James Saft

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

On one point departing Kansas City Fed President Thomas Hoenig and the high-yield bond market agree: current monetary policy is not helping.

Bonds issued to highly indebted and riskier companies have suffered since the Federal Reserve last Wednesday introduced “Operation Twist,” its attempt to suppress longer-term rates and goose investment and speculation.

This should come as little surprise to Hoenig, who retires from the KC Fed on Oct. 1 after a long career as a central banker and banking supervisor, and who has decried the way monetary policy has encouraged the running up of debts.

“When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have in fact bought problems,” Hoenig said on Wednesday in his farewell speech.
The cost of the debts, a drug that isn’t working any more, is becoming clear; from the utterly indifferent reaction in key markets to Fed policy initiatives and from the very poor performance of the economy since the bubble burst.

Hoenig predicts long-term U.S. GDP growth to average around 2.5 percent a year, down from the 3 percent plus the U.S. has enjoyed over the last quarter century. That may sound a slight difference, but if his prediction comes true it will have profound effects. For one thing the same low growth that has been caused by the amassing of debts will make those very debts harder to repay.

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

The question isn’t “will Europe tip the world into recession?” but rather how much worse the euro crisis will make the recession that is already chugging down the tracks.

Markets have been transfixed by the European debt crisis, with its dozens of moving pieces, and its potential to reshape the monetary and political map, to topple banks and to deal a massive shock to the global economy, trade and confidence. High-level meetings in Washington over the weekend were, once again, inconclusive. Some hope for a euro super bazooka bailout vehicle, though such a fund faces obstacles and its chances for lasting success are far from clear.

Investors are right to worry about the unraveling of Europe, but wrong to conflate averting disaster there with a return to rude economic health.

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

HUNTSVILLE, Ala. – That much-anticipated global coordinated easing won’t be global, won’t be coordinated and won’t even be much of an easing.

In 2008 the world got global coordinated monetary easing, with contributions from central banks from Tokyo to Washington.

In 2009 virtually every member of the Group of 20 nations contributed to global coordinated fiscal easing, committing to a total of almost $700 billion in additional spending, or more than 1 percent of global GDP.

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

HUNTSVILLE, Ala. – Tim Geithner went a very long way on Friday to accomplish very little, flying to Poland to pitch to the assembled euro zone finance ministers the same tactics that have worked so poorly in the U.S.

Faced with another debt problem, Geithner once again proposed more debt as the solution, suggesting that Europe should leverage its EFSF bailout fund so it can have enough firepower to buy up the debts of weak euro zone nations. This mislabels a debt problem as a price problem, and is an almost exact analogue to the U.S.’s own tactics in addressing its own financial system problem — creating leveraged funds to buy up toxic debt and thereby massage the balance sheets of banks.

This is the deflationary equivalent of reacting to runaway inflation by deciding to lop a zero off the end of prices; things will appear better but the underlying issue is not resolved. This is borne out in the U.S., where private fortunes continue to be made in banking, but where the system is unable to play its role in capital intermediation. Many lenders are still wary, rightly, of funding U.S. banks and are unconvinced that the toxic debt problem is gone for good.

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

HUNTSVILLE, Ala. — Don’t count on the euro zone getting a leg up from the giants of the emerging markets.

The idea that Brazil, Russia, India and China will use some of their massive foreign reserves to buy up the bonds of weak euro zone countries has a certain symmetry, but it is unlikely to happen and even more unlikely to work if it does.

Brazilian Finance Minister Guido Mantega on Tuesday confirmed that the so-called BRIC nations will discuss help for Europe when they meet next week in Washington in the run-up to the IMF meeting on Sept. 24.

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

HUNTSVILLE, Ala. — It looks as if patriotism is the last refuge of bankers.

Jamie Dimon, chief executive of JP Morgan Chase, on Monday inveighed against new Basel III banking regulations which will impose higher minimum levels of capital adequacy on banks.

“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” Dimon told the Financial Times. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”

HUNTSVILLE, Ala. – It is clear we are living in a strange world when Switzerland, that most euro-skeptic of nations, has tied its fortunes to the success, in its current fragile form, of the euro zone common currency.

The Swiss National Bank on Tuesday shocked the markets when it announced it was imposing, unilaterally and with immediate effect, a cap on the value of its currency against the euro, seeking to shield its economic competitiveness from the massive flows seeking safe haven amid doubts over the euro zone.

This amounts to an extreme expression of confidence in the euro zone’s ability to sort itself out, because if it cannot this policy will fail expensively. It may even fail if the euro does not but if worries about it generate enough of a flow of cash that the SNB turns and flees.

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

HUNTSVILLE, Ala. — With European banks facing mounting funding problems, it is time once again for the tail to try to wag the dog.

Democracy or not, procedure or not, principles or not, a funding crisis could soon put euro zone policy makers in a position where they either take radical steps to resolve their debt crisis, or face having their decisions made for them by events which would overwhelm their banking systems.

That, at least, is the impression given by recent comments from leading bankers. I’d love to tell you they are bluffing, but I am not so sure.

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

HUNTSVILLE, Ala. — If you thought you’d found someplace that was insulated from the economic weakness coming from the U.S. and Europe, well, chances are you are wrong.

Around the world, manufacturing is taking a hit, and the rate of slowing and the suddenness of the move pose a threat not just to the economy, but to financial market valuations.

Take Canada, long held up as a model of economic and financial system management, and supposedly well positioned due to great demand from emerging markets for its natural resources.