My comment: Again a waterfall model. They put funds on top of the banks in the faith that somehow, through magics, spells, or any other ritual, it will fall toward main street, toward the real economy.
Again, they walk with one leg (financials), they dismiss the other leg, economy. Again a top-down approach. To put funds into stock markets, credit cards, etc. anything works for them except where funds create real wealth such as building wind mills, railways, cheap houses for the people who lose their former homes, etc. even subsidiasing mortagages in default, subsidiasing interest rates for acquisition of durable goods, machinery, etc. Development is always from below. ------------------------------------------------------------------------------------ Desperate Measures by Desperate Policy Makers in Desperate Times: the Fed Moves to Radically Unorthodox Policies as Economy Is in Free Fall and Stag-Deflation Deepens Nouriel Roubini | Nov 26, 2008 http://www.rgemonitor.com/blog/roubini/254591/desperate_measures_by_desperate_policy_makers_in_desperate_times_the_fed_moves_to_radically_unorthodox_policies_as_economy_is_in_free_fall_and_stag-deflation_deepens Another batch of worse than awful news greeted today Americans getting ready for the Thanksgiving holiday: free falling consumption spending, collapsing new homes sales, falling consumer confidence, very high initial claims for unemployment benefits, collapsing orders for durable goods. It is hard to get any worse than this but the next few months will serve even worse macro news. At this rate of contraction as revealed by the latest data it would not be surprising if fourth quarter GDP were to fall at an annualized rate of 5-6%. Let us discuss next the financial consequences of such desperate news and the desperate policy actions undertaken to stem this nasty stag- deflation… Equity markets have shrugged off today’s and the last week awful news based on a variety of factors: President Elect Obama choosing a first rate economic team; a major fiscal package to be passed by Congress as soon as the new administration takes power; the bailout of Citigroup at terms that – while being a royal rip-off for the US taxpayers – they lead to a bailout of not only the unsecured debtors of Citi but also of the common shareholders; and, most importantly, the Fed, Treasury and FDIC now moving to radical unorthodox policy actions to deal with the credit crunch. As discussed last week in this forum the threat of stag-deflation (recession/stagnation and deflation) and of debt deflation has already forced the Fed into a liquidity trap as the Fed Funds rate is effectively close to 0% and an informal policy of “quantitative easing” has already started has the Fed has flooded financial markets with over $2 trillion of liquidity. And as argued here last week the Fed would be forced into more radical and unorthodox “crazy” policies to prevent deflation, debt deflation and a nasty credit crunch. Indeed, as I predicted then in my piece The Deadly Dirty D-Words: “Deflation”, “Debt Deflation” and “Defaults”. And How Central Banks Will Have to Resort to “Crazy” Policies as We Have Reached Such Bermuda Triangle of a “Liquidity Trap” : “now a desperate Treasury is starting to think about using the remaining TARP funds to directly unclog the unsecured consumer debt (credit cards, student loans, auto loans) market and the securitization of such debt. Desperate times required desperate and extreme actions. Even “Crazier” Policy Actions Are Required to Reduce Long Term Market Interest Rates But even more desperate or “crazier” monetary actions are needed to address the increase in real long term market rates. These actions are needed to prevent deflation from setting in, to reduce the credit spread (the difference between long term market rates and long term government bond yields) and to reduce the yield curve spread (the difference between long term government bond yields and the policy rate)…. Next, the Fed could try to directly affect the credit spread (the spread between long term market rates and long term government bond yields). Radical actions could take the form of: outright purchases of corporate bonds (high yield and high grade); outright purchases of mortgages and private and agency MBS as well as agency debt; forcing Fannie and Freddie to vastly expand their portfolios by buying and/or guaranteeing more mortgages and bundles of mortgages; one could decide to directly subsidize mortgages with fiscal resources; the Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Some of such policy actions seem extreme but they were in the playbook that Governor Bernanke described in his 2002 speech on how to avoid deflation. They all imply serious risks for the Fed and concerns about market manipulation. Such risks include the losses that the Fed could incur in purchasing long term private securities, especially high yield junk bonds of distressed corporations. In the commercial paper fund the Fed refused to purchase non-investment grade securities. Even high grade corporate bonds are not without risk as their spread have massively widened in recent months from 50bps over Treasuries to levels in the 500bps plus range. Also pushing the insolvent Fannie and Freddie to take even more credit risk may be a reckless policy choice. And having a government trying to manipulate stock prices would create another whole can of worms of conflicts and distortions. Finally, the Fed could try to follow aggressive policies to attempt to prevent deflation from setting in: massive quantitative easing; flooding markets with unlimited unsterilized liquidity; talking down the value of the dollar; direct and massive intervention in the forex to weaken the dollar; vast increase of the swap lines with foreign central banks (an indirect and disguised form of forex intervention) aimed to prevent a strengthening of the dollar; attempts to target the price level or the inflation rate via aggressive preemptive monetization; or even a money-financed budget deficit (an idea suggested by Bernanke in 2002 that he termed to be the equivalent of an “helicopter drop” of money in the economy). And this week, indeed, the Fed, together with the Treasury, started to implement some of the “crazier” policy actions that we discussed last week: a) outright purchases of agency debt and MBS to the tune of a whopping $600 billion; b) another $200 billion of loans to backstop the consumer and small business credit markets (credit cards, auto loans, student loans, small business loans); c) an effective policy of aggressive quantitative easing as the balance sheet of the Fed – already grown from $800 billion to over $2 trillion – will be expanded further as most of the new bailout actions and new programs will be financed via injections of liquidity rather than issuance of public debt. Effectively the Fed Funds rate has been abandoned as a tool of monetary policy as we are already effectively at the zero-bound for the policy rate that signals a liquidity trap; and the Fed is now relying on massive quantitative easing and direct purchases of private sector short term and long term debts to try to aggressively push down short term and long term market rates. No wonder that, after announcing $600 billion of purchases of agency debt and MBS the rate on 30 year mortgage rates has fallen overnite by 75bps. Even that radical fall in mortgage rates – the largest daily move in decades – will be of small comfort to debt burdened households as only those who qualify for refinancing will be able to do that and the total average monthly savings on mortgage debt service would amount to a modest $150. Desperate times and desperate economic news require desperate policy actions, even more desperate than any “desperate housewife” could dream of. The Treasury will be issuing in the next two years about $2 trillion of additional debt (on top of having to refinance and rollover another $1 trillion of maturing debt) while the Fed/Treasury/ FDIC are taking on a massive amount of credit risk via outright bailouts and guarantees (TAF, TSLF, PDCF, ABCPFFFMLM, TALF, TARP, Bear Stears, AIG, Citigroup, TALF and another half a dozen new facilities and programs). These policies – however partially necessary – will eventually leads to much higher real interest rates on the public debt and weaken the US dollar once this tsunami of implicit and explicit public liabilities and monetary debt driven by rising twin fiscal and current account deficits will hit a world where the global supply of savings is shrinking – as most countries moves to fiscal deficits thus reducing global savings – and foreign investors start to ponder the long term sustainability of the US domestic and external liabilities. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "World-thread" group. To post to this group, send email to world-thread@googlegroups.com To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/world-thread?hl=en -~----------~----~----~----~------~----~------~--~---
