Daily Archives: February 2, 2010

Simone Baribeau

Interest rates are low. Consumer borrowing, however, is still expensive. So what are consumers doing?

Paying down their debt, says a report put out today by the St. Louis Fed. Households have reduced credit card debt by 3.5 per cent and mortgage debt by 2 per cent. The Economic synopses, written by William T. Gavin, St. Louis Fed Vice President, credits the spreads between interest paid on consumer savings (which is held down by low interest rates) and the cost of consumer borrowing (which remains relatively high.)

“Because interest rates on savings are so low, households have ‘saved’ by paying down credit card and mortgage debt.”

Of course, an alternative explanation is that the reduced mortgage debt (which has experienced its first year-on-year decline) is due to falling housing prices. Read more

Simone Baribeau

The Senate banking committee briefly broke into rumblings about 20-somethings with clever ideas being able to subvert the intent of Congressional laws on complicated banking matters.

It’s no reason not to pass legislation to ban proprietary trading, Paul Volcker said. “Yes, banks have 26-year-olds with a whole lot of mathematical training and all the rest, but the supervisors need to hire some 28-year-olds.”

Paul Volcker, in both his written testimony and during the question and answer period, said: “Bankers know what proprietary trading is, don’t let them tell you otherwise.”

Mr Volcker was also questioned on whether the US could learn anything from Canada, which had been able to avoid the worst of the housing crisis, a topic explored by the FT last weekRead more

Simone Baribeau

In a sign of just how powerful the Federal Reserve is, Paul Volcker and Neal S. Wolin couldn’t give a definitive answer on whether the Fed could now prevent proprietary trading without Congressional action.

Mr Volcker said that the Fed could tell banks they were “conducting a particular activity in a particularly risky way” but he wasn’t sure they could “say they can’t do proprietary trading”. Mr Wolin said that in any case, it shouldn’t be left up to the discretion of the regulator. Read more

Simone Baribeau


How hard will Chris Dodd, who’s on his way out of the Senate, push for the Shelby rule? It’s not clear. Mr Dodd, like ranking member Richard Shelby, expressed frustration at the end of the hearing that the ‘Volcker’ rules hadn’t been proposed earlier. He wants to pass a bi-partisan bill, he said, and some of the last minute changes made getting Republican support more difficult.

I don’t want to go to the floor of the United States Senate begging for a sixtieth vote. I’m not going to do that.

ORIGINAL POST (from 20:31):

Chris Dodd, chairman of the Senate banking committee, says he ‘strongly’ supports the ‘Volcker’ rules, which would prohibit commercial banks from engaging in proprietary trading.

But (shock of shocks) there was no initial bi-partisan consensus. Richard Shelby, the Republican ranking member, said he’d consider the proposal, but he was “quite disturbed” that the administration had waited so long to introduce it. Read more

Simone Baribeau

Questioned on whether the “Volcker rule” would have, by itself, prevented the financial crisis, Paul Volcker said that it would not have, but its goal is to prevent future crises.

“I tell you sure as I am sitting here that if banking institutions are given free rein and allowed to speculate however they want to, I don’t know if I’ll see the crisis, but my soul is going to come back and haunt you.”

 Read more

Yes, if rumours are true, China Investment Corporation (CIC) is set to receive a $250bn capital injection, not $200bn as previously thought. The bumper bonus is rumoured to be due before Chinese New Year, February 14.

CIC, which has been active securing energy and other resources, was formed in 2007, and currently has about $300bn under management. Experts say an additional $250bn would take it to the top of the league, above both Norway and Abu Dhabi (even though it doesn’t seem it would from this table).

The Reserve Bank of Australia navigated the slump by shadowing the steep rate cuts of the Federal Reserve; it is emerging tracking closely the tightening efforts of the People’s Bank of China. Rarely has that monetary co-dependence been stated as explicitly as it was on Tuesday, when governor Glenn Stevens explained the RBA’s first rate decision of the year. Chinese authorities’ efforts to “reduce the degree of stimulus to their economy” are one of the main reasons Australia can leave its target cash rate where it is, for now – but relying on China’s credit curbs to cool Australia’s economy is a high-risk strategy. (Summary from Lex)

Simone Baribeau

Paul Volcker, former Fed chairman, is pitching Obama’s proposed “Volcker rules” directly to Congress today. Here are his prepared remarks.

Mr. Chairman, Members of the Banking Committee:

You have an important responsibility in considering and acting upon a range of issues relevant to needed reform of the financial system. That system, as you well know, broke down under pressure, posing unacceptable risks for an economy already in recession. I appreciate the opportunity today to discuss with you one key element in the reform effort that President Obama set out so forcibly a few days ago. Read more

Well, so much for central bank independence fears in Mexico, Argentina and South Africa: the UK Tory party has just pledged to work hand-in-hand with the Bank of England should it win the upcoming general election. This is becoming a global trend. Will the markets price in higher UK inflation tomorrow?

George Osborne, chancellor-in-waiting, wants to keep interest rates lower for longer by cutting the record budget deficit faster than the ruling Labour party. He played on voters’ fears by using the ‘G’ word – Greece – to describe the possible fate for Britain if the deficit is not addressed. Read more

George Osborne, shadow chancellor, has outlined eight benchmarks against which he wanted a Conservative government to be judged.

It’s all very reminiscent of Labour’s five pledges in 1997. But even though those pledges have been long forgotten and have never been the measure by which the Labour government has been judged, these benchmarks (see below) deserve to be taken seriously, since the Conservatives are still the most likely party of government in a few months.

Superficially attractive, my view is there are many flaws with these benchmarks, however, which makes me predict they will not catch on as a measure of true success of a Conservative government, should one be formed.

  • Most benchmarks are too easy. Many are a simple consequence of cutting public spending, which both parties plan. Benchmarks 1, 2, 5 and 6 will be met as long as government spending is cut along the lines Labour is already planning. Benchmark 7 is a continuation of the current trends for deleverage and less reliance on wholesale funding in the banking sector. Starting at the depth of a recession, benchmark 3 will be met as long as the next government is not an abject failure. That just leaves Benchmarks 4 and 8.
  • Some benchmarks are not necessarily desirable. Benchmarks 1 and 4 put the government in hock to credit ratings agencies and arbitrary international comparisons. There is little evidence that scoring well on World Economic Forum’s indicators of tax competitiveness or business regulation has a significant effect on the well-being of British citizens.
  • Some benchmarks are not consistent. Improving public sector productivity in Benchmark 6 cannot guarantee better schools and hospitals. If the workforce in these services were halved, productivity would be sky-high, but service quality would not. Services may be better value for money without being better.
  • Some obvious benchmarks are missing. Where is a commitment to improved living standards, for example, surely the primary economic goal?

While you get a sense of the priorities of a coming Conservative government, there is also the over-riding impression that Tory politicians want to be judged on their own slightly-fake, easy-to-pass tests. It makes the party’s complaints over the dumbing-down of the assessment of school quality seem hypocritical.

The benchmarks in full: Read more

The US, Britain, France and Germany are trying to convince Russia and China to agree to blacklist Iran’s central bank and firms linked to the Revolutionary Guard Corps, in a new round of UN sanctions over Tehran’s nuclear program. Russia and China are permanent members of the UN Security council, which means they can – and do – veto resolutions.

Such sanctions could hurt Iran’s energy market. The government has allowed for up to €5bn euro bond issues by the oil ministry to help finance development of the country’s oil, gas and petrochemical sectorsRead more

The Bank of England’s Monetary Policy Committee starts its February meeting tomorrow with the issue of whether to pause quantitative easing as the main issue on the agenda. A month ago, everyone thought the Bank would keep interest rates at 0.5 per cent and pause the programme of QE at a total £200bn of money created and assets purchased. After disappointing fourth quarter growth figures, there is a bit of doubt about the Bank’s actions. I still think the Committee will pause QE on Thursday. Here is why: Read more

The Irish central bank has revealed that business lending fell during December, at an accelerating rate. The numbers follow similar data from the Bank of England and the European Central Bank.

In Ireland, credit to non-financial corporations fell by 3.2 per cent in December, 2.7 per cent the month before, and 2.2 per cent in October. Private sector lending as a whole was also down at an increasing rate. Read more

Ralph Atkins

Greeks are waiting for a possible television address tonight by George Papandreou, their prime minister, on the country’s fiscal plight. If he does speak, the likelihood is that he will go further than before in accepting tougher measures will be needed to bring down the public sector deficit. Pressure he faced in Davos last week from global financial world leaders appears to have had an effect, and the Greek premier seems keen to get his retaliation in before the European Commission pronounces on his government’s plans tomorrow.

Still, past form suggests Mr Papandreou will not go far enough to calm financial markets. Greek politics appears to be preventing rapid changes in direction, even with the country facing a real risk of default. Read more

In a post on the enjoyable nonsense of Davos last week, I teased that there was a photo of Martin Wolf, our chief economics commentator, in a large ruff and wonderful cod piece. Here it is by popular request….

The Australian central bank has kept its cash rate at 3.75 per cent, after three consecutive monthly rises, signalling concerns about the strength of the recovery. The Aussie dollar slid 1.4 per cent against both the dollar and the yen on the news.

The move was unexpected, though markets beat economists in being less surprised. Read more