If Fed Missed This Bubble, Will It See a New One?

Ben Bernanke, the Fed chairman, has said it is difficult “to know in real time if an asset price is appropriate or not.”

Excellent piece by David Leonhardt, economics writer for the New York Times. - MT

By DAVID LEONHARDT

Published: January 5, 2010

The New York Times - If only we’d had more power, we could have kept the financial crisis from getting so bad.

That has been the position of Ben Bernanke, the Federal Reserve chairman, and other regulators. It explains why Mr. Bernanke and the Obama administration are pushing Congress to give the Fed more authority over financial firms.

So let’s consider what an empowered Fed might have done during the housing bubble, based on the words of the people who were running it.

In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?
http://www.nytimes.com/2010/01/06/business/economy/06leonhardt.html

U.S. Considers Reining In ‘Too Big to Fail’ Institutions

A protester in March of 2008 framed the question that Barney Frank, chairman of the House Financial Services Committee, and Treasury Secretary Timothy F. Geithner will try to answer this week with proposals to tighten regulation.


 New York Times - WASHINGTON — Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near collapse of the financial system last year — how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble. The White House plan as outlined so far would already make it much more costly to be a large financial company whose failure would put the financial system and the economy at risk. It would force such institutions to hold more money in reserve and make it harder for them to borrow too heavily against their assets.
Setting up the equivalent of living wills for corporations, that plan would require that they come up with their own procedure to be disentangled in the event of a crisis, a plan that administration officials say ought to be made public in advance.

It May Be Time for the Fed to Go Negative

By N. GREGORY MANKIW

WITH unemployment rising and the financial system in shambles, it’s hard not to feel negative about the economy right now. The answer to our problems, however, could well be more negativity. But I’m not talking about attitude. I‘m talking about numbers.

Let’s start with the basics: What is the best way for an economy to escape a recession?

Until recently, most economists relied on monetary policy. Recessions result from an insufficient demand for goods and services — and so, the thinking goes, our central bank can remedy this deficiency by cutting interest rates. Lower interest rates encourage households and businesses to borrow and spend. More spending means more demand for goods and services, which leads to greater employment for workers to meet that demand.

The problem today, it seems, is that the Federal Reserve has done just about as much interest rate cutting as it can. Its target for the federal funds rate is about zero, so it has turned to other tools, such as buying longer-term debt securities, to get the economy going again. But the efficacy of those tools is uncertain, and there are risks associated with them.

In many ways today, the Fed is in uncharted waters.

So why shouldn’t the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent?

At that interest rate, you could borrow and spend $100 and repay $97 next year. This opportunity would surely generate more borrowing and aggregate demand.http://www.nytimes.com/2009/04/19/business/economy/19view.html

Fed Gets a Test on Treasurys

The Wall Street Journal - Treasurys slumped Tuesday, and the 10-year note's yield rose above 3%, as the market tested the Federal Reserve ahead of the end of its monetary-policy-setting meeting on Wednesday after a so-so five-year note auction and stronger data.

The 10-year yield rose as high as 3.03% following the auction as losses picked up speed. Treasurys had started to weaken midmorning after data that showed a surprise jump in consumer confidence this month. That figure erased early gains spurred by continued worries about the health of the banking sector.

The 10-year yield has bounced around 3% for most of the month, but had failed to close above that level since mid-March, before the Fed began its Treasury-buying program. Late Tuesday, the 10-year note was yielding 3.002%.

Strategists are focusing on 3.04% as the next key level if supply concerns continue to push yields higher, followed by 3.10% and then 3.25%.

Reaching 3.25% would likely concern policy makers, said Carl Lantz, interest-rate strategist at Credit Suisse in New York, as it could force mortgage rates to rise above 5%. The Fed may then decide to increase its purchases of Treasurys, a program it kicked off March 25 to help drive down consumer borrowing rates.

"There's more of a sense we could see the market break now and test the Fed's resolve to be more aggressive" in its buying, Mr. Lantz said, adding he doesn't believe the Fed will refer to any added buying in its policy-meeting statement Wednesday.

Instead, the Fed is likely to stress that it will work to keep long-term borrowing rates low. If it words the statement correctly, Treasurys could rally.

The Fed, though, could choose to surprise market participants Thursday when it buys Treasurys in 10- to 17-year maturities. Its previous foray into buying longer-term Treasurys was relatively small, at $2.5 billion. The Fed could decide to purchase more than it has in the past and send a message to the bond market that it wants to keep long-term yields in check, Mr. Lantz said.

Along With New Money, IMF Gets Politically Perilous Tasks

International Monetary Fund officials were nearly giddy in early April when they learned that leaders at the G-20 summit backed a fourfold increase in fund resources to $1 trillion. During a press briefing, IMF Managing Director Dominique Strauss-Kahn used the phrase "the IMF is back" six times.

But at the IMF's spring meeting this past weekend, reality set in. In exchange for the money, the IMF has been handed tough assignments in fighting the global recession and staving off another one. The work will require a political dexterity and willingness to stand up to powerful IMF members that the fund has rarely shown in the past.

"There's been a huge expansion of IMF resources and huge attention to the IMF, but nothing has been done to make members fear IMF surveillance" or oversight, says Adam Posen, deputy director of the Peterson Institute for International Economics, a Washington think tank.

The new facility has won plaudits from some developing countries, but the IMF will still have to make tough political calls. Only nations ranked highly by the IMF can qualify for credit line. The IMF often forces other borrowers to cut spending or raise interest rates even if that deepens a downturn, though the IMF has taken steps to protect some programs for the poor.

The disparate treatment has prompted complaints in Turkey, Pakistan, Eastern Europe and elsewhere that the IMF is playing favorites, and it may lead to pressure on the fund to ease its standards. The World Bank has tried to reduce the effect of the budget cuts by financing infrastructure projects that otherwise might be jettisoned.

Pressure on the IMF will ramp up when it must decide whether to renew the credit lines after their one-year terms. Saying "no" would undermine a country's economic standing; saying "yes," if the country's policies don't warrant it, would undermine IMF credibility.http://online.wsj.com/article/SB124078041608357051.html#mod=todays_us_page_one

About $500 billion of the new funds are earmarked for the IMF's main job of bailing out troubled countries. The IMF has introduced a credit line that doesn't require borrowers to make the kinds of painful economic changes -- cutting spending, slashing subsidies -- that have turned the IMF into political poison in much of Latin America and Asia. Mexico, Poland and Colombia have signed up for the credit line.

Fed Signals It’s Ready to Expand Assistance as Needed

WASHINGTON — Conceding that the economy is still spiraling downward on most fronts, the Federal Reserve signaled on Wednesday that it would expand its use of unconventional measures to directly prop up lending for mortgages, consumer loans and businesses.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Fed said Wednesday in its statement.

The Fed has already been buying mortgage-backed securities and said in its statement that it would expand its intervention as needed. The committee also served notice that it would purchase longer-term Treasury bonds, a move that would drive down long-term interest rates of all types. http://www.nytimes.com/2009/01/29/business/economy/29fed.html?partner=permalink&exprod=permalink

Central Banks Are Creatures of Financial Crises

Crowds gather near Wall Street on Oct. 24, 1929, the first day of the stock-market crash that preceded the Great Depression.

The Wall Street Journal - Since the beginning of the financial crisis in 2007, the Federal Reserve has come to the rescue so many times that even seasoned central-bank watchers have trouble keeping track.

It has injected more than $1 trillion into the financial system. It has backstopped corporate short-term lending. It has cut its overnight target rate from 5.25% in August 2007 to between zero and 0.25% -- the lowest level in the Fed's 95 years. Since it can't lower rates any more, it has begun effectively to print money in an attempt to bolster the economy.

But its actions don't seem so extraordinary from the perspective of three centuries of central-banking history. Central banks have been built on financial crises, with each major tremor expanding their role. And today's economic convulsions foreshadow more changes to come at the Fed.

If it wasn't for crises, central banks might not exist. In Britain, after years of civil war and the ouster of King James by William III in 1688, the country's public finances were in tatters, with tax collection falling short of what the government needed to pay its bills and lenders unsure about the stability of the government. The Bank of England, one of the first central banks and for centuries the most important one, was founded in 1694 to purchase government debt and curtail the funding crisis.http://online.wsj.com/article/SB123302236816918321.html?mod=article-outset-box

Fed Fears Long, Deep Recession

The New York Times - WASHINGTON — Policy makers at the Federal Reserve appeared almost stunned by an economy that was sinking faster than they had expected on almost every front in December, so much so that they even toyed with the idea of not announcing an official target for overnight interest rates, according to minutes of the meeting released on Tuesday.

At the meeting on Dec. 15 and 16, Fed policy makers jumped through the looking glass and slashed the benchmark federal funds rate on overnight loans between banks virtually to zero. Vowing to use “all available tools” for stimulating the economy, the Fed then outlined a radical new approach of pumping money into the economy through its own lending programs and through heavy purchases of mortgage-backed securities and possibly longer-term Treasury bonds.

Despite having already created a raft of new lending programs to financial institutions and even corporate borrowers, Fed policy makers as well as the Fed’s staff forecasters began the meeting with sharply reduced forecasts. They all expected a severe economic contraction that was likely to last through at least the first half of 2009.http://www.nytimes.com/2009/01/07/business/economy/07fed.html?partner=permalink&exprod=permalink

http://online.wsj.com/article/SB123126756338458009.html?mod=testMod