home Prices Suffer Biggest Drop In 25 Years

(Reuters) U.S. home prices dropped the most in a quarter century in the three months to the end of September on an annualized basis as inventories, restrictive lending and a credit crunch yanked support from the market, a Freddie Mac index showed.

The Freddie Mac Conventional Mortgage Home Price Index Classic Series fell an annualized 1.3 percent last quarter, compared with appreciation of 0.5 percent in the second quarter, the No. 2 home funding company said in a statement.

Year-over-year, prices rose 1.9 percent, a sharp retreat from the 7.8 percent growth seen a year earlier, it said.

“Lenders have tightened underwriting standards, and the turbulence in the capital markets led to a spike in the cost of jumbo loans,” Frank Nothaft, Freddie Mac’s chief economist, said in the statement. That added to the weight on prices from house inventories at their highest since 1985, he said.

The Freddie Mac index measures all loans outside of government programs and includes data from both home purchase transactions and mortgage refinancings based on appraisals. The index echoes trends in other widely watched measures.

The Standard & Poor’s Case-Shiller National Home Price Index last month showed prices slid 4.5 percent in the third quarter from a year earlier.

Declining home prices have triggered a crisis in mortgage lending by revealing weaknesses across hundreds of thousands of loans made through the U.S. housing boom. Loans made to risky, subprime borrowers and those that required no equity from the borrower have led to soaring defaults, leading lawmakers and the Bush administration to pursue various efforts to stall resulting foreclosures.

Realty Check with Diana Olick

A plan supported by Treasury Secretary Henry Paulson that aims to freeze rates on many subprime loans will do little to slow the housing downturn, analysts said.

“Many government and policy-makers feel this is a subprime problem,which is completely wrong,” said Paul Miller, an analyst at Friedman Billings Ramsey, in a research note. “This is a high loan-to-value and overvalued housing problem!”

house price index showed home prices in the Pacific region posted thefastest rate of depreciation, at 3.5 percent, annualized.

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Surprise! CEOs Aren’t Too Worried About Economy

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Fed says they watch this closely:

Surprise! CEOs Aren’t Too Worried About Economy

U.S. chief executives’ view of the economy improved in the fourthquarter, although they have become far more concerned about energy prices than they were a year ago, according to a survey by the Business Roundtable.

The group said its quarterly CEO Economic Outlook Index rose to 79.5 in the quarter, from 77.4 in the third quarter. It is below the 81.9 reading in the fourth quarter of 2006. Anything above 50 indicates growth.

The reading suggested that, even with the United States two years into a housing slump and with businesses facing a credit crunch and high energy prices, CEOs are expecting a controlled slowdown in growth, a Roundtable official said.

“America’s CEOs are expecting the economy to continue in a pattern of softer growth,” said Harold McGraw, chairman and chief executive of McGraw-Hill Companies, who also chairs the Business Roundtable.

“People keep waiting for shoes to drop and you do have a housing recession and you do want to watch if there could be any spillover effect from that, which we have not really seen,” McGraw said on a conference call with journalists.

“CEOs are getting a little bit more comfortable that we are slowing down a little bit as an economy,” he added. “But there aren’t huge dark clouds out there. But again, we have to pay attention to the consumer and the consumer behavior patterns.

The cost of health care and energy topped their list of cost worries, with twice as many CEOs citing energy as their main worry than a year earlier.

Oil prices hit record highs near $100 last month before falling back below $90 on concerns a slowing economy would crimp demand. U.S. light crude oil futures were trading at $87.56 Tuesday.

High energy prices and slowing growth are taking a toll across the economy. Delta Air Lines warned Wall Street Tuesday that those factors would take a toll on its results, while rival Southwest Airlines Co said it was cutting back capacity growth plans.

CEOs expect U.S. gross domestic product to rise 2.1 percent next year. It was their first forecast of 2008 GDP.

Fifty-one percent of respondents did not expect to change their capital spending plans over the next six months and 45 percent — a plurality of respondents — expect their company’s U.S. employment toremain flat.

The survey, conducted between Nov. 5 and Nov. 20, took the pulse of 105 of the group’s 160 member companies. Collectively, Roundtable members generate $4.5 trillion in annual revenue.

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BoC cuts rates

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Makes a lot more sense to Central Bankers to cut with a strong currency than a weak one, particularly with the strong currency keeping prices below their inflation targets.

The ECB, however, is looking at 3% cpi, and would rather not see the Fed cut, as they believe that would weaken the $ and bring more criticism from their eurozone exporters, as well as draw more agg demand away from the eurozone, making it that much more difficult politically for the ECB to act within its price stability mandate.

OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 4 1/4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 4 1/2 per cent.Since the October Monetary Policy Report (MPR), there have been a number of economic and financial developments that have a bearing on the prospects for output and inflation in Canada.Consistent with the outlook in the MPR, the global economic expansion has remained robust and commodity prices have continued to be strong. The Canadian economy has been growing broadly in line with the Bank’s expectations, reflecting in large part underlying strength in domestic demand. However, both total CPI inflation and core inflation in October, at 2.4 per cent and 1.8 per cent respectively, were below the Bank’s expectations, reflecting increased competitive pressures related to the level of the Canadian dollar. The Bank now expects inflation over the next several months to be lower than was projected in the MPR. In the context of exceptional volatility in global financial markets, the Canadian dollar spiked well above parity with the U.S. dollar in November, but it has recently traded closer to the 98-cent-U.S. level assumed in the October MPR.Overall, the Canadian economy continues to operate above its production capacity. Given the strength of domestic demand and weak productivity growth, there continue to be upside risks to the Bank’s inflation projection.However, other developments since October suggest that the downside risks to the Bank’s inflation projection have increased. Global financial market difficulties related to the valuation of structured products and anticipated losses on U.S. sub-prime mortgages have worsened since mid-October, and are expected to persist for a longer period of time. In these circumstances, bank funding costs have increased globally and in Canada, and credit conditions have tightened further. There is an increased risk to the prospects for demand for Canadian exports as the outlook for the U.S. economy, and in particular the U.S. housing sector, has weakened.All these factors considered, the Bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009. In light of this shift, the Bank has decided to lower the target for the overnight rate. At its next interest rate decision in January, the Bank will assess all economic and financial developments and the balance of risks. A full projection for the economy and inflation will be published in the Monetary Policy Report Update on 24 January 2008.

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Cut mania spreading!

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U.K. Economists Call for Immediate Rate Cut, TelegraphReports

(Bloomberg)U.K. economists urged the Bank of England to cut interest rates as a matter of urgency after the sterling inter-bank market’s fastest decline in modern times, the Daily Telegraph reported. The volume of market loans in the banking system fell from640 bln pounds ($1.3 trillion) at the start of the credit crisis to249 bln pounds by the end of September, the newspaper said.

seems these were absorbed by the banking system, much like in the US?

Tim Congdon, a professor at the London School of Economics, called for a half-point rate cut, to 5.25 %, when the central bank’s Monetary Policy Committee meets on Dec. 5, commenting that a market that’s taken 30 years to build “has completely imploded in a matter of months,” the Telegraph said. Patrick Minford, a professor at Cardiff University, wants a three-quarter-point cut, saying the committee has been “standing idly by” as three-month London Inter-Bank Offered Rate spreads shot up by 75 basis points; he described the central bank’s behavior as “highly irresponsible, neglecting a century of monetary teaching,” the newspaper said.

There was no such market a century ago, as above. What the advantage of market loans verses non market loans is to the real economy is never discussed.

If there is a real problem, it would be real borrowers no longer able to obtain credit. That’s never discussed as a reason to cut.

Peter Warburton, of Economic Perspectives, called for a half-point cut at once and a further easing in the new year, the Telegraph added.

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