Daily Archives: February 17, 2010

Simone Baribeau Assessing the Fed’s other mandate

February 17, 2010 9:20 pm by Simone Baribeau

Other than an immense amount of pain, what could the 9.7 per cent unemployment rate cause?

A reduction in the “economy’s potential output, at least temporarily,” according to “several” FOMC members.

That’s quite an admission. The Fed is tasked with maximising employment, in order to maintain long-term growth. And now, it turns out, that the failure of the Fed to maximise employment means that we’re looking at a smaller economy. The “at least temporarily” qualifier is scant comfort. The alternative, of course, is that we’d be looking at a permanently smaller economy because unemployment was allowed to reach these levels. Let’s hope that’s not the case.

FOMC members proffered one argument that unemployment might not be as bad as it appears.

Continue reading: “Assessing the Fed’s other mandate”

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Posted in Federal Reserve |

Simone Baribeau Just how big should the Fed’s balance sheet be?

February 17, 2010 8:01 pm by Simone Baribeau

Smaller, according to recently released minutes of the FOMC. But how to get there remained an open debate.

Policymakers were unanimous in the view that it will be appropriate to shrink the supply of reserve balances and the size of the Federal Reserve’s balance sheet substantially over time.

They also agreed that the Fed should eventually hold only securities issued by the US Treasury. But that was as far as the consensus went. Significantly, most of the FOMC members argued that gradual sales of MBS and other assets “could be helpful.” The alternative, of course, would be to hang on to the securities until they matured, and not reinvest the proceeds. But here’s the dissent:

Continue reading: “Just how big should the Fed’s balance sheet be?”

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Posted in Federal Reserve |

Simone Baribeau Plosser: Fed should steer clear of fiscal policy

February 17, 2010 7:20 pm by Simone Baribeau

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, today warned (again) of the risks of increased political oversight of the Fed and (again) suggested that the Fed should give up some of its emergency powers in order to maintain its independence.

Specifically, Mr Plosser called for the Fed’s balance sheet to contain only Treasury securities (rather than MBS backed by GSEs) and for it’s ‘unusual and exigent’ lending authority to be either ‘eliminated or severely curtailed.’

Like Ulysses and the Sirens, the Fed could help preserve its independence by limiting the scope of its ability to engage in activities that blur the boundary lines between monetary and fiscal policy.

It’s not a new argument, but it’s an interesting one.

Continue reading: “Plosser: Fed should steer clear of fiscal policy”

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Posted in Federal Reserve |

Should Greece take a eurozone holiday?

February 17, 2010 7:01 pm by Emma Saunders

Greece should take a eurozone ‘holiday’, devalue, and then re-enter the single currency, says Martin Feldstein:

“The rest of the eurozone could allow Greece to take a temporary leave of absence with the right and the obligation to return at a more competitive exchange rate.

“More specifically, Greece would shift its currency from the euro to the drachma, with an initial exchange rate of one euro to one drachma. Bank balances and obligations would remain in euros. Wages and prices would be set in drachma.

“If the agreement called for Greece to return at an exchange rate of 1.3 drachmas per euro, the Greek currency would immediately fall by about 30 per cent relative to the euro and other non-euro currencies. If there is little or no induced inflation in Greece, Greek products would be substantially more competitive in both domestic and foreign markets.”

Comments welcomed.

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Posted in European Union (EU) |

Progress in Iceland?

February 17, 2010 6:34 pm by Emma Saunders

An Icelandic delegation currently in London is armed with a plan, agreed with opposition parties in Reykjavik. Icelandic politicians hope to gain British and Dutch approval for the plan, which might allow the cancellation of a divisive referendum.

Details on the domestic consensus are scarce, but people close to the situation said it could involve accelerated repayments in return for lower interest rates. This could be in everyone’s interests. If the right balance is struck, the British and Dutch will be paid more quickly and the Icelanders will pay less in total. With rising inflation, why let time eat away the value of the money?

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Posted in Uncategorized |

88% Americans say economy still in recession

February 17, 2010 6:26 pm by Emma Saunders

Eighty-eight per cent of Americans think the economy is still in a recession, despite economists saying the opposite. This is from an ABC poll. Those who think the economy is faring worse than before outnumber the optimists (see chart). On a more personal note, 53 per cent say that, based on their experience, the economy has not begun to recover. (hat tip zero hedge)

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Posted in Uncategorized |

Tobin tax: is Japan onside too?

February 17, 2010 5:34 pm by FT writers

For years, taxes on capital flows were seen as a barbarous relic of the 70s, on a par with Demis Roussos and Baked Alaska. No friend of free markets dared support the idea of US economist James Tobin, dreamed up to curb currency volatility after Bretton Woods collapsed.

That’s changing. Since Lord Turner, chairman of the UK’s Financial Services Authority, started stirring interest in taxing financial transactions last year, politicians in Germany, France and Australia have voiced tentative approval. Now Japan, through the musings of vice-finance minister Naoki Minezaki, might just be falling in line.

Brazil has shown that Tobinesque taxes needn’t be a tithe on growth. The country imposed a 2 per cent charge on capital inflows in October of last year, and has seen its currency weaken as intended. Of all the vague ideas seeking a global consensus, support for this one appears to be strengthening (from Lex).

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Posted in Uncategorized |

Lagarde’s threat to speculators

February 17, 2010 4:55 pm by Emma Saunders

Six financial firms have apparently been singled out for speculating on Greek debt during the crisis of confidence that has hit the eurozone.

In a hearing with the Finance Commission at the French National Assembly, which was closed to the press, Lagarde reportedly told French lawmakers that the six institutions are all anglo-saxon, a word French politicians and media use to designate US and UK-based companies.

On Monday Ms Lagarde threatened a ‘second look’ at the validity of sovereign credit default swaps and other derivatives used to bet on governments’ default. It is unclear what further action can and will be taken against the six firms. As Gillian Tett has pointed out, even if leaders mount more ‘linguistic’ attacks, the smart money will probably have cut and run.

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Posted in Uncategorized |

Russian forex intervention likely

February 17, 2010 4:31 pm by Emma Saunders

Russia’s currency hit a 13-month high today against the euro-dollar basket, also hitting the current boundary of the central bank’s floating trading band.

The rouble firmed as far as 34.9985 against the basket according to Reuters data, testing the boundary of the 35-38 trading band. In the past, the central bank has allowed the band to shift by 5 kopecks for each $700 million of interventions at its boundaries, and dealers expect these parameters to prevail.

The move will also have implications for the major currencies as traders would expect the central bank to balance reserves by selling some of its accrued dollars – against the euro in particular, but also against the pound and the yen.

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Posted in Uncategorized |

UAE banks ask central bank for help

February 17, 2010 3:54 pm by Emma Saunders

Banks are unable to lend as much as needed due to regulations on loan-to-deposit ratios, a senior banker said in Abu Dhabi yesterday. Banks need a liquidity injection from the central bank or a relaxation of the ratio requirement.

“The Central Bank has guaranteed all deposits,” Abu Dhabi Islamic Bank CEO Tirad Mahmoud told Gulf News. “So why do we pay 4 per cent [on deposits]: because we have to in order to meet the regulatory requirement.”

Mr Mahmoud is the second banker this month to call for additional funds. In early February, Noor Islamic Bank CEO Hussain Al Qemzi said banks need an additional $5.5bn-$6.8bn (Dh20bn – Dh25bn) to resume normal lending.

Separately, Mr Mahmoud said the biggest challenge sector-wide in 2010 will be for banks to manage their real estate exposure. “I don’t think the real estate sector has seen the bottom yet,” he said.

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Posted in Uncategorized |
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