James Saft

Central bank credit exceeds their grasp

Dec 2, 2011 17:46 UTC

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

To judge by equity markets, central banks have all the credibility in the world, but their reputation just may exceed their actual power.

Markets rallied furiously on Wednesday after six leading central banks acted to give banks access to easy money, a coordinated bid to unblock funding markets which threatened to seize up due to fears over European debts.

The group — the Federal Reserve, the European Central Bank and the central banks of Japan, Britain, Canada and Switzerland — agreed to offer dollar swap lines at a half a percent less interest than previously and pledged to keep these lines in place until early 2013.

In some ways the jubilant market reaction makes sense, though we should be careful about concluding that the outcome of the European crisis has improved by 4 percent simply because shares went up by about that much. Over the long term, central banks have a very hard time affecting the value of anything, though they are excellent at changing the price of things.

What the moves — which are similar to steps taken in 2008 after the collapse of Lehman Brothers — do accomplish is to lessen the chances that a bank gets caught short and collapses because it can’t access dollar funding. The very understandable unwillingness of U.S. banks and money market funds to provide dollars to European banks, many of which are full to the gills with now doubtful European government bonds, had raised this as a real possibility, and a move to mitigate that is welcome. The very existence of the central bank backstop will somewhat ease funding markets, though the days of money market funds lending money cheaply to European banks may well have ended.

Triumph of gold, the anti-investment

Apr 21, 2011 12:23 UTC

In investing, extreme behavior is becoming more mainstream every day.

How else can we interpret the extraordinary moves by the University of Texas’ endowment fund to not only buy nearly $1 billion of gold, equal to about 5 percent of its assets, but to insist on taking physical delivery of the precious metal.

Things really have come to an interesting juncture when the second-largest academic endowment in the U.S., managed and advised by sober, rational people, decides that what they need is insurance against getting, in essence, robbed, via inflation, by fiscal and monetary policy.

Little wonder that gold futures went above $1,500 per ounce for the first time on Wednesday, driven by a laundry list of concerns starting with a falling dollar and not ending with the growing chance of “debt restructuring” (well, default, if you insist) by Greece.

Bonds, risk and Bernanke’s intentions

Feb 10, 2011 20:49 UTC

Will bond investors keep faith with U.S. government debt amid signs of growing global inflation?

In the end, as with all banks, even central banks, it boils down to trust.

Asked on Wednesday at an appearance before the U.S. House of Representatives Budget Committee if the Fed’s $600 billion programme of quantitative easing amounted to monetization — that Peter to Paul transfer when a government prints money to pay for a shortfall — Ben Bernanke said an interesting thing:

“Monetization involves a permanent increase in money supply though money creation. (QE) is a temporary measure that will be reversed. Money will be normalized and there will be no permanent increase in outstanding balance sheet or inflation.”