Daily Archives: October 6, 2010

When the IMF evaluates a situation, the result is usually evenly balanced: it’s quite bad, they might say, but then this and this are quite good. So you notice right away if that counter view is missing and they say simply: this is quite bad.

This is how US real estate has been evaluated in the IMF’s latest Global Financial Stability Report. Look for the box Risks of a Double Dip in the US Real Estate Markets (p. xxxiii) – and then look for the good news.

“Powerful downside risks” to residential property prices include low demand; surplus of houses for sale; high rate of foreclosures; and rising ‘strategic’ defaults. But commercial real estate is worse.

“Banks face about $1.4 trillion in CRE loans expected to mature in 2010-14, nearly half of which are seriously delinquent or ‘underwater’,” Read more

Determined to stay ahead of the competition, Fitch has cut Ireland’s sovereign debt rating one notch to A+, outlook negative. The three main agencies had almost all settled upon Fitch’s previous rating of AA-, with S&P’s recent cut removing its one notch difference, and Moody’s recent cut and downgrade review looking likely to cut its two notch difference. But Fitch has taken the next step, following the “greater than expected fiscal cost” of the Irish government’s bank recapitalisation plan.

Before you place too much emphasis on this, however, you might want to read a new paper from NBER. Research has found that increased competition among ratings agencies has led to lower quality corporate ratings. In one test, speculative grade firms were 7.7 times as likely to default within three years as investment grade firms when competition was low (i.e. Fitch market share is at the 25th percentile), but only 2.2 times as likely when competition was high (market share at the 75th percentile). Read more

At today’s Monetary Policy Committee meeting, Andrew Sentance goes head-to-head with Adam Posen in a bid to sway the mushy middle of the Bank of England’s MPC to his point of view. Like most analysts, the betting is that neither will succeed and the Bank will leave policy unchanged with interest rates at 0.5 per cent and a stock of £200bn of assets purchased under the programme of quantitative easing.

As a paid-up member of the mushy crowd, I share Mr Posen’s theoretical concern that deficient demand will have permanent effects, but also Mr Sentance’s observation that the evidence for these worries is lacking.

So, following Robin’s good practice and the wise words of Fed chairman Ben Bernanke from January, I wondered whether the use of a simple rule of thumb – a Taylor Rule – could help guide us where UK interest rates should be going.

The short answer is no. Read more

Canada’s central bank is the latest to ask whether central banks should expand their remit beyond inflation targeting. “If we look only at interest rates, inflation and output, we may miss bubbles and other elements of systemic risk as they build,” Canada’s deputy central bank governor said on Tuesday.

Tiff Macklem said the Bank needed to develop models that include elements of banking and capital markets. “When the financial system is not working normally,” he said, “we cannot rely on the short-cut from interest rates to output and inflation.” The WSJ recently reported the Fed was also developing a more comprehensive model, the Quantitative Surveillance Mechanism (QSM)Read more