The Great Debate
Locking up bank reserves is wrong policy focus
– John Kemp is a Reuters columnist. The views expressed are his own. —
Plotting an exit strategy and shrinking the Federal Reserve’s balance sheet has become a hot topic as policymakers try to underscore their commitment to price stability and markets ponder the risk of inflation.
But micro-managing the reserve base is a curiously inadequate way to respond to medium-term concerns about inflation. Interest rates (the cost of credit) and supervision (leverage) are broader, more appropriate tools.
It is irrelevant whether the Fed sells its assets back to the market. What matters is whether and when the central bank is prepared to raise the price of borrowing.
Sluggish investment will hamper recovery
– John Kemp is a Reuters columnist. The views expressed are his own –
Unable to rely on the wounded consumer, the outlook for U.S. growth in the next three years depends on business investment and exports to take up the slack when stimulus programmes wind down. Ultra-low interest rates will help. But with the economy struggling to work off a huge overhang of unused real estate assets, and not much sign of investment elsewhere, investment spending is set to remain sluggish, condemning the economy to a weak recovery in the medium term.
Federal Reserve Chairman Ben Bernanke and other senior U.S. officials have already warned the rest of the world can no longer rely on over-indebted U.S. consumers as the principal source of global growth. There is no choice but to rely on investment and exports to take up more of the burden.
But investment spending outside real estate has been very depressed over the last cycle; there is no reason to expect it to accelerate much before 2013 at the earliest. So despite signs of a significant cyclical improvement in manufacturing in the past couple of months, the medium-’term outlook looks weaker.
Fed redux: Making policy behind the curve
– John Kemp is a Reuters columnist. The opinions expressed are his own. –
With clear signs the U.S. and world economies have returned to growth, investors are trying to guess when the Federal Reserve will begin to raise interest rates again.
Voting to maintain the federal funds target at 0.00-0.25 percent at this week’s meeting, the rate-setting Federal Open Market Committee (FOMC) reiterated that low rates of capacity utilisation, subdued inflation trends and stable inflation expectations were “likely to warrant exceptionally low levels of the federal funds rates for an extended period”.
The language echoes almost exactly the phrasing the FOMC used throughout H2 2003, when it repeatedly noted that “the Committee believes that policy accommodation can be maintained for a considerable period” (Aug, Sep, Oct and Dec meetings). The formula was altered in January 2004 (”the Committee believes it can be patient”) (January and March meetings) but interest rates were not in fact raised until the end of June 2004.
Banks’ exposure to the Obama Plan
President Barack Obama’s proposals to ban banks from proprietary trading unrelated to serving their customers will have a very uneven impact on the sector.
There is no easy way to identify how much money the major banks make from proprietary trading rather than market-making, brokerage and hedging services on behalf of their customers. The banks do not break out their activities in this way, and the regulators do not collect standardised data.
But it is possible to identify which banks depend most heavily on trading rather than investment or commercial banking activities, and which are therefore potentially most exposed to a tightening of the regulations to prevent proprietary trading unrelated to serving their customers.
The attached charts (see here and here) show the 20 largest banks in the United States by average assets and the share of their adjusted operating income derived from trading activities in the first nine months of 2009. The numbers are taken from the Form Y-9C Consolidated Financial Statements which banks themselves file, published by the Federal Reserve in the form of Bank Holding Company Performance Reports (BHCPR), and used by federal bank supervisors:
Obama bank plan is good policy, good politics
– John Kemp is a Reuters columnist. The views expressed are his own –
President Barack Obama’s proposed curbs on bank size and proprietary risk-taking will be criticised for being vague, hard to implement, and focusing on issues that were only part of the cause of the recent crisis.
But the president should ignore self-interested counsels of perfection from the industry that aim to preserve the status quo. The plan is good politics, and good policy. On the political front, the plan is a belated attempt to reposition the administration and congressional Democrats. It aims to channel the popular revolt that washed away Democrats in New Jersey and Virginia last autumn and now in Massachusetts.
For much of the year, the administration and its allies have seemed obsessed by issues which are low on the list of voters’ concerns (healthcare, climate change) or reward special interests (bank bailouts) while appearing impotent to do anything about the rising tide of unemployment and punish those responsible for causing the crisis.
Obama is featured in a movie exposing greedy hedge funds and market manipulation called “Stock Shock.” Even though the movie mostly focuses on Sirius XM stock being naked short sold to hell, I liked tit because it gives the average guy a better understanding of the dark side of Wall Street. DVD is everywhere but cheaper at http://www.stockshockmovie.com
Massachusetts election kills cap-and-trade
- John Kemp is a Reuters columnist. The views expressed are his own -
The Republican Party’s stunning special election victory in deep-blue Massachusetts has killed any lingering prospect of passing cap-and-trade legislation in 2010, and with it international negotiations to produce a binding climate accord before the end of the year.
With no chance of U.S. action in the short term, emerging markets such as China and India are under no pressure to accept mandatory emissions reduction targets. If climate legislation is eventually revived in the United States, in 2011 or beyond, it may come back in the form of a carbon tax rather than a permit trading program.
TO RETREAT OR REINFORCE? Perhaps the most important decision any general has to make is when to stand and fight, and when to beat a retreat in order to fight another day. The Massachusetts special election to fill the Senate seat left open by the death of Edward Kennedy confronts President Barack Obama with a similar strategic choice.
Senate retirements narrow cap-trade window
– John Kemp is a Reuters columnist. The views expressed are his own –
LONDON – Yesterday’s announcement by Senator Byron Dorgan (Democrat, North Dakota) that he would not seek a fourth term in November, coupled with today’s expected announcement by Senator Chris Dodd (Democrat, Connecticut) that he won’t seek a sixth term, will remove two veterans, once secure legislators from the Democratic caucus. It highlights the mounting problems confronting congressional Democrats facing voters in November’s midterms amid high unemployment, a relatively unpopular agenda led by the administration, and concerns about the party’s capture by special interests.
Dodd’s retirement is not surprising, given his plummeting poll numbers and criticism for being too close to the banking and insurance industries he regulates as chairman of the Senate Banking Committee but which have been major campaign contributors.
Despite trying to reinvent himself as a populist in recent months, the legislation he has worked on has sometimes appeared to show too much favouritism for the industry. He has also run into criticism for receiving VIP mortgages in 2003 from Angelo Mozilo’s failed Countrywide Financial.
An obvious solution is a carbon tax swap in which other taxes are swapped for a carbon tax. This way taxpayers don’t have to worry about their bills. In fact, such swap is actually cutting taxpayers taxes.
Anything but oil
– John Kemp is a Reuters columnist. The views expressed are his own —
As OPEC ministers meet in Angola this week, they can congratulate themselves on a brilliant piece of market management.
Quick decision-making and aggressive output cuts over the last 18 months have stabilised prices at their highest level in real terms since the early 1980s. And this despite the deepest recession since World War Two.
The cartel has had plenty of help. Cheap liquidity from central banks has helped finance inventories, while continued enthusiasm from the investment community has encouraged the market to look past weak short term fundamentals and concentrate on the possibility of renewed price increases in future.
OPEC appears to concur on the danger posed by permanent demand destruction:
According to the Financial Times today, the cartel on Tuesday said high prices and the economic crisis had triggered a shortfall in demand among members of the Organisation for Economic Co-operation and Development, the rich countries’ club.
“The crisis appears to have induced a permanent loss in oil demand in OECD and slower rate of growth in non-OECD, due to policy measures and changes in consumer behaviour,” the cartel’s economists told ministers in a presentation.
Cost of cap-and-trade for U.S. households
– John Kemp is a Reuters columnist. The views expressed are his own –
How much are U.S. households prepared to pay to avert the threat of climate change? According to the latest polling data published by the Washington Post, the answer is not very much, probably not much more than $25 per month or $300 per year.
Most respondents (65 percent) believe the federal government should regulate greenhouse gases from sources like power plants, cars and factories, including those who believe this strongly (50 percent) or somewhat (15 percent). Only a minority think the government should not regulate them (29 percent).
While the margin favoring regulation has narrowed since the middle of the year (when it was 75 percent to 22 percent), probably in response to a vigorous opposition campaign, there is still a clear majority in favor of taking some action on climate change.
Cap & trade is a scam. It has not worked well in previous formulations, since polluters can just move around their pollution credits and evade making significant changes. It will also become a new market, and boon for Wall St, however the profits will be rolled into price increases for the average consumer. The average person will likely shoulder a disproportionate burden. Simultaneously, adherence to cap & trade in developing countries will be difficult and far from transparent. Its basically an excuse for a big payday.
To be honest, the whole concept of climate change is wearing thin. We have to redirect our focus from CO2 emissions, to more dangerous, and proven, pollutants that go unregulated. We must also stop looking at climate change/ pollution as a global issue, we must start looking at it from a regional or local perspective. Cities, industrial centers, and transportation hubs are the main culprits, so why regulate pristine areas?
When we stop looking at this as “climate change” and “apocalyptic”, and start looking at it as addressing regional pollution, there would be much more support and progress. While the US is not innocent, we are far less of a polluter than China/SE Asia, with their permanent brown cloud. Climate change legislation would do little to stop particulate emissions, toxic chemical releases, and heavy metal and radioactive contamination. These are far more dangerous than one of the most common gases in our atmosphere.
Households face power-pricing revolution
– John Kemp is a Reuters columnist. The views expressed are his own —
Households in the United States and the United Kingdom are about to experience a revolution in the way they pay for electricity.
Over the next decade, almost all homes will be fitted with “smart meters” recording the time as well as the quantity of electricity used. Most customers will face some form of dynamic pricing that relates the price they pay for each kilowatt hour (kWh) to the actual cost of generating it.
Smart meters and dynamic pricing are critical to using the generation and transmission system more efficiently while accommodating a growing share of renewables (wind, solar) on the grid without sacrificing reliability. VARIABLE DEMAND
I think it is fairer to use smart metering–energy customers will pay for what they use and will be able to adjust consumption accordingly. If the cost of the smart thermostat is prohibitively expensive for some households, perhaps it should be subsidized. As for the suggestion above that customers pay the same rate, are you suggesting a fixed cost regardless of consumption? If so, that makes no sense whatsoever: Should all driver’s pay a flat fee for gasoline, regardless of how much they drive?
Yes, I think this will require some supervision of the power companies–as somebody commented earlier, utilities may be an “honesty-challenged sector.” But, the premise for smart metering makes perfect sense: charge customers the marginal cost their energy usage. If you use lots of power, yes, you will pay more; if you make an effort to conserve, you’ll pay less.
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New Bubbles on which assets ?
…”while allowing banks to fatten gross interest margins.” How does that work ?
Mortgage payments should be next to nothing with such low rates, with the added tax break, so people can’t service other expenses, i.e. credit card repayments etc.