Saving the financial system is probably more art than science. One gets that impression, anyway, when reading today’s Page One profile of New York Fed Governor Timothy Geithner. There are a few very juicy tidbits that suggest TG is driving the Fed’s response to the credit crisis, perhaps more-so than Fed Chairman Ben Bernanke. For instance:
Not long ago, I wrote a post about the dollar’s value and its relationship to interest rates. Part of that piece was concerned with the pressure some countries are feeling to break their currencies’ peg to the dollar, in particular the petro states and China. Their economies are importing dollars by the plane-load, which they receive in exchange for exports to the U.S. These countries maintain a constant–or near constant–exchange rate to the U.S. dollar. This peg enables their export industries to continue profiting from sales to the U.S.
The stock market was down again last week, consumer confidence is at 30 year lows, house prices are declining nationwide for the first time. Is there any good news to report about the economy? Indeed there is: a gallon of gas is approaching $4 per gallon, which I think is just super.
Democratic Congresswoman Laura Richardson has even Hillary Clinton beat for selective memory problems. Remember how Hillary kept repeating the Bosnia story? That she dodged sniper fire, etc.? She always knew it was a lie, but she needed a concrete example of her foreign policy experience. It was telling that that was the only story she could come up with. I hope the Clintons (and the Bushes) disappear from American politics permanently.
Today’s top NYT editorial is full of socialism and sophistry. House prices are falling but buyers aren’t yet returning to the market. This means prices may continue to fall. That could compound recessionary pressures that the housing sector is putting on the economy as a whole.
Does anyone remember when Fan and Fred were still thought to be “prudent” lenders? Relative to the CFCs and WMs of the world they may always have been, but they still have far more risk in their portfolios than they should given the taxpayer guarantee backstopping their balance sheets.
If Ben Bernanke keeps his present course, former Fed Chairman Paul Volcker warns we could repeat the 70s. “Core” inflation is still within the Fed’s “comfort zone,” but at a certain point, rising food and energy costs may pull other prices along with them. That’s the opposite of what the Fed is assuming will happen. The Fed appears to believe that food and energy costs will come back down as the economy slows.
Following up on yesterday’s post regarding credit losses, here is an interview with Carlyle’s David Rubinstein from Bloomberg. The article notes that while credit losses have totaled $329b worldwide, banks have been able to raise $247b to offset those losses. Such capital raises dilute the shit out of common shareholders, though to the extent that those shareholders risk losing everything in bankruptcy if banks DON’T raise capital, a smaller share of ownership in the banks’ continuing earnings is an acceptable price to pay.