Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system.
The revelation of the scale of overseas lenders’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world’s banking sector.
Now the US, relying on the same flawed theory [of quantitative money], is doing it again. Not surprisingly, China accuses it of deliberately aiming to depreciate the dollar. But the resulting increase in US exports at the expense of Chinese, Japanese, and European producers is precisely the purpose.
The euro will become progressively overvalued, just as the gold bloc was in the 1930’s. Since the eurozone is committed to austerity, its only recourse is protectionism. Meanwhile, China’s policy of slowly letting the renminbi rise against the dollar might well go into reverse, provoking US protectionism.
The failure of the G-20’s Seoul meeting to make any progress towards agreement on exchange rates or future reserve arrangements opens the door to a re-run of the 1930’s. Let’s hope that wisdom prevails before the rise of another Hitler.
The US Federal Reserve will slash its growth forecasts and predict higher unemployment when it releases updated economic projections this week.
The Fed will release the latest forecasts made by members of its rate-setting open market committee on Tuesday, alongside the minutes of their November meeting, giving a complete picture of why they launched a new $600bn round of asset purchases.
The revised forecasts will show how the Fed became much more pessimistic over the summer and also highlight fears among a few members of the FOMC that some of today’s 9.6 per cent unemployment rate is structural and will take years to cure.
If there is a silver lining to the uproar over the Federal Reserve’s decision to create $600 billion in new reserves in the next few months, it is the renewed public attention to the Fed’s impossible dual political mandate for stable prices and maximum employment.
To be specific, Paul Ryan suddenly has company. The Wisconsin Congressman has since 1999 proposed legislation that would let the Fed focus monetary policy solely on the goal of stable prices. This week he’s been joined by fellow Republicans Mike Pence of Indiana and Tom Price of Georgia, while Senator Bob Corker of Tennessee told us he plans to work with Mr. Ryan to introduce legislation next year that would lift the dual mandate. If the 112th Congress did nothing else, this would be worth the price of its election and a major contribution to better economic policy.
The global economy is now well into its second year of recovery from the deep recession triggered by the most devastating financial crisis since the Great Depression. In the most intense phase of the crisis, as a financial conflagration threatened to engulf the global economy, policymakers in both advanced and emerging market economies found themselves confronting common challenges. Amid this shared sense of urgency, national policy responses were forceful, timely, and mutually reinforcing. This policy collaboration was essential in averting a much deeper global economic contraction and providing a foundation for renewed stability and growth.
In recent months, however, that sense of common purpose has waned. Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems. One source of these tensions has been the bifurcated nature of the global economic recovery: Some economies have fully recouped their losses while others have lagged behind. But at a deeper level, the tensions arise from the lack of an agreed-upon framework to ensure that national policies take appropriate account of interdependencies across countries and the interests of the international system as a whole. Accordingly, the essential challenge for policymakers around the world is to work together to achieve a mutually beneficial outcome–namely, a robust global economic expansion that is balanced, sustainable, and less prone to crises….
A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.
“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.
The economists have been consulting Republican lawmakers, including incoming House Budget Committee Chairman Paul Ryan of Wisconsin, and began discussions with potential GOP presidential candidates over the weekend, according to a person involved.
Anyone wondering what President Obama will face when he arrives in South Korea on Wednesday for a global financial summit meeting need look no further than an announcement by China’s leading state-endorsed rating agency, which downgraded the United States’ credit rating on Tuesday ”” and provocatively questioned American leadership of the global economy.
The agency cited the Federal Reserve’s decision to pump more money into the United States economy and warned of Washington’s “deteriorating debt repayment capability” and “the serious defects in the United States economic development and management model,” which it predicted would lead to “fundamentally lowering the national solvency.”
In the rest of the world, the United States is still the gold standard of credit risks, and the Chinese downgrade is not expected to have much real impact. But the sharply worded attack from the country that is buying billions of dollars in American debt each month was just the latest rhetorical assault on the United States, as officials from China to Germany to Brazil suggest that Washington’s addiction to debt has greatly diminished its credibility.
China kept up a drumbeat of criticism of U.S. easy money policies on Tuesday, warning two days before a G20 world economic summit that Washington could destabilize the global economy and inflate asset bubbles.
Nearly a week after the Federal Reserve announced it was going pump as much as $600 billion into the economy, world leaders continue to bash the plan, saying it will flood global markets with cash without doing much for the U.S. recovery.
President Barack Obama acknowledged in Jakarta that the Group of 20 rich and developing nations “still have a lot of work to do” to ensure balanced global growth.
It is undeniable that we are on the path to fiscal collapse. This decline will occur in two stages. First there is the decay as the swelling national debt wears away the economy’s foundations and commits more and more future income to foreign creditors. We are already in stage one.
In stage two a lethal combination of phenomena arises in quick succession: greater default risk, looming inflation, higher interest rates, declining growth, financial market instability, and an acceleration of government borrowing. They feed on each other. The economy heads on a downward spiral. Between stage one and stage two there is a tipping point. Experts know it will come, but nobody wants to predict when. (See below.) This article is about the slow economic decline of stage one. Next week part 2 will describe the hell of a full-blown fiscal collapse.
There is no question economics has failed us. The old paradigms have been made obsolete by the hard reality of the 2007-2009 financial crisis and soaring government debt. But some ideas can be salvaged from the wreckage.
U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets while China softened its stance on the Federal Reserve’s quantitative easing days before a summit of the Group of 20.
The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”
Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.
The dollar fell the most in four weeks against the currencies of six major trading partners after the Federal Reserve said it will pump more money into the U.S. financial system to spur inflation and employment.
The greenback slid versus 15 of its 16 major counterparts after the Fed said it will buy $600 billion of U.S. Treasuries through June. It pared losses after data yesterday showed payrolls grew more than forecast. The Australian and Canadian currencies reached parity with the dollar as investor appetite for higher-yielding assets rose before leaders of the Group of 20 nations discuss currency policy in Seoul next week.
“The global market dynamic is still supporting dollar weakness,” said Sacha Tihanyi, a currency strategist at Bank of Nova Scotia in Toronto, Canada’s third-largest lender. “The Federal Reserve’s statement may be favorable for the U.S. economy, but it’s unfavorable for the U.S. dollar.”
….why is the Fed going to such an extreme when the economy might be improving? The answer is the US housing market. Mortgage rates have fallen further than treasury yields, making houses more affordable than ever, but house sales remain depressed. If housing stays moribund, this will have two serious negative effects.
First, there will be more defaults, and thus more damage to banks’ balance sheets. Note that the Fed is buying shorter-dated bonds, which helps banks, whose business is to borrow in the short term and lend in the long term.
Second, people will continue not to be ”“ or feel ”“ rich, and hence will not spend much….
The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.
President Barack Obama steps back onto the world stage Friday, when he leaves for two economic summits in Asia after a big electoral rebuke.
But his troubles will not ease overseas.
The U.S. and nations abroad are at odds over economic policy. Among the issues, conservative governments in Britain and Germany are pressing for fiscal austerity measures in Europe that Mr. Obama’s administration is resisting implementing in the U.S.
“The rest of the world is looking more like the tea party,” which wants to rein in government spending, according to Kenneth Rogoff, a former chief economist at the International Monetary Fund.
The question being asked all across the world of business news is: Will QE2 be successful? Because this policy is literally economic suicide, the question becomes: Will the Federal Reserve be successful in the assisted economic suicide of the U.S. government? I find this an utterly appalling question — which highlights the intellectual bankruptcy of government policymakers and the bankers who goad them onward.
Quantitative easing is nothing more than a euphemism for printing money out of thin air. Its one-and-only purpose is to destroy the currency being printed. It is pure dilution and absolutely no different than a corporation vowing to improve its fiscal performance simply by printing a lot of new shares.
….low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
The Federal Reserve’s push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said.
Fed Chairman Ben S. Bernanke yesterday gave Group of 20 finance ministers and central bankers meeting in Gyeongju, South Korea an overview of the U.S. central bank’s efforts to jumpstart the world’s largest economy. His strategy, which investors expect will soon include greater asset purchases, drew criticism at the talks, said Bruederle.
“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting.
Is this a currency war or what?
Fast-growing nations like Thailand are trying to devalue their exchange rates to bolster their export-driven economies.
In Washington, where “strong dollar” has been the mantra for years, policy makers are taking steps that could make the already weak dollar weaker still.
European policy makers worry that a resurgent euro will threaten growth in their own backyard. And the entire world, it seems, is jawboning China to level the playing field and let its undervalued currency, the renminbi, appreciate. It is a step that Beijing, by all accounts, does not want to take.
With so many economies struggling, it suddenly seems as if it is every nation for itself in the currency markets….
A string of Federal Reserve officials on Tuesday indicated the central bank will soon offer further monetary stimulus to the economy, with one saying $100 billion a month in bond buys may be appropriate.
While internal differences on the unconventional policy are still evident, the consensus view at the Fed appears to be that the economy is weak enough to warrant further support, most likely through increased purchases of Treasury debt.
The U.S. economy is expected to have grown just 1.9 percent in the third quarter, a level considered too low to bring down unemployment. The debt purchases would help lower long-term interest rates in the hope of boosting demand.
The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports.
Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro.
The U.S. economy continued to lose jobs last month as small gains in the private sector failed to offset big cuts in government workers, pointing to a still sluggish recovery.
Private-sector employers added only 64,000 jobs in September, the Labor Department said Friday. Overall, nonfarm payrolls fell by 95,000 as temporary census workers were let go and state and local governments also cut employment.
he U.S. labor market remains in the doldrums 15 months after the recession ended. That could hurt Democrats in mid-term elections Nov. 2 and is likely to lead the Federal Reserve to take new steps to jump-start the economy at its next meeting Nov. 2-3. The September data was the last jobs report before these two key events.
As the U.S. prepares to embark on a new round of Federal Reserve quantitative easing, there are plenty of reasons to doubt that it is the right course for the economy and job creation.
Here’s another: The voyage might have to be aborted ”” or at least diverted ”” soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane.
Even before the anticipated launch of the next round of Treasury purchases ”” it’s expected to be made official on Nov. 3 ”” the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged….
Households and corporations alike are refinancing their loans in droves to take advantage of interest rates that seem impossibly cheap. But those same low rates come with a flip side, driving down the income of retirees and others who live off their savings.
It is a side effect of a government policy meant to push down interest rates to a point that businesses and consumers are compelled to borrow and spend again, and yet it is hurting anyone with a savings account.
With the regulated rate that financial institutions can borrow from one another at almost zero, banks are paying savers next to nothing. The average returns on interest-bearing deposit accounts slipped to 0.99 percent in July, according to Market Rates Insight, which tracks bank rates. It is the first time its measure has dipped below 1 percent since the 1950s, when its data begins.
The Obama administration and the Federal Reserve want to fix the United States economy by spending more money. But while that approach might work for Europe, it is risky for the US. The nation would be better off embracing traditional American values like self-reliance and small government.
There’s no question about it: The 20th century was America’s era. The United States rose rapidly from virtually nothing to become the most politically powerful and economically strongest country in the world. But the financial crisis and subsequent recession have now raised doubts about its future. Are we currently witnessing the beginning of the end of the American era?
This coming Monday marks the second Labor Day of the Obama administration, and the American work force has little to show for it other than higher unemployment, stagnant wages, last year’s $1.4 trillion federal deficit, this year’s $1.3 trillion deficit, and next year’s anticipated $1 trillion-plus deficit. Oh, and a slew of new federal regulations and programs””like ObamaCare””that will make it even more expensive for businesses to retain current workers, much less create new jobs.
No wonder American confidence in the future is evaporating. And when confidence crumbles, consumers won’t spend, lenders won’t lend, investors won’t invest, and businesses won’t hire.
Today we see businesses husbanding cash rather than hiring. Nonfinancial S&P 500 companies are sitting on a record $837 billion. Personal savings are increasing dramatically, to over 6% of income today compared to barely 1% in 2005. Those small businesses still willing to take on more debt to expand are having tremendous difficulty finding credit.
It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects. The patient ”” who started in critical care ”” was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.
This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now. Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.
The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s.
“The economy is going to limp along for the next few months,” said Gus Faucher, an economist at Moody’s Analytics. There’s even a one in three chance it could slip back into recession, he said.
Many temporary factors that boosted the economy earlier this year are fading. Companies built up their inventories after cutting them sharply in the recession to match slower sales. The increase provided a boost to manufacturers, but now many companies’ stockpiles are in line with sales and don’t need to grow as much. In addition, the impact of the government’s $862 billion fiscal stimulus program is lessening. That leaves the private sector to pick up the slack. But businesses are cutting back on their spending on machines, computers and software, according to a government report earlier this week. And the housing sector is slumping again after a popular home buyer’s tax credit expired in April.
We don’t have alternative universe laboratories to run control bailout experiments, but we can imagine the alternative outcomes if different actions were taken.
So let’s do just that. Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).
In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. Int he end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.
Seldom does the United States look at Europe with economic envy. The past few weeks, however, have been one of those rare phases. Concern about America’s stumbling recovery has been rising, just as anxieties about the euro area’s economy have faded. The dollar is the weakling among rich-world currencies…. But Americans should take a little heart: it is too soon to despair about their economy. And Europeans should show a little caution: it is too soon to be sure that theirs is firmly back on its feet.
One problem that dogged Japan during its lost decade was a stop-and-go fiscal policy in which stimulus packages were administered in an “on again, off again” fashion and taxes were lowered and then raised. There is a risk that the U.S. could fall into this trap in an effort to strike a balance between short-term fiscal support and long-term budget integrity.
This strongly suggests that congressional leaders of both parties should embrace a pro-growth fiscal reform that would help to create long-run fiscal stability and foster certainty about future tax rates. With the 2001-2003 tax cuts set to expire at the end of 2010, the time is now to move ahead with broad-based reform.
A good starting point would be the bipartisan Wyden-Gregg tax reform bill. This bill is not incredibly bold, but is probably the best we could do in the current environment and is much better than the current tax code.
Wyden-Gregg would be revenue-neutral; it would simplify the tax code by reducing the number of personal income tax brackets to three from six and would do so without raising marginal income tax rates.