Category Archives: Financial Times

Redefining full employment

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Not good.

As suspected way back on this website:

‘Great Recession’ Will Redefine Full Employment as Jobs Vanish

by Matthew Benjamin and Rich Miller

May 4 (Bloomberg) — Post-recession America may be saddled with high unemployment even after good times finally return.

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring — in what former Federal Reserve Chairman Paul Volckercalls “the Great Recession” — is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.

Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.”


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Fed foreign currency swap lines

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(IF ANYONE HAS BUITER’S EMAIL ADDRESS KINDLY FORWARD THIS, THANKS)

The question is, why has the Fed entered into new swap lines to be able to borrow foreign currency from several CBs who already have Fed dollar lines?

Several possibilities not mutually exclusive:

  1. They may have agreed on some kind of international currency stability scheme that use swap lines to keep currencies stable to each other.

  2. More likely is the notion that these lines are needed to control global interest rates in one’s own currency. The Fed started extending the swap lines to control USD LIBOR which was partially determined by banks outside the US.

    3. Yes, it worked to do this, but as previously explained, (indirectly) lending to lesser, foreign credits at low rates to keep rates down threatens a much larger problem.

    Note that it was announced last week that Mexico was drawing down its $30 billion line from the Fed. How much sense does it make for the Fed to lend Mexico 30 billion dollars, functionally unsecured, just to somehow help keep LIBOR down? Mexican banks aren’t even in the LIBOR basket. There are other options to get LIBOR down without extending unlimited dollar loans to unknown and potentially high risk borrowers. What the Fed has done is reckless at best.

    So in a world of CBs who put the highest priority on being able to control their interest rates and don’t recognize the risk of extending potentially bad loans to do it, using these swap lines for interest rate control make perfect sense.

  3. The Fed could also be worried about the dollar getting weak and not having foreign currency reserves to directly intervene. This could be signs of the heightened level of this insecurity from having ‘increased the money supply’ by ‘printing money’ and a zero rate policy, as none of them understand that the size of their balance sheet and the low interest rate policy have nothing to do with inflation.

What they do with their balance sheet is about price and not quantity.

And with the non government sectors quickly becoming net savers to the tune of nearly $10 trillion lowering rates is fiscally contractionary. Not to mention rates are a marginal cost of production, and nowadays ‘inflation’ most often comes through the cost side.

So the Fed arranging foreign currency credit lines might be a ploy to show the other CBs they are serious about the value of the dollar long term. Of course, Bernanke has many times stated to Congress the value of a weak dollar and in his mercantilist view he’s trying to support exports and narrow our trade gap that he sees as a ‘bad thing’ per se, as he still holds on to the gold standard construct of ‘national savings’ and sees our trade gap as an imbalance, rather than an enhancement of our real terms of trade and real standard of living. So I’d say that unless something changes the Fed would welcome a weak dollar and not use the new swap lines to support it. In fact, it is more likely that in addition to getting USD interest rates down to support lending, the Fed also acted to support demand for US goods and services by keeping the world USD ‘short’ position from strengthening the dollar and hurting US exports.

Functionally these swap line advances are like World Bank or IMF lending. While the advances by those agencies always start out as loans, historically they have morphed into fiscal transfers, as, in real terms, it all becomes a race to the bottom whereby whoever borrows the most and inflates the most wins.

These central bankers, however, (errantly) rely on ‘inflations expectations theory’ for their understanding of inflation, which of course is inapplicable, but it’s all they have and it’s deeply believed.

Therefore they aren’t worried about the inflationary aspects of swap lines,
and the incentive for an inflationary race to the bottom. (They do however worry to some degree about weak currencies causing inflation expectations to elevate)

So currently, for example, the Fed is hanging out a free lunch to any Central Bank that stops worrying about the possibility of paying back the Fed, and simply starts behaving as if the dollar loans are fiscal transfers, by looking the other way when their member banks start using them as such. I see signs of this possibility in the eurozone where the borrowings have been outstanding far too long for comfort that the banks are making good faith efforts to pay them down.

Regarding USD LIBOR, if I were running the Fed I’d ban the use of LIBOR with member banks. The idea of a mob of old men in bow ties sipping sherry at 9am arbitrarily setting my interest rates that flow through to trillions of my banking system’s dollar loans just doesn’t seem optimal for public purpose.

Lastly, to address a technical issue that’s been raised, while the lines are swaps, they provide usable currency deposits only for the counter party that activates the line.

For example while the ECB has borrowed dollars from the Fed and has provided euro deposits for the Fed as collateral, the Fed can’t use those euro deposits except in the case of an ECB default. And even if was somehow agreed that the Fed could use those euro deposits, when the ECB payed back the dollar loans the Fed would have to pay back the euro deposits, which is an unworkable arrangement.

So even with euro deposits as collateral for its dollar loans to the ECB, if the Fed wants to spend euro it has to borrow them. Hence the new lines to the Fed from the ECB and others.

Bottom line? The CBs think they have ‘learned something’ from the crisis- swap lines can be used to help CBs control interest rates in their currencies around the world, and therefore it makes sense to set them up in advance for that purpose.

That’s what happens with a world that doesn’t fully understand reserve accounting, monetary operations, and that the currency is a public monopoly. Never in a crisis have the CBs done so much that actually accomplished so little- at least not in the desired direction.

Why did the Fed, the Bank of England, the ECB, the Bank of Japan and the Swiss National Bank announce a dubbel openslaande porte-brisée deur?

by Willem Buiter

April 9 (Financial Times) — On April 6, 2009, the Fed, the ECB, the Bank of England, the Bank of Japan and the Swiss National Bank simultaneously made announcements about currency swap arrangements. I consider these statements to be misleading and quite possibly redundant.

The Bank of England, for instance, made the following announcement:

“The Bank of England, the European Central Bank, the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing swap arrangements that would enable the provision of foreign currency liquidity by the Federal Reserve to US financial institutions. Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via swap agreements with the relevant central banks. Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets.

Bank of England Actions

The Bank of England has agreed that it would enter into arrangements to provide sterling liquidity to the Federal Reserve should it be required. The sterling would be provided via a swap arrangement with the Federal Reserve, similar to that which underpins the Bank of England’s US dollar repo operations. Both swap arrangements run until 30 October 2009.”

The Fed’s statement concerning this same swap arrangement was rather more illuminating. For starters, it actually gave the amounts of the swaps:

“The Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing swap arrangements that would enable the provision of foreign currency liquidity by the Federal Reserve to U.S. financial institutions. Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap agreements with the relevant
central banks. Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets.

Federal Reserve Actions
The Federal Open Market Committee has authorized new temporary reciprocal currency arrangements (foreign currency liquidity swap lines) with the Bank of England, the ECB, the Bank of Japan, and the Swiss National Bank. If drawn upon, these arrangements would support operations by the Federal Reserve to provide liquidity in sterling in amounts of up to £30 billion, in euro in amounts of up to EUR80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion.

These foreign currency liquidity swap lines have been authorized through October 30, 2009.”

What this really amounted to was a renewal of swap arrangements agreed earlier (on September 18, 2008), which had expired on January 30, 2009. Canada, which was included in the earlier swap arrangement, is no longer a party to the new version.

The antecedents of the ‘new’ swap arrangements

The swap arrangements between the Fed and assorted foreign central banks that were the antecedent of the arrangement ‘announced’ on April 6, 2009, were initiated at the end of 2007. On September 18, 2008, the Fed made the following announcement, providing the most direct antecedents of the April 6, 2009 swap arrangements: “The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks.

The FOMC has authorized increases in the existing swap lines with the ECB and the Swiss National Bank. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB, an increase of $55 billion, and up to $27 billion by the Swiss National Bank, an increase of $15 billion.

In addition, new swap facilities have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada.

All of these reciprocal currency arrangements have been authorized through January 30, 2009.”

In parallel with other central banks, the Bank of England extended, on 3rd February 2009, the term of this swap facility agreement with the Federal Reserve until 30 October 2009.

Framing matters
A swap is a swap is a swap. The arrangement between the Fed and the Bank of England provides the Fed with sterling and the Bank of England with US dollars. The swap arrangement with the ECB provides the Fed with euros and the ECB with US dollars. Etc. Etc. You don’t have to make two announcements, one that the Fed is getting Swiss francs, euros, yen and sterling and one, a couple of months later, that the SNB, the ECB, the BoJ and the BoE are getting US dollars. So why the redundant announcement on April 6, 2009?

With the original swap arrangements, the rationale for the arrangements was clearly a US dollar scarcity among financial institutions outside the US. Even with the extension of the September 18, 2008 arrangements announced on February 3, 2009, US dollar scarcity outside the US was given as the reason by the Bank of England: “To address continued pressures in global U.S. dollar funding markets, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to October 30, 2009.”

But on April 6, 2009, the statement by the Fed is not about the Fed supplying US dollars to foreign central banks to meet an excess demand for US dollars by banks outside the US. The statement is all about foreign central banks supplying the Fed with euros, sterling, yen and Swiss francs to accommodate a US thirst for these foreign currencies: “The Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing swap arrangements that would enable the provision of foreign currency liquidity by the Federal Reserve to U.S. financial institutions. Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap agreements with the relevant central banks. Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets.”

It may well be that in a swap arrangement between central banks, one party is the supplicant and the other party the bestower of favours. When Iceland tried to arrange swap arrangements with the ECB and the Fed in the spring of 2008, there certainly was very little appetite for Icelandic kroner in the ECB and the Fed – so little in fact, that Iceland failed in its attempt to arrange the swaps.

Two things are very weird about the April 6, 2009 announcement. The first is that it was redundant. It provided no new information beyond the extension of the old swap arrangements of September 18, 2008, that had been announced on February 3, 2009. The February 3, 2009 announcement extended the swap arrangements to October 30, 2009. The April 6, 2009 announcement did not change that. And the April 6, 2009 announcement did not change the size of the swap materially (the Bank of England can probably draw up to $44 bn or so under the latest swap arrangement).

It is conceivable – the statements are worded quite clumsily – that the April 6, 2009 announcement is about swap arrangements additional to the swaps previously announced (on February 3, 2009). In that case, the size of the swap arrangements has effectively been doubled. The redundancy objection disappears, but the misleading framing objection continues to apply in spades. If this is indeed the case, my concerns (explained below) about the fate of the US dollars provided by the Fed in the original swaps are strengthened.

The second strange feature is that the April 6, 2009 statement by the Fed is misleading. It is clearly phrased to convey a sense of the Fed needing foreign exchange (euros, yen, Swiss francs and sterling) to provide this foreign currency liquidity to US financial institutions. That is rhubarb. The US dollar shortage abroad continues today in much the same way as on February 3, 2009 or on September 18, 2008. Financial institutions in the US can get foreign exchange liquidity quite readily from the US subsidiaries of Euro Area, British, Swiss and Japanese banks. They don’t need the Fed for that.

On April 6, 2009 as on September 18, 2008, the non-US central banks were the beggars in the swap arrangements and the Fed the chooser. So why pretend that the opposite is the case? Why make a redundant and misleading announcement about the swap arrangements? The answer “beats me”, comes to mind. So does: “a collective central bank screw-up”. Finally there is the possible explanation that by re-framing an existing swap arrangements as the reflection of a Fed need for foreign exchange rather than as a non-US central bank need for US dollars, attention is diverted from foreign exchange shortages outside the US.

I can certainly make a quite convincing case that the UK is woefully short of foreign exchange reserves. At the end of March 2009, UK official foreign exchange reserveswere $49.3 bn gross and $28.3 bn net. The Bank of England’s net foreign currency assets are negligible ($6 mn at the end of 2008)

Clearly, the UK swap facility with the Fed is large relative to the size of UK Government Foreign Currency Assets. Gross foreign exchange reserves exceed the size of the swap facility ($44 bn, say) by less than $5 bn and net foreign exchange reserves are more than $15 bn lower than the size of the swap facility.

Small net or gross foreign exchange reserves don’t matter as long as the solvency of the government and the nation are beyond doubt, because in that case the authorities will always be able to borrow whatever foreign exchange reserves they require. This is arguably no longer the case anywhere. The massive prospective government deficits of the UK and the impressive size of the nation’s short-term foreign currency-denominated liabilities are such that one can without too much effort visualise a scenario where both the government and the private sector are rationed out of the foreign exchange markets and debt markets. When a ‘sudden stop’ is a non-negligible risk, foreign exchange reserves matter. Ask the Asian and South American countries that went through the 1997-1998 crises.

Recently, interest in the Bank of England’s US dollar repos has petered out, but at the beginning of the programme, amounts close to the $40 bn limit were taken up. If those US dollars were borrowed by banks like RBS and HBOS, both insolvent except for past, current and anticipated future government financial support, they may well have been lost. These banks (and other UK banks that are still standing more or less on their own two feet) had (and continue to have) very large US dollar exposures on which they made massive losses – well in excess of $40 bn. These banks also have few liquid foreign currency assets.

Assume one or more banks that borrowed US dollars from the Bank of England cannot pay them back. The Bank of England takes the collateral that secured these US dollar loans. Eligible collateral for these loans consists of those securities that are routinely eligible in the Bank’s short-term repo open market operations and Standing Facilities, as published on the Bank’s website, together with conventional US Treasury securities. Assume that little if any of the collateral offered for the US dollar loans from the Bank of England consisted of US Treasury securities. So the Bank gets a mitt full of sterling securities back in lieu of the US dollars it has lost. Nice, but not good enough. When the swap arrangements expires, the Bank of England has to repay the Fed in US dollars, not in sterling securities. So unless the swap arrangement is extended, or extended and expanded, the Bank of England would have to send the Fed an ‘Oops’ note.

If the full swap line was lost ($40 bn), the UK would be completely out of (net) foreign exchange reserves – if we consolidate the foreign exchange assets and liabilities of the government and the US dollar swap exposure of the Bank of England. Not a good place to be. Of course, the beauty of swaps if that they are off-balance sheet items.

I haven’t checked the details about the official foreign exchange reserves of Switzerland and the Euro Area nations, nor do I know much about the foreign exchange losses of Swiss and Eurozone banks, although I expect that these losses are vast. It is possible that the earlier use of the swap lines by the ECB and the SNB has also made a rather large dent in the net foreign exchange reserves of Switzerland and the Eurozone nations.

In any case, the Machiavallian interpretation of the redundant second announcement of the central bank swaps is that it was intended to divert attention from the dire condition of the official foreign exchange reserves of a number of European countries, especially the UK. Extending the duration of the swaps delays the moment that the loss of the US dollars will have to be recognised. If this was indeed the case, it is bound to fail. Markets can be stupid, but not that stupid. This will not reduce the risk that Reijkjavik-on-Thames will have to seek IMF assistance at some point.


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China News

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Between car sales and nominal wages doesn’t seem motor fuel consumption is going down any time soon.

And just look at these financial sector increases!

China’s home-made car sales hit new high in March

by Deng Shasha

Apr 9 (Xinhua) — Sales of domestic cars in China set a new record of 1.11 million units in March, up 5 percent from a year earlier, China Association of Automobile Manufacturers (CAAM) said Thursday.

This was an increase of 34 percent from February. In February, sales rose 24.7 percent year-on-year to 827,600 units.

Carmakers produced 1.1 million motor vehicles last month, up 5.55 percent year-on-year, according to CAAM.

The first-quarter sales and production totaled 2.68 million and 2.57 million, up 3.88 percent and 1.91 percent, respectively.

The association said sales were buoyed by government stimulus policies. On January 20, China halved the purchase tax on passenger cars to 5 percent for models with engine displacements of less than 1.6 liters.

China’s Urban Wages Rose 17 Percent Last Year, Government Says

by Paul Panckhurst

April 9 (Bloomberg) — China’s average urban wages jumped 17.2 percent in 2008 from a year earlier, the National Bureau of Statistics said today.

The increase was to 29,229 yuan ($4,276), the bureau said in a statement on its Web site. Excluding inflation, the gain was 11 percent, the bureau said.

Brokerage employees earned the most, almost six times the national average. Workers at timber processors and textile manufacturers earned the least, the statistics bureau said.


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2001 Quantitative-easing letter- nothing has changed

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Quantitative Easing is Simply a ‘Bank Tax’

Letters to the Editor- Financial Times; Feb 23, 2001

by Warren B. Mosler

From Mr. Warren B. Mosler

Sir, The Group of Seven’s call for monetary easing to solve Japan’s economic problems seems to misunderstand bank mechanics. I suspect that most who advocate quantitative easing do not recognize that it is but a “bank tax”. The purchase of securities by the Bank of Japan reduces private sector holdings of Japanese government bonds and increases member bank reserve account balances at the BOJ. As reserve accounts do not earn interest, banks are left holding a higher percentage of their capital in these non- interest-bearing BOJ accounts.

Quantitative easing would reduce the interbank rate in Japan from 0.25 per cent back to 0 per cent. But, since lending is not reserve constrained, loans would increase only to the extent that lower interest rates would attract additional borrowers. Recent experience shows that to be negligible. Furthermore, since Japan is a large net payer of interest on its public debt, cutting rates reduces government interest payments and therefore private sector income.

Warren B. Mosler, Principal, AVM LP, 250 So Australian Avenue, W Palm Beach, FL 33401, US.


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Off Topic Comments

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Submitted on 2009/04/10 at 1:07pm by high tech redneck

“profits for investing, not for working for a living”
There used to be a time I was amazed how the labor class kept taking the abuses piled upon them.
On Cspan I just watched Jesse Jackson say Obama would have been the first president to enter office with a student loan if his books hadn’t been so successful and he recently got to pay off the loans with his book profits. Jesse was very angry that blacks still have to pay for student loans and housing loans when bankers can get much cheaper or even free talf loans. He was adamant that we should give free education to everyone that wants it. I go into the library and I read mosler economics and it doesn’t cost me anything but my very valuable time, so what is Jesse so mad about? MIT offers many of thier courses for free over the internet. I think most laborers could put down the budweiser and not go fishing this weekend and READ if they really wanted too.
Who wants to enable working class to equality in the investor class?
Warren you don’t want a bunch of poor working class blacks to be ahead of you in line to fill up their boats with gas when you want to take the superboat out for a joyride do you? Why should their boating needs/wants eat into 3 or 4 hours of your boating time while you wait to gas up? Also you don’t want a bunch of working class blacks out clogging the roads on sunday drives when you want to take the supercar out for a 200mph jaunt do you? What good does a supercar do you when you are in bumper to bumper traffic doing 5mph? There are very deep rooted desires in most of the “investor” class to keep the status quo.
The gods of Greece lived up on Mt. Olympus, they didn’t want to be burdened with the sufferings of overcrowded streets and cities down in the valley.

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Submitted on 2009/04/12 at 3:14am by Comments Encouraged

If they have little purchasing power, what does it matter how many social security dollars you get? How sad you worked your whole life for a promise from the government that was used like a carrot to sucker you like a donkey.
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/`b
/####J
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Submitted on 2009/04/10 at 4:55pm by Pocahontas

Making Banking Boring – Paul Krugman

I agree Warren, I think they should do what Krugman says and take away your supercar, your house, and your superboat. It is not enough to just make banking boring again, to stop this boom/bust cycle we need to strip YOU and every other person like you of the wealth you have to send a message this will not be tolerated anymore. That will remove the incentive for future generations to try these tricks again, thinking they can get away with it.
It is ridiculous that because you clicked buttons back and forth trading financial instruments that you should live so much better than other human beings. My native american indian friends tried to play the white mans game and open casinos on the reservations and the governator is taxing us and taking all our wealth back – where are our bailouts?
Your distribution of the wealth in this world needs to be returned to the borg, sooner rather than later.

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Submitted on 2009/04/08 at 5:22pm

Wikipedia review of Lila:
Major themes
As in his past book, the narrative is embedded between rounds of philosophical discussion. The main goal of this book is to develop a complete metaphysical system based on the idea of Quality introduced in his first book. Unlike his previous book, in which he creates a dichotomy between Classical and Romantic Quality, this book centers on the division of Quality into the Static and the Dynamic.
Another goal of this book is to critique the field of anthropology. Pirsig claims traditional objectivity renders the field ineffective. He then turns his concept of Quality toward an explanation of the difficulties Western society has had in understanding the values and perspectives of American Indians. One interesting conclusion is that modern American culture is the result of a melding of Native American and European values.
Another theme analyzed using the Metaphysics of Quality is the interaction between Intellectual and Social patterns. Pirsig states that until the end of the Victorian era, social patterns dominated the conduct of members of the American culture. In the aftermath of World War I, intellectual patterns and the scientific method acceded to that position, becoming responsible for directing the nation’s goals and actions. The later occurrences of fascism are seen as an anti-intellectual struggle to return social patterns to the dominant position. The hippie movement, having perceived the flaws inherent in both social and intellectual patterns, sought to transcend them, but failed to provide a stable replacement, degenerating instead into lower level biological patterns as noted in its calls for free love.
Criticism
The book has been criticised for being presented in a way that suits neither fact nor fiction. The title suggests a factual inquiry, but the characters appear fictional. While the book’s narrative is mostly from the perspective of the main character, who is a thinly disguised version of the author, some sections come directly from Lila, and since her thoughts generally support the author’s viewpoint in real life, appear a bit dishonest. [3]
The basis of the philosophical argument presented by the book is that Quality (which can be very basically understood as similar to Sophocles’ ‘good’, or as, in some religions, ‘god’, in the sense that Quality is universal and undefinable; at once the stimulus and the goal of human development) is a property of the interaction between subject and object and is more fundamental than either; subjects and objects only attain existence through interaction, and that interaction, Quality, therefore comes first. This has been challenged as unconvincing when set aside an alternative explanation in terms of evolutionary psychology. One of Pirsig’s examples, of a man sitting on a hot stove and perceiving the experience as one of ‘low quality’, to some, fails to demonstrate that quality is a fundamental property of things, since it is easy to explain his actions in terms of an evolutionarily evolved instinct to avoid things that our senses tell us will damage our bodies.[3]
In an interview, the author has said that he is disappointed that more ’seriously thinking people’ do not really understand his ideas fully. Many people, he says, write to him that they re-read the book many times but still don’t really understand it, adding “I have read many reviews criticising my ideas, but I have yet to see anything that proves me wrong. I’d like to give a prize to the first person who can convince me that my ideas about a metaphysics of quality are wrong.”[4]

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Submitted on 2009/04/08 at 1:44pm by Comments Encouraged

Comments Encouraged, that needs to be revised to – Mosler Economic Hitler Youth Comments Encouraged – dissenting voices will be silenced. What point am I missing exactly when I walk into a miami bank and because I am a native american indian I don’t get a loan, but if I was the latino cousin of the loan officer, I get lots of money?

Trust the government – just ask my forefather geronimo!

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Submitted on 2009/04/08 at 1:39pm by Richard Benson

Censorship, so that like minds can stroke each other’s pet theories, wonderful!

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Submitted on 2009/04/08 at 1:34pm by Keynes Liquidity Fetish

Energy technology, superboat technology, supercar technology, aids and cancer research, etc etc etc – how does any of this progress with everyone on the planet becoming a Mike Norman clone and clicking buttons back and forth on a trading terminal all day? The whole system is a heaping pile of dogs**t, it does not make humans do anything productive, all it does is make them zombies to a bloomberg terminal.

http://online.wsj.com/article/SB123915041409099017.html#mod=todays_us_personal_journal

…For much of the past decade, Kenneth Kimmons of Bedford, Texas, was a buy-and-hold investor. He regularly socked away money in mutual funds across his 401(k) plans, individual retirement accounts and a brokerage account.

But after watching his investments fall by about 50% last year, he started trading individual stocks and options full-time last fall. He generally buys stocks at the start of the trading day — lately, it’s been bank stocks — and sells them a few hours later. “I just got tired of putting money away and losing it,” says the 31-year-old. He says he’s doubled his money since he started trading full-time.

…Mr. Catalano trades mostly stocks and exchange-traded funds, usually four to five times a week. He writes covered-call option contracts to generate income off his shares, a tactic that could lose him some of the upside if share prices rise substantially. Since he started trading in September, he is down about 5% but has done better than the market.
… “The problem I have with the buy-and-hold strategy is that it’s a bull-market strategy,” say Matthew Tuttle, a financial adviser in Stamford, Conn. “In the bust, you give all of your profits back.” Mr. Tuttle has recently taken a more active approach to trading. While short-term investors are likely to face higher tax bills — since short-term gains are taxed at higher rates than long-term gains — he notes that some people who incurred big losses last year will be able to carry those losses forward to offset taxes in future years.

…The uncertain environment has prompted David Dilley of Bonita Springs, Fla., to trade more frequently. The 76-year-old retiree believes there has been a “sea change” in economic philosophy … So, while he had considered himself a longtime buy-and-hold investor, he’s now trading Canadian oil trusts in his E*Trade account several times a week. Mr. Dilley didn’t provide exact numbers but says he’s beating the broader market averages so far this year.

…Sue Cirillo of Pelham Manor, N.Y., used to hold on to household names such as Apple. But last fall, she sold some of her longtime holdings, moved to cash and started trading. “The difference between now and then is that when I’ve made money, I take it off the table and look for the next opportunity,” says the 47-year-old music producer. “Before, I was more focused on companies that I felt were going to be profitable.” Now, she pays attention to daily market swings, subscribes to online advice services such as Mr. Parness’s for trading ideas, and has recently learned to short stocks.

…Mark Swenson of southern New Hampshire says he typically trades with exchange-traded funds, instead of buying individual stocks. The 40-year-old says he started trading for the first time last October, in part to generate additional income in case his work as a plumber dried up. Although he says he got “slaughtered” when he first started trading, he says that he has since made up much of that initial loss and that it’s easier for him to trade than do nothing.

“I could no longer stomach it — watching my money disappear,” he says. “For right now, it’s a traders’ market. Until I get the sense that the market is on the rise, I generally don’t plan on doing any buying and holding — not for the long term.”

…Linda Smith of Denver fired her broker, saying it was a waste of money to pay her adviser 1.5% in annual fees for picking mutual funds she believed she could pick herself. “No one on this planet knows better what to do with my finances than me,” says the 53-year-old. For the year, she figures her portfolio is up about 5%, including the interest from her CDs. “Nobody can time the market 100% correctly 100% of the time,” she says. “However, that doesn’t mean you can’t get lucky now and then.”

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PPIP- everyone wants in- “at least 15 states”

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This gets worse by the day, from a variety of angles.

That’s what happens with an administration that doesn’t understand their own monetary system.

The US government doesn’t have any use for private or state funds.

If they want the states to have more money better to simply write them a check.

State pension funds weigh toxic assets: report

by James Kelleher

Apr 5 (International Business Times) — New Jersey’s beleaguered pension fund would buy troubled loans and securities – so-called “toxic assets” – as part of a Wall Street recovery plan discussed Friday with the head of the Federal Deposit Insurance Fund.

Bill Clark, director of the state’s Division of Investment, was among officials from at least 15 states who discussed the proposal with FDIC chairwoman Sheila Bair on Friday.

Present at the midday meeting were pension officials from New York City, New York State and Connecticut, said Orin Kramer, chairman of the New Jersey State Investment Council, who helped coordinate the meeting.

Representatives of 12 other states, including Pennsylvania, California and Florida, participated in the meeting by phone, Kramer said.

The states are interested in investing in the Public-Private Investment Program for Legacy Assets, believing it could provide a good return on investment, Kramer said. Bair is open to the idea, but the details need to be worked out, Kramer said.

The program, unveiled by the U.S. Treasury on Mar. 23, would provide federal funding to form public-private partnerships that would buy up so called “legacy assets,” including commercial and residential mortgages and securities. The intent is to reduce the bad assets on the balance sheets of banks, and free them to lend more.

Kramer said Governor Corzine believes the program could provide a lucrative opportunity for New Jersey’s pension fund, which has been battered in recent months by the general problems in the financial markets.

In a statement, Corzine’s spokesman Robert Corrales said the meeting was a “good opportunity” for federal officials and states to develop a plan to involve pension funds “without having to accept the traditional fee structure charged by private sector managers to invest in these types of assets.”

The latest available valuation report for the state pension fund, dated Feb. 27, 2009, listed the total value at $56.3 billion, down $3 billion from the report released at the end of January. Last year, the fund was valued at more than $80 billion.

Crozine, Kramer and Brown have also faced criticism over the last several months over the fund’s losses.

Andrew Gray, Director of Public Affairs at the FDIC, said “Chairman Bair met with a broad range of investor groups today as another step in the ongoing dialogue with stakeholders as the FDIC develops the Legacy Loans Program.”


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Eurozone- quantitative easing VS fiscal adjustment

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Thanks, they all have it wrong regarding quantitative easing.

Net financial assets of the non government sectors remain unchanged.

There is no ‘monetary’ consequence apart from the resulting somewhat lower long term interest rates.

And the idea that it helps delays fiscal responses that do help.

Europe needs its politicians to drive a new fiscal stimulus

by Julian Callow

Mar 31 (FT) — As international pressure intensifies on the European Central Bank to print money by adopting a programme of aggressive asset purchases, it is worth questioning whether Europe has got its priorities in the right order. So far, the ECB has been doing most of the heavy lifting in terms of injecting stimulus into the euro area.

Looking ahead, it is preferable that opportun- ities to undertake radically further fiscal easing are fully exploited before requiring the ECB to go down the route taken by the Federal Reserve, Bank of England and Swiss National Bank (ie. undertaking “pure” quantitative easing via extensive asset purchases financed by the creation of new central bank money).

This implies quantitative easing is more powerful than fiscal and should be saved for last. Not true.

In short, if the euro area is to err on the side of being a little reckless in terms of policy,

Quantitative easing is totally tame, not reckless. It’s just part of the CBs role in setting the term structure of risk free rates.

it is preferable this be in a fiscal, rather than monetary, direction.

For the eurozone, with the national governments credit sensitive agents, fiscal is unfortunately the reckless pass under current institutional arrangements.

This is for three reasons.

First, well devised and appropriately targeted fiscal incentives can prove very efficient, both in terms of stimulating demand and even in timeliness. For example, a modest €1.5bn scheme to encourage new car purchases via subsidies to scrap older cars (just 0.06 per cent of German GDP) has already led to about 350,000 new orders being placed in Germany. That represents 11 per cent of German registrations last year.

Yes, fiscal works!

Second, the fiscal framework is much better established, including a possible exit strategy.

Just the thought of an exit strategy shows a lack of understanding of how aggregate demand works and is managed by fiscal policy. It also shows deficit myths are behind the statement.

For decades, economists have built up a good understanding of fiscal multipliers and lags. The cost of such measures is transparent,

There is no ‘cost’, only nominal ‘outlays’ by government.

unlike a strategy of central bank asset purchases, where the impact and exit strategy are uncertain and future costs are obscured.

Yes, few understand this simply thing. It’s about price (interest rates) and not quantities.

Third, for the euro area there is a particular reason why aggressive quantitative easing could prove hazardous.

It can’t be hazardous.

This results from the unique status of the ECB and euro as icons of European integration. Even though it may have happened more than 80 years ago, the collective memory of the hyperinflation experienced by Germany and Austria during the 1920s – and of its consequences, which ultimately gave birth to the euro – still casts a long shadow over European perceptions of paper money.

The mainstream believe that it is inflation expectations that cause inflation, and we pay the price via their errant analysis.

Here, we should not forget that, in contrast to the dollar, the pound and the Swiss franc, the euro has been in physical cash circulation for only seven years. As well, it is worth noting that the proportion of EU citizens saying they tend not to trust the ECB has tended to shift upwards – to 31 per cent in the most recent survey (autumn 2008), the highest in EMU’s history. This compares with 48 per cent saying that they tend to trust the ECB (source: Eurobarometer 70).

In short, were the ECB to adopt a strategy of aggressively printing money through an extensive asset purchase programme, this would risk significantly undermining the euro’s credibility, particularly if this strategy was not well communicated.

Credibility is way overrated!

That said, the ECB is in a neighbourhood where most of its peers have embarked on a strategy of aggressively printing money.

The term ‘printing money’ is a throwback to the gold standard and fixed FX in general where the CB prints convertible currency in excess of reserves. This has no applications with today’s non convertible currency.

This risks pushing up the euro on a trade-weighted basis further, at least in nominal terms, which would represent another negative shock to euro area exporters. In this context, if fiscal policy was used more aggressively as a means of providing new stimulus to the economy, it should seek in part to compensate businesses whose outlook could be further weakened by currency appreciation.

Increasing deficits does not strengthen a currency. If it did Zimbabwe would have the word’s strongest currency.

Without doubt, reaching agreement on sufficiently robust fiscal stimulus in Europe is harder to accomplish than a policy of leaving the bulk of policy stimulus up to the ECB.

True. And too bad the ECB doesn’t have any policy variables at hand to add to aggregate demand.

The measures, rather than having a small committee to determine the appropriate level of stimulus, must be decided by politicians, who face political constraints and competing interests. But the transparency that gives a strategy of fiscal stimulus its rel>ative appeal also hampers the ability of politicians to execute it. Also, we are presented with an adverse starting position, with the euro area budget deficit likely this year to be close to 6 per cent of GDP.

That’s the good news. The automatic stabilizers are causing the deficits to grow to the point where they will trigger a recovery. Hopefully before the point where the national governments become insolvent trying to fund themselves.

Nonetheless, this should not mean that the aggressive use of additional fiscal stimulus is insuperable. We have lived through desperate times, which call for desperate measures. Central banks, including the ECB, have already responded with far-reaching measures. In order to stimulate economic recovery in Europe, its political leaders need to take up the baton.

Europe could also assist its cause by several other measures. For one thing, it seems odd that the European Commission has launched “soft” excessive deficit procedures against several euro area countries. As well, European governments, including the European Commission, could do a much better job of outlining to the rest of the world, in a clear and concise way, the details of their stimulus actions so far. For, encompassing the full range of monetary and financial system support measures, these are far from being negligible – with the discretionary fiscal stimulus measures alone amounting to about 1 per cent of euro area GDP in 2009.

Julian Callow is chief European economist at Barclays Capital


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Re: Financial services

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Yes!

>   
>   Sounds like Krugman has been reading your blog:
>   

The Market Mystique

by Paul Krugman

Mar 26 (NY Times) — But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.


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Re: Graduate student support

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>   
>   On Tue, Mar 17, 2009 at 11:19 AM, James wrote:
>   
>   Warren
>   
>   It has been a while since we’ve spoken; I hope you are doing well.
>   As you can imagine we have had a busy and interesting year. The
>   University, like many others, is dealing with budget issues. It looks
>   like we will not get hit too hard this year.
>   

Well done!

>   
>   We finally have a chancellor and provost who work with us much more
>   cooperatively. The governor has pledged no cuts to the university in
>   exchange for no tuition increases and we hope the legislature agrees.
>   
>   Our program is prospering. A New York Times articles ranked us as
>   one of the top three heterodox programs in the US. We now have 48
>   Ph.D. students, the largest program in the region, and have received
>   several applications for next year.
>   

Excellent!

>   
>   Several students are writing dissertations and will graduate
>   in the next year.
>   

Are they ready for my pop quiz??? :)

>   
>   I might add that this year we have reached another goal for the
>   program. When we started we knew we would have to go slowly
>   and hoped we could attract good students. We wanted to attract
>   international students, but we also wanted to build the program
>   around students from the US. This year our applications are
>   more than half from American students and of very high quality.
>   

Good to hear it!

>   
>   We will soon be renewing assistantships for those now being
>   supported and making offers to new students. We have
>   selected four for new offers and there are seven more to
>   whom we would make offers, but presently lack the funding.
>   I have been seeking additional funding from the university
>   and there are hopeful prospects in that quarter we should
>   know in the next few days. We have also received funds
>   from grants and contracts that should support two or three more.
>   

Very good!

>   
>   In light of the more uncertain budget for the upcoming year
>   we have been asked to secure funding before we make offers.
>   We seek your continued support, at last year’s level of $116,000,
>   in order to move on these offers. If you would be willing to raise
>   your support to fund two additional students it would be most
>   helpful both to those students and in our effort to garner more
>   support from the university-they like matches. Funding two
>   more would require an additional $33,000 for stipends and
>   waivers; a total of $149,000.
>   

CC’d to AVM to if they want to help again and the rest of my list, and posted on my blog.

>   
>   Another issue we face is that our stipend level has not changed
>   in over ten years and is now below that of almost all Ph.D. programs.
>   For example, Middle Tennessee State, a program not known as an
>   intellectual powerhouse, offers stipends the economics Ph.D. students
>   of $14,000, ours are $10,000. Further, international students must
>   have a minimum level of financial support before they qualify for a
>   student visa. Our total support to them, including stipend and all
>   tuition waivers, is about $2,800 below the threshold for a visa.
>   We can raise the stipend for international students to overcome
>   this, but the consequence is that make fewer offers and would
>   discriminate unfairly against American students. The university
>   is aware of the problem, but budget restraints stand in the way
>   of a solution in the near term. The official position of the
>   administration at this point is that we should offer support
>   to fewer students in order to raise the stipend for others.
>   We have resisted this as harmful to the long term interests
>   of the program, but some change will be needed before much
>   longer. I would like to discuss this with you sometime soon
>   to get your ideas.
>   

Ok, no immediate ideas but will think about it.

>   
>   As I’m sure you know the people in our department have invested
>   a great deal of sweat equity over the years to build what we consider
>   a highly successful program. UMKC was recognized this year as one
>   of the top six universities in the US engaged in community and urban
>   affairs progress. With your support, intellectual commitment, and
>   good spirit our department occupies an important spot in this activity.
>   For this I am deeply grateful and hope you feel our efforts have
>   warranted your support.
>   

Glad to have been able to help!

>   
>   To summarize our request we ask for $116,000 for continuing
>   support and if you agree $33,000 to support two additional
>   students; a total of $149,000 for nine students.
>   

I’m good with the $116,000.

Sending this to my list to see if it fits anyone else to support the world’s only ‘in paradigm’ grad program.

I know a lot of them are supporting schools that teach it backwards so maybe they would feel good directing some of that this way.

Best!

Warren

>   
>   Warmest regards
>   
>   Jim
>   


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Re: Chinese stimulus

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Yes, thanks, as expected!

>   
>   On Tue, Mar 17, 2009, at 8:47, wrote:
>   
>   Looks like China is interested in prosperity as well, just leaving the Europeans behind!
>   

Last November China announced a CNY4trn stimulus package. The first part of the money started to be spent at the end of February on a high speed rail network forming a triangle between Shanghai, Hangzhou and Nanjing, cutting travel times between the cities of up to 8 hours down to just 1 hour. Trains will run at upto 350km an hour – (do you realise the fastest train in the States is between New York and Boston, that for a 5 minute period only gets up to 80mph).


Overall the country will invest CNY600bn in railways this year, and a minimum of CNY600bn a year until 2012.


When you look at infrastructure projects on the ground like this, and combine it with the development in the local bond market (both local authority and corporate bonds), and the major international development with ASEAN +3 (free trade area next year plus the trial renminbi bloc), the economic and financial development with most of the former USSR in terms of the Shanghai Cooperation Organisation, and the push towards a free trade agreement with the Gulf Cooperation Council, is it really that difficult to see China achieving the 8% GDP growth target that it is aiming for?


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