Daily Archives: March 8, 2010

Simone Baribeau

Who’s afraid of global growth?

Jürgen Stark, member of the executive board of the ECB, for one. At least, if it’s the wrong kind of growth.

One striking feature of the high global growth rates was the reliance on large and unsustainable global imbalances. In principle, current account imbalances can be desirable, if they channel funds across the world to their most productive use. But in the years prior to the crisis imbalances were a symptom of economic distortions: in some countries asset price bubbles developed and household debt levels rose beyond sustainable levels. Eventually, the rise in the household debt burden resulted in an acceleration of defaults on mortgage and consumer loans, which undermined the stability of the financial system.

In other countries for example, in emerging Asia which held the value of their currencies at artificially low levels to support their export-oriented growth strategies, the vast accumulation of foreign exchange reserves had potentially high opportunity costs. These managed exchange rate regimes may also have contributed to hampering necessary domestic adjustments and distorting the allocation of resources towards export-oriented industries.

His solution (in part): Read more

Simone Baribeau

Monthly prices rose 0.3 per cent in February in Chile, there first monthly increase since September, spurred by transportation costs, the National Statistics Institute said today. These increases were relatively unaffected by the earthquake, which it the country on February 27, and is sure to affect prices in the coming months. Inflation still remains well below the central bank’s target range of 2 per cent to 4 per cent. The central bank has said it does not expect to raise its key rate, now at 0.5 per cent, until at least the second quarter of the year.

Simone Baribeau

Can’t get a job? That may be because everyone else is too efficient.

Increases in productivity have led to far higher level of unemployment than would otherwise be expected, and may continue to be a drag on job creation into 2010, said a paper published by the Federal Reserve Bank of San Francisco today. Read more

Simone Baribeau

One way to assess if housing prices are rising for real reasons (ie, the property is becoming more valuable) or if they’re part of a bubble (ie, it’s a speculative boom, bound to crash) is to compare housing prices in a given area with rental prices. If housing prices are rising much faster over a prolonged period of time than rents, you’ve probably got a bubble on your hands.

Which begs the question: how do you measure rents? Read more

Simone Baribeau

Sheila Bair, the chairman of the FDIC, today spoke on regulatory reform. Her comments were nothing surprising or new. She called for the creation of a resolution mechanism for large failing institutions, more sharing of information between regulators, and strengthening consumer protections.

But one interesting statement: Read more

The weekend’s suggestion from Germany for a European Monetary Fund is extremely confused. Angela Merkel, German chancellor, has just said she supports the idea in principle, but the details need to be worked out. Exactly. I have not been able to find anyone today who can explain what the EMF is supposed to do. It seems a classic solution in search of a problem.

So, I predict the idea of an EMF will go nowhere fast. But as my colleague, Alan Beattie, pointed out in the most thoughtful comment I’ve seen on it today, it’s not the first time the acronym EMF and the word “unbelievable” have been used together.

While Germany and France might have other ideas for an EMF, it is not clear they are any more believable: Read more

Ralph Atkins

What does the European Central Bank really think about an European Monetary Fund. The first public comments have been negative. Jürgen Stark, executive board member, argues in an article to appear in tomorrow’s Handelsblatt newspaper that such a fund would discourage fiscal discipline and violate eurozone principles.

But Mr Stark’s comments were his personal view, the ECB says. So far Jean-Claude Trichet, ECB president, has refused to comment publicly. After meeting global counterparts in Basel, Switzerland, earlier today, he said the idea had not been discussed at all. Last Thursday, he said the 22-strong ECB governing council did not have a position.

The impression I have is that there are divisions within the ECB that Mr Trichet has yet to smooth over. As I noted in a previous post,there are at many in Frankfurt who, in the wake of the crisis over Greece, would like to see more joined up thinking by eurozone political leaders – with a view to strengthening Europe’s 11-year-old monetary union. The ECB president himself seemed entirely happy with the pledge last month by eurozone leaders “to take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area”. A European Monetary Fund would address the obvious weakness exposed by Greece in the eurozone’s “crisis management” capabilities.

No doubt, the devil will be in the detail. Read more

Simone Baribeau

The Federal Reserve Bank of New York said today that it would expand its counterparties for conducting reverse repurchase agreement transactions.

“This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed’s traditional counterparties,” the NY Fed said in a statement.

The NY Fed has been testing “reverse repos” since last December in preparation for eventual monetary policy tightening and as early as last October had announced that it would expand its counterparties for these transactions.

Reverse repos are one of the tools the Fed has said it plans to use to drain excess reserves from the financial system once it begins its exit strategy in earnest. But Ben Bernanke, Fed chairman, has made clear that he does not expect it to be the primary tool – rather, the Mr Bernanke intends to use the interest rate the Fed is paying on its holding of bank reserves to be the “most important” technique for draining the funds. Read more

From the FT and around the web:

Brussels ready to back fund – Financial Times Read more

By Quentin Peel in Berlin and Scheherazade Daneshkhu in Paris

Germany and France are planning to launch a sweeping new initiative to reinforce economic co-operation and surveillance within the eurozone, including the establishment of a European Monetary Fund, according to senior government officials. Read more

Robin Harding

The market seems to be convincing itself that the Bank of Japan will change policy soon, with an extension of its Y10,000bn in 0.1 per cent, three-month loans to the six-month maturity the most likely option.

That policy was introduced at an emergency monetary policy meeting on 1st December 2010. Given the possibility that the BOJ will use the six-month maturity as well it’s interesting to ask what the three-month lending policy has achieved. Read more