FOMC Revolt ?
Interesting FOMC fight developing over the powers of the Chairman versus the governors:
"Federal Reserve’s interest-rate target is getting close to zero, and so is the power of the Fed’s regional bank presidents.
The district chiefs’ authority over borrowing costs has been marginalized in the past two months as Chairman Ben S. Bernanke and the Fed Board of Governors in Washington made their own decisions on emergency measures to flood the economy with cash.
“The Board has usurped authority,” said William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington. “This dramatic change in policy direction has not been announced or even acknowledged.”
AIG: We Need More Money
And so, more errors of these emergency bailouts begins: Once committed to the initial $85 billion dollars, what choice does nation have but to throw good money after bad.
Down the rathole:
AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.
AIG’s executives were on Friday night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.
People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday.
AIG’s board is due to meet on Sunday to approve the results and discuss any new government plan, they added.
The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.
AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.
Un-frickin-believable . . .
AIG in talks with Fed over new bail-out
FT, November 8 2008 00:36
BoE Slashes Interest Rates 150 Bips
The Bank of England unexpectedly slashed the benchmark interest rate by 1.5 percentage points as policy makers tried to contain the damage caused by a recession.
The nine-member Monetary Policy Committee, led by Governor Mervyn King, slashed the bank rate to 3 percent. The move was predicted by none of the 60 economists in a Bloomberg News survey. The pound plunged as much as 1.1 percent to $1.5722.
Dollar rally should hurt Oil and Gold today . . .
Bank of England Slashes Key Rate by One Third to 3%
Bloomberg, November 6 2008
Very interesting party this evening -- an even split between traditional NYC Democrats, and former Reagan/Bush/Nixon aides and advisors. Lots of GOP members, and a few Obama advisors.
I spent a good portion of the evening chatting with Richard Whalen, a longstanding Washingon D.C. insider, and a fascinating character to boot.
The highlight of the evening: I met, and got to speak with, former FOMC Chairman, and current Obama economic advisor, Paul Volcker. (Paul Volcker!)
Even better, I got to tell him my favorite Bush joke (actually, a quote from Allan Mendelowitz):
“The Bush administration, which took office as social conservatives, is now leaving as conservative socialists.”
It really cracked him up!
Tall Paul. How frickin' cool is that . . . ?
While Greenspan Slept
This Bloomberg special report may have slipped by unnoticed last week during all of the market mayhem. Its worth reviewing, as it places blame not only at the feet of Alan Greenspan, but Arthur Levitt and Robert Rubin as well.
Ten years ago, Wall Street was enjoying a bull market fed by a booming dot-com industry, a Fed chairman, Alan Greenspan, who trusted the market to correct its own ills, and a Congress amenable to lightening the touch of regulators.
In 1998, the imminent collapse of hedge fund Long-Term Capital Management forced the Fed to organize a bailout by Wall Street. Investment banks had loaned the fund billions and were among counterparties in more than $1 trillion in derivative contracts used to hedge investment risks.
That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives. In 2000, Congress passed a law keeping them unregulated.
Levitt said he went along with concerns by Greenspan and Rubin that Born's action might throw derivatives contracts into "legal uncertainty.'' He said he now regrets that he didn't press a presidential advisory group "to take a closer look'' at the issue. Rubin said in an interview that ``you could have had chaos'' if Born's plan found existing derivatives contracts invalid because they weren't traded on an exchange. Both Born and Greenspan declined to comment.
Outstanding credit-default swaps, derivative contracts used to hedge or speculate on a company's debt, would grow to $62 trillion from $631 billion in 2001. While the swaps spread risk, as intended, they also helped spread fear. Ninety percent of the trades were concentrated in the hands of 17 banks, according to the Federal Reserve Bank of New York. That left them exposed to losses if one failed, as Lehman Brothers did in September, and contributed to the unwillingness to lend to each other that's at the center of the recent credit squeeze.
Its worth reading in its entirety . . .
Greenspan Slept as Off-Books Debt Escaped Scrutiny
Alan Katz and Ian Katz
Bloomberg, Oct. 30 2008
Symposium: Mortgage Meltdown, Economy, and Public Policy
OK, so you missed the big 2 day UC Berkeley - UCLA Symposium, with speeches from FOMC Chair Ben Bernanke, Janet Yellen, Federal Reserve Bank of San Francisco, Yale Professor Robert Shiller, UCLA Professor Edward Leamer, and others.
You'll catch it next year! Meanwhile, if you are so inclined, you can read some of the papers that were presented.
Dwight M. Jaffee, Edward E. Leamer, Christopher Mayer/Glenn Hubbard, Diana Hancock/Wayne Passmore, Robert J. Shiller, Kristopher Gerardi/Paul Willen
THE MORTGAGE MELTDOWN, THE ECONOMY, AND PUBLIC POLICY
OCTOBER 30-31, 2008
CAL ALUMNI HOUSE, UC BERKELEY
The Future of Mortgage Finance in the United States
Chairman Ben S. Bernanke
UC Berkeley/UCLA Symposium, October 31, 2008
The Mortgage Meltdown, Financial Markets, and the Economy
Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco
UCLA Symposium at UC Berkeley, October 30, 2008
Here Comes Da Zirp!
How likely are we to see a zero percent interest policy? Pretty likely:
"Federal Reserve Chairman Ben S. Bernanke signaled he's ready to cut interest rates to the lowest level on record should the central bank's actions fail to stem the deepening economic slump.
Policy makers said yesterday that ``downside risks to growth remain'' even after their half-point reduction in the main rate to 1 percent. The Fed dropped a reference in its statement to threats from inflation, projecting "levels consistent with price stability'' in coming quarters...
Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley...
Reflecting a crisis that has reverberated throughout the global economy, the Fed's Open Market Committee yesterday said that international rate cuts should contribute by loosening credit markets. The FOMC also said slowing economies abroad will threaten the record boom in American exports, which have kept the U.S. from a deeper slump...
In a new step to increase the availability of dollars in emerging markets, the Fed yesterday agreed to provide $120 billion to four counterparts. Brazil, Mexico, South Korea and Singapore get $30 billion each by signing the so-called currency swap lines. The U.S. already has unlimited agreements with the European Central Bank and Bank of England."
Inflation from 2002-07, Deflation from 2008-09, hyper inflation from 2010-???
I could see Gold going to $3,000, by way of $300 first.
* With apologies to Flip Wilson
Fed Signals Door 'Open' for Cutting Rates to Lowest on Record
Scott Lanman and Craig Torres
Bloomberg, Oct. 30 2008
Is Money Too Expensive?
At 1.5%, rates are historically low.
And the problem isn't the cost of credit, its the availability of credit.
From a macro perspective, there is no reason to cut more than 25bps...leave a little dry powder for next month. (Good discussion yesterday at Real Time Economics)
Rate decision in 5 minutes.
UPDATE: October 29, 2008 2:18pm
50 BPS CUT, RISK REMAINS TO GROWTH
Federal Reserve cuts interest rates to 1% -- the lowest levels since 2003.
Flaw? What Flaw?
As we await the Fed's 2:15 rate decision, how about a little humor?
Headline of the Day: The Greenspan Putz
How can you not love this Alan Kohler guy?
This is the issue at the heart of the heart of the financial crisis now enveloping the world. Loans were securitised and turned into investments rather than assets of institutions that have a regulated capital buffer and, in extremis, government support.
Government backing is never explicit, but everyone knows that banks are almost never allowed to fail, especially big ones.
Investments in mortgage securities are an entirely different matter. The trouble is that the differences have not been made clear to the investors.
As Alan Greenspan said in his testimony to Congress last night: “With … home prices rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, (mortgage securities) were wrongly viewed as a ‘steal’.”
Unsophisticated investors didn’t stand a chance.
Indeed . . .
The Greenspan putz
Business Spectator, 7:48 AM, 24 Oct 2008