Daily Archives: March 1, 2010

Simone Baribeau

As the Fed approaches the end of its purchases of mortgage backed securities, Fannie and Freddie, the mortgage giants now under government conservatorship, are again raising the eyebrows of some within the Fed and congress.

The latest comments, fast on the heels of those of Ben Bernanke last week, come from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, and Republican representatives Darrell Issa and Jim Jordan.

From Mr Lacker:

I have said elsewhere that it would be a mistake to try to build this expansion on another housing boom and that over time we should wean our economy off dependence on housing subsidies. Too many houses were built over the last decade, and what we’ve been through the last three years should teach us that subsidising housing mortgage debt was a dangerous policy that was carried too far. But whatever society decides about the bias toward housing, real regulatory reform would be incomplete without addressing the fate of the government-sponsored housing finance enterprises.

Separately today, responding to Tim Geithner’s testimony before the House Budget Committee that the post-conservatorship plan for the troubled mortgage giants wouldn’t be released until next year, Mr Issa and Mr Jordan called for a hearing into the administration’s treatment of the GSEs. Read more

Simone Baribeau

Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, today argued that the primary reason for financial market instability was a poorly defined government safety net for financial institutions. The bursting housing bubble, he said, caused pain for financial groups, but there was nothing fundamentally destabilising about it: institutions overvalued certain assets, and as the market corrected itself, people lost money.

The considerable downturn in housing market fundamentals alone would have led one to expect substantial movements in financial prices and quantities, with attendant strains for many institutions, even in a very well-functioning financial system.

Interconnectedness isn’t inherently destabilising, he argues. Financial institutions have every reason to “neglect the implied exposure to their counterparties’ counterparties.”

But, he says, the moral hazard created by the government’s implied guarantees to large interconnected institutions is destabilising. Read more

Simone Baribeau

Another dove flies away. Donald Kohn, the Vice Chairman of the federal reserve board, has announced that he will step down come June, leaving the board shy three members.

Mr Kohn is one of the last remaining dove governors. Another dove, Frederic S. Mishkin, resigned in August 2008. The other governor whose seat is still empty is Randall S. Kroszner, who stepped down in January 2009. (Mr Kroszner, who made few comments directly on monetary policy, was no dove: his most remembered statement on rates at the beginning of the financial crisis was unmistakably hawkish).

Left on the board Read more

Or, looked at another way, sterling has hit a 25-year low against the Australian dollar (and it’s 24.96 years, actually). Sterling has been falling across the board.

The change in exchange rate has been particularly swift of late, although there were steeper-still changes in the opposite direction during 1985. Read more

A very rough paraphrase of Daniel Tarullo’s speech follows:

Within the world of banking regulation, the bulk of the consensus has formed around prudential requirements, supervisory initiatives, and market discipline proposals. Those who believe additional measures are required have mostly turning to structural proposals, such as:

(1) Reversing the trend that allowed more financial activities within banks;
(2) Directly regulating products and services, regardless of the type of firm;
(3) Limiting the size or interconnectedness of financial firms.

Other points of interest: Read more

Cristina Fernandez has told Congress that she’s scrapped a presidential decree to tap $6.6bn in foreign currency reserves to help pay the country’s debt. The plan had been blocked by the country’s courts, and was the reason central bank chief Martin Redrado was ousted.

But, hang on: Ms Fernandez has signed a new decree to allow $4bn reserves to pay multilateral lenders, eg the World Bank or IMF. $2.2bn of reserves had already been earmarked for the purpose. So we’re talking about $6.2bn instead of $6.6bn, the money would still be used to pay debt, but the creditors would be different. Read more

Rate setting meetings are going to get lonely. Donald Kohn has announced he will leave the Federal Reserve, effective June 23.

History will judge Chairman Bernanke and the Fed to have met challenges over the last several years “with great speed, imagination and effectiveness,” Kohn said in his resignation letter to President Barack Obama, released today by the Fed. Read more

Sterling is being sold across the board. At lunchtime it was down almost 2 per cent against the currencies of Britain’s main trading partners. There are a bunch of technical reasons why it seems to be in freefall. Figures from the Chicago Mercantile Exchange suggest traders are building up short positions in sterling, the news that Prudential has agreed to buy the Asian operations of AIG insurance group for $35.5bn will create a significant new demand for foreign currency, and the FT’s story today that gilts are trading as if it has already lost the prized AAA_rated status have all put the skids Britain’s currency.

But the big concern in the markets is the chance of a hung Parliament after weekend opinion polls put the Conservative lead over Labour at only 2 per cent. On a uniform swing, this would not be far from sufficient for a majority Conservative government and would indicate a minority Labour administration is most likely. The fear is that such a government would be weak and indecisive in reducing the budget deficit, leading to further economic chaos. Read more

Is Norway calling the bottom of global property markets? Its central bank has given approval for its oil-funded sovereign wealth fund to invest up to 5 per cent ($22bn) in the asset class.  “Investments will principally be made in well-developed markets and within traditional types of real estate,” Finance Minister Sigbjoern Johnsen told Reuters. “We must be prepared for real estate prices to fluctuate a good deal.”

Norway has form calling turning points. Last year the fund was allowed to increase its proportion of equity holdings to 60 per cent. During that year, major indices rose about 50 per cent. The fund made 13.5 per cent in Q3 alone. I wonder if they’re planning to reduce the equity proportion now (Bloomberg).

Apologies for lack of FT posts here…  some technical problems.

Eurozone and EU-wide unemployment have stayed at their record December highs of 9.9 and 9.5 per cent, respectively.

Looking at the by-country data is instructive. With inflation data released at the end of last week, we thought a Phillips curve might be in order: Read more

It may be semantic and definitional. It may be highly significant.

Revisions to estimates of Swedish growth in Q3 and Q4 last year show that the country’s economy contracted in both quarters. Both of the revisions are less than a percentage point, and could be within a margin of error. But that would still confirm the fragility of any putative recovery. Read more

Robin Harding

Japan’s finance minister, Naoto Kan, wants to escape the country’s persistent deflation by the end of the year, according to Reuters.

“Escaping deflation is difficult so we won’t see an immediate improvement such as in several months. But taking two to three years would be too long. Hopefully, we want Japan to see prices turn positive by the end of this year,” Kan told a lower house financial committee.

 Read more