Richard Koo is the first speaker on this video
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Two Senators Try to Slam the Door on Bank Bailouts – NYTimes.com
This is a show-down between Wall Street and the voting public. Gretchen Morgenson at NY Times writes:
THERE’S a lot to like, if you’re a taxpayer, in the new bipartisan bill from two concerned senators hoping to end the peril of big bank bailouts. But if you’re a large and powerful financial institution that’s too big to fail, you won’t like this bill one bit.
The legislation, called the Terminating Bailouts for Taxpayer Fairness Act, emerged last Wednesday; its co-sponsors are Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican. It is a smart, simple and tough piece of work that would protect taxpayers from costly rescues in the future.
This means that the bill will come under fierce attack from the big banks that almost wrecked our economy and stand to lose the most if it becomes law.
For starters, the bill would create an entirely new, transparent and ungameable set of capital rules for the nation’s banks — in other words, a meaningful rainy-day fund. Enormous institutions, like JPMorgan Chase and Citibank, would have to hold common stockholder equity of at least 15 percent of their consolidated assets to protect against large losses. That’s almost double the 8 percent of risk-weighted assets required under the capital rules established by Basel III, the latest version of the byzantine international system created by regulators and central bankers.
This change, by itself, would eliminate a raft of problems posed by the risk-weighted Basel approach……
The outcome is far from clear. The financial muscle of Wall Street can buy a lot of influence on the Hill. But my guess is that they are too smart to incense voters by meeting the bill head-on. Instead they will attempt to delay with amendments and eventually turn it into an unwieldy 1000-page unenforcable monstrosity that no one understands. Much as they did with Dodd-Frank.
If they win, the country as a whole will suffer. Maybe not today, but in the inevitable next financial crisis if this bill does not pass.
Read more at Two Senators Try to Slam the Door on Bank Bailouts – NYTimes.com.
The Grave Evil of Unemployment, Bryan Caplan | EconLog | Library of Economics and Liberty
Bryan Caplan makes the case for a fresh approach from free-market economists:
At the level of high theory, free-market economists love market-clearing models. If there’s surplus wheat, the price of wheat will fall to clear the market. If there’s surplus labor, similarly, the wage will fall to eliminate unemployment. What about nominal wage rigidity? Most free-market economists concede that nominal wage rigidity exists to some degree, but think the problem is mild and short-lived……..The high theory’s wrong: Nominal wage rigidity is both strong and durable.
Rather than treat unemployment as a necessary but temporary affliction, Caplan suggests that free-market economists should be attacking the “vast array of employment-destroying regulations” imposed by government — and tight monetary policy by central banks, where they should be advocating nominal GDP targeting as an alternative.
Read more at The Grave Evil of Unemployment, Bryan Caplan | EconLog | Library of Economics and Liberty.
TheMoneyIllusion
TheMoneyIllusion highlights this common mistake by central banks:
Despite the fact that our mainstream textbooks tell us that low rates don’t mean easy money, most central bankers cannot shake the suspicion that low rates do mean easy money, and that the current relatively low rates are a danger to the economy. This irrational bias is driving policy failure in much of the world. Even central banks at the zero bound (like the Fed) are inhibited in their push for unconventional stimulus by this cognitive illusion.
Read more at TheMoneyIllusion.
Fed Watch: Monetary Policy and Financial Stability
Tim Duty quotes Minneapolis Federal Reserve President Narayana Kocherlakota, speaking at the 22nd Annual Hyman P. Minsky conference:
….unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity. All of these financial market outcomes are often interpreted as signifying financial market instability. And this observation brings me to a key conclusion. I’ve suggested that it is likely that, for a number of years to come, the FOMC will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low. I’ve also argued that when real interest rates are low, we are likely to see financial market outcomes that signify instability. It follows that, for a considerable period of time, the FOMC may only be to achieve its macroeconomic objectives in association with signs of instability in financial markets.
Unusually low interest rates will only cause an asset price bubble when they encourage excessive borrowing by consumers. In the current environment where increased savings are being channeled into repaying debt, the risks of excessive credit growth are low. But the Fed has to maintain a fine balancing act, reacting quickly to any increase in asset prices which would encourage speculative demand for credit — and raising interest rates in order to discourage this.
Read more at Economist’s View: Fed Watch: Monetary Policy and Financial Stability.
Richard Koo: Quantitative and Qualitative Easing
Richard Koo in his latest report makes that the point that central banks in the US and UK have not cured their economies of deflationary pressures, they have merely kicked the can down the road:
Central bank officials in the US and the UK claim quantitative easing has been a success because it prevented a Japan-like deflation. But as I noted in my last report (2 April 2013), the rate of Japanese wage growth four to five years after the bubble collapsed was roughly equal to the levels now being observed in the US. Deflation took root in Japan only after 1997, when the nation fell off the fiscal cliff following the Hashimoto administration’s ill-fated experiment with fiscal consolidation. That was seven to eight years after the bubble burst.
Read more at Richard Koo Quantitative and Qualitative Easing 2013 04 16.
“Fragile by design” – the political causes of banking crisis | The Market Monetarist
Lars Christensen discusses a soon-to-be-released book by Charles Calomiris and Stephen Haber: “Fragile by Design: Banking Crises, Scarce Credit,and Political Bargains.”
Calomiris and Haber conclude that the root cause of banking crisis has to be found in what political institutions different countries have. Said in another way the main cause banking crisis is one of “political design”…….The differences between USA and Canada seem to be particularly interesting……..since 1840 the US have had 14 banking crisis, while Canada have had none and this despite the fact that credit has been as abundant in Canada as in the US.
Read more at “Fragile by design” – the political causes of banking crisis | The Market Monetarist.
Fixing the Banking System for Good
I believe we have a crisis of values that is extremely deep…. because the regulations and legal structures need reform. I meet a lot of these people [from] Wall street on a regular basis. I’m going to put it very bluntly: I regard the moral environment as pathological…… I have never seen anything like it. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to ….counterparties in transactions. They are tough, greedy, aggressive and feel absolutely out of control…… They have gamed the system to a remarkable extent. And they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies……
Professor Jeffrey Sachs of Columbia University speaking at the “Fixing the Banking System for Good” conference on April 17, 2013.
Pimco’s El-Erian: Markets Trading at ‘Very Artificial Levels’ | WSJ
Steven Russolillo at WSJ reports:
Actions by central bankers across the globe are propping up asset prices to artificial levels that are potentially putting investors at risk, Pimco CEO Mohamed El-Erian said in an interview with the Wall Street Journal.
“Investors should recognize that in virtually every single market segment, we are trading at very artificial levels,” El-Erian told WSJ’s Francesco Guerrera. “It’s true for bonds, it’s true for equities. It’s true across the board.”
This reinforces my long-term bullish outlook for gold. Central banks are unlikely to cease their easy money policies any time soon. What we are currently witnessing is the opposite, with the Bank of Japan going ‘nuclear’ in an attempt to kill persistent deflation that has dogged them for over two decades.
I strongly recommend that you watch the video interview at Pimco’s El-Erian: Markets Trading at ‘Very Artificial Levels’ – MoneyBeat – WSJ.
S&P 500 rising while gold and bond yields fall
The S&P 500 is set to break resistance at 1600, which would suggest an advance to 1700, but expect a correction to test the new support level before the quarter ends. Troughs above zero on 13-week Twiggs Momentum indicate a healthy primary up-trend.
* Target calculation: 1350 + ( 1350 – 1100 ) = 1600
The red and green arrows above indicate previous turning points at March and September quarter ends. A correction that respects support at 1500 in the current quarter would confirm the breakout.
Falling 10-year Treasury yields suggest that inflation expectations are falling. Breach of 1.70% would indicate another test of primary support at 1.40%, but rising Twiggs Momentum indicates that a bottom is forming.
Reversal of gold below $1500/ounce confirms that demand for gold as a safe-haven and inflation-hedge is fading — a bullish sign for stocks.
Bellwether transport stock Fedex dipped below $100 after an earnings disappointment but remains in a primary up-trend. Recovery above $100 would suggest that the economic recovery is on track, while breach of the rising trendline (and support at $85) would warn of a down-turn.
Structural flaws in the US economy remain, but the market is gaining momentum and the current advance shows no signs of ending.