Opinion

The Great Debate

QE2 to speed triumph of emerging markets

While “decoupled” is not the same as “immune”, look for growth and investment performance in emerging markets to be better than in the sclerotic developed world.

In the short term emerging markets will be free riders as the U.S. launches the second round of quantitative easing. A portion of the stimulus generated by “QE2″ will inevitably leak cross border, while the risks of the gambit will fall almost entirely on the U.S. and on dollar-denominated assets.

QE2 is designed to work in two ways: to stimulate investment by making it cheaper to borrow money and to lift consumption by boosting asset prices.

To the extent it succeeds a goodly portion of that consumption will be goods and services purchased by the developed world from emerging markets.

As for investment, in the absence of capital controls U.S. corporations that choose to invest using borrowed money can be counted on to put a lot of the  money to work where opportunities are best: emerging markets.

Fed is banking on phony wealth effect

The Federal Reserve is committed to enticing Americans into doing once again what worked out so badly in the last decade: spending the phony paper gains engineered by overly loose monetary policy.

That, at least, is the very strong impression given by a speech by Brian Sack, the markets chief of the New York Federal Reserve, a man whose job it will be to implement the second round of large-scale quantitative easing coming after the elections in November.

A round of speeches from key Fed officials has given the clear view that, faced with deteriorating conditions and trapped by the lower bound of zero in its monetary policy, the Fed is preparing to once again buy up large amounts of Treasuries, perhaps even more than the government is issuing on an ongoing basis, in an attempt to drive down market interest rates and stimulate the economy.

Central banks face crisis of confidence

Central banks around the world are facing the worst crisis of confidence since the 1930s, as investors, households and firms question their commitment and ability to deliver price stability.

Whether it is inflation or deflation, outsiders question whether the major central banks will be able to regulate prices in the next few years.

TOO HOT ….
Bank of England Chief Economist Spencer Dale last week lashed out at what he branded “dangerous talk” the Bank had gone soft on inflation and was choosing to ignore price increases persistently above the target.

The Knightian dog ate my recovery

Remember when business and economic leaders droned on about “100-year storms,” 2008′s get-out-of-jail free card for people who missed the housing bubble?

This was the whole idea that there was no way that people could be held accountable for the crisis because the notion of there being a problem with continual double-digit house price growth and sky-high leverage was just so darned unlikely.

Well, it looks like we have the 2010 version of how the dog ate their homework again and this time it is called “Knightian uncertainty.”

Fed can’t fix broken economy, politics

The Federal Reserve’s decision to move to a kind of quantitative neutrality is a tacit admission that it, or rather that the United States, is in a political bind that makes a bold response to a deteriorating economy difficult.

Despite reams of evidence that conditions are worsening — much of it cited in the statement the Fed made as it left rates on hold — the U.S. central bank made only a token gesture; announcing that as mortgage-related debt it holds on its balance sheet comes to term and is repaid it will replace it  with new, mostly long-term, Treasuries.

That keeps its quantitative easing policy essentially static, a strategy dubbed “quantitative neutrality” by Northern Trust economist Asha Bangalore.

Communities of color need financial protections

- Jose Garcia is associate director for research and policy at Demos. He is responsible for providing statistical and policy analysis for Demos’ Economic Opportunity Program on issues such as household debt and assets. -

As the days heat up, so too has the debate in Congress over what type of consumer protection to include in financial reform legislation. Detractors have moved to take the bite out efforts to crack down on abusive lending practices while advocates try to hold the line. Should there be an independent Consumer Financial Protection Agency? Or should it be housed in the Federal Reserve? And what authority should it have?

The debate has taken place at a time when debt continues to undermine the economic mobility of many American families and how Congress resolves the issue in the next couple of weeks will be critical to the future of those families, particularly consumers of color. It’s no exaggeration to say the creation of an independent agency may be the only means for addressing generations of abusive lending that has saddled communities of color with unmanageable debt.

Bank lending and profits; a costly divergence

Don’t count on the profitability of the financial services sector as a leading indicator of anything. Well, anything other than financial services compensation.

A stupendous recovery in profits is underway at U.S. banks, brokerages and insurance companies, but the big picture shows that for the rest of us that rebound may prove sterile.

Data from the U.S. Bureau of Economic Analysis shows the sector had an absolutely cracking 2009, with profits rising in the fourth quarter by 240 percent against the same period a year before.

from The Great Debate UK:

Greenspan and the curse of counterfactual

Laurence_Copeland-150x150- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Suppose that, instead of appeasing Nazi dictator Adolf Hitler at Munich in 1938, Neville Chamberlain had taken Britain to war, what would today’s history books say about the episode?

It is of course impossible to know. Perhaps something along the lines: “the British prime minister’s stubborn refusal to compromise resulted in a war which dragged on for 6 months at a cost of over 300,000 lives.....” Make up your own scenario.

Tightening underway, Fed a passenger

A tightening in financial conditions is under way but its principal architect won’t be the Federal Reserve.

Far from it, the Fed will be pinned down by powerful disinflationary, perhaps even deflationary, forces, making it very unlikely to be willing to raise interest rates any time soon.

Instead the tightening is coming from Asia, where China is fighting a local battle against rampant lending, and from investors all over the world, as one by one they realize that lending to governments isn’t always so risk-free.

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”.

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