Category Archives: Fed Reserve

Campaigns have to face financial mess

Obama, McCain say they have a solution


WASHINGTON –There’s more to it than lipstick on pigs.

The defining issue of the presidential campaign — the economy — confronted the nominees this week in the starkest of terms. This came about as the meltdown on Wall Street and government bailouts sent Sens. John McCain and Barack Obama scrambling to find footing on uncertain terrain where any misstep could end their hopes for the White House.

It sets the stage for a six-week run to Nov. 4 that promises to look more like off-road racing in mud-covered monster trucks than a dignified dash between two thoroughbreds.

Today, as Treasury Secretary Henry Paulson talked up a still-vague program — expected to be finalized and approved as early as next week — potentially committing hundreds of billions of tax dollars to buy up bad loans and stabilize housing and financial markets, both candidates honed their messages with the possibility the U.S. economy could collapse before Election Day. “This is just an incredible outcome,” said Dana Johnson, Comerica’s chief economist, based in Dallas. “The only precedent that comes close is the bank failures of the 1930s.”

Now voters can add to the long list of issues — the solvency of Social Security, health care, energy policies, tax policies and the war in Iraq — this big one: who has the best plan to bring regulatory reform to the financial markets.

“The array of economic issues that are going to have to be dealt with by the next president is just mind-boggling,” Johnson said. That doesn’t make the choice easier for voters, but it sharpens campaign strategy.

It also adds import to next Friday’s first of three presidential debates. It is to focus on domestic issues. “The first debate may well decide the whole thing,” said Joe Trippi, who ran Howard Dean’s unsuccessful 2004 presidential campaign, but also helped provide a model for the grassroots support Obama has tapped this year.

Accusations fly both ways

A week ago it seemed the bright shiny object in the campaign — McCain’s pick of Alaska Gov. Sarah Palin as his running mate — might divert attention from tough issues. It all changed with Wall Street’s meltdown and the Bush administration’s response — a rush toward federal intervention that may have seemed surprising for the Republican White House but was generally supported by both nominees.

Obama should have an advantage on economic doubts in battleground states like Michigan and Ohio precisely because a Republican is president and a backlash could be expected.

But that edge is dubious, especially in Michigan where a Democratic governor has been unable to steer the economy into safer harbor.

The Wall Street turmoil gives McCain an opportunity — as long as he can avoid serious missteps like early this week when he said the economy was “fundamentally strong.”

Already staking a claim to being “the original maverick” for bolting his party at times — on immigration and tax cuts, for example — the financial crisis gives him a chance to appear strong and bipartisan, as well as well-prepared to moderate a free-market philosophy for the good of the country.

Obama, of course, has the same chance to make his case as the agent of clear-thinking change.

McCain called today for more investment transparency, regulatory reform and creation of a trust to bolster mortgage holders and financial institutions. On Thursday, he said he’d fire the Securities and Exchange Commission chair (though there’s a question whether the president can).

But he also sounded a partisan note, taking to task Democrats leading a “do-nothing Congress” and Obama, whom he linked to the excesses of mortgage backers Fannie Mae and Freddie Mac.

The problem is it set off a new round of finger-pointing. Democrats sent reporters a newspaper article listing McCain’s campaign links with Fannie, Freddie and the mortgage meltdown — while Obama, after meeting with his economic advisers in Florida, suggested that what the markets need is confidence that “partisan wrangling” won’t slow reform.

Obama set down the tenets he believes need to guide Washington — saying whatever happens needs to help people on Main Street as well as Wall Street, be coupled with new regulations and be developed to stabilize global markets as well.

“John McCain and I can continue to argue about our different economic agendas for next year, but we should come together now to work on what this country urgently needs this year,” he said.

Partisans take their sides

The reality is that it is difficult for either party or candidate to win the blame game except with their partisans.

McCain is an unapologetic free market believer who has voted for deregulating markets in the past (though he also supported regulation at times as necessary). His friend and former adviser Phil Gramm helped to create a system to deregulate financial institutions — but it was approved by Democrat Bill Clinton’s White House and supported by some of the same people now advising Obama.

Unless there’s a major misstep, the race probably won’t come down to specific proposals. The intricacies of the market don’t, as Comerica’s Johnson said, lend themselves “to sound bites.”

McCain will smear Obama as the president who’ll raise your taxes. Obama has said he wants to keep middle-class tax cuts and raise taxes only on people making more than $250,000 a year and on oil company profits. Obama will smear McCain as a tool of rich corporate interests and their lobbyists, which, if nothing else, his support for financial reform this week seems to throw into doubt.

Which brings the campaign back — albeit more urgently — to where it was.

Can Obama lure the new voters who seem to be registering in battleground states, convince blue-collar voters that he will protect their interests and win the argument that McCain represents four more years of President George W. Bush’s policies?

Or can McCain keep his conservative base energized (without Palin in the forefront), swing the same blue-collar voters and, critically, women, to his side by getting them to find their comfort level with him?

The battle lines may not have changed, but now we’re talking about the cut and quality of the pork, instead of the shade of the makeup.



Obama’s Black Ambition

If Barack Obama is running on the platform of being black, then he should lose unless the electorate cows in fear meanwhile justifying their own capitulation by hypocritical accusations (e.g., against conservatives for resisting miscegenation). An economist article suggested that American whites are less racist than they used to be (like in the fifties) because whites have had a seven-fold increase in the proportion of interracial children. This argument infers that whites are racist if they don’t intermarry and that whites are therefore racist by virtue of their skin color. Notwithstanding the fact that this is a racist argument, it leads unambiguously to the conclusion that whites are criminal (because it is a crime to be racist).  Don’t you like how the devil turns things upside down? Very nice logic indeed.

A leftist on tv says that she thinks it’s mean that people won’t vote for a candidate because of his race. On the contrary, it’s mean to vote for a candidate because of his/her identity.



An Economic Triple-Threat (Daily Reckoning)

An Economic Triple-Threat
Philadelphia, Pennsylvania
Wednesday, April 9, 2008
*** The Feds debate the ‘long and short’ of recession…placing bets on the Fed’s next move…
*** Greenspan: “Non, je ne regrette rien”…the stinging reproach of a former Fed Chairman…
*** Dealing with future problems, today…a few worthwhile suggestions from the Philadelphia film festival…and more!
— Special Offer —
Introducing the “Oil Vacuum”
Only one company has the capabilities of unlocking one of the biggest oil deposits in the world. Some have already called this the best invention of the past year and soon it could make you $65,500.
Time is running out to get in on this great new development. Click here to find out this company…
March’s FOMC minutes were released yesterday…and while they were interesting, what was said in the last meeting wasn’t too terribly surprising.
The minutes show that Fed policymakers were worried that a “deep” recession, rather than a “shallow” one, would permeate the U.S. economy, which spurred them to cut the key interest rate by three-quarters of a percentage point.
The Fed was mostly united in their decision to cut the key lending rate, except for two dissenters, Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher.
While the majority saw the rate cut as the right decision since “further restriction of credit availability and ongoing weakness in the housing market made a severe downturn a strong possibility,” Plosser and Fisher thought otherwise. The hawks were more comfortable with smaller cuts because of the concern that an inflationary flare-up would occur.
MSNBC reports: “On the one hand, the Fed has been urgently moving to prevent the trio of economic woes – housing, credit and financial – from plunging the country into deep recession. On the other hand, with soaring energy prices and high food costs, policymakers realize they can’t afford to let inflation out of control, either.”
The financial media and experts are placing bets that the Fed will chose to cut rates again next month, as the economy has yet to reach its final bottom.
“There’s no question the U.S. economy is one of the weakest in the world,’’ Stephen Koukoulas, a London-based global strategist at TD Securities, a unit of Toronto-Dominion Bank, Canada’s third-largest bank, said in an interview with Bloomberg Television. “We do need the policy makers, the Fed and even the administration to come in and kick-start the economy. It’s probably going to get worse before it gets better.”
*** Alan Greenspan has been popping up all over the press lately – after 18 years of Greenspeak, it looks like the former Fed chief wants to set the record straight…at least from his point-of-view.
“I have no regrets on any of the Federal Reserve policies that we initiated back then because I think they were very professionally done,” Mr. Greenspan told CNBC yesterday.
And to the Journal , he said: “I don’t remember a case when the process by which the decision making at the Federal Reserve failed.”
The Financial Times recently ran a piece titled, “The fed is blameless on the property bubble.” James Saft, writing for Reuters says that Big Al argued that the epic bubble was not caused by loose monetary policy, but by “the fall in global long-term interest rates, which, as chairman…of the most powerful central bank in the world, apparently had nothing to do with him.”
Albert Edwards, global strategist at Societe Generale Cross Asset Research in London puts it bluntly: “He was the midwife of serial bubbles that are unraveling.”
Former Fed chief Paul Volcker remains unconvinced by Greenspan’s protests, questioning his cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.”
And in a speech to the members of the Economic Club of New York, Volcker chided Bernanke for “toeing ‘the very edge’ of the bank’s legal authority in orchestrating last month’s bailout of beleaguered investment bank Bear Stearns,” reports The New York Times .
“Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Volcker said.
*** We had the opportunity to interview Mr. Volcker for I.O.U.S.A. We met the economic bigwig, who is most famous for fighting the inflation of the 1970’s and 1980’s in his office overlooking Rockefeller Center this past winter.
We asked him the obvious question: Does he see a similarity to today’s economic climate to that of when he was at the helm of the Federal Reserve? And do we need the same sort of forceful hand that he lent to the economy during that time period?
“Well, there are all kinds of consequences and uncertainty in the future if we don’t deal with these problems. But when I look at back on my lifetime, it was obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the ’70s led to the kind of crisis in the late ’70s and the early ’80s, and it was very uncomfortable. We don’t want to have to go through big recessions to teach lessons. We’d like to anticipate what needs to be done while maintaining the growth of the economy. And the threat always is an unstable economy, an unstable currency; and that it’s destructive not just to economic life, but it can be destructive of America’s position in the world, which is a concern to me more generally.
“But the great challenge, I think, for democracy, is being able to cope effectively with problems that are pretty clearly out in the future, but require action that require some discipline, some restraint today,” he continued.
“And that’s the test we’re going through, and that’s a question of education and understanding, I think. So I think as people get better understanding of some basic economic issues, the democracy will be better able to cope with those challenges out there in the future.”
This idea of educating America comes up again and again as we promote the documentary. The other night, at a Q&A following a screening at the Philadelphia Film Festival, one audience member suggested that I.O.U.S.A. be shown at every high school in America. We couldn’t agree more. After all, the generation that will have to deal with these debts and deficits should be educated on the subject.
By the way, if any of our readers are in the Philadelphia area, we have a screening of I.O.U.S.A. this evening at 5 PM at the International House.
Until tomorrow,
Short Fuse
The Daily Reckoning

Most sweeping changes since Great Depression

Proposal will give the Federal Reserve new regulatory power




WASHINGTON – The Bush administration is trying to confront the credit crisis that has rattled nerves from Wall Street to Main Street by proposing wholesale changes in how Washington oversees the financial system.

A plan set for release Monday would give new powers to the Federal Reserve so that the central bank serves as the system’s overarching protector of stability.



Verbatim: Bush On The Economic Challenges And America’s Record Of Resilience

By PRESIDENT GEORGE W. BUSH | Posted Friday, March 14, 2008 4:30 PM PT

Following are excerpts from President Bush’s speech made Friday at the Economic Club of New York.

This is not the first time since I’ve been president that we have faced economic challenges. We inherited a recession. And there were the attacks of September the 11th, 2001, which many of you saw firsthand, and you know full well how that affected our economy.

Then we had corporate scandals. And I made the difficult decisions to confront the terrorists and extremists on two major fronts, Afghanistan and Iraq. We had devastating natural disasters. And the interesting thing, every time, is this economy has bounced back better and stronger than before.

So I’m coming to you as an optimistic fellow. I’ve seen what happens when America deals with difficulty. I believe that we’re a resilient economy, and I believe that the ingenuity and resolve of the American people is what helps us deal with these issues. And it’s going to happen again.

Our job in Washington is to foster enterprise and ingenuity so we can ensure our economy is flexible enough to adjust to adversity and strong enough to attract capital. And the challenge is not to do anything foolish in the meantime. In the long run, I’m confident that our economy will continue to grow, because the foundation is solid.

Unemployment is low at 4.8%. Wages have risen, productivity has been strong. Exports are at an all-time high, and the federal deficit as a percentage of our total economy is well below the historic average. But these are tough times. Growth fell to 0.6% in the fourth quarter of last year. It’s clearly slow. The economy shed more than 80,000 jobs in two months. Prices are up at the gas pump and in the supermarket. Housing values are down. Hardworking Americans are concerned about their families, and they’re concerned about making their bills.

Fortunately, we recognized the slowdown early and took action. And it was decisive action, in the form of policies that will spur growth.

This package is temporary, and it has two key elements. First, the growth package provides incentives for businesses to make investments in new equipment this year. As more businesses take advantage, investment will pick up, and then job creation will follow. The purpose was to stimulate investment. And the signal is clear — once I signed the bill, the signal to folks in businesses large and small know that there’s some certainty in the tax code for the remainder of this year.

Secondly, the package will provide tax rebates to more than 130 million households. And the purpose is to boost consumer spending. The purpose is to try to offset the loss of wealth if the value of your home has gone down. The purpose is to buoy the consumer.

* * * *

The Federal Reserve has taken action to bolster the economy. I respect Ben Bernanke. I think he’s doing a good job under tough circumstances. The Fed has cut interest rates several times.

This week the Fed also announced a major move to ease stress in the credit markets by adding liquidity. It was strong action by the Fed, and they did so because some financial institutions that borrowed money to buy securities in the housing industry must now repair their balance sheets before they can make further loans. The housing issue has dried up some of the sources of credit that businesses need in our economy to help it grow.

This morning the Federal Reserve, with support of the Treasury Department, took additional actions to mitigate disruptions to our financial markets. Today’s events are fast-moving, but the chairman of the Federal Reserve and the secretary of the Treasury are on top of them, and will take the appropriate steps to promote stability in our markets.

Now, a root cause of the economic slowdown has been the downturn in the housing market. After years of steady increases, home values in some parts of the country have declined. At the same time, many homeowners with adjustable rate mortgages have seen their monthly payments increase faster than their ability to pay. As a result, a growing number of people are facing the prospect of foreclosure.

Foreclosure places a terrible burden on our families. Foreclosure disrupts communities. And so the question is, what do you do about it in a way that allows the market to work, and at the same time helps people?

The temptation is for people, in their attempt to limit the number of foreclosures, to put bad law in place. And so I want to talk about some of that. First of all, the temptation of Washington is to say that anything short of a massive government intervention in the housing market amounts to inaction. I strongly disagree with that sentiment.

I believe there ought to be action, but I’m deeply concerned about law and regulation that will make it harder for the markets to recover — and when they recover, make it harder for this economy to be robust. And so we must be careful and mindful that any time the government intervenes in the market, it must do so with clear purpose and great care. Government actions have far-reaching and unintended consequences.

I want to talk to you about a couple of ideas that I strongly reject. First, one bill in Congress would provide $4 billion for state and local governments to buy up abandoned and foreclosed homes. I guess this sounds like a good idea to some, but if your goal is to help Americans keep their homes, it doesn’t make any sense to spend billions of dollars buying up homes that are already empty.

As a matter of fact, when you buy up empty homes you’re only helping the lenders, or the speculators. The purpose of government ought to be to help the individuals, not those who speculated in homes. This bill sends the wrong signal to the market.

Second, some have suggested we change the bankruptcy courts, the bankruptcy code, to give bankruptcy judges the authority to reduce mortgage debts by judicial decree. I think that sends the wrong message. It would be unfair to millions of homeowners who have made the hard spending choices necessary to pay their mortgages on time.

It would further rattle credit markets. It would actually cause interest rates to go up. If banks think that judges might step in and write down the value of home loans, they’re going to charge higher interest rates to cover that risk. This idea would make it harder for responsible first-time home buyers to be able to afford a home.

There are some in Washington who say we ought to artificially prop up home prices. It sounds reasonable in a speech, but it’s not going to help first-time homebuyers, for example. A lot of people have been priced out of the market right now because of decisions made by others. The market is in the process of correcting itself; markets must have time to correct. Delaying that correction would only prolong the problem.

* * * *

We’ve taken three key steps. First, we launched a new program at the Federal Housing Administration called FHA Secure. It’s given FHA greater flexibility to offer refinancing for struggling homeowners with otherwise good credit. In other words, we’re saying to people, we want to help you refinance your notes.

Over the past six months this program has helped about 120,000 families stay in their homes by refinancing about $17 billion of mortgages, and by the end of the year we expect this program to have reached 300,000 families.

I’m old enough to remember savings and loans, and remember who my savings and loan officer was, who loaned me my first money to buy a house. And had I gotten in a bind, I could have walked across the street in Midland, Texas, and said, “I need a little help; can you help me readjust my note so I can stay in my house?” There are no such things as that type of deal anymore. As a matter of fact, my mortgage could be owned by somebody in a foreign country, which makes it hard to renegotiate the note.

So we’re dealing in a difficult environment, to get the word to people there’s help for you to refinance your homes. And so Hank Paulson put together what’s called the Hope Now Alliance to try to bring some reality to the situation, to focus on helping creditworthy people refinance rather than pass a law that will make it harder for the market to adjust. This Hope Now Alliance is made up of investors and service managers and mortgage counselors and lenders. And they set industrywide standards to streamline the process for refinancing and modifying certain mortgages.

Last month Hope Now created a new program called Project Lifeline, which offers some homeowners facing imminent foreclosure a 30-day extension. The whole purpose is to help people stay in their houses. During this time they can work with their lender. And this grace period has made a difference to a lot of folks.

An interesting statistic has just been released: Members of the Alliance report that the number of homeowners working out their mortgages is now rising faster than the number entering foreclosure. The program is beginning to work, it’s beginning to help.

The problem we have is a lot of folks aren’t responding to over a million letters sent out to offer them assistance and mortgage counseling. So one of the tasks we have is to continue to urge our citizens to respond to the help, to pay attention to the notices they get describing how they can find help in refinancing their homes. We’ve got toll-free numbers and Web sites and mailings.

We’ve also taken some other steps that will bring some credibility and confidence to the market. HUD Secretary Alphonso Jackson is proposing a rule that requires lenders to provide a standard, easy-to-read summary statement explaining the key elements of mortgage agreements.

These mortgage agreements can be pretty frightening. There’s a lot of tiny print. And I don’t know how many people understood they were buying resets or not. But one thing is certain: There needs to be complete transparency. And to the extent that these contracts are too complex, and people made decisions that they just weren’t sure they were making, we need to do something about it. We need better confidence among those who are purchasing loans.

And secondly, Hank Paulson announced new recommendations yesterday to strengthen oversight of the mortgage industry, improve the way the credit ratings are determined for securities and ensure proper risk management at financial institutions.

* * * *

There are some further things we can do, by the way, on the housing market that I call upon Congress to do. Congress did pass a good bill that creates a three-year window for American families to refinance their homes without paying taxes on any debt forgiveness they receive. The tax code creates disincentives for people to refinance their homes, and we took care of that for a three-year period. And they need to move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow state housing agencies to issue tax-free bonds to homeowners to refinance their mortgages.

Congress can also take other steps to help us during a period of uncertainty — and these are uncertain times. A major source of uncertainty is that the tax relief we passed in 2001 and 2003 is set to expire. If Congress doesn’t act, 116 million American households will see their taxes rise by an average of $1,800. If Congress doesn’t act, capital gains and dividends are going to be taxed at a higher rate. If Congress doesn’t make the tax relief permanent, they will create additional uncertainty during uncertain times.

A lot of folks are waiting to see what Congress intends to do. One thing that’s certain that Congress will do is waste some of your money. So I’ve challenged members of Congress to cut the cost of earmarks in half. I issued an executive order that directs federal agencies to ignore any future earmark that is not voted on by the Congress.

* * * *

I sent Congress a budget that meets our priorities. There is no greater priority than to make sure our troops in harm’s way have all they need to do their job. That should be a priority of any president and any Congress.

And beyond that, we’ve held spending at below rates of inflation on nonsecurity spending, discretionary spending; we’ve held the line. We’ve submitted a budget that’s in balance by 2012 — without raising your taxes.

If the Congress truly wants to send a message that will calm people’s nerves, they’ll adopt the budget I submitted and make it clear they’re not going to run up the taxes on the working people, and on small businesses, and on capital gains, and on dividends, and on the estate tax.

* * * *

I believe strongly it’s in our nation’s interest to open up markets for U.S. goods and services. I believe strongly that NAFTA has been positive for the United States of America, like it’s been positive for our trading partners in Mexico and Canada.

I believe it is dangerous for this country to become isolationist and protectionist. I believe it shows a lack of confidence in our capacity to compete. And I know it would harm our economic future if we allow those who believe that walling off America from trade to have their way in Congress.

We expect for Congress to move forward on the Colombia Free Trade Agreement. It’s important for our national security interests, and it’s important for our economic interests.

Most Americans don’t understand that most goods and services from Colombia come into the United States duty-free. Most of our goods and services are taxed at about a 35% rate heading into Colombia. Doesn’t it make sense to have our goods and services treated like those from Colombia? I think it does. I think our farmers and ranchers and small-business owners must understand that with the government finding new markets for them, it will help them prosper.

If Congress were to reject the Colombia Free Trade Agreement, it would send a terrible signal in our own neighborhood; it would bolster the voices of false populism. It would say to young democracies, “America’s word can’t be trusted.” It would be devastating for our national security interests if this United States Congress turns its back on Colombia and a free trade agreement with Colombia. Once they pass the Colombia (pact), they can pass Panama and South Korea as well.

Let me talk about another aspect of keeping markets open. A confident nation accepts capital from overseas. We can protect our people against investments that jeopardize our national security, but it makes no sense to deny capital, including sovereign wealth funds, from access to the U.S. markets. It’s our money to begin with. It seems like we ought to let it back.

* * * *

We’re going to deal with the issues as we see them. We’re not afraid to make decisions. This administration is not afraid to act. We saw a problem coming and we acted quickly, with the help of Democrats and Republicans in the Congress. We’re not afraid to take on issues. But we will do so in a way that respects the ingenuity of the American people, that bolsters the entrepreneurial spirit and that ensures when we make it through this rough patch, our driving is going to be more smooth.

Why Is the Yield Curve Inverted? (Jan 25, ’08)


The Fed lost much of its influence over long term bond prices once sovereign wealth funds (e.g., China) became majority shareholders of these instruments. Rational actors price risk according to, as people have pointed out previously, recessionary trends and other factors that affect opportunity cost. [Esp. foreign and lesser developed countries’] governments, however, act like institutional investors with a time horizon and risk assessment much different from that of Wall Street or Main Street.

There is an inversion in the yield curve from 6mos through two or three years because of the level ownership of these instruments in foreign countries. Sovereign wealth funds’ time horizons begin at one year and end at thirty, whereas [Wall Street and Main Street] begin their calculations, of course, at 30 days. So, for foreign governments, the yield curve is not necessarily inverted. Rather, the shape of the curve reflects the aforementioned demand assessments manifest in the levels of ownership of these instruments.

Even if the whole yield curve is inverted, however, that just means foreigners heavily value [the] stability [of US securities] over actual returns (even if ROI is negative after inflation). These cats will pay the cost of inflation for the effects of sterilization (to boost international trade) and of stimulus to their respective economies due to the phenomenon of coupling with America.