James Saft

Foreclosures, capital and sickening cures

Oct 28, 2010 12:53 UTC

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

A dilemma at the heart of the response to the financial crisis is that the antidote to so many ills actually causes the symptoms to worsen.

Take for examples bank capital levels and the chaos surrounding home mortgage foreclosures.

Both issues are the fruit of the same tree: the desire to do things quickly, cheaply and with minimal safeguards.
And both, if you want to fix them, are probably going to slow the economy and lower asset prices in the short term.

So over the long term, paradoxically, the economy will slow and asset values fall anyway.

Being in possession of a hammer and sighting a nail, Governor of the Bank of England Mervyn King put it bluntly on Monday: “Of all the many ways of organizing banking, the worst is the one we have today.”

Toxic asset profits, public liability

Oct 26, 2010 15:26 UTC

Hedge funds sponsored by the U.S. Treasury are reporting eye-popping returns, but the costs to taxpayers and households could end up being massive.

Funds created under the Public-Private Investment Program reported annualized net internal rates of return averaging 36 percent through Sept. 30, the Treasury announced on Friday, a figure that could encourage the belief that the banking bailout was a shrewd investment rather than a transfer of wealth.

The PPIP was created in 2009 to allow private investors to partner with the public purse to purchase distressed assets from the banking system, using cheap loans from the government for leverage.

Weakened Fed mulls threats, promises

Oct 19, 2010 12:06 UTC

As any schoolteacher knows but the Federal Reserve will soon learn, threats and promises are the tools of the weak.

Trapped by interest rates that cannot sink below zero, the Fed, it is becoming clear, is not just preparing to engage in a massive new purchase of securities, or QE2, but is also considering a new communication policy it hopes will convince people that inflation, if not recovery, is just around the corner.

Investors expect a second round of ‘quantitative easing,’ or QE2, will take the form of increased purchases of Treasury debt aimed at keeping long-term rates low and encouraging consumers and businesses to go out and spend.

Euro zone faces QE2 pain test

Oct 14, 2010 13:23 UTC

QE2 — a second round of quantitative easing — means that soon the U.S., Japan and Britain will all be busily exporting their deflation, raising the question: Just how much pain can the euro zone take?

If by November we have three of the largest economies printing money and buying up their own debt, the outcome — in fact the intention — will be to drive their currencies lower against their trading partners, opening new international markets for their goods and, by raising the price of imported goods, fighting deflation before its debilitating psychology can take hold.

That is the plan, at any rate, and, unless something else happens, it will force the euro up against all major currencies, including, as it is tied to the dollar, the Chinese yuan. The euro has risen about 9.5 percent against the dollar in the past month, a trend that ultimately will murder European exporters and its stock market.

QE2 to speed triumph of emerging markets

Oct 12, 2010 11:49 UTC

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.

Fed is banking on phony wealth effect

Oct 7, 2010 11:19 UTC

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.

China runs circles round adversaries

Oct 5, 2010 11:26 UTC

If the global currency war was a baseball game, they would have to invoke the “slaughter rule” and send China home the winner.

Motivations and consequences aside, China is so adroit in melding diplomacy, jawboning and action to keep the value of its currency low that you have to feel something approaching compassion for its plodding adversaries from the U.S., Europe and Japan.

China’s latest well played move is its pledge to use some of its massive foreign currency reserves to support poor Greece, which the markets widely believe will default some fine day, European Union support or not.