Category: Banks & Interest Rates

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Morgan Stanley Still Expects QE3 This Year – WSJ

“For some time, our call has been that the Federal Reserve will undertake additional balance-sheet action in the first half of 2012,” writes Vincent Reinhart, an economist with the bank and a former top-level Fed staffer.

He argues it’s most likely the Fed will act to expand its balance sheet via Treasury and mortgage bond buying — in market parlance, QE3 — at either the April or June Federal Open Market Committee, and that the ultimate size of the program could tack on $500 billion to $700 billion onto what is currently a $2.9 trillion balance sheet. There’s also a chance they will put in place a modified version of the current effort to sell short-dated bonds to buy longer-dated securities.

Why act? Reinhart says the second half of the year will box the Fed in politically. Officials won’t wish to be seen starting a high-profile action in the thick of the presidential campaign. Also, he reckons growth will still be too weak, and inflation will be falling short of the Fed’s 2% target.

via Morgan Stanley Still Expects QE3 This Year – Real Time Economics – WSJ.

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Five Largest Banks ‘Should Be Broken Up’: Fed’s Fisher – CNBC

The five biggest banks in the United States are too powerful and should be broken up, Dallas Fed President Richard Fisher said on Wednesday.

The financial crisis has left the five biggest banks even more powerful than before, he said at an event in Mexico City……

“After the crisis, the five largest banks had a higher concentration of deposits than they did before the crisis,” he said. “I am of the belief personally that the power of the five largest banks is too concentrated.”

via Five Largest Banks ‘Should Be Broken Up’: Fed’s Fisher – US Business News – CNBC.

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ECB Allots €529.5 Billion in Long-Term Refinancing Operation – WSJ.com

LONDON—The European Central Bank said it handed out €529.5 billion $712.7 billion in cheap, three-year loans to 800 lenders, the central bank’s latest effort to arrest a financial crisis now entering its third year. Wednesday’s loans were on top of the €489 billion of similar loans the ECB dispensed to 523 banks in late December. The ECB’s goal is both to avoid an escalating crisis as banks struggle to pay off maturing debts and to mitigate a sharp pullback in bank lending to customers across ailing European economies……about two-thirds of the loans went to banks in three euro-zone countries — two in the “periphery,” likely Spain and Italy, and one in the “core,” likely France or Germany.

via ECB Allots €529.5 Billion in Long-Term Refinancing Operation – WSJ.com.

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QE3 – Wall Street’s biggest fantasy? | WSJ.com

WSJ.com – Mean Street

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Steven Russolillo discusses the prospects of another round of quantitative easing by the Federal Reserve based on recent comments by Dallas Fed Chief Richard Fisher.

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How to Fix Europe’s Banks – WSJ.com

Francesco Guerrera: A simple solution is staring the likes of Deutsche Bank AG, BNP Paribas SA and Banco Santander in the face: large, decisive, increases in capital through equity sales that would allay investor concerns and boost balance sheets. With the year-end results almost all out of the way, banks should start raising capital soon. The experience of the U.S. financial crisis shows that in stressed times capital infusions can cure or mask many ills and buy valuable time to restructure businesses.

via How to Fix Europe’s Banks – WSJ.com.

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Westpac: RBA Statement on Monetary Policy

It appears that the objective of this Statement is to emphasise that without a significant deterioration in global financial conditions policy should remain unchanged. When you assess the various pieces of the Bank’s description of the domestic economy – weak employment; rising unemployment rate; subdued retail spending; soft housing market; below trend growth outside mining; scaling back of public investment; building construction subdued; inflation to remain around the mid-point of the target range; policy at neutral, not stimulatory – we see a fairly clear case for policy to move into the stimulatory zone immediately. Of course our forecasts as contrasted with the Bank’s forecasts clearly suggest that the qualitative descriptions provided in this statement are understating the need for a policy response.

It has been and remains our view that a further 50bps in policy easing can be justified immediately although our forecast is that this adjustment is likely to occur over a three to four month period. We find the use of the requirement that demand conditions need to weaken materially before a rate cut can be delivered overly conservative and expect that the Bank’s policy will change more rapidly than we assess is their current intention.

Consequently at this stage we maintain our view that the next rate cut in this cycle can be expected in March to be followed by a move in May but recognise that we are currently dealing with a central bank that while acknowledging all the reasons policy needs to be stimulatory appears to have no immediate intention to move.

Bill Evans
Chief Economist

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New Economic Perspectives: Banks Weren’t Meant to Be Like This. What Will their Future Be – and What is the Government’s Proper Financial Role?

So we are brought back to the question of what the proper role of banks should be. This issue was discussed exhaustively prior to World War I………

It was above all in Germany that long-term financing found its expression in the Reichsbank and other large industrial banks as part of the “holy trinity” of banking, industry and government planning under Bismarck’s “state socialism.” German banks made a virtue of necessity. British banks “derived the greater part of their funds from the depositors,” and steered these savings and business deposits into mercantile trade financing. This forced domestic firms to finance most new investment out of their own earnings. By contrast, Germany’s “lack of capital … forced industry to turn to the banks for assistance,” noted the financial historian George Edwards. “A considerable proportion of the funds of the German banks came not from the deposits of customers but from the capital subscribed by the proprietors themselves.[3] As a result, German banks “stressed investment operations and were formed not so much for receiving deposits and granting loans but rather for supplying the investment requirements of industry.”

via New Economic Perspectives: Banks Weren’t Meant to Be Like This. What Will their Future Be – and What is the Government’s Proper Financial Role?.

Comment:~ The author contrasts the short-term focus of modern banks with the long-term outlook of the early German banking system which was largely equity-funded, rather than deposit-based. The question is: could we ever successfully return to such a system?

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Living In A QE World | Jim Bianco

Central banks are ruling markets to a degree this generation has not seen. Collectively they are printing money to a degree never seen in human history.

So how does this process get reversed? How do central banks pull back trillions of dollars of money printing without throwing markets into a tailspin? Frankly, no one knows, least of all central banks as they continue to make new money printing records.

…..When/If these central banks go too far, as was eventually the case with home prices, expanding balance sheets will no longer be looked upon in a positive light. Instead they will be viewed in the same light as CDOs backed by sub-prime mortgages were when home prices were falling. The heads of these central banks will no longer be put on a pedestal but looked upon as eight Alan Greenspans that caused a financial crisis.

via Living In A QE World | The Big Picture.

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The winners and losers of QE3 – macrobusiness.com.au

The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

That’s a clear declaration of intended QE3 if conditions are met. The two conditions are price stability and inadequate employment growth. Price stability now has a number with the Fed also announcing a new inflation target of 2%. Anything under that number potentially triggers QE3.

via The winners and losers of QE3 – macrobusiness.com.au | macrobusiness.com.au.

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