Category Archives: ECB

Greece Sells 2 Billion Euros of 2015 Debt to Banks

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That spread for its own banks that it guarantees shows a serious funding issue.

During a period of euro weakness funding problems could become worse and spread to other euro nations.

When foreign govts. buy euros for their portfolio of fx reserves, they have to hold them in some kind of account or security. Most probably opt for eurozone national govt paper. Same with international institutional investors.

When they stop adding to their euro portfolios and/or reduce them, they stop buying and/or sell that paper.

The new holders of euro (those who buy the euros when portfolios sell them) may or may not buy that same govt paper, and the euros may instead wind up as excess reserves at the ECB in a member bank account, or even as cash in circulation as individuals who don’t trust the banks turn to actual cash. The banks with the excess reserves may or may not buy the National govt paper or even accept it as repo collateral, to keep their risk down, and instead simply hold excess reserves at the ECB.

Markets will clear via ever widening funding spreads as national govt paper competes for euros that are otherwise held as ‘cash reserves.’ The amount of reserves held at the ECB doesn’t actually change, apart from some going to actual cash.

What changes are the ‘indifference levels’- yield spreads- between having cash on your books and holding national govt paper risk. And the ability to repo national govt paper at the ECB doesn’t help much.

Would you buy Greek paper today if you were concerned it might default just because you could repo it at the ECB, for example?

Also, while Americans go to insured banks and Tsy secs when they get scared, Europeans exit the currency as they have a lot more history of hyper inflation.

That means a non virtuous cycle can set in with a falling euro making National govt funding problematic, which makes the euro continue to fall.

This happened a little over a year ago due to a dollar funding liquidity squeeze.

The Fed bailed them out with unlimited dollar swap lines and the euro bottomed at something less than 130 to the dollar.

This time it’s not about dollars so the Fed can’t help even if it wanted to.

And the ‘remedies’ of tax hikes and/or spending cuts Greece intends to pursue will only make it all worse, especially if undertaken by the rest of the eurozone as well. Fiscal tightening will only slow the economy and cause national govt. revenues to fall further, unless the taxes are on those taxpayers who will not reduce their spending (no marginal propensity to spend) and the spending cuts don’t reduce the spending of those who were receiving those funds.

And the treaty prevents ECB bailouts of the national govts. so any bailout from the ECB would require a unified Fin Min action and an abrupt ideological reversal of the core monetary values of the union towards a central fiscal authority.

This is somewhat analgous to what happened to the US when the original articles of confederation gave way to the current constitution in the late 1700’s..

Greece Sells 2 Billion Euros of 2015 Debt to Banks, Bankers Say

By Anna Rascouet and Christos Ziotis

Dec. 16 (Bloomberg) — Greece sold 2 billion euros ($2.9 billion) of floating-rate notes privately to banks, eight days after Fitch Ratings downgraded the nation’s debt as the government struggles to cut the European Union’s largest budget deficit, two bankers familiar with the transaction said.

The securities, which mature in February 2015, will yield 250 basis points, or 2.5 percentage points, more than the six- month euro interbank offered rate, or Euribor, they said. That’s 30 basis points higher than a similar-maturity Greek fixed-rate bond when converted into a floating rate of interest, according to data compiled by Bloomberg.

Greek bonds have fallen in the past week, with two-year note yields rising by the most in more than a decade on Dec. 8, when Fitch cut the nation’s credit rating to BBB+, the lowest in the euro region, citing the “vulnerability” of the nation’s finances. Prime Minister George Papandreou has been unable to convince investors he can reduce a deficit the government says will rise to 12.7 percent of gross domestic product this year, after the economy shrank 1.7 percent in the third quarter.

“Selling bonds via a private placement can be a double- edged sword at this point,” said Luca Cazzulani, a fixed-income strategist in Milan at UniCredit Markets & Investment Banking. “On the one hand, it shows that Greece can always find buyers for their bonds. But the market might take it as a sign that they only have this channel left.”

Widening Spread

Greek bonds rose snapped two days of declines today, with the yield on the 10-year note dropping 11 basis points to 5.62 percent as of 10:26 a.m. in London. It rose as much as 29 basis points yesterday to 5.76 percent, the highest since April 3.

Concern some countries may struggle to pay their debt was reignited after Dubai’s state-owned Dubai World said on Dec. 1 it wanted to restructure $26 billion of debt. The premium, or spread, investors demand to hold Greek 10-year bonds instead of German bunds, Europe’s benchmark government securities, rose as high as 250 basis points yesterday, the highest closing level since April 2. It narrowed to 239 basis points today.

The participating banks in yesterday’s private placement were National Bank of Greece SA, Alpha Bank AE, EFG Eurobank Ergasias SA, Piraeus Bank SA and Banca IMI SpA, the bankers familiar with the transaction said. Italy’s Banca IMI was the only foreign-based in the group.

Worst Performers

The government paid “generous” terms, said Wilson Chin, a fixed-income strategist in Amsterdam at ING Groep NV.

“I guess you have to pay some liquidity premium, given the sale was done at the end of the year,” he said. “I would be very surprised if they continue to use this method into the first quarter of next year. That would probably be taken as a sign the market isn’t working for them.”

Greek bonds are the worst performers after Ireland among the debt of so-called peripheral euro-region countries this year, handing investors a 3.5 percent return, according to Bloomberg/EFFAS indexes.

In a private placement, issuers offer securities directly to chosen private investors as opposed to selling them through an auction or via a group of banks.

Papandreou pledged in a speech two days ago to begin reducing the nation’s debt, set to exceed 100 percent of GDP this year, from 2012. The European Commission estimates the ratio at 112.6 percent of GDP this year, second only to Italy.

‘Painful Decisions’

“In the next three months we will take those decisions which weren’t taken for decades,” Papandreou said in Athens. He said many choices will be “painful,” though he promised to protect poorer and middle-income Greeks.

Credit-default swaps on Greece rose 1 basis point to 238.5, according to CMA DataVision, after surging 25.5 basis points yesterday. Such swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.


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Buiter blog

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The economics profession is a disgrace. None of them seem to fathom monetary operations.

Fiscal expansions in submerging markets

By Willem Buiter

This morality tale has important consequences for a government’s ability to conduct effective countercyclical policy. For a fiscal stimulus (current tax cut or public spending increase) to boost demand, it is necessary that the markets and the public at large believe that sooner or later, measures will be taken to reverse the tax cut or spending increase in present value terms.

Not true. This is some kind of ricardian equivalent twist that is inapplicable. For example, govt spending to hire someone is a direct increase in demand. And any dollar spent due to a tax cut increases demand by that dollar. (these are minimums)

If markets and the public at large no longer believe that the authorities will assure fiscal sustainability by raising future taxes or cutting future public expenditure by the necessary amounts, they will conclude that the government plans either to permanently monetise the increased amounts of public debt resulting from the fiscal stimulus, or that it will default on its debt obligations.

In fact that has already happened. As evidenced by the price of gold in an otherwise deflationary environment.

Permanent monetisation of the kind of government deficits anticipated for the next few years in the US and the UK would, sooner or later be highly inflationary.

‘Monetization’ alters interest rates, not inflation. Only to the extent that interest rates influence inflation does monetization influence inflation. And there’s not much evidence rates have much to do with inflation, and mounting evidence they have no influence on inflation. Not to mention my suspicions that lower rates are highly deflationary.

This would raise long-term nominal interest rates

Not directly- only to the extent market participants believe the fed will raise rates over the long term.

and probably give risk to inflation risk premia on public and private debt instruments as well.

Has already happened in many places.

Default would build default risk premia into sovereign interest rates, and act as a break on demand.

This has already happened and has not functioned as a break/brake? On demand or as a constraint on deficit spending.

Beacause I believe that neither the US nor the UK authorities have the political credibility to commit themselves to future tax increases and public spending cuts commensurate with the up-front tax cuts and spending increases they are contemplating,

Since taxes serve to moderate agg demand, this implies that when economies ‘overheat’ the authorities won’t tighten fiscal policy. However, the automatic fiscal stabilizers conveniently do that for them, as tax revenues rise during expansions faster than even govt can spend. And this fiscal consolidation does induce contraction and ends the expansion. It was the too low deficit in 2006 the slowed aggregate demand and began this latest down turn, with a little help from the drop in demand when the housing frauds were discovered.

I believe that neither the US nor the UK should engage in any significant discretionary cyclical fiscal stimulus, whether through higher public spending (consumption or investment) or through tax cuts or increased transfer payments.

There is no other way to add to aggregate demand, except by letting the auto stabilizers doing the exact same thing the ugly way- through a deteriorating economy- rather than proactively which prevents further decline.

Instead, the US and UK fiscal authorities should aggressively use their fiscal resources to support quantitative easing and credit easing by the Fed and by the Bank of England (through indemnities offered by the respective Treasuries to the Fed and the Bank of England to cover the credit risk on the private securities these central banks have purchased and are about to purchase).

Qe is just an asset shift that does nothing for aggregate demand, except possibly through the interest rate channel which, as above, is minimal if not counterproductive.

The £50 bn indemnity granted the Bank of England for its Asset Purchase Facility, by HM Treasury should be viewed as just the first installment on a much larger indemnity that could easily reacy £300 bn or £500 bn.

Purchasing financial assets doesn’t alter aggregate demand.

The rest of the scarce, credibility-constrained fiscal resources

Fiscal resources are not credibility constrained.

Japan today forecast deficits of over 200% of GDP with no signs of market constraints. In fact, their 10 year JGB’s trade at about 1.3%, and they were downgraded below Botswana.

of the US and the UK should be focused on recapitalising the banking system with a view to supporting new lending by these banks, rather than on underwriting existing assets or existing creditors.

Govt capitalization of banking is nothing more than regulatory forbearance. Bank capital is about how much private capital gets lost before govt takes losses. In the US, having the Treasury buy bank equity simply shifts the loss, once private equity is lost, from the FDIC to the Treasury, which funds the FDIC in the first place.

Other available fiscal resources should be focused on supporting, through guarantees and insurance-type arrangements, flows of new lending and borrowing. As regards recapitalisation and dealing with toxic assets I either favour temporary comprehensive nationalisation or the ‘good bank’ model. Existing private shareholders of the banks, and existing creditors and holders of unsecured debt (junior or senior) should be left to sink or swim without any further fiscal support, as soon as new lending, investment and borrowing has been concentrated in new, state-owned ‘good banks’.

The problem with banking is the borrowers can’t afford their payments. This needs to be fixed from the bottom up with payroll tax holiday or VAT holiday, not from the top down as he suggests.

It is true that, despite the increase in longer-term Treasury yields from the extreme lows of early December 2008, recent observations on government bond yields don’t indicate any major US Treasury debt aversion, either through an increase in nominal or real longer-term risk-free rates or through increases in default risk premia – although it is true that even US Treasury CDS rates have risen recently to levels that, although low by international standards, are historically unprecedented.

Yes, and 10 year rates in Japan are 1/3 of the US rates, and their debt is 3 times higher. He’s barking up the wrong tree.

In a world where all securities, private and public, are mistrusted, the US sovereign debt is, for the moment, mistrusted less than almost all other financial instruments (Bunds are a possible exception).

And Japan even less mistrusted with triple the deficits?

But as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits – figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics –

Only because those numbers include the tarp which is only a purchase of financial assets, and not a purchase of goods and services. Ordinarily tarp would have been done by the fed and the deficit lower, as it’s the Fed’s role to purchase financial assets. But this time it didn’t happen that way except for maiden lane and a few other misc. Purchases.

I expect that US sovereign bond yields will begin to reflect expeted inflation premia (if the markets believe that the Fed will be forced to inflate the sovereign’s way out of an unsustainable debt burden) or default risk premia.

That’s all priced in the TIPS and I don’t see much inflation fear there.

The US is helped by the absence of ‘original sin’ – its ability to borrow abroad in securities denominated in its own currency –

A govt doesn’t care which holders of its currency buys its securities. Deficit spending creates excess reserve balances at the Fed. The holders of those balances at the fed, whether domestic or foreign, have the option of doing nothing with them, or buying Treasury securities, which are nothing more than interest bearing accounts also at the Fed. The other option is spending those balances, which means the fed transfers them to someone else’s account, also at the Fed.

and the closely related status of the US dollar as the world’s leading reserve currency. But this elastic cannot be stretched indefinitely. While it is hard to be scientifically precise about this, I believe that the anticipated future US Federal deficits and the growing contingent exposure of the US sovereign to its financial system (and to a growing list of other more or less deserving domestic industries and other good causes) will cause the dollar in a couple of years to look more like an emerging market currency than like the US dollar of old. The UK is already closer to that position than the US, because of the minor-league legacy reserve currency status of sterling.

Meaning what? Just empty rhetoric so far.

Under conditions of high international capital mobility, non-monetised fiscal expansion strengthens the currency if the government has fiscal-financial credibility, that is, if the markets believe the expansion will in due cause be reversed and will not undermine the sustainability of the government’s fiscal-financial-monetary programme.

It’s a function of nonresident ‘savings desires’ of US financial assets.

If the deficits are monetised, the effect on the currency is ambiguous in the short run (it is more likely to weaken the currency if markets are forward-looking),

Because it’s a non event for the fed to buy financial assets, apart from small changes in term interest rates.

but negative in the medium and long term. If the increased deficits undermine the credibility of the sustainability of the fiscal programme, then the effect on the currency could be be negative immediately.

Ok, lots of things can turn traders against anything that’s traded. No news there.

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ – the cessation of capital inflows to both the private and public sectors.

With non convertible currency and floating fx there is no such possible constraint on federal spending and/or federal lending. The private sector, and other users of the currency, is a different story, and always vulnerable to a liquidity crisis.

Hence the ECB was bailed out by the fed with unlimited swap lines (functionally unsecured dollar loans from the Fed) when its member banks got caught short dollars last year.

That was their ‘sudden stop’ and it happened only because of foreign currency issues, not euro issues, and it happened to the private sector, not the public sector. Not to say current institutional arrangements don’t make the euro national govts subject to liquidity issues, but that’s another story.

There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers.

Yes, it’s about credit worthiness for borrowers who are users of a currency and not govts. In their currency of issue.

But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

The fact that this article has any credibility speaks volumes.


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EU Officials Say Stimulus Exit Unlikely Before 2011

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They are worried raising rates will further support the euro.

And they all seek a quick return to ‘fiscal responsibility’

This all should insure the Eurozone remains characterized by high unemployment and elevated systemic risk


EU Officials Say Stimulus Exit Unlikely Before 2011

By Svenja O’Donnell and Chris Burns

Oct. 1 (Bloomberg) — European Union finance chiefs said the pace of recovery means they probably won’t withdraw stimulus measures before 2011 as they grapple with rising unemployment and the effects of the euro’s gains.

“We look with concern to the exchange-rate developments and the impact of our ability to export,” Portuguese Finance Minister Fernando Teixeira dos Santos said today in an interview with Bloomberg Television at a meeting of European finance chiefs in Gothenburg, Sweden. “But we should expect markets to react appropriately to the fundamentals of our economy.”

The finance officials are discussing the form and timing of exit strategies after spending billions of euros in emergency measures to drag the economy out of its worst recession in 60 years. While there are signs the recovery is under way, it may not be sustained enough to permit a withdrawal of these measures before 2011, ministers said.

“We have to prepare exit strategies, of course, and we shall see if these strategies can be implemented then in 2011,” Luxembourg’s Jean-Claude Juncker said after leading a meeting of euro-area finance chiefs today. “We shall see whether this situation becomes more stable by then.”

The euro, which has gained 13 percent in the past seven months against the dollar, traded at $1.4544 at 2:10 p.m. in London today, down from $1.4640 in New York yesterday.

Euro’s Advance

The ministers discussed the euro’s advance in preparation for a Group of Seven meeting in Istanbul this weekend, European Central Bank President Jean-Claude Trichet told a press conference.

“We had a discussion as usual preparing for the meetings in Istanbul,” Trichet said. “There is very strong sentiment that we have a shared interest in a strong and stable international financial system and excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

Trichet also said exit plans should be implemented once the recovery is under way, “in our own view the latest in 2011,” he said.

The euro-area economy may expand 0.2 percent in the current quarter and 0.1 percent in the three months through December, the commission said on Sept. 14. In the second quarter, the economy contracted just 0.1 percent as Germany and France returned to growth.

Jobless Rate

Europe’s unemployment rate rose to a 10-year high of 9.6 percent in August, data showed today, as companies continued to cut jobs even as the recession eased. The European Commission forecasts the euro-area jobless rate will reach 11.5 percent next year.

“It’s clear we have to keep economic policy very expansionary in the coming period to really be sure of establishing a recovery,” Swedish Finance Minister Anders Borg said today. “At the same time, this is the time to start designing and communicating exit strategies,” he said, adding that it’s “clear that fiscal policy in Europe is not sustainable.”

France’s budget deficit will widen next year to a record, the government projected yesterday, as President Nicolas Sarkozy cuts business taxes and spending on jobless benefits climbs. Spain this week posted the largest budget shortfall in at least nine years.

This afternoon the euro-area officials were joined by finance ministers from the rest of the European Union as well as central bankers from the 27 EU nations. Included on their agenda is the banking industry and financial- supervision proposals. The Committee of European Banking Supervisors is due to present the results of stress tests carried out on the banking industry.

Reducing Deficits

Officials should focus on reducing deficits over raising interest rates, Jean Pisani-Ferry, director of Bruegel, a Brussels-based study group, said in a presentation to ministers in Gothenburg today.

“In view of the public finance costs of large deficits, budgetary consolidation should be given priority over monetary tightening,” Pisani-Ferry said in the report, co-written with Juergen von Hagen and Jakob von Weizsaecker. “For this to succeed, governments need to start fiscal consolidation swiftly in 2011 with the withdrawal of the stimuli.”

This afternoon the euro-area officials were joined by finance ministers from the rest of the European Union as well as central bankers from the 27 EU nations. Included on their agenda is the banking industry and financial-supervision proposals. The Committee of European Banking Supervisors is due to present the results of stress tests carried out on the banking industry.


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Assessing the Fed under Chairman Bernanke

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“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Keynes, Chapter 12, The General Theory of Employment, Interest, and Money

The Fed has failed, but failed conventionally, and is therefore being praised for what it has done.

The Fed has a stated goal of “maximum employment, stable prices, and moderate long term interest rates” (Both the Federal Act 1913 and as amended in 1977).

It has not sustained full employment. And up until the recent collapse of aggregate demand, the Fed assumed it had the tools to sustain the demand necessary for full employment. In fact, longer term Federal Reserve economic forecasts have always assumed unemployment would be low and inflation low two years in the future, as those forecasts also assumed ‘appropriate monetary policy’ would be applied.

The Fed has applied all the conventional tools, including aggressive interest rate cuts, aggressive lending to its member banks, and extended aggressive lending to other financial markets. Only after these actions failed to show the desired recovery in aggregate demand did the Fed continue with ‘uncoventional’ but well known monetary policies. These included expanding the securities member banks could use for collateral, expanding its portfolio by purchasing securities in the marketplace, and lending unsecured to foreign central banks through its swap arrangements.

While these measures, and a few others, largely restored ‘market functioning’ early in 2009, unemployment has continued to increase, while inflation continues to press on the low end of the Fed’s tolerance range. Indeed, with rates at 0% and their portfolio seemingly too large for comfort, they consider the risks of deflation much more severe than the risks of an inflation that they have to date been unable to achieve.

The Fed has been applauded for staving off what might have been a depression by taking these aggressive conventional actions, and for their further aggressiveness in then going beyond that to do everything they could to reverse a dangerously widening output gap.

The alternative was to succeed unconventionally with the proposals I have been putting forth for well over a year. These include:

1. The Fed should have always been lending to its member banks in the fed funds market (unsecured interbank lending) in unlimited quantities at its target fed funds rate. This is unconventional in the US, but not in many other nations that have ‘collars’ where the Central Bank simply announces a rate at which it will borrow, and a slightly higher rate at which it will lend.

Instead of lending unsecured, the Fed demands collateral from its member banks. When the interbank markets ceased to function, the Fed only gradually began to expand the collateral it would accept from its banks. Eventually the list of collateral expanded sufficiently so that Fed lending was, functionally, roughly similar to where it would have been if it were lending unsecured, and market functioning returned.

What the Fed and the administration failed to appreciate was that demanding collateral from loans to member banks was redundant. The FDIC was already examining banks continuously to make sure all of their assets were deemed ‘legal’ and ‘appropriate’ and properly risk weighted and well capitalized. It is also obligated to take over any bank not in compliance. The FDIC must do this because it insures the bank deposits that potentially fund the entire banking system. Lending to member banks by the Fed in no way changes the asset structure of the banks, and so in no way increases the risk to government as a whole. If anything, unsecured lending by the Fed alleviates risk, as unsecured Fed lending eliminates the possibility of a liquidity crisis.

2. The Fed has assumed and continued to assume lower interest rates add to aggregate demand. There are, however, reasons to believe this is currently not the case.

First, in a 2004 Fed paper by Bernanke, Sacks, and Reinhart, the authors state that lower interest rates reduce income to the non government sectors through what they call the ‘fiscal channel.’ As the Fed cuts rates, the Treasury pays less interest, thereby reducing the income and savings of financial assets of the non government sectors. They add that a tax cut or Federal spending increase can offset this effect. Yet it was never spelled out to Congress that a fiscal adjustment was potentially in order to offset this loss of aggregate demand from interest rate cuts.

Second, while lowering the fed funds rate immediately cut interest rates for savers, it was also clear rates for borrowers were coming down far less, if at all. And, in many cases, borrowing rates rose due to credit issues. This resulted in expanded net interest margins for banks, which are now approaching an unheard of 5%. Funds taken away from savers due to lower interest rates reduces aggregate demand, borrowers aren’t gaining and may be losing as well, and the additional interest earned by lenders is going to restore lost capital and is not contributing to aggregate demand. So this shift of income from savers to banks (leveraged lenders) is reducing aggregate demand as it reduces personal income and shifts those funds to banks who don’t spend any of it.

3. The Fed is perpetuating the myth that its monetary policy will work with a lag to support aggregate demand, when it has no specific channels it can point to, or any empirical evidence that this is the case. This is particularly true of what’s called ‘quantitative easing.’ Recent surveys show market participants and politicians believe the Fed is engaged in ‘money printing,’ and they expect the size of the Fed’s portfolio and the resulting excess reserve positions of the banks to somehow, with an unknown lag, translate into a dramatic ‘monetary expansion’ and inflation. Therefore, during this severe recession where unemployment has continued to be far higher than desired, market participants and politicians are focused instead on what the Fed’s ‘exit strategy’ might be. The the fear of that presumed event has clearly taken precedence over the current economic and social disaster. A second ‘fiscal stimulus’ is not even a consideration, unless the economy gets substantially worse. Published papers from the NY Fed, however, clearly show how ‘quantitative easing’ should not be expected to have any effect on inflation. The reports state that in no case is the banking system reserve constrained when lending, so the quantity of reserves has no effect on lending or the economy.

4. The Fed is perpetuating the myth that the Federal Government has ‘run out of money,’ to use the words of President Obama. In May, testifying before Congress, when asked where the money the Fed gives the banks comes from, Chairman Bernanke gave the correct answer- the banks have accounts at the Fed much like the rest of us have bank accounts, and the Fed gives them money simply by changing numbers in their bank accounts. What the Chairman explained was there is no such thing as the government ‘running out of money.’ But the government’s personal banker, the Federal Reserve, as decided not publicly correct the misunderstanding that the government is running out of money, and thereby reduced the likelihood of a fiscal response to end the current recession.

There are also additional measures the Fed should immediately enact, such banning member banks from using LIBOR in any of their contracts. LIBOR is controlled by a foreign entity and it is counter productive to allow that to continue. In fact, it was the use of LIBOR that prompted the Fed to advance the unlimited dollar swap lines to the world’s foreign central banks- a highly risky and questionable maneuver- and there is no reason US banks can’t index their rates to the fed funds rate which is under Fed control.
There is also no reason I can determine, when the criteria is public purpose, to let banks transact in any secondary markets. As a point of logic, all legal bank assets can be held in portfolio to maturity in the normal course of business, and all funding, both short term and long term can be obtained through insured deposits, supplemented by loans from the Fed on an as needed basis. This would greatly simply the banking model, and go a long way to ease regulatory burdens. Excessive regulatory needs are a major reason for regulatory failures. Banking can be easily restructured in many ways for more compliance with less regulation.

There are more, but I believe the point has been made. I conclude by giving the Fed and Chairman Bernanke a grade of A for quickly and aggressively applying conventional actions such as interest rate cuts, numerous programs for accepting additional collateral, enacting swap lines to offset the negative effects of LIBOR dependent domestic interest rates, and creative support of secondary markets. I give them a C- for failure to educate the markets, politicians, and the media on monetary operations. And I give them an F for failure to recognize the currently unconventional actions they could have taken to avoid the liquidity crisis, and for failure inform Congress as to the necessity of sustaining aggregate demand through fiscal adjustments.


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FT: Bank Struggles to gauge if QE is taking effect

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>   
>   On Thu, Aug 20, 2009 at 4:11 AM, Marshall wrote:
>   
>   Maybe the BofE is having problems because it is looking at this through the wrong
>   monetary paradigm. All QE is doing is switching one form of debt term structure
>   for another, not actually contributing to aggregate demand. If they figured that
>   out, they wouldn’t be “struggling” here.
>   

True, hopefully this is what it takes, globally, to finally recognize with a non convertible currency the direction of causation is from loans to deposits and reserves, and that at the macro level banking is in no case reserve constrained, for all practical purposes.

And from there it hopefully follows that govt. spending is in no case inherently revenue constrained. But I suppose that could take another hundred years at the current pace of discovery.

>   >   
>   >   I would make it even simpler. QE per se does NOTHING to contribute to aggregate
>   >   demand and should therefore be stopped and replaced by fiscal policy which does
>   >   contribute to aggregate demand. Ironically, the last BOE minutes showed King
>   >   voted for increasing QE purchases beyond what most other MPC members were
>   >   prepared to support, yet this is the same guy who has railed against the
>   >   government’s “excessive” spending.
>   >   
>   >   But, you’re right. At the current pace of discovery, we might not get there until
>   >   our grandchildren are 6 feet under.
>   >   

Bank struggles to gauge if QE is taking effect

By Norma Cohen

August 20 (FT) — The Bank of England’s monetary policy committee appears united in the conviction that its unconventional approach to boosting Britain’s economy has -further to run.

But by how much, for how longand, crucially, knowing when enough is enoughare much thornier questions, judging by the debate revealed in the minutes of its latest meeting this month.

After the Bank announced its surprise move to increase the gilts purchase programme to £175bn – raising the authorised amount by a further £25bn – most analysts chalked it up as an “insurance” measure, an added fillip just in case the massive cash injections to date fell short of what was needed.

But now it emerges that the MPC is deeply concerned about whether the nascent recovery suggested by a range of recent economic indicators is sustainable – particularly since there is little evidence that the £125bn spent between March and the end of July has delivered additional lending.

“The aim of the MPC’s programme of asset purchases was to boost nominal spending to ensure that it was consistent with meeting the inflation target in the medium term,” the minutes noted. That is another way of saying that the MPC wants to offset the collapse in demand by making money cheaply and easily available, hoping that households and businesses will spend it and ward off a deflationary spiral.

Yes, not realizing funding is always easily available to the banking system at the policy rate.

However, just how the gilts purchases would achieve that is the subject of much debate. Judging the efficacy of the programme is equally problematic. After all, the MPC is engaged in a policy untested in the UK, or indeed in almost any other developed economy.

By one key measure, there is little sign that the purchases, known as quantitative easing, are having any effect. There is little sign that the M4 money supply – the broadest measure of money flowing through the economy – is expanding.

Brian Hilliard, an economist at Société Générale, said that in theory QE ought to be effective. “If you are a monetarist, a deficiency of nominal spending can be righted by injecting a given sum,” he said. Through various channels, that money should work its way through the economy and help boost demand for goods and services.

If anyone knows him, please send this along. There are no ‘various channels.’

The minutes note that an expansion in money supply would help the MPC determine when or whether QE was working. However, the committee acknowledges that there is “unlikely to be a simple, straightforward mapping between asset purchases, monetary growth and nominal spending”. That may be one way of explaining the fact that, despite huge cash injections, M4 showed only insipid growth between the first and second quarters of 2009.

Not true either. That can come from increased borrowing due to govt. deficit spending, technical shifts in liabilities, and other things unrelated to QE.

Michael Saunders, an economist at Citigroup, noted the reference in the minutes to a pick-up in broad money growth in the second quarter – to a 3.7 per cent annualised rate from a 3.3 per cent rate in the first quarter. The growth, he said, amounted to a quarterly expansion in M4 of roughly £1.8bn. “So £125bn of QE has caused broad money growth to accelerate by £1.8bn. That’s a pretty poor rate of return,” he argued.

He could use an email as well.

It didn’t even cause that. And it’s not a ‘rate of return’ because it isn’t an investment.

Equally, it is not clear how the MPC is deciding how much money it should inject into the economy. In the minutes of its March meeting, the MPC estimated that since the UK’s output gap – the shortfall between what the economy could produce and what it is actually producing – was about 5 per cent of gross domestic product, an equivalent amount should be injected through QE. In round numbers, that amounted to £75bn, the sum initially authorised.

As if there was some channel for that to actually happen.

One disclosure that emerges from the minutes of this month’s meeting is that the MPC has abandoned that numerical equation. There is no discussion within them on how to judge the additional sums needed for QE. The impact of a cash injection of £175bn, compared with the £200bn favoured by Mr King, is not spelt out.

Mr. King needs this emailed to him as well. He seems further off the mark than any of the others.

There is general agreement that looking at money supply alone to gauge the success of QE may produce too narrow a perspective. A recent analysis of the Bank’s QE programme by the International Monetary Fund concluded that, by many measures, it was having beneficial effects, but it also noted that there was uncertainty on how to judge such success.

“The significant uncertainty surrounding the transmission of QE – explicitly acknowledged by the MPC – would seem to caution against relying too much on any such numerical assumptions,” the IMF concluded.

And another email to the IMF, thanks!

Bernanke seems to at least recognize that the channel of consequence is the adjustment of long term interest rates, and not the quantity of reserves, though the FOMC hesitates to fully go there by setting a target term structure of rates and letting the quantity of reserves adjust.


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Germany – Credit Crunch II

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Yes, interesting to see if the Eurozone national governments are able to run their deficits as high as projections indicate without themselves having liquidity issues, even with the indirect help from the ECB. Looks to me like all the support measures add to the deficits of the national govts.

On Tue, Aug 18, 2009 at 4:57 PM, Russell wrote:

Regardless of your view on the economy, you have to at least consider the possibility that the financial crisis isn’t over, that we may just be in the eye of the storm. There are all the smaller (but still big) banks failing, as well as the lingering concerns over mortgages, commercial real estate and the national debt.

According to The Telegraph’s Ambrose Evans-Pritchard, the German government is laying the groundwork to head off a second coming of the credit crisis:

“The most difficult phase for financing is going to be in the first and second quarter of 2010,” said Hartmut Schauerte, the economic state secretary.

“We are working as a government to create instruments that can offset a feared credit crunch or any credit squeeze in sectors of the economy,” he said.

Mr Schauerte said firms with weak balance sheets may struggle to roll over loans as they come due in coming months. Negotiations with banks could prove “very difficult”.

State support is likely to be concentrated on boosting the capital base of German firms and providing credit insurance for exporters, perhaps to the tune of €250bn to €300bn (£256bn). “If this service fails, we are going to see dozens of credit collapses,” he said.

Articles:

Germany braces for second wave of credit crunch

Germany Prepares For Credit Crunch Part II


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French Non-Farm Payrolls Fall Less Than Expected

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Proactive fiscal measures, exports, and very ugly automatic stabilizers seem to have slowed the decline in employment, coupled with productivity increases that are supporting output with lower levels of employment.

French Non-Farm Payrolls Fall Less Than Expected as Slump Eases

August 14 (Bloomberg) — French companies cut fewer jobs than expected in the second quarter as the euro area’s second-largest economy exited its worst recession since World War II.

Payrolls, excluding government employees, farm workers and the self-employed, dropped by 74,100, or 0.5 percent, to 15.65 million, the Paris-based Labor Ministry said today. That was less than the 0.8 percent drop forecast by three economists in a Bloomberg News survey, and compared with a loss of 168,300 jobs in the first quarter.

“The current weakness of domestic demand and excess production capacity account for both the weakness in companies’

pricing power and the continued deterioration of the labor market,” said Caroline Newhouse-Cohen, an economist at BNP Paribas, in a report yesterday. “A lot of uncertainties are still weighing on the French economy.”

The French economy returned to growth in the second quarter as exports rose and 30 billion euros ($42.8 billion) in government spending and tax cuts introduced by President Nicolas Sarkozy helped consumer spending. Companies cut investment at a slower pace than in the two previous quarters.

Rising joblessness in France is curbing government revenue and boosting welfare spending, pushing up the budget deficit.

The budget shortfall will soar to 8.3 percent of gross domestic product next year, more than the 7 percent to 7.5 percent the government expects, according to the Organization for Economic Cooperation and Development.

France’s jobless rate hit a three-year high of 9.4 percent in June, the European Union statistics office said on July 31.

On Aug. 11, Adecco SA, the world’s largest supplier of temporary workers, reported a surprise second-quarter loss and said it will deepen cost cuts as sales decline because fewer companies are hiring. The company, based in Zurich, cut about 2,000 jobs in the quarter and told workers in France that an additional 350 jobs will be cut and 100 branches merged in 2009.

The number of temporary workers in France fell 3.7 percent in the second quarter from the first and 32.1 percent from a year earlier to 419,600, the Labor Ministry said. French monthly wages rose 0.4 percent in the second quarter from the first, when they climbed 0.8 percent, the Labor Ministry also said today. From a year ago, wages rose 2.2 percent.


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ECB statements

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ECB’s Stark Says Economy May Recover Sooner Than Forecast

Stark Says State Debt May Boost Long-Term Market Rates, BZ Says

*ECB’S STARK SEES `NO BIG PROBLEMS’ UNWINDING ASSET PURCHASES

*ECB’S STARK COMMENTS IN INTERVIEW WITH BOERSEN-ZEITUNG

*ECB’S STARK SAYS RISING GOVT DEBT MAY BOOST LONG-TERM MKT RATES

*STARK SAYS ECB CONSIDERS RISK OF DEFLATION `VERY SMALL’

*ECB’S STARK SAYS MUST NOT OVERESTIMATE SIZE OF OUTPUT GAP

Higher levels of unemployment will be needed for long term price stability

*ECB’S STARK SAYS POTENTIAL GROWTH RATE HAS PROBABLY DECLINED

Higher levels of unemployment will be needed for price stability

*ECB’S STARK SAYS OUTPUT GAP MAY BE SMALLER THAN SOME THINK

Higher levels of unemployment will be needed for price stability.

*ECB’S STARK SAYS MUST BE CAUTIOUS ABOUT INFLATION OUTLOOK

*STARK: STIMULUS, INVENTORIES WON’T CREATE SUSTAINABLE GROWTH

*ECB’S STARK SAYS ECONOMY MAY RESUME GROWTH SOONER THAN EXPECTED

*ECB’S STARK SEES SIGNS ECONOMY IS STABILIZING

*ECB’S STARK SAYS RATES ARE `APPROPRIATE’


Karim writes:

Stark is also engaging in classic Fed bashing; knowing full-well that the output gap is the key driver of the Fed’s inflation model while the ECB looks at a broader series of measures and places much more emphasis on monetary aggregates


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Zombie Economy: European Industrial Production Unexpectedly Declines

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Looks to me like the world hit a ‘soft spot’ in July, maybe due to the winding down of China’s suspected ‘inventory building.’

CPI’s continue to fall in the Eurozone indicating continuing domestic demand weakness.

Strong productivity gains are not being matched with fiscal adjustments to sustain output and employment, as evidenced by a continuing rise in unemployment and a widening of the output gap.

I like the term Zombie economy as the world continues to unknowingly rely on ‘automatic stabilizers’ for a very ugly means of fiscal adjustment.

Meanwhile, as unemployment continues to rise, they wait, with blind certainty for the mythical ‘kicking in of billions’ by Central Banks to somehow take effect, and be so powerful, that they are spending their time debating irrelevant ‘exit strategies’ from this non event for aggregate demand.

Right now there is no hope for further US fiscal adjustment, barring a major economic setback. President Obama has pledged not to sign a health care bill that is not ‘revenue neutral’ and it’s all but certain marginal tax rates will rise next year.

And the increased expenditures for ‘shovel ready’ projects, merits of the projects aside, are being offset by forced cut backs by States that continue to face revenue shortages due to the fall in GDP.

Banks that have been sustained by wide net interest margins that offset lingering loan losses are now seeing portfolios run off, as those with positive cash flow (corporations with flat sales and consumers in foxholes still worried about job losses) are paying down debt and net new lending languishes.

  • European Industrial Production Unexpectedly Declines
  • Liikanen Says Next Months Will Show If Euro Area Through Worst
  • French Consumer Prices Fall for Third Month on Energy, Retail
  • European Government Bonds Extend Gain After BOE Inflation Report


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EU Daily | ECB sees ‘turning point’ in lending conditions

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Yes, central banks have finally managed to restore a degree of ‘market functioning’ after full year or more of ‘extraordinary measures’ which mainly served to demonstrate a lack of understanding of basic monetary operations.

Note that only after automatic stabilizers began to reverse the slide at year end did the lending environment begin to recover as well.

  • ECB sees ‘turning point’ in lending conditions
  • European Retail Sales Fall for 14th Straight Month, PMI Shows 2009
  • German Unemployment Total Rose in July as Job Cuts Continued
  • German July Retail Sales Decline at Slowest Pace in 14 Months
  • Ifo Sees More Jobs Lost Among German Machinery Makers, FTD Says
  • French Retail Sales Post Sharpest Drop in Four Months, PMI Says
  • Italy’s Retail Sales Fall as Job Cuts, Recession Curb Spending
  • Italian Banks Agree on One-Year Loan Moratorium, MF Reports
  • Spanish Consumer Prices Dropped by Record 1.4 Percent in July
  • Spain’s Recession Eased in Second Quarter, Central Bank Says
  • German Bonds Decline as Stocks Advance, Italy Auctions Debt


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