Commentaries

Now raising intellectual capital

FOMC: Dull by design?

Photo
-

The FOMC is determined not to make waves, either in the markets or in Congress. Today’s decision looks to be a compromise between these two goals. Lawmakers such as Jim DeMint are yearning for an end to the credit easing policies. But going cold turkey might unsettle the Treasury market. Allowing the program to taper off gently is a good middle ground. With the Fed’s regulatory role hanging in the balance in Congress over the coming months, this is no time to attract adverse attention.

Even so, I think it’s a shame that the Fed didn’t follow the Bank of England’s lead in extending asset purchases. If the Fed is so confident that it can quickly suck back any liquidity then why not try to make sure the recovery gets off to a stronger start?

The economic revival will soon start to look quite statistically impressive, with growth rates of up to 3 percent. Beneath this there will be climbing unemployment and surging foreclosures. The Fed itself is forecasting tepid growth and mounting joblessness. They could still help ease this pain by striving to shave more off the cost of borrowing for consumers and businesses.

They have done a great job at helping save America from depression. But this is a limp end to a historic policy.

Another wrinkle in the TALF CMBS saga

-

The New Fed has released some modifications on its CMBS TALF program that could be telling as to why one of the CMBS legacy bonds put up as collateral was rejected during the inaugural round.

Clarification added to the FAQ:

The New York Fed will not fund a TALF loan if, in its judgment, a potential borrower is motivated to request a TALF loan due to such borrower’s or any of its affiliates’ direct or indirect economic interest in the underlying loans or leases, or products or services relating to such loans or leases, contained in the pool backing the ABS, and such economic interest would impact the incentive of such borrower to independently assess the risk of investment in such ABS. To the extent that any potential TALF borrower has any concerns that it could be rejected on this basis, such borrower is encouraged to contact the New York Fed well in advance of its loan request.

Bubble, bubble toil and trouble

-

NEW YORK, July 29 (Reuters) – The Federal Reserve seems to be volunteering to be top bubble burster. In a recent speech, Bill Dudley, the president of the Federal Reserve Bank of New York, overturned more than a decade of Fed orthodoxy by claiming it was the central bank’s duty to defuse asset price bombs before they detonate.

As the United States struggles with the fallout from the bursting of the housing and credit bubbles, the Fed may win applause for being proactive. By the time the next one starts to inflate, however, Fed officials may regret they raised their hand. Doing the job properly will certainly make them unpopular and there is no guarantee that it will even work.

Events, dear boy, events

-

Several blogs have pointed to a pair of fascinating timelines on the U.S. financial turmoil and on the international response to the crisis that were produced by the Federal Reserve Bank of New York.

In the case of the U.S. timeline, what’s also interesting is what has been left out. The timeline, not surprisingly, emphasizes actions by the Federal Reserve and the federal government and does not itemize every major event involving a financial firm. The mortgage-related write-downs, for example, are summed up with an Oct. 16, 2008 item: “Citigroup begins a string of major bank writedowns.”

  •