The Basel III rules aren’t even law yet in any country, yet bank chief executives are under pressure from investors to explain how they will deliver a commercial return on equity under the new rules by 2013/14. Banks have resisted raising equity in the market not just because they don’t want to dilute existing shareholders but because they fear it will depress returns. Instead, they have tried to convince investors they can reach their capital and return-on-equity targets organically, through retained earnings and deleveraging.
America’s Debt Crisis: Why Europe Is Right and Obama Is Wrong – SPIEGEL ONLINE
American economists, central bankers and fiscal policy makers have reinterpreted British economist John Maynard Keynes’s clever idea that government spending is the best way to counteract a serious economic downturn — and have turned it into a permanent prescription. In their version of the Keynesian theory, declining growth or tumbling stock prices should prompt central banks to lower interest rates and governments to come to the rescue with economic stimulus programs. US economists call this “kick-starting” the economy.
….The only problem is that this method of encouraging growth has not stimulated the US economy in recent years, but in fact has put it on a crash course. From the Asian economic crisis to the Internet and subprime mortgage bubbles, economic stimulus programs by monetary and fiscal policy makers have regularly laid the groundwork for the next crash instead of encouraging sustainable growth. In the last decade, the volume of lending in the United States grew five times as fast as the real economy.
With thanks to Barry Ritholz
The Sceptical Inflationist | Steve Saville | Safehaven.com
The reason we are in the inflation camp is that the case for more inflation in the US doesn’t depend on private-sector credit expansion; it depends on the ability and willingness of the Fed to monetise sufficient debt to keep the total supply of money growing. A consistent theme in our commentaries over the past 10 years has been that the Fed could and would keep the inflation going after the private sector became saturated with debt.
Up until 2008 there was very little in the way of empirical evidence to support the view that the Fed COULD inflate in the face of a private sector credit contraction, but that’s no longer the situation. Thanks to what happened during 2008-2009, we can now be certain that the Fed has the ability to counteract the effects on the money supply of widespread private sector de-leveraging. The only question left open to debate is: will the Fed CHOOSE to do whatever it takes to keep the inflation going in the future?
via The Sceptical Inflationist | Steve Saville | Safehaven.com.
Follow the Money: Behind Europe’s Debt Crisis Lurks Another Giant Bailout of Wall Street
A Greek (or Irish or Spanish or Italian or Portuguese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008. Financial chaos.
….The Street has lent only about $7 billion to Greece, as of the end of last year, according to the Bank for International Settlements. That’s no big deal.
But a default by Greece or any other of Europe’s debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more.
That’s where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle.
Guest Post: Credit Spreads In The New Normal | ZeroHedge
A banking crisis implies easy money, ZIRP, various types of balance sheet expansion, and lower credit quality on central bank balance sheets. This acts to suppress credit risk, compressing spreads. This creates “artificiality” in credit market insofar as a central bank is not a natural buyer of higher risk securities. There will come a time when risk is moved off central books, and markets will have to learn how to re-price risk with no government support.
via Guest Post: Credit Spreads In The New Normal | ZeroHedge.
Bernanke Defends Fed Focus on Unemployment
In an appearance before the Joint Economic Committee, Bernanke blamed slow-growing consumer spending, which accounts for 70 percent of economic activity, on persistently high unemployment and the gnawing fear among a growing number of Americans that their jobs may be at risk. After noting that the decline in home values and financial assets also contributed to decreasing confidence, he said “probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market.”
Dollar surges as Fed nixes QE3
The US Dollar Index surged after the latest FOMC statement avoided any mention of additional purchases of Treasuries or mortgage-backed securities (MBS). Though they did leave the door ajar with their concluding paragraph:
………The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
The index respected the new support level at 76.00, confirming a primary advance to 79* — the start of a primary up-trend. 63-Day Twiggs Momentum crossed to above zero, further strengthening the primary trend signal; a large trough that respects the zero line would provide final confirmation.
* Target calculation: 76 + ( 76 – 73 ) = 79
QE Can’t Save the Day… We’ve Done a Version of It For Over 10 Years | ZeroHedge
While most commentators proclaim that QE is a completely new phenomenon, we have in fact seen a version of it in the form of the Fed’s and Asia’s (especially China’s) purchases of US Treasuries/ currency pegs over the last decade or so.
Indeed, today, the Fed, China, and Japan collectively hold 61% of the $10 trillion of US debt held by “the public.” When you add in the additional $4.6 trillion in US debt held by “intragovernmental holdings” (basically the Federal Government buying Treasuries by raiding Social Security and other pension funds) you find that Asia and the Feds have monetized $10.7 trillion of the US’s total $14.6 debt (roughly 73%) over the last 20 years.
via QE Can’t Save the Day… We’ve Done a Version of It For Over 10 Years | ZeroHedge.
Disappointment With The Fed | ZeroHedge
Ben just disappointed the market for the first time. Whether he knew it or not he failed to beat expectations. He has been so good at managing expectations and using that as a policy tool he lost sight of how far ahead of itself the market had gotten.
……He downgraded the economy but didn’t use that as an excuse to do more. There was no new, ingenious idea. If anything they tried to clarify the commitment to hold rates low til 2013 is dependent on economic conditions remaining weak. Yet there were still 3 dissenters.
…..By disappointing some people I expect his ability to keep the market up by talking will be reduced as Investors will need to see action rather than being told vaguely that there could be action. That will take time to play out and even I have to admit he gave us something today, just not enough.
The Next Selling Wave Is About to Begin | Toby Connor | Safehaven.com
As the stock market moves down into the next daily cycle low and the selling pressure intensifies, this should drive the dollar index much higher. It remains to be seen if gold can reverse this pattern of weakness in the face of dollar strength, especially since the dollar will almost certainly be rallying violently during the intense selling pressure that is coming in the stock market.
via The Next Selling Wave Is About to Begin | Toby Connor | Safehaven.com.
When the dollar strengthens, gold normally falls. Except in times of high uncertainty (like the present), when demand for gold as a safe haven overcomes downward pressure from a stronger dollar. Buying gold at current prices is a bet that either Greece will default — a pretty safe bet — or that the Fed is again forced to use its printing press (not quite as certain).