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

The US risks falling into another Great Depression if it removes regulatory oversight from the Fed. This from the newest regional Fed chief, Narayana R. Kocherlakota, who became Minneapolis Fed president in October 2009. Policies taken by the Fed during the crisis “eliminated the possibility of Depression 2.0,” he said. Removing regulatory oversight would needlessly put them “back on the menu”.

Victims of the Stanford fraud are seeking damages from Antigua’s central bank, after it seized an “enormously valuable” Standford-owned bank. Lawyers argue the bank should have become the property of the victims.

A year ago, the Securities and Exchange Commission accused Mr Stanford of a massive fraud run through his offshore bank in Antigua. Stanford International Bank in Antigua was shut down by authorities, and then Stanford-owned Bank of Antigua was seized by the central bank. This bank primarily dealt with local deposits and loans. Read more

The governor of Korea’s central bank has said he thinks a rate rise “will happen in the not too distant future”.

Bank of Korea Governor Lee Seong-tae told a parliamentary committee that the bank would have to start raising interest rates once the private sector’s “self-driven recovery” was confirmed. Read more

Europe’s cost of debt will rise substantially if Indonesia’s concern at holding euros as a reserve currency catches on. The US, Japan and the Middle East might benefit.

Indonesia has cancelled its first sale of euro debt, put off by Europe’s deficit-financing troubles, a finance ministry official told Bloomberg. “The euro bond is definitely not on our mind,” said Rahmat Waluyanto, director general of the debt management office at the finance ministry. “It’s out of our thoughts for the time being because of Greece, Spain, Italy and Portugal. The four countries are having problems and that is causing negative sentiment in the euro market.”

The euro is the world’s second most widely held reserve currency. Indonesia had planned to sell bonds in euros to diversify from a weakening US dollar. The government has now issued $2bn and is also looking at samurai and Islamic bonds for the rest of the year. Read more

Minutes of the February 2 rate-setting meeting show concerns for the global recovery and domestic credit were mostly behind the surprise decision to keep the cash rate on hold at 3.75 per cent.

Signs of growth in major economies “was currently being supported by the inventory cycle and stimulatory policy settings,” said the board of the Australian central bank. Positive signs for the US were drowned out by concerns for Europe, where household spending continued to fall, and debt levels were high. Plus, “as yet, there was limited evidence of a pick-up in investment in the euro area or Japan.” Read more

Ralph Atkins

The European Central Bank has started a two-stage overhaul of its top leadership after the formal nomination of Portugal’s Vitor Constâncio as its next vice-president.

Eurozone finance ministers’ endorsement late on Monday of Portugal’s central bank governor for the number two slot at the central bank, guardian of the euro, set the stage for a decision next year on a successor for its president, Jean-Claude Trichet. Read more

Figures just out show the UK labour force is shrinking. The same happened last month.

Figures for January show employment is down from 28.921m to 28.905m, and unemployment is down from 2.458 to 2.457. The changes are slight enough to warrant three decimal places, and it should be noted that the change to employment are within sampling variability (+/- 129).

The rising number of economically inactive (“Not labour force” in the diagram, right) is largely driven by men. Many are becoming students, a 2.8 per cent rise on the quarter (4.3 per cent for men; 1.3 per cent for women). Many of those surveyed want a job but are excluded from the unemployment numbers because they haven’t been looking for work in the past four weeks, or those who are looking but unable to start in the next fortnight (Table 13).

Within unemployment, two trends are clear. First, claims for unemployment benefit are still rising. They are up 30 per cent on the year, rising more for women (37 per cent) than for men (28 per cent). The claimant count fell last month by 0.9 per cent, but have regained that ground this month, rising 1.5 per cent.

Second, the duration of unemployment continues to rise, with those seeking work for more than 12 months seeing the fastest rise in caimant count, up 9.2 per cent in the last month alone (Table 11(1)). Young claimants were by far the worst off, with claimants in the 18-24 age bracket rising 23.7 per cent in the month. Read more

Simone Baribeau

But it’s tightening standards anyway.

According to new rules released today, borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. Canadians also won’t be able to take out home equity loans for the last 10 per cent of their home’s value. And those who buy investment properties will need to put down 20 per cent in order to receive government-backed mortgage insurance.

Still, Jim Flaherty, Minister of Finance, assures Canadians that there’s no housing market bubble, even as prices break new records in some cities. Read more

Simone Baribeau

Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, showed little love for the unemployed today in his speech to the Peterson-Pew Commission on Budget Reform Policy Forum.

The inflation hawk – the sole dissenter at last month’s FOMC meeting – called for a reduction in the deficit and said the time to start slashing is now.

“The responsible path to sustainable economic growth with price stability…[is to] act now to implement programmes that reduce spending and increase revenues to a more sustainable level.”

Ok. But it’s also true that the recession itself added to the budget deficit, with spending on social programmes (like unemployment insurance) rising and tax revenues (from the unemployed) falling. Borrowing for these programmes, in turn, raises our debt servicing payments into the future.

So a continued high level of unemployment now is likely to contribute to higher debt in the future, an argument for which Mr Hoenig shows little sympathy. Read more