Banks & Interest Rates Archives - Page 41 of 62

June 1, 2013

The 7 Reasons Why People Hate QE | Eric Parnell

Excellent article by Eric Parnell sets out the negative impacts of quantitative easing (QE):

…the Fed has dramatically expanded its policy scope into areas that are normally the territory of fiscal policy. This has included specifically targeting selected areas of the economy such as the U.S. housing market including the aggressive purchase of mortgage backed securities (MBS)…
….the Federal Reserve has elected to provide direct and generous support to financial institutions and risk takers, some of which directly contributed to the cause of the crisis. Unfortunately, this subsidy is being funded by effectively taxing the income generating capability of the millions of Americans who are either retired or living on a fixed income…
[QE] has forced Americans who had planned their lives and retirements around the ability to generate high quality and safe rates of return to now take on extraordinary risks to achieve these same goals.
By flooding financial markets with liquidity, it has completely distorted the true price setting mechanism across all asset classes.
It has forced many investors across all different philosophies and disciplines to significantly shorten their time horizons and holding periods associated with their investments.
The daily direction of financial markets is no longer driven by economic or market fundamentals…..Instead, investment markets are now almost entirely at the mercy of what Chairman Bernanke or his associates on the Federal Reserve might say or not say on any given trading day.
Lastly and even more broadly than investment market forces, QE has the detrimental effect of not allowing the economy to cleanse itself…… misses the very important point that recessions are actually good for an economy. This is due to the fact that it forces an economy that has become sloppy with the excesses from the previous expansion to work these excesses off and reallocate capital more efficiently.

But writing an article such as this is the same as writing 7 Good Reasons Why People Hate Chemotherapy. We all dislike QE. QE is not something that central banks apply through choice. QE is something — like chemotherapy — they apply when they have no choice. QE is the lesser of two evils — the greater evil being a deflationary spiral like the Great Depression of the 1930s.

The important lesson to take from this is: How to Avoid QE. Manage credit growth and the monetary base more conservatively during the good times. Remove the punch bowl just as the party gets going — so we don’t end up with a massive hangover when it’s over.

May 30, 2013

Central Banks’ Central Bank Warns About Rehypothecation Threats | Zero Hedge

Tyler Durden writes:

…….none other than the TBAC warned that the US is suddenly facing a $10+ trillion high quality collateral shortage in the next decade. As we have also explained, this is a major problem for the Fed which at current rates of QEeing, will monetize all Treasury duration exposure in roughly 5 years – at that point there will be virtually no collateral left and the Fed will be finally out of both tools and ammo.

I suspect that fiscal deficits will add sufficient new Treasury bonds to the pile, so that the Fed never has to run out of decent collateral.

May 26, 2013

Two cheers for higher Japanese bond yields in the spirit of Milton Friedman | The Market Monetarist

Market monetarist Lars Christensen gives an insight into rising Japanese (JGB) bond yields:

…..the markets do not think that the Japanese government is about to go bankrupt. In fact completely in parallel with the increase in inflation expectations the markets’ perception of the Japanese government’s default risk have decreased significantly. Hence, the 5-year Credit Default Swap on Japan has dropped from around 225bp in October last year just after Mr. Abe was elected Prime Minister to around 70bp today!

May 22, 2013

Market Insight: Central bankers turn deaf ear on balance sheets – FT.com

John Plender at FT observes:

The sheer size of the move in US Treasuries is striking. From the beginning of May to the end of last week, yields on the 30-year Treasury bond rose by nearly 40 basis points while the 10-year yield rose around 30bp. That is a measure of the market’s sensitivity to assumptions about an exit from the era of central bank balance sheet expansion. It is also an indication of how far we are from a return to normality.

May 21, 2013

Carney Warns Europe Faces Decade of Stagnation Without Key Reforms | WSJ

Nirmala Menon at WSJ quotes Mark Carney, incoming governor of the Bank of England:

Mr. Carney, currently Canada’s top central banker, said Europe can draw lessons from Japan on the dangers of taking half measures……..“Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens,” Mr. Carney said in his final public address as governor of the Bank of Canada.

May 19, 2013

Can two senators end ‘too big to fail’? | The Big Picture

Barry Ritholz writes:

The idea that two senators from opposite sides of the ideological spectrum can find common ground to attack a problem with a simple solution is novel in the Senate these days. If Brown and Vitter manage to end the subsidies to banks deemed “too big to fail,” they will have accomplished more than “merely” preventing the next financial crisis. They will have helped to create a blueprint for how to get things done in an era of partisan strife.

Read more about the progress of the Brown-Vitter (TBTF) bill at Can two senators end ‘too big to fail’? | The Big Picture.

May 12, 2013

The monetary policy revolution

James Alexander, head of Equity Research at UK-based M&G Equities, sums up the evolution of central bank thinking. He describes the traditional problem of inadequate response by central banks to market shocks like the collapse of Lehman Brothers:

Although wages hold steady when nominal income falls, unemployment tends to rise as companies scramble to cut costs. In the wake of the crash, rising joblessness created a vicious circle of declining consumption and investment that proved very difficult to reverse, particularly as central banks remained preoccupied with inflation.

Failure of both austerity and quantitative easing has left central bankers looking for new alternatives:

…..Economist Michael Woodford presented a paper [at Jackson Hole last August] suggesting that the US Federal Reserve (Fed) should give markets and businesses a bigger steer about where the economy was headed by adopting a nominal economic growth target. In September, the Fed announced its third round of QE, which it has indicated will continue until unemployment falls below 6.5% – the first time US monetary policy has been explicitly tied to an unemployment rate. US stocks have since soared, shrugging off continued inaction surrounding the country’s ongoing debt crisis.

While targeting unemployment is preferable to targeting inflation, it is still a subjective measure that can be influenced by rises or falls in labor participation rates and exclusion of casual workers seeking full-time employment. Market Monetarists such as Scott Sumner and Lars Christensen advocate targeting nominal GDP growth instead — a hard, objective number that can be forecast with greater accuracy. Mark Carney, due to take over as governor of the BOE in July, seems to be on a similar path:

Echoing Michael Woodford’s comments at Jackson Hole, he advocated dropping inflation targets if economies were struggling to grow. He has since proposed easing UK monetary policy, adopting a nominal growth target and boosting recovery by convincing households and businesses that rates will remain low until growth resumes.

While NGDP targeting has been criticized as a “recipe for runaway inflation”, experiences so far have not borne this out. In fact NGDP targeting would have the opposite effect when growth has resumed, curbing inflation and credit growth and preventing a repeat of recent housing and stock bubbles.

May 6, 2013

Are Australian banks really sound?

Business Spectator reports:

In a statement APRA chairman John Laker said that, in implementing the Basel III liquidity reforms, the authority’s objectives were to improve its ability to assess and monitor ADIs’ liquidity risk and strengthen the resilience of the Australian banking system.

“APRA believes ADIs are well-placed to meet the new liquidity requirements on the original timetable and doing so will send a strong message about the soundness of the Australian banking system,” he said.

If you repeat misinformation often enough, people will believe it is true. Australian banks face two risks: liquidity risk and solvency risk. Addressing liquidity risk does not address solvency risk. Australian banks report risk-weighted capital ratios which are misleading if not downright dangerous. Risk-weighting encourages banks to concentrate exposure in areas historically perceived as low risk, such as residential mortgages. When all banks are over-weight the same asset, the risk profile changes — as Eurozone banks discovered with government bonds.

If we remove risk-weighting, as proposed in the US Brown-Vitter bill, the four majors in Australia would have capital ratios of 3 to 4 percent. Not much of a capital buffer in these uncertain times.

May 4, 2013

The insufferable conceit | MacroBusiness

Sell on News at Macrobusiness observes:

Columbia University economist Jeffrey Sachs recently commented that the financial system is plagued by large scale fraud. He blamed it on a docile president, a docile White House and docile regulators……..

Sachs is right in his observations, of course. But I am not sure he is right to imply that it is new. I think Greed and Wall Street have been bedfellows as long as Wall Street has existed.

May 4, 2013October 5, 2017

Blame del Pont for the nightmarish rise in Argentine inflation | The Market Monetarist

Lars Christensen cites MercoPress on hyper-inflation in Argentina:

Because of inflation, people collect their salaries and rush to turn them into foreign currency”, added the money traders…

He observes:

The collapse of the peso should be no surprise to anybody who have studied Milton Friedman. Unfortunately Argentina’s central bank governor Mercedes Marcó del Pont hates Milton Friedman, but she loves printing money to finance public spending.