Simone Baribeau

What’s causing the foreclosure crisis? Is it the correction in home prices across the US from bubble-induced highs or is it, as many claim, a result of lax lending standards and predatory subprime loans?

The distinction isn’t just splitting hairs. Governors of the Federal Reserve and other policy makers have put quite a bit of effort into blaming failures of mortgage regulation (rather than market failures) for the crisis. But are no-income McMansion moms really the ones feeding the foreclosures? Or are otherwise credit-worthy homebuyers defaulting as they realise they owe hundreds of thousands more than their home is worth? After all – I can afford to pay back a loan of $500, but if I’ve used it to buy a tulip bulb that’s now worth $1.50, I might just decide to cut my losses and give it to the bank to garden.

Crunching the numbers leads to some interesting, if inconclusive, results. Read more

Simone Baribeau

No change in the Fed funds rate. And no change in the extended period language. But, lest readers begin seeing monthly Fed funds meetings as uneventful, there has been a relatively interesting change in the Fed’s view of financial conditions.

From today’s statementRead more

Simone Baribeau

Charles Plosser, president of the Philadelphia Fed, today gave a quite interesting speech on developing regulation to address too-big-to-fail financial institutions. His comments (well worth a read) on the Squam Lake Group’s recommendations (also worth a read) come after a lull in the too-big-to-fail discussion. A few months back, living wills, robust resolution mechanisms, and early intervention were at the forefront of the public policy debate. But as the european debt crisis has captured headlines, officials have been quieter on their plans to address the TBTF problem (until today’s conference), with the notable exception of St Louis Fed president James Bullard, who’s been explicitly stating the implicit guarantee still holds. Read more

Simone Baribeau

If we are indeed facing a double dip downturn, James Bullard’s comments today on the strength of the global recovery will be long remembered.

Apparently unconcerned that the Fed (after missing the US housing bubble) would have lost credibility in its ‘no bubble!’ declarations, the St Louis Fed president said today:

While I am sympathetic to the possibility of ‘bubble’ phenomena in macroeconomics generally speaking, I do not think that we should interpret China in this light at the current juncture.

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Simone Baribeau

Moody’s just slashed Greece’s rating to Ba1 from A3, a whopping four notches, bringing the ratings agency in line with its peers and the country’s debt squarely into junk territory. Moody’s, along with Standard and Poor’s and Fitch, had already downgraded the debt-laden nation in April, but by fewer notches.

From the release:

Moody’s Investors Service has today downgraded Greece’s government bond ratings by four notches to Ba1 from A3, reflecting its view of the country’s medium-term credit fundamentals.
Today’s rating action concludes the review for possible downgrade, which Moody’s initiated on 22 April 2010. Moody’s has also downgraded Greece’s short-term issuer rating to Not-Prime from Prime-1. Greece’s country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone’s rating). The outlook on all ratings is stable.

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Simone Baribeau

The terror of bad economic policy.

Some 79 per cent of Americans think the budget deficit is an extremely or very serious threat to the future of the country: the same percentage as for terrorism, according to a USA Today/Gallup poll.

US residents also tend to prefer Republicans to Democrats when dealing with these issues.

Is this preference fact-based? Are Republicans, in fact, better than Democrats at keeping America’s shores safe and its budget in line?

There’s no easy way to measure terrorism, but budget deficits are quantifiable. So who’s done a better job balancing them?

Here’s the chart for the last 40 years. Read more

Simone Baribeau

Fans of Donald Kohn, second in command at the Federal Reserve, have a temporary reprieve today. Mr Kohn, who was slated to leave the Fed in a couple weeks, will now stay on perhaps until September.

Here’s the Fed’s statement:

Vice Chairman Donald L. Kohn announced on Friday that, at the request of Federal Reserve Chairman Ben S. Bernanke, he plans to remain on the Board until a new Governor is appointed but to leave no later than September 1. He had announced in March that he intended to resign at the expiration of his term as Vice Chairman on June 23, 2010. While he remains on the Board as a Governor, he will continue to participate in all Board and Federal Open Market Committee meetings.

Janet Yellen, now San Francisco Fed president, was nominated by President Barack Obama back in April to fill the soon-to-be vacant slot, but so far, there have been few visible moves to get the Senate confirmation process in motion – and Republicans have been actively obstructionist in confirming Obama picks to any government post. Read more

Simone Baribeau

The Beige book backs Bernanke. The economy’s improving, albeit modestly, according to the aggregation of anecdotal evidence of economic activity in the 12 Federal Reserve districts. No big shockers in the report, but a few interesting items:

  • BP spill. Tourism’s up almost across the board, but the oil spill may be a drag. Atlanta reported “that the Gulf oil spill and Tennessee floods had already resulted in some vacation lodging cancellations. The potential exists for a much greater impact, although contacts are quite uncertain as to the ultimate effects.”

 Read more

Simone Baribeau

Today’s jobs numbers, which showed only 41,000 private sector jobs gained, were a disappointment. And where there are disappointments, there are losers. But where there are gains, there are winners! So, without further ado, this month’s list of job market winners and losers.

Winners Read more

Simone Baribeau

Well that was disappointing. The private sector in the US added only 41,000 jobs in May, compared with a 218,000 gain in April, and well below economists expectations.

But, hey, gains are gains. And among those over 25, the only group for whom the unemployment rate fell were people with who had at least a bachelor’s degree. Which implies that at least some of the gains were among high-wage job seekers (or, if you like, the working rich).

So where are people who earn over $100,000 getting jobs? According to a survey from TheLadders.com, a job searching service for high-income professionals, the five cities with the strongest job markets were Seattle, San Francisco, San Diego, Washington DC and Boston. The top sectors, the group says, were aerospace and defence, biotech, e-commerce, engineering, financial services, IT and software. Read more

Simone Baribeau

Thomas Hoenig, president of the Kansas Fed, fully spread his hawkish wings today. In a speech titled “the high cost of exceptionally low rates,” he called for the Federal Reserve to raise rates to 1 per cent from near zero by the end of the summer.

I have no illusions about the challenges of moving away from zero. But in my judgment, the process should begin sooner to avoid the danger of having to over compensate later, as so often happens in policy.

Dennis Lockhart, president of the Atlanta Fed, didn’t go as far as Mr Hoenig, but took a step toward signaling he would be willing to consider removing the Fed’s “extended period” pledge. “The time is approaching when it will be appropriate to consider recalibrating interest rate policy,” he said, but he did not think that “that time has yet arrived.”

So is the committee becoming more hawkish or are the hawks flying away from the committee? Read more

Simone Baribeau

Ahead of the past few US nonfarm payroll reports (here, here and here), I’ve made a big deal about revisions to the headline numbers in the months (and years) after they’re initially reported. When the economy was getting worse, the Bureau of Labor Statistics massively underestimated the size of the losses in their first jobs reading (for several months revisions exceeded 100,000). Now that the market appears to be improving, the BLS seems to be underestimating the gains.

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Simone Baribeau

Q: What do jitters over European debt, stubbornly high unemployment and earthquakes have in common?

A: They have all been cited as reasons for central banks to delay interest rate hikes.

It’s not just economic crises that cause central banks to postpone tightening monetary policy. Since the beginning of the year, a number of political and natural disasters have pressured banks to keep rates low. Here is Money Supply’s list of the top three non-financial events that kept rates low. Are we missing any? Comments welcomed below. Read more

Simone Baribeau

For those following the saga:

Last week, Martin Wolf wrote a column on the fable of the grasshopper and the ants as an allegory to import-surplus and export-surplus countries. The new moral: don’t be an ant. Read more

Simone Baribeau

The FT’s live coverage of the Financial Crisis Inquiry Commission’s hearing on the credibility of credit ratings agencies has ended. But read on – a play-by-play of one of the most metaphor-enriched hearings on record is below. Testifying on “credit ratings and the financial crisis” were Warren Buffett, the billionaire investor, and Raymond McDaniel, chairman of Moody’s Corp. All times are eastern standard time.

As it happened coverage below.

2:05 pm: It’s over. After a discussion about rating state and municipal securities (Buffett wit #68 “If the federal government will step in to protect the security, I’d rate it triple A, if not, I don’t know what it should be rated.”) the meeting wraps up. The third hearing will begin at 2:30. No live blog for the next session, alas, but you can watch it hereRead more

Simone Baribeau

The FT reported last week that China was reviewing its holdings of eurozone debt in the wake of the crisis that has swept through the region’s bond markets.

China subsequently denied that it was set to change its diversification policy.

In a follow up piece, Reuters spoke with officials in Brazil, India, Japan and South Korea, who told the news agency that their central banks will also continue to invest in the euro.

Via Reuters: Read more

Simone Baribeau

Is the growth in global manufacturing running out of steam?

Probably not. But in many countries, it did slow down in May. Read more

Simone Baribeau

The US will have one major advantage before it starts using its term deposit facility in earnest. It gets to see how effectively a similar facility mops up excess liquidity in Europe.

Tomorrow, the ECB will look to attract €35bn to be deposited for one week for an interest rate of up to 1 per cent. The move comes as the eurozone’s central bank looks to reduce the inflationary pressures that could be created by its recent bond purchases. Read more

Simone Baribeau

Raise or hold?

Russia has chosen the third option: cut. Read more

Simone Baribeau

Sure, sounds good, but will it be effective?

That’s the question everyone’s asking today about BP’s latest effort to stem the tide of oil gushing into the Gulf of Mexico. But it could just as appropriately be asked of the progress of the US HIRE Act, past in March, which gives employers tax credits of up to $1,000 per worker and provides a payroll tax exemption for employer social security payments. Read more