Man of the year

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I’m perhaps a bit harsher and more direct in my criticisms than Time Magazine when they named Chairman Bernanke their
Man of the Year:

His latest speech shows he’s got ‘quantitative easing’ and monetary operations completely wrong as he believes the banks lend out reserves.

His alphabet soup of programs for the interbank lending freeze up completely missed the
point that all the fed has to do is lend in the fed funds market which would have immediately solved the problem that never should have happened, and lingered for over 6 months and contributed to the last leg of the collapse.
He’s on the wrong side of fiscal policy, urging the Congress to balance the budget, at least longer term.

He’s on the wrong side of the trade issue, trying to engineer exports at the expense of domestic consumption,
which is indeed happening, and causing our real terms of trade and standard of living to deteriorate.

He hasn’t even begun to consider the evidence that is showing lower rates to be deflationary rather than inflationary.

He still adheres to inflations expectations theory.

His unlimited dollar swapline program was an extraordinarily high risk policy that fortunately worked out,
but never should have been done without discussion with Congress. In fact, last I read he still thinks it was low risk,
not understanding that fx deposits at the foreign CB are not actual collateral.

If I had to select someone from outside the Fed for the next chairman Vince Reinhart is the only one I can think of that at least thoroughly understands monetary ops and reserve accounting, though we do have our differences on theory and policy .


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Banks Given 10 Years To Meet Tougher Capital Rules – Tokyo

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Capital ratios control permissible leverage which initially appear to control bank returns on equity, but longer term spreads adjust and the roe gravitates to a bank’s cost of capital.

And since higher leverage increases risk to investors, the cost of capital eventually adjusts to the capital ratios, so over time- in the long run when we’re all dead to quote Keynes- it all comes down to about the same thing.

With markets discounting the near term a lot more than the long term it makes sense lower capital ratios will help bank equities.

>   
>   FYI – FSA just stated no agreement has been reached yet.
>   

*JAPAN’S FSA SAYS NO AGREEMENT TO EXTEND RULE IMPLEMENTATION
*JAPAN’S FSA SAYS INTERNATIONAL TALKS ON CAPITAL RULES ONGOING
*JAPAN BANK REGULATOR SAYS `NO TRUTH’ CAPITAL AGREEMENT REACHED

By Shingo Kawamoto
Dec. 16 (Bloomberg) — Japan’s Financial Services Agency
says no agreement has been reached on delaying new rules on
capital adequacy for banks. Motoyuki Yufu, a spokesman for the
regulator, spoke after the Nikkei newspaper reported
international banking authorities agreed to start introducing
new capital adequacy rules from 2012, giving lenders a
transition period of 10 to 20 years to implement the
regulations.

>   
>   Based on article below this transition period could potentially apply to
>   all banks and not just Japanese banks
>   

Banks Given 10 Years To Meet Tougher Capital Rules

TOKYO (Nikkei)- Global banking regulators have agreed to effectively delay the enforcement of new capital adequacy rules for large banks, opting to create a transition period of at least 10 years, The Nikkei learned Tuesday. The Basel Committee on Banking Supervision, made up of the banking authorities of major countries, has been discussing introducing stricter capital requirements since September 2008 in an effort to prevent a recurrence of the global financial crisis.

The proposed changes include raising the 8% minimum capital ratio banks are currently required to maintain and focusing on a narrower definition of core capital. The committee will stick to its plan to gradually introduce the new rules starting in 2012, but will establish a transition period of 10-20 years. This means that the rules will not be fully implemented until at least the early 2020s.

Banking authorities have apparently determined that a rush to adopt stricter requirements might deter lending by major banks and hurt the chances of a recovery in the global economy. “The Basel Committee has turned to a more cautious approach,” says a financial regulatory official in Japan. The committee will also consider allowing banking regulators in each country or region to decide when to fully adopt the new requirements. The slow phasing in of new capital rules will come as good news to Japanese banks, which had faced the prospect of being forced to bolster their capital through the issuance of common shares.

The Basel Committee plans to compile an outline of its proposals before the end of this year and roll out a concrete plan sometime next year.
(The Nikkei Dec. 16 morning edition)


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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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CPI/Housing

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Karim writes:

CPI

  • Headline CPI +0.4% and core +0.034%
  • OER -0.1% and volatile items largely offsetting (lodging away from home -1.5% vs tobacco +1% and vehicles +0.8% (after +1.7% prior month))
  • Favorable base effects for core coming in H1 2010 should see y/y drift to 1% from current 1.7%

Housing

  • Starts up 8.9%; largely payback from weak October and driven by multi-family
  • Single family up 2.1% (-7.1% prior) and multi-family up 67.3% (after down cumulative 51% prior 2mths)
  • Permits +6% (versus prior -4.2%)
  • Net/Net housing component of GDP likely to remain flat/slightly positive for next 2-3 quarters


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Eurobond Being Mulled Again Amid Fears Over Greece

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Looks like it’s serious enough for this, thanks.

And anything done at the national level serves to weaken the group as a whole.

Eurobond Being Mulled Again Amid Fears Over Greece>

2009-12-15 15:40:15.949 GMT

PARIS (MNI) – Eurozone leaders, reacting to worries about the situation in Greece and its potential fallout are looking at the option of a special fund to provide emergency aid, a well-placed monetary source told Market News International.

The source, who is familiar with the ongoing discussions, said that if a eurobond proposal ended up being nixed, “there is also the option of a solidarity rescue fund to which all eurozone countries can contribute.”


It’s not quite clear how the EU or eurozone would get around the so-called “no-bailout clause,” but there is a sentiment among many EU leaders that the clause has lost credibility because the political and economic costs of letting a member state fail would be too high.

The no-bailout clause, in article 103 of the EU Treaty, says that neither the EU, the ECB nor any national government “shall…be liable for or assume the commitments” of a member state.

A eurobond, depending on how it was structured, could be a hard sell in this regard. However, some sort of fund that loaned to a country – but did not take on any burden associated with its debt – might just pass muster.

It’s unclear what such a fund might look like, since one has never been attempted. But one option might be for large EU countries or the EU to create a special facility through which it borrowed money in the bond market to help the member in trouble.

Such an arrangement might be similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing. Under current rules, these particular EU Commission bonds can’t be used to help eurozone members.

Some observers have warned that any arrangement smacking of a bailout – whether a eurobond or “solidarity fund” — could potentially be regarded as unfair by countries such as Ireland, which has already announced stiff spending cuts to try and put its fiscal house back in order.

However, proponents of doing something would argue that Ireland is not yet out of the woods and could be submerged again in the market undertow should the situation in Greece lead to a more generalized selloff of peripheral EMU sovereign debt.

So far, other peripherals have been largely spared in the recent tumult surrounding Greece, which is by far the worst performing among sovereign eurozone issuers.

The spread on Greek bonds widened Tuesday by 24 basis points to 253 points above the benchmark German Bund, on market disappointment over a paucity of budget balancing details contained in the speech Monday night by Greece’s Prime Minister George Papandreou.

By contrast, Ireland’s sovereign paper was unchanged at a spread of 165 points above Bunds; Spain widened just 1 point to a spread of 62 basis points; Portugal widened 2 points to 67 bps above Bunds.

Papandreou pledged to bring Greece’s deficit back to within the Maastricht limit of 3% of GDP within four years, but some of the other details were sketchy. On the revenue side – Greece’s government has promised a hefty 40% increase – Papandreou mentioned a new progressive tax on all sources of income, as well as the abolition of certain tax exemptions, a new capital gains tax and a stiff tax on bonuses. He also promised new revenue from a reinvigorated fight against tax evasion.

On spending, he pledged a freeze on public sector wages above E2,000 a month; a 10% cut in supplemental wages; a hiring freeze in most sectors for 2010; and a 10% cut in social security spending next year.

Reaction was lukewarm not only in markets but also at the European Commission, which in each of the past 5 years has registered dissatisfaction with spending and revenue estimates posited by Greece, calling them overly optimistic.

“It’s not just a question of words but also deeds,” the spokesperson for European Monetary and Economic Affairs Commissioner Joaquin Almunia said Tuesday, adding that the Commission wants to see “concrete measures” to get [Greece’s] budget deficit “moving downwards as soon as possible.”

Greece is expected to submit specific proposals to the Commission shortly after the New Year.

Meanwhile, the ECB is expected on Thursday to consider the possibility of further ratings downgrades on Greek debt.

“In the case of a further downgrade, we must be prepared, as it could have a domino effect on other eurozone countries,” the central banking source asserted. “That in turn would put pressure on the euro and the euro is a prime concern.”

The source also seemed to hint that Greek debt, if hit by additional downgrades, could have trouble staying on the list of eligible collateral at ECB refinancing operations after next year, when
the current acceptable minimum rating of BBB- will revert to the pre-crisis standard of A-.

“We will have to take under consideration what will happen after 2010, when the temporary and more lenient stance of the ECB will stop,” he said.

“I don’t say that Greece is heading towards losing its eligibility for collateral,” he continued. “However, we always plan and assess how a situation will evolve in the medium-term, and there is a risk that some countries might be facing much more expensive borrowing conditions in the next two years, because of market conditions.”

The official added that, in the case of Greece, “if borrowing becomes even more expensive, it will create problems in its efforts to combat high debt and deficit.”

But he waxed optimistic, nonetheless. “Despite the fact that rating agencies are downgrading Greece, we do not believe that there will be a borrowing problem,” he said.

“We believe that the Greek government will adopt all necessary measures to satisfy not only the markets but also its EU allies and the ECB and work towards fiscal consolidation within the next four years.”


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Bill Dudley’s Speech

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>   
>   (email exchange)
>   
>   On Tue, Dec 15, 2009 at 8:36 AM, wrote:
>   
>   I was reading Bill Dudley’s speech from last week and can’t figure out why he’s saying
>   some things that are at best misleading.
>   
>   Mr. Dudley’s overall remarks were interesting, helpful and encouraging in many ways,
>   but I was quite concerned by what he said towards the end about excess reserves:
>   

“If we raise the interest rate on excess reserves, we can incentivize banks to hold the excess reserves with us rather than lend them out”

>   
>   It’s difficult to make sense of this statement, because banks, in the aggregate, don’t in
>   effect “lend” or “not lend” excess reserves. I realize that there is a lot of confusion in
>   the financial press surrounding the issue of excess reserves. Unfortunately, Mr. Dudley’s
>   choice of words seems likely to perpetuate some of these misunderstandings and also
>   seems inconsistent with Fed staff papers on this matter.
>   
>   In the hope that it might prove useful at some point, I would like to offer the following
>   assertions:
>   
>   1. In our system, banks are never reserve-constrained in their lending activities – the
>   Fed will always add as many reserves as are needed to maintain its interest rate target.
>   

Yes, and more so. If the Fed doesn’t proactively add reserves to alleviate a shortage the result is an overdraft in at least one member bank’s reserve account, and an overdraft *is* a loan from the Fed, so in any case needed reserves are necessarily added as an ‘automatic’ matter of accounting. The Fed’s decision is about pricing the overdraft.

So it’s always about price and not quantity.

>   
>   Bank lending decisions are independent of reserves.
>   

Yes, completely.

>   
>   2. Now that the Fed is paying interest on excess reserves, their quantity is irrelevant –
>   monetary policy objectives can be pursued completely independently from any
>   accounting measure of excess reserves in the system.
>   

Yes, apart from a small glitch- the agencies have reserve accounts that don’t earn interest. The Fed is on this and working to get it changed so all reserve accounts pay interest.

>   
>   3. The private sector cannot create or extinguish reserves. See Fed paper
>   http://www.newyorkfed.org/research/staff_reports/sr380.pdf
>   

Yes!!!


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Iraq to increase crude production

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This would be a game changer if they do it and pump all that:

BAGHDAD
Petroleumworld.com, Dec 14, 2009

Iraq struck deals with several foreign energy giants to nearly triple its oil output in an auction that ended on Saturday, as the country bids to become one of the world’s biggest energy producers.

Major agreements were reached with Russian firm Lukoil and Anglo-Dutch company Shell over giant fields during the two-day sale, while contracts were also awarded to China’s CNPC and Malaysia’s Petronas.

“Iraq’s oil production will reach 12 million barrels per day (bpd) within the next six years,” Oil Minister Hussein al-Shahristani told reporters after the auction. “That is the highest production level of the world’s oil-producing countries.”


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Summers supports Obama administration policy stupidity

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Banking and the entire private sector in a capitalist society is necessarily procyclical. Only the Federal government can be countercyclical, and,
indeed that’s it’s role in supporting aggregate demand in a slowdown. The blame for current conditions falls unambiguously on current policy. Comments below

Obama Plans to Press Banks Monday to Start Lending Again

Dec. 13 (CNBC) —President Barack Obama’s economic advisers are talking tough about the banks ahead of his meeting Monday with heads of financial institutions.

Larry Summers and Christina Romer say Obama will press bankers to ease lending to help Americans get back to work.

As Summers put it, bankers need to recognize that “they’ve got obligations to the country after all that’s been done for them.”
He says no major bank would be intact without the government’s bailout of the financial sector, and now they need to do all they can to get credit flowing again.

Why would we want to demand releveraging of the private sector and not growth through increased incomes via my proposals for a payroll tax holiday, per capita revenue distribution, and an $8/job for anyone willing and able to work to facilitate private sector expansion as demand is restored?

Only one reason- the usual deficit myths.

Summers spoke Sunday on CNN’s “State of the Union” program.
Romer, on NBC’s “Meet the Press,” said Americans are still paying the price for Wall Street excesses.

No, we are still paying the price for poor policy response due to disgraceful flawed mainstream economics mired in deficit myths that has blocked the obvious means of supporting aggregate demand readily available.

On Saturday, Obama singled out financial institutions for causing much of the economic tailspin and criticized their opposition to tighter federal oversight of their industry.

Why does he care if “they” oppose any particular policy?

This shows a profound weakness of leadership where he can’t use his bully pulpit to lobby congress to do the ‘right thing.’

Unfortunately, however, due to the lack of a fundamental understanding of banking and the financial sector in general the administration’s proposals fall far short of the mark even if they did get them passed.

While applauding House passage Friday of overhaul legislation and urging quick Senate action, Obama expressed frustration with banks that were helped by a taxpayer bailout and now are “fighting tooth and nail with their lobbyists” against new government controls.
In his weekly radio and Internet address Saturday, Obama said the economy is only now beginning to recover from the “irresponsibility” of Wall Street institutions that “gambled on risky loans and complex financial products” in pursuit of short-term profits and big bonuses with little regard for long-term consequences.

Its just barely stopped the slide from a too little too late fiscal adjustment that added precious little to the work done by the fiscal ‘automatic stabilizers’ of rising transfer payments and falling incomes due to the slowdown.

Not to forget Fed policy that further removes personal interest income, which should be a good thing as it allows for lower taxes for a given level of federal spending. But of course that’s not recognized and therefore the 0 rate policy is instead a wet blanket on demand.

“It was, as some have put it, risk management without the management,” he said.

Right back to you.

The president also told CBS’ “60 Minutes” that “the people on Wall Street still don’t get it. … They’re still puzzled why it is that people are mad at the banks. Well, let’s see. You guys are drawing down $10, $20 million bonuses after America went through the worst economic year … in decades and you guys caused the problem,” Obama said in an excerpt released in advance of Sunday night’s broadcast of his interview.

Right back to you.

The only question is whether this is innocent fraud or subversion.

(feel free to distribute)


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