Daily Archives: February 17, 2010

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. Read more

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: Read more

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. Read more

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. Read more

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?

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)

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. Read more

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. Read more

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. Read more

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.” Read more