Opinion

The Great Debate

from Commentaries:

Time for the Fed to stand up to its critics

John M. Berry is a guest columnist who has covered the economy for four decades for the Washington Post and other publications.

By John M. Berry

Financial crises and the policies to deal with them top the agenda at the Kansas City Fed's Jackson Hole conference. But what is actually going to be on everyone's mind at the august gathering is the uncertain future of the Federal Reserve itself.

Many members of Congress want to clip the Fed's wings for failing to prevent the crisis and for its actions since the meltdown began two years ago. In particular, most are angry about government bailouts, starting with the $29 billion in Fed backing for the purchase of Bear Stearns by JPMorgan Chase.

Financial institutions got into trouble because they took enormous risks, and the public bailouts look suspiciously like unjustified rewards for fat cats' wildly reckless behavior. But the bailouts were an unavoidable cost of halting the country's plunge into a second Great Depression. Congress has got to swallow its anger and do what is needed for the future.

The first objective on the financial reform agenda when Congress reconvenes next month should be to do no harm. That means killing legislation that would direct the Government Accountability Office to "audit" the Fed's monetary policy actions. Such audits could allow politicians to influence those decisions, which is exactly what some of the bill's sponsors want.

from Commentaries:

FOMC: Dull by design?

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.

from Commentaries:

Commercial real estate death watch

It's no wonder that the Federal Reserve has a watchful eye on commercial real estate. Lending hasn't come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents.

Maguire Properties is one such company. The Wall Street Journal reports the debt-laden REIT is handing over seven buildings to its creditors along with the $1.06 billion of debt that comes along with them. But rather than restructure the debt, the creditors may try to offload them into an extremely soft market, suggesting they'd rather take their lumps now rather than wait for a snapback in the market that may well be years away.

That's not good news for office building prices since such sales could pressure prices even further.

It’s tough to modify your way out of a hole

jamessaft1(James Saft is a Reuters columnist. The opinions expressed are his own)

If you thought the U.S. housing crash could be blunted if only lenders would cut delinquent borrowers a break, it is perhaps time to move on to another vain hope.

That’s right, the loan modification movement – pushed by the U.S. administration and others as a means of keeping non-paying borrowers in their houses, keeping those same houses from flooding the market as foreclosures, and even helping beleaguered lenders – is running into a reality-shaped wall.

An exhaustive study of loan modifications by economists at the Boston Federal Reserve, under which delinquent borrowers are given lower rates, more time, or even cuts in the principal amount owed, showed fundamental problems with the way that idea works when put into practice.

Today’s markets need noise filters

Agnes Crane – Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Reasons people give to explain the quick switch-back movements in stocks and other risky assets are becoming, well, just bizarre.

On Monday, it was the World Bank’s dire outlook for the global economy — no matter that the organization’s president already said output was likely to decline by close to three percent earlier this month.

First exit for the Fed

fed– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Call it a battle for beginnings and endings, and the Federal Reserve is smack in the middle.

As Fed policymakers convene for a two-day meeting starting on Tuesday, the lines are growing more defined between those who want the Fed to do more to stimulate a still fragile economy, and those who are calling for a defined exit strategy to prevent the global economy from going into an inflation-inducing overdrive.

Fed sets out exit strategy

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

Intense criticism of the Fed’s role in the financial rescue program and the decision to triple its balance sheet, including monetizing a portion of the Treasury’s debt, has forced the central bank to issue an unusual defense of its actions (http://www.federalreserve.gov/newsevents/press/monetary/20090323b.htm).

It attempts to placate critics by acknowledging the real risk of inflation, and marks the Fed’s first attempt to set out an “exit strategy” for ending quantitative easing and other credit programs once the crisis is safely passed.

U.S. government borrowing runs into resistance

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

Investors have started to balk at absorbing large quantities of U.S. government debt, taking on substantial inflation and devaluation risk in return for little reward. While the government has no trouble placing short-term debt with a maturity of up to 2 years, longer-dated securities are proving much harder to sell.

Increasing resistance from the market explains why the Federal Reserve felt it had no choice but to announce it would start buying back longer-term U.S. Treasury securities last week, in a $300 billion program of direct quantitative easing and monetization.

Geithner’s naked subsidy redefines toxic

jimsaftcolumn31– James Saft is a Reuters columnist. The opinions expressed are his own

Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.

The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.

One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.

Playing chicken with the Fed

John Kemp Great Debate– John Kemp is a Reuters columnist. The opinions expressed are his own –

Yields on long-term U.S. Treasury debt continued to surge higher yesterday as the market braced for a future upturn in inflation and a tidal wave of long-dated issues that will be needed to fund the bank rescues and the emerging stimulus package.

Yields on three-year notes are up by around 47 basis points from their mid-December low. But yields on ten-year paper have soared 82 points and rates on the 30-year long bond have surged 114 points. Long-bond rates have retraced more than half their decline since the autumn (https://customers.reuters.com/d/graphics/USTREAS.pdf).

Back-end yields would probably have risen even further were it not for persistent hints the Federal Reserve is thinking about buying longer-dated issues to cap them. But the market has started to call the Fed’s bluff.

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