Wednesday, January 20, 2010

Leftovers - Radio Show 1/16/2010

The Baseline Scenario had a post in which Kevin Drum is asking why President Obama has not, with respect to financial regulatory reform, let us know what side he is on.  James Kwak notes there is no powerful lobbyist support for financial regulatory reform, unless you count Elizabeth Warren who is the Chairperson of the TARP Congressional Oversight panel.  Drum cites FDR's 1936 gauntlet to the bankers and Kwak says it is not too late for Obama to pick up the mantle.

President Obama has three problems in seeking financial regulatory reform and a sustainable economic recovery in which there is job creation: Tim Geithner, Larry Summer, and the people who recommended them.  The economist, Randall Wray, is calling for Geithner to be replaced and a new economic team installed which recognizes: 1) banks are not facing a liquidity crisis, but are insolvent, 2) saving financial systems does not save the economy, 3) all bailouts and guarantees to financial institutions need to be unwound, and 4) a need to understand government finance.

Bill Black, who is a professor of economics and law at the same University as Wray and who has regulatory experience with the unwinding of the Savings and Loan bubble of the 90's, has an article delineating the history of the Federal Reserve's opposition to regulation despite Bernanke's recent statements.  He particularly concentrates on the Greenspan and Bernanke periods, including Bernanke's appointing an economist, Patrick Parkinson,  with no regulatory experience and who has publicly stated derivatives do not need regulation as the Fed's top regulator.

Prior to President Obama announcing a 15 basis points tax on banks liabilities if they have assets of $50 billion or more and accepted TARP money, The Baseline Scenario put forward the argument for a supertax on bank bonuses.  It is expected to raise $90 billion dollars over 10 years, but TARP losses are approximately $117 billion.  While banks call it unconstitutional, others say it does not go far enough.  Some Congressmen have proposed a 50% tax on bank bonuses.  The UK and France already have a tax on bank bonuses but they assessed it wrong by making the banks pay the tax rather than the bankers.

What has not been disclosed in the vast majority of stories about the proposed bank tax is that the tax is deductible on corporate tax returns, consequently reducing the economic impact to the banks by approximately 35%.

Bernanke has been arguing that the housing bubble was not caused by low interest rates but a lack of regulation.  To that end Bernanke has engaged in a direct argument with John Taylor over the effectiveness of the Taylor Rule, which is designed to indicate the appropriate Fed target interest rate. Tyler Cowan has written on the Taylor-Bernanke argument and the failure of the Fed to critique its monetary policy. Taylor has an op-ed piece which is direct reply to Bernanke in which he criticizes the Fed's inflation forecasts and failure to develop a vigilant program for detecting bubbles.  Taylor also has his own blog.

Richard Alford, who is a former NY Fed economist, wrote an article, "Why Bernanke's Defense of Super Low Interest Rates Does Not Hold Up", argues Bernanke's definition of deflation does not hold with Bernanke's favorite  favorite inflation indicator, the PCE.  Alford believes that between 1996 and 2006, there was a fundamental mismatch between the causes of disinflation, unemployment, and the policy steps taken in response with undesirable domestic side effects.  He holds that the Fed should have listened to the many voices after 2002 warning about trade imbalances and decline in private savings.

Tom Duy in his Fed Watch says "It's Not About Interest Rates Yet" and the Fed will hold interest rates at low, rock bottom levels.  Consumers have failed to resume spending,, retail activity remains well below the trend expected in 2007, and there has been no offsetting improvements in trade balances.  The underlying rate of growth is doubtful, industrial production is improving, the reversal of unemployment is elusive, households are hobbled, and the trade imbalance is not turning around.  There is little likelihood interest rates will be raised and the possibility of future asset purchases may be resumed is not unlikely.  I have been saying for some time that, historically, the Fed does not raise interest rates until 12-18 months after the end of a recession.

Hussman still remains concerned about the over valuation of the stock market and the weak recovery.  Consequently, he still expects an abrupt market decline within the next few months.

John Prestbo has written that it appears the stock market inflation adjusted return for 12/31/1999 to 12/31/2009 was actually negative.

John Mauldin still believes in the V-shaped recovery and cites a variety of minor improvements, but still sees 2010 as a year of uncertainty and believes that a tax cut is necessary.  However, I would disagree, because tax cuts have seen growth in unemployment, while tax increases have seen growth in employment.  Government spending spurs employment more than private spending.  I think we need to target creating jobs now with government programs and creating more credit availability for small businesses if we are to see job creation in the foreseeable future.

Nouriel Roubini is saying that the second half of 2010 may bring downside surprises with the possibility of a double dip recession.  The stimulus has not spurred top line revenue growth fast enough and thinks US GDP will be anemic at 2%-3%, which is not enough to drive GDP growth or job creation.

The CFTC has announced proposals to limit big energy traders, but they would apply to only the ten biggest position holders.

ECB Governing Council member, Nowotny, warned that US banks need to curb risk taking.

US banks are lifting executive salaries as they but bonuses just as many have predicted.  They want their cake whatever frosting it has on it.

China's $1.2 trillion 2009 exports edged out Germany's $1.17 trillion to become the world's top exporter.

Central banks in South Korea, Indonesia, India, and Singapore bought US dollars to curb the gains in their currencies.  There was also speculation China would let its yuan rise.

Bullard, St. Louis Fed President, said global growth, particularly in Asia, is driving the US recovery.  I have been saying and publishing in my blog and in nationally published articles that China has a spending bubble, real estate bubble, and increasing use of leverage.  As China tightens its monetary policy, how will that braking effect the global recovery.  I think the stock market showed us an advertisement for what might happen on 1/12.

UK trade deficit decreased November from $11.4 to 11.0 billion; the Canadian trade deficit was $331 million in November, but it was the 4th monthly deficit in five months.

The German economy was down 5% in 2009 as exports fell 14.7% in Q4 and is estimated to grow 1.2%-1.5% in 2010.

China renewed vows to curb real estate speculation amid concerns over a possible asset bubble and said it will keep an eye on excessive lending.

California's credit rating was reduced another level by S&P, which said the state will run out of cash in April.

Foxwoods Casino (owned by The Pequots tribe) is in financial difficulty.  Since the casino is owned by a sovereign tribe, only they can own the casino.  Where does this leave lenders who have no legal right to foreclose?  Why did the lenders provide credit without addressing this issue in the loan contract?

Heineken is to acquire FEMSA in a $7.7 billion deal.

Treasury auctions:
10 yr TIPS, $10 billion, yield 1.43%, bid-to-cover 2.69, foreign 40.7%.
3yr Treasury, $40 billion, yield 1.49%, bid-to-cover 2.98, foreign 38.0%.
10yr Treasury, $21 billion, yield 3.754% (lower than expected), bid-to-cover 3.01 (strong), foreign 29.02% (Primary Dealers took over 50%).
30yr Treasury, $13 billion, yield 4.640%, bid-to-cover 2.69, foreign 40.7%.


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