Today’s Fed minutes offered some crunchy details on the debate within the US central bank over asset sales. And it looks like Ben Bernanke is winning the argument.
Months ago the Fed chairman said the central bank should consider selling the $1,000bn-plus portfolio mortgage-backed securities and agency debt accumulated during the recession, but only after the recovery was entrenched and monetary policy tightening had begun.
This hasn’t been your father’s recession.
Unlike other recent recessions which were relatively shallow and short lived, we won’t see a quick and full recovery from this one. A problem which, Sandra Pianalto, Cleveland Fed president, said yesterday, is one of the reasons that the recovery will be so long delayed.
A Greek former European Commissioner has accused the country’s central bank of encouraging naked short-selling of Greek bonds by altering the regulations on its electronic bond trading platform last year. Vasso Papandreou, a senior deputy in the governing socialist party, made the charges on Wednesday in a written question to parliament.
The six-page question addressed to Mr Papaconstantinou set out details of measures taken by the central bank last year that appeared to facilitate naked shorting. First, the HDAT bond settlement period was extended from t+3 to t+10. Second, the central bank abolished penalties for investors who did not deliver a bond on the settlement date, in a move that allowed failed transactions to be continuously recycled.
The monthly inflation/deflation fight is still alive and well, with the deflation side striking a blow after today’s US CPI numbers showed year over year inflation rise only 0.9 per cent.
“Core inflation continued to decelerate in April resulting in the smallest year over year advance in the index since 1966,” wrote Joseph Brusuelas of Brusuelas Analytics. “Pricing developments have set the stage for further declines in core pricing throughout the remainder of this year.”
Conspiracy theorists must be having a field day. German regulators have banned naked short selling on eurozone sovereign debt, sovereign CDS and shares in a handful of private companies. Germany has wanted action on naked short selling for months, and now they have acted unilaterally. But as the Economist points out: “It has made the markets think that the Germans know something bad that isn’t public.”
So let’s run with that theory. Perhaps Italians know something bad too. They have just released banks from the obligation to mark-to-market their losses on eurozone government bonds held in available-for-sale portfolios. The move is apparently designed to “safeguard capital ratios“. Isn’t that responsibility meant to lie with the banks, not the central bank? And can sovereign bonds credibly be excluded? They cost real money, and make or lose real money, just like other bonds.
Germans certainly have their own style at a time of crisis. As Angela Merkel’s government faced a backlash over its attempts to control speculators, Karl Otto Pöhl, the former Bundesbank president was offering a hardline view on the eurozone’s failings. The ECB was breaking the rules by buying government bonds, Mr Pöhl, 80, told Der Spiegel. The basis on which the eurozone operated had “changed fundementally” and the euro was likely to fall further. The Greece bailout was “about rescuing banks and rich Greeks,” he added for good measure.
His comments certainly highlighted German anger at the eurozone rescue package launched last week – and the pressure Axel Weber, the current Bundesbank president, faces from his stern predecessors. But that will hardly help calm financial market fears that EU policymakers’ hearts are not really into sorting out the mess.
Since Monday’s announcement of the Office for Budget Responsibility, it has become apparent that the new fiscal watchdog will enter an academic and policy-making viper’s nest when it produces its first forecasts. On top of some of the OBR’s obvious flaws, George Osborne has given Sir Alan Budd the hospital pass of making an explicit assumption of the fiscal multiplier, something policymakers like to fudge (see below).
Why so? The OBR will produce its first growth and borrowing forecasts a few days before the 22 June Budget. The Treasury’s unit handling the OBR says these forecasts will be on the basis of no policy change from the 29 March Budget.
The forecasts will therefore be the Budget forecasts, adjusted for any fiddling of the figures under Labour, updating for almost three months extra data and, perhaps, including the £6bn spending cuts for 2010-11 to be announced on Monday. I say “perhaps” because these spending cuts are for one year only and will be offset thereafter by tax reductions, so it would be seriously misleading to include them in a forecast alone (improving the outlook for borrowing) without the subsequent and known tax reductions.
Then, the chancellor will make the substantive spending cuts and tax increases he promised in his FT interview. And then the OBR will have to produce a second set of growth and and borrowing forecasts, taking into account the additional fiscal tightening planned by the new Con-Lib coalition government.
Here the OBR will have to make an explicit assumption of the fiscal multiplier – the ultimate effect on the economy of changes to tax or public spending. Its assumption will be easy to derive from the way it changes its growth and borrowing forecast. This will be an extremely political act for the OBR and it had better be ready to put its reputation on the line. It can also be an iterative process – if cutting public spending reduces growth, which in turn cuts tax revenues, borrowing still falls short of the chancellor’s fiscal goals and this requires further cuts in public spending etc.
When you talk to OBR people in the Treasury, they say: “Ah… the second round effects …hmm, we’ll get back to you”. And they don’t. Let’s think through what the outcomes could look like.
Dissent is bubbling under at the Monetary Policy Committee, despite a unanimous vote on the Monetary Policy Committee to keep interest rates at 0.5 per cent with a stock of £200bn quantitative easing.
The nine members of the Bank of England’s rate-setting committee disagree on the inflationary pressure in the economy and the power of spare capacity to bring inflation down. This is evident in the minutes of the May meeting, which was held before the MPC had sight of yesterday’s bad inflation figures.
A disappointing auction of government debt has followed Germany’s decision to implement a partial ban on naked short-selling of certain stocks. A €6bn offer attracted just €6.42bn bids.
The German action against naked shorting—selling securities such as shares and bonds that are not owned or borrowed—comes amid heated discussion in Europe of regulatory curbs on speculative trading, which has been widely blamed by politicians for exacerbating the Greek debt crisis.