Counterparties: The economics of flying blind

April 19, 2013

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The leaders of the G20 met in Washington today; their official communique was sent out, like any grand pronouncement, as a Word document posted on a Russian website.

The world’s most powerful finance ministers and central bankers appeared to be working through some serious confusion today. Even India’s finance minister seemed a bit puzzled by all the talk of Europe: “It was supposed to be a G20 meeting, but for a moment I thought it was a G7 meeting”, he said.

Three days after a grad student dismantled the widely-held idea of a 90%-of-GDP tipping point for national debt, the G20 agreed to move away from the idea of setting specific national debt targets. This a big change — just three years ago, the G20’s richest nations pledged to cut their deficits in half by this year. Now, as Reuters notes, Europe is not just re-thinking austerity, but promising to slow it down.

The IMF, which previously endorsed Britain’s austerity program, has now changed its stance on debt. That may augur a direct confrontation with the Cameron government. Just today, the UK had its credit outlook downgraded by Fitch, in part because of a “weaker fiscal and economic outlook”.

Mohamed El-Erian blames the IMF for some of the global policy confusion. While he admires the Fund’s “highly respected” analysis and “world class insight”, he says that policy implementation “frequently falls hostage to pressure from its political masters in advanced economies.”

His case in point: during the Cyprus crisis, the IMF signed on to a flawed rescue plan, then quickly retracted its support. The “IMF felt it had no choice but to succumb to pressure by European politicians,” El-Erian writes. Neil Irwin, on the other hand, applauds the IMF for changing its mind on debt and says that the IMF has now become the kind of friend who urges you to work less and drink more. (At the end of a long week, we at Counterparties appreciate those kind of friends.)

The G20 bigwigs also seemed unsure about the effectiveness central banks’ easy monetary policy. On Friday, there were no G20 objections to Japan’s two-year $1.4 trillion monetary stimulus program. But the FT’s Chris Giles says that, after years of low rates and stimulus, the world’s central bankers feel they’re effectively flying blind, in an “environment of uncertainty about the way economies work and how to influence recoveries with policy”.

Ex-ECB executive board member Lorenzo Bini Smaghi summed up the meetings. “We don’t fully understand what is happening in advanced economies,” he said. – Ryan McCarthy

On to today’s links:

Regulators
The SEC is moving past the financial crisis and onto a “bold and unrelenting” enforcement program – Bloomberg

Even More TBTF
Mortgage REITs, the latest systemic threat to the US financial system – WSJ

Data Points
Canadians surpass Americans in net worth – WSJ

Politicking
If at first you don’t succeed: Simpson and Bowles are back with another deficit plan – Bloomberg
The new Simpson-Bowles plan in full (pdf) – Moment of Truth

Tech
Is there a new tech “rust belt”? – WSJ

Correlation
Generational attitudes on sushi and gay marriage – Mother Jones

Progress
Abe’s growth plan for Japan includes getting more women to lean in – FT

Deals
Dude, Blackstone isn’t getting a Dell – WSJ

Random
The European Spreadsheet Risks Interest Group exists, and is predictably awesome – EuSpRiG

Alpha
“Two traders with a Bloomberg terminal” no longer guarantees hedge fund prosperity – Economist

And, of course, there are many more links at Counterparties.

Comments
3 comments so far

Krugman has a good, acid piece on the idea that economics is all too confusing for the Europeans to understand. He says it is confusing because that is what they wanted and now that their wrong nostrums have proved poisonous they are pretending they had no idea what to do. Nonsense, in effect, he snaps. You had plenty of good advice; you just refused to take it.

Posted by Chris08 | Report as abusive

“Mortgage REITs, the latest systemic threat to the US financial system”

Yikes! When you get a chance, please debunk that brain dead vapid article. mREITs are less than 10% of the agency mortgage market, certainly no larger than the Banks, Brokers, Institutions and Pensions in them as well. Agency mREITs are even a smaller player in the repo market.

Annaly had no problem getting repo financing during 2007 -2008 because their desirable collateral was backed by the US Treasury. They’re hedged with repo with terms as long as 4 years, so any short term spikes aren’t gonna be felt too much.

Agency mREIT leverage is about 30% less than the Banks and Brokers as well, and if there’s to be new rules and regulations it’ll have to apply also to the Banks and Brokers. Any chance of that? I don’t think so either.

Agency mREITs assets grew rapidly last year thanks to the Europocalypse which along with the Fed, scared a lot of investors out of the sector. Their shares were trading below asset value so that was an ideal time for secondary offerings, which aren’t dilutive and the only way mREITs get larger.

WIth the Fed’s foot on the throat of both long and short term rates for at least 2 years, most mREITs are in a sweet spot of stable net interest spreads.

Nothing to see here, move along. . .

Posted by jpmist1 | Report as abusive

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