Author Archives: WARREN MOSLER

Re: ECB funding Spanish mortgage banking system

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(an interoffice email)

Deep,

Interesting!

In the case of a bank failure, Spain still is the entity that would
repay depositors. To get the funds Spain would somehow liquidate the
failed bank. If the loss was large enough so that Spain couldn’t
raise the funds to pay off the depositors (via both liquidating the
bank and attempting to borrow in the credit markets) payment to the
depositors would be delayed until Spain did raise the funds.

The ECB would either return the mtg collateral to Spain for payment,
or, if Spain would not or could not receive the collateral vs payment,
the ECB would liquidate the collateral and hold Spain responsible for
any deficiency balance.

This makes the ECB much like any other depositor, but with collateral
as security.

It does not reduce the risk of loss to bank shareholders should the
mtgs not perform.

It does not remove ultimate liability from Spain.

It does not involve risk to the ECB beyond that of Spain paying for
any deficiency, and presumably the ECB isn’t loaning at 100% of market
value.

It does not create a ‘moral hazard’ issue as bank shareholders and
Spain are still in first loss position for any loan losses.

It does prevent a disruptive ‘fire sale’ from ‘technical volatility’
of forced liquidations.

It does provide bank funding at the ECB’s target rate for interbank
lending, which is what the target is all about, so that seems ok?

I have no problem with institutional structure that doesn’t use the
liability side as a source of ‘market discipline’ and instead uses
capital requirements/ratios/gap rules, etc. and regulates the asset
side as well?

And with the right haircuts and regs funding non bank mtg production
can likewise suit public purpose.

>Spanish banks funding mtgs at the ECB
>
> Shortcut to:
> http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/28/bcnspa
> in128.xml
>
>
>

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Claims, ECI

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From Karim:

  • True to the past 5yrs pattern, claims seem to be reverting to trend after the first few weeks of January.

Right, good call!

  • IJC climbed from 306k to 375k; the trend before the January drop was around 340-350k; this number was for MLK holiday week, so an adjustment issue here as well; bottom line is I think trend is still around 350k.
  • Continuing claims rose from 2685k to 2716k.
  • ECI (both headline and wage component) up 0.8% q/q

Data below is for Dec, so was largely known in yday’s GDP number.

  • Personal income up 0.5%, with wage and salary component up 0.4%
  • Core PCE up 0.2% m/m (2.2% y/y)

Most meaningful data here was continuing claims (little to no hiring taking place) and ECI (wage gwth still tame).

And Fed still looking at this as an indication of ‘inflation expectations’.

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Monoline proposal

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Fed by itself or working with AAA counterparty offers to sell supplemental bond insurance to investors. (AFLAC concept)

Maybe charge a point and insure up to a price of maybe 99, or whatever combo works.

Worst case the current insurers are downgraded to AA, so they should still be able to cover losses, so risk is minimal to the new insurer, and fees will likely be profits.

Only investors who care would buy it.

Bonds would remain AAA rated.

The key is the current insurer’s capital is still in first loss position, and the current insurance is probably still money good, or they’d be talking about a downgrade way below AA.

And not all bond holders care about AAA vs AA. Only those who care buy the supplemental insurance.

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Poland cutting demand

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This has been much the same for new members that previously had higher budget deficits.

It firms the Euro and keeps unemployment higher than otherwise.

[Before the euro, tight fiscal was ‘offset’ by the national CBs bought $ (I call that ‘off balance sheet deficit spending’) which supported employment and net export growth. While exports are a real cost, and this process thereby came at a real cost to the domestic standards of living, it did make the numbers (GDP, employment) look good.]

Poland likely to slash deficit in euro convergence plan

(Thomson Financial) Poland is likely to lower the public sector deficit in its new convergence programme for joining the euro, targetting a cut in its deficit to 1 pct of gross domestic product by 2011, a deputy finance minister said today.

He also said the government would aim to cut the 2009 deficit by several billion zlotys from the 27.1 bln zlotys planned for this year.

“From the convergence programme which should be approved by the government and sent to Brussels, it is possible that in 2008 the general government deficit will be 2.6-2.7 pct (of GDP), and in 2009 2-2.5 pct,” Stanislaw Gomulka, one of Poland’s four deputy finance ministers, said today. “In 2010 it may be around 1.5 pct and in 2011, 1 pct. I think the discussion will concern these levels,” Gomulka told reporters on the sidelines of a conference in Warsaw.

Asked by Thomson Financial News about next year’s deficit, he said: “The government may assume in its work on the 2009 budget, a deficit of several billion zlotys lower than the 27.1 bln zlotys planned for 2008.” The government normally lodges its initial budget assumptions in the middle of year after several months of consultations with other ministries.

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Oil comments

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Iraqi Oil Minister Sees No Output Change from OPEC

(Reuters) Iraq’s oil minister Hussain al-Shahristani said on Thursday there was no sign of any shortage of oil in international markets and he did not expect OPEC to change its output levels at a meeting this week.

Saudis might like letting prices sag in front of meetings to stave off production increase talk.

“Quite frankly, the data we are looking at do not show any shortage of oil on the market. The prices are not really affected by any fundamental market forces,”

Right, just the Saudis (and probably Russians as well) setting price and letting the quantity they pump adjust, aka acting as swing producer.

Shahristani said ahead of the meeting on Friday of OPEC oil ministers in Vienna.

Twin themes continue – moderating demand and inflation.

So far, the Fed is directing all its efforts to the demand issue, including support for the coming fiscal package.

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Valance Weekly Economic Reports: Global News Highlights

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Same twin themes taking hold – weakness and inflation.

Highlights:
US Mixed data
EU Softening data could change ECB’s inflation rhetoric
JN CPI Higher on food, energy prices; Mixed data continues
UK Housing Market Continued To Show Weakness
AU Businesses Less Confident About Q1 economic outlook

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GDP/ADP

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From Karim:

  • GDP slows from 4.9% to 0.6%
  • Personal consumption slows from 2.8% to 2.5%
  • DGO strength in Dec shows up in modest positive in equipment and software (+3.8%)
  • Residential FI (housing) down 23.9%
  • Core PCE up 2.7% annualized for quarter and 2.1% y/y
  • Net exports add 0.4% to gwth
  • Inventories a drag by 1.25%
  • Inventory/shipment ratio still at recent highs, so unlikely that inventory drag is over yet
  • ADP gain of 130k signals upside risk to consensus 65k advance in nfp; while usually reliable, adp has also had some spectacular misses
  • In light of decline in jobs hard to get component of conference board survey and adp, will call for 90k gain in nfp Friday.
  • Pretty long period between jan and march fed meetings (next meeting march 21). So by next meeting, will have 2 nfp reports to look at as well as decent idea on Q1 gwth. Bernanke testimony likely on 2/27.

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2008-01-30 US Economic Releases

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2008-01-30 MBAVPRCH + 4 Wk Ave + 12 Wk Ave

MBAVPRCH Index + 4 Wk Ave + 12 Wk Ave

From Karim:
very volatile series-see chart-white line is purchase index-purple line is 4wk avg and green line is 12wk avg-latter is probably best indicator of trend and looks like still heading lower. Of course this series also reflects multiple applications for same home purchase, which is more likely over the past few months in light of tighter standards for many borrowers, so probably have to adjust for that compared to same series a year ago.

2008-01-30 MBAVREFI

MBA Refinancing Index (Jane 25)

Survey n/a
Actual 5103.6
Prior 4178.2
Revised n/a

Refi index positive for ‘market functioning’, but purchase index could be softening.

As before, winter housing numbers are volatile.

2008-01-30 ADP Employment Change

ADP Employment Change (Jan)

Survey 40K
Actual 130K
Prior 40K
Revised 37K

Not the stuff of recession. While not a reliable predictor of Friday’s payroll report, it is a ‘real’ number as it’s ADP’s report of 392,000 business it services.

2008-01-30 GDP Annualized

GDP Annualized (4Q A)

Survey 1.2%
Actual 0.6%
Prior 4.9%
Revised n/a

Lower than expected but still positive, consumer up 2% which is far from recession, and final sales for domestic purchases were up 1.4%, and the Dec export number won’t be reported until Feb 14. The durable goods number yesterday may portend a higher than estimated export number for the next Q4 GDP revised report. Inventories were burned off by 1.25% of GDP, which is also generally not indicative of recession.

2008-01-30 Personal Consumption

Personal Consumption (4Q A)

Survey 2.6%
Actual 2.0%
Prior 2.8%
Revised n/a

Down but not terrible, and not the stuff of recession

2008-01-30 GDP Price Index

GDP Price Index (4Q A)

Survey 2.6%
Actual 2.6%
Prior 1.0%
Revised n/a

Not good.

2008-01-30 Core PCE QoQ

Core PCE QoQ (4Q A)

Survey 2.5%
Actual 2.7%
Prior 2.0%
Revised n/a

Very troubling to the Fed. Mainstream theory says you can’t let core elevate. The cost to bring it down is much higher than any possible losses due to near term weakness caused by keeping rates high.

2008-01-30 FOMC Rate Decision

FOMC Rate Decision (Jan 30)

Survey 3.0%
Actual 3.0%
Prior 3.5%
Revised n/a

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