How G20 can unfreeze credit and cut bailout costs
– Lena Komileva is Head of G7 Market Economics, Tullett Prebon –
One of the big historical lessons of this crisis for economic policy is that bringing down the risk-free cost of money – central bank rates or government bond yields – and injecting liquidity into the banking system cannot on their own fix broken credit markets.
Quantitative easing by central banks may help to solve short-term liquidity problems for domestic borrowers and lenders, by going around broken markets during times of extreme financial and economic uncertainty. However, this is no substitute for efforts to restore international credit markets back to health.
Effective policy measures would contain the economic fear and channel private sector incentives – the foundation of free markets – in a way that alters the behaviour of lenders, companies and consumers. The end-game policy strategy cannot be to replace free markets.
So why have traditional monetary stimuli failed to end this crisis? And what should be done next?
The textbook understanding of the relationship between easier central bank money and the supply of liquidity in the broader economy assumes that there is a direct, causal link between banks’ capacity to generate credit and actual lending growth.
However this assumption ignores two important factors – 1) lenders’ incentives and 2) the role of international credit markets, which have come to dwarf traditional bank lending over the past decade.
World stuck with the dollar, more’s the pity
– James Saft is a Reuters columnist. The opinions expressed are his own –
The dollar is, and will remain, the U.S.’s currency and its own and everyone else’s problem.
The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.
U.S. desire for free access to the cookie jar that being the world’s reserve currency represents will be too strong, especially given its need to finance huge amounts of debt reasonably cheaply. As well practicalities are fearsome, even if consensus was more or less there.
Chinese central bank head Zhou Xiaochuan on Monday called for the creation of a new “super-sovereign” global reserve currency, advocating building on an International Monetary Fund instrument called Special Drawing Rights.
Zhou echoed a call by Russia last week, when it indicated it would raise the issue at the upcoming Group of 20 meeting in London on April 2, saying the idea had support from emerging market economies including Brazil, India, South Korea and South Africa.
There is no doubt that the current system breeds instability, but it enjoys the great advantage of entrenchment and sticking with it allows the U.S., and others, to avoid making hard choices and paying true market prices for their economic decisions.
The biggest problem with a world currency and a mega-strong IMF is who will be in charge after all, whom will the IMF be responding to? Without democratic supervision, IMF may turn into the worst type of Frankensteinian monster ever created. And let us keep in mind that IMF is actually ruled by the US.
How will the Fed get off its Tiger?
– James Saft is a Reuters columnist. The opinions expressed are his own –
The Federal Reserve and U.S. economy have two considerable risks now that quantitative easing is at hand: keeping the dollar from a disorderly decline and figuring out how to dismount from the tiger.
The Fed has cut interest rates to a range of zero to 0.25 percent and said it would use “all available tools” to get the economy growing again, including buying mortgage debt as well as exploring direct purchases of Treasuries.
While the central bank was at pains to distance its policy from Japan’s during its extended downturn, there can be no doubt that the dollar printing presses are and have been running and will pump out as much currency as is needed to avoid deflation and make credit available at a stimulative rate.
There is no question of the Fed not being able to re-ignite inflation in the U.S. economy; if they print money fast enough, prices will go up. The issue is more about the collateral damage possible when a major debtor nation takes these steps, even if it is doing it for all the right reasons in support of the best possible cause.
In the short term the risk is that foreign holders of the dollar and Treasuries are spooked by the whirring of the presses, and, reasoning that the Fed cannot fail in its quest to re-ignite inflation, decide to hold something less, well, risky.
Now of course in the current circumstances there may, for better or worse, not be that much of a dollar alternative for global reserve managers and investors and, seeing as how a rapid unwind in the dollar would hurt creditors, they may stick it out.
Actually if you pump money into companies to create products for non-existent markets, the end result is not inflationary. For instance if we paid auto makers $800 billion to upgrade machinery and restructure, the general idea is that the new products will be sold for less or at prices that are more competitive than in past years. When we pump money in banks, keeping competitors alive rather than letting them fail, we maintain a larger number of players going after the same market. That is actually deflationary. In effect we are financing slimmer profit margins. This means in the longrun the cost of repaying the stimulus will be much more painful than the stimulus itself. Times have changed. But we still keep harping on prehistoric concepts.
Fed unleashes greatest bubble of all
– John Kemp is a Reuters columnist. The views expressed are his own –
Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.
Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.
THE ASYMMETRIC EXPERIMENT
Bubble mania is no accident. It is the direct consequence of the Fed’s asymmetric response to shifts in asset prices. Pressed to “lean against the wind” and adopt counter-cyclical interest rate and credit policies in the asset market, senior Fed policymakers have repeatedly demurred.
Led by Bernanke and Greenspan, officials have argued it is too hard and subjective to identify bubbles until afterwards, and not the Fed’s job to second-guess asset allocation decisions of professional investors.
Even if bubbles could be identified, they argue, pricking them would require swingeing rate rises that would inflict widespread damage on the rest of the economy.
I cant help but read the hundreds upon hundreds of posts much like the ones on this board claiming the ultimate bankruptcy of the largest economy (and largest tax base) in the world. There is no doubt that the housing bubble represents the largest challenge facing the U.S. since the second world war as far as hardships are concerned. However, any student of economics and history for that matter will take note of the real effects of fiscal stimulus. Yes the national debt has skyrocketed with the bailouts, but a bankrupt country’s debt will not be issued at less than 1% rates. Are these rates artificially conceived? Maybe, but no less real. And inflation really is of no concern at this point. I would hope for some inflation right now as this would certainly drive some of the loads of cash into assets that protect inflation- stocks, commodities and could possibly stabilize housing prices somewhat. The Chinese have benefited in terms of relative economic power. But it has not and will not successfully decouple from a strong relationship with the U.S. As for the goldbug survivalist crowd- it has proven to be an historically wrong sided bet against the collapse of civilization. Sure things have changed, but countries adapt and do not collapse within a framework of a few financially troubling years. Britain successfully re-engaged with a globalized world following the second world war and their dissolution of the world’s superpower, as the U.S. will most certainly do in the coming years. However, the U.K. still remains and economically and politically to this day even after the “collapse” of their empire. We will spend less – probably good, be a world leader- Obama is good start, and we will quite possibly looked upon with amazement in the years ahead that we were able to “print” our way out of this mess.
Fighting deflation globally ain’t easy
– James Saft is a Reuters columnist. The opinions expressed are his own –
With the U.S., Japan and Britain — nearly 40 percent of the global economy — facing the threat of deflation, it’s going to be just too easy for one, two or all three of them to get the policy response horribly wrong.
The global economy is so connected, and our experience with similar situations so limited that the scope for error is huge.
Think of it as having three pilots flying a jet plane, one each operating a wing and the third managing the tail.
Oh yeah, and they all work for different airlines.
Though there will be much talk of international coordination in the next year, and though the central banks and governments of the world will likely be rowing in the same direction, their ability to gauge the effects of monetary policy and government spending on their own economies will be pretty limited, and even more so on the whole.
Failure when fighting a global recession, a global balance sheet adjustment, a global banking recapitalization, debt deflation and very possibly actual deflation can take many forms.
The economies in the western world are now in free fall with various governments in panic mode such as the British government which have unveiled their latest strategy to spend its way out of the recession, Its instructed the banks which have been nationalized to get lending back to 2007 levels. The US bail out is just another example that the governments have no option but to keep spending but this cannot continue the west is bankrupt and the future is grim, governments will fall the wealth will be removed from the rich and at present the powerful the outlook is for a break down in law and order.
Quantitative easing has begun
– John Kemp is a Reuters columnist. The views expressed are his own –
Quietly, without fanfare, the Federal Reserve has turned on the printing presses. The central bank is flooding the market with enough excess liquidity to refloat the banking system — and hopes to generate an upturn in both economic activity and inflation in the next 12-18 months to prevent the economy falling into a prolonged slump.
Since the banking crisis intensified in September, the Fed has been rapidly expanding the credit side of its balance sheet, providing an ever-increasing array of facilities to support the financial system (repos, term auction credit, primary discount credit, broker-dealer credit, commercial paper funding, money market mutual fund liquidity and term securities lending).
Total credit extended by the central bank has surged from an average of $885 billion in the week ending August 27 to $2.198 trillion in the week ending November 12. Credit extensions surged another $142 billion last week alone — mostly in form of increased term auction credit (+$114 billion) and other miscellaneous credits the central bank does not break out (+$41 billion).
Until fairly recently, the expansion on the asset side of the Fed’s balance sheet was matched by increased non-bank liabilities, mostly in the form of higher balances deposited by the US Treasury into its regular and special supplementary financing accounts at the central bank.
Since the Treasury was borrowing this money in the open market by issuing cash management bills, the impact of the Fed’s balance sheet expansion was being fully sterilized.
The Fed was providing liquidity in the narrow sense (helping commercial banks cover short-term funding problems arising from illiquid assets on their books) but not in the broader sense of inflating the money supply (money in circulation plus vault cash plus reserve balances).
Quantitative easing whereby newly printed notes are handed over to banks in the expectation that bank lending will be revived does nothing to solve the main problem of banking namely defaulting borrowers. The fiscal solution to defaulting borrowers involves giving an annual $1500 housing benefit to all United States citizens in reduction of their toxic bank overdrafts where appropriate, these toxic debts will then cease to be toxic.
Well it’s nice to see someone who can keep 3-4 balls in the air. But Lena this is not the point.
I have £xxx, in real money (unless you keep stealing it with your market collapses…). I will let you have this to play with if you guarantee me a sensible return, no if’s no but’s. It’s up to you to find places to invest it. That’s your job (not to make a merry go round).
If not I’ll put it under bed for a rainy day.