David Stockman, former Director of the Office of Management and Budget under President Ronald Reagan, gives Alex Daley a run-down of the Fed’s performance.
Duration 30:43
Christian Noyer: Monetizing public debt
Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the BIS: Some central banks have developed large-scale public debt acquisition programmes. They have done so for reasons relating to immediate macroeconomic stabilisation… to go beyond the zero-interest rate limit. The Eurosystem as well intervened on a much smaller scale when malfunctioning debt markets prevented the effective transmission of monetary policy impulses. There is not a single central bank that is seriously considering the monetisation of deficits with the more or less declared intention of reducing the weight of debt via inflation. In my view, this notion is nothing more than a financial analyst’s fantasy.
via Christian Noyer: Public and private debt – imbalances of global savings.
Comment:~ No central bank has declared an intention to monetize public debt (or deficits) — reducing public debt via inflation — but without a viable alternative how many will end up there? Gary Shilling points out that “competitive quantitative easing by central banks is now the order of the day.” The Bank of Japan last year “expanded its balance sheet by 11 percent, while the Federal Reserve’s increased 19 percent, the European Central Bank’s rose 36 percent and the Swiss National Bank’s grew 33 percent.” Japan, after 20 years of stagnation and with net public debt at 113% of GDP, illustrates the predicament facing many developed countries. If there was a plan B they would have tried it by now.
A lack of money isn't the problem: it's time to shrink – The Drum – ABC News
Alan Kohler: Debt was built up through 30 years of current account imbalances after currencies were finally unshackled from the gold standard in 1971, and the depression of the 70s came to an end in 1982.
Central banks, principally the Federal Reserve, complied in the process of debt build-up by holding down interest rates and allowing asset prices to rise, keeping balance sheets in the black.
The credit crisis of 2007-08 brought asset prices down rapidly and rendered banks suddenly insolvent, so they had to be recapitalised by governments. Now the governments of Europe, the US and Japan are insolvent, and the only question is when the central banks will monetise their debt – that is, print more money and buy their debts…..
Basel takes aim at Mega Bank | | MacroBusiness
Deep T: As the research previously posted here on MB shows, Mega Bank [the big four Australian banks: NAB, CBA, WBC and ANZ] carries a level of capital against residential mortgages that is less than 2% even with mortgage insurance. Mega Bank uses internal risk based models to determine the amount of capital which are primarily based on the historical default rate of Australian mortgages relative to loan to value ratios. The period over which Mega Bank assesses the historical default rate is primarily over a period of rising house prices fueled by the expansion of mortgage credit by Mega Bank. Thereby masking probable default levels over a more benign period…..
Economists React: How Likely Is QE3 Following Jobs Data? – WSJ
CAPITAL ECONOMICS: QE3 will depend on second-quarter GDP and July’s ISM data because the jobs report was not bad enough to make QE3 “a done deal.” Both GDP and ISM numbers will be released just ahead of the Fed’s next policy meeting.
via Economists React: How Likely Is QE3 Following Jobs Data? – Real Time Economics – WSJ.
Comment:~ The range of opinion canvassed by WSJ leans toward the Fed holding off QE3 for the present because jobs numbers aren’t bad enough to warrant drastic intervention. In the long run QE appears inevitable — and not only in the US. There are three options: (1) stagnation with low growth and high unemployment; (2) debt-deflation as in 2009; and (3) inflation. Option (3) would reduce the public debt load by raising nominal GDP and rescue underwater homeowners and banks by lifting real estate values. Those on fixed incomes would suffer but they do not appear a powerful enough lobby to deter politicians from this course.
Europe Central Banks Fight Slowdown – WSJ.com
The ECB lowered its main lending rate by 0.25 percentage point to 0.75%, the lowest level in the central bank’s 13-year history. It reduced the rate it pays banks that deposit funds overnight with the central bank by the same amount, to zero. Both decisions were unanimous.
via Europe Central Banks Fight Slowdown – WSJ.com.
Comment:~ Lowering interest rates will help restore liquidity, but will not fix the current solvency crisis.
Quantitative easing and the (lack of) responses in bond yields
…When the Fed was performing quantitative easing, treasury yields rose as the economy recovered and inflation expectation rose. On the other hand, treasury yields fall when the Fed was not performing quantitative easing as the period without quantitative easing coincided with the weakening of the economy as well as the deterioration of the Euro Crisis.
via Quantitative easing and the (lack of) responses in bond yields.
Comment:~ Quantitative easing (QE) expands the stock of money in the economy as the government, through its agent the Fed, issues new banknotes (or equivalent deposits) in payment of goods and services. The resulting inflation would drive up yields.
Bernanke Acknowledges Treasury Strategy at Odds With Fed Policy – WSJ
Kristina Peterson and Jon Hilsenrath: The Fed’s [Twist] program is designed to work by taking long-term bonds off the market, nudging investors into riskier assets, such as stocks, that could help boost the economy. The problem is that while the Fed has been snapping long-term bonds off the market, the Treasury Department has been ramping up its issuance of long-term debt to take advantage of historically low long-term rates. Since October 2008, the average maturity of outstanding marketable Treasurys has climbed by nearly 32%, reaching almost 64 months in May, the agency said earlier this month. That’s its highest level in a decade.
via Bernanke Acknowledges Treasury Strategy at Odds With Fed Policy – Real Time Economics – WSJ.
Fed Extends Operation Twist – WSJ.com
U.S. Federal Reserve officials extended through the end of the year a program meant to drive down long-term interest rates and signaled that they were “prepared to take further action” if needed amid heightened worry about the economy’s performance.
By continuing the program, known as “Operation Twist,” the Fed will buy $267 billion in long-term Treasury bonds and notes while it sells short-term Treasurys. The program had been set to expire this month.
Westpac: China credit supply outstrips demand
Phat Dragon is placing the most value on new information regarding credit demand and supply. It is credit growth that tells us more about the shape of activity later this year than any other macro indicator……the supply side of the credit equation is moving decisively higher (greater policy emphasis, increased willingness to lend) but ……sluggish demand for loans is holding the system back. Indeed, the June quarter observation for “loan demand” (bankers’ assessment) fell to 12% below average, lower even than the Dec-2008 reading, even as the “lending attitude of banks” (corporate assessment) rose for a second straight quarter and the ‘easiness’ of the monetary policy stance (bankers’ assessment) rose to 21% above average.
via Westpac: Phat Dragon – a weekly chronicle of the Chinese economy.