tag:blogger.com,1999:blog-32103785002006296312024-03-13T19:57:56.947-07:00Mase: Economics and FinanceA review and interpretation of current happenings in the world of economics and financeMase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.comBlogger658125tag:blogger.com,1999:blog-3210378500200629631.post-54592744001473112732012-02-16T06:15:00.000-08:002012-02-16T06:15:28.685-08:00Euro Drops Below $1.30<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style><span style="font-family: Arial; font-size: 10pt;"></span>This morning the value of the Euro dropped below $1.30. The United States should thank the European Union for the diversion it has created. With all the turmoil taking place in Europe, little attention is being paid to the monetary and fiscal policies of the United States and the impact these policies are having on the value of the United States dollar against other major currencies. <br />
<span style="font-family: Arial; font-size: 10pt;"></span> <br />
<div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">As can be seen in the following chart the value of the United States dollar against other major currencies in the world continues its secular decline. In terms of monetary policy and fiscal policy, international financial markets continue to give a negative rating to the United States and continue to see further future declines in the value of the dollar. </span></div><div class="MsoNormal"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-9pd7p1QhlNZz7YsLyRFtCOSlDFQmjfh9uzvzBDZNbWL_BguuX8hXfb2mqTSt5AlZ0VYyMap3QLTfYiiaGRmj7dvRwsTadEbVzvbTVDESEoTmCh9HWnPkgUeVGESBaMVl4w_-YA6afSU/s1600/fredgraph.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-9pd7p1QhlNZz7YsLyRFtCOSlDFQmjfh9uzvzBDZNbWL_BguuX8hXfb2mqTSt5AlZ0VYyMap3QLTfYiiaGRmj7dvRwsTadEbVzvbTVDESEoTmCh9HWnPkgUeVGESBaMVl4w_-YA6afSU/s320/fredgraph.png" width="320" /></a></div><br />
</div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">I continue to believe that, given the current policy leanings of the United States government, that the value of the United States dollar will continue to decline in the future. Since the early 1960s the United States government, both Republican and Democrat, has generally followed a policy of credit inflation that resulted in the United States going off the gold standard and then resulted in the secular decline in the value of the dollar since President Nixon floated the dollar’s price in August 1971. The two exceptions to this secular decline occurred when Paul Volcker was the Chairman of the Board of Governors of the Federal Reserve System in the early 1980s and when Robert Rubin was the Secretary of the Treasury in the Clinton administration in the latter part of the 1990s.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">To me, there the Obama administration has continued the policy of credit inflation carried on by his predecessors and perhaps even improved upon it. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The only times that the value of the dollar has rebounded over the past several years has been when there has been a “flight to quality” in US Treasury securities. Other than this the value of the dollar has continued to decline except relative to the Euro. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Again, it seems to me that the United States should thank the European officials for all their follies because they have taken attention away from the political mess in the United States and the continued weakness in the value of the United States dollar in the world. </span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com4tag:blogger.com,1999:blog-3210378500200629631.post-43280011838262022972012-02-15T11:10:00.000-08:002012-02-15T11:10:04.967-08:00The Progress of the Economic Recovery in the United States<style>
<span id="goog_645375359"></span><span id="goog_645375360"></span>
<span id="goog_1082271140"></span><span id="goog_1082271141"></span>
<span id="goog_258698450"></span><span id="goog_258698451"></span>
<span id="goog_1608364188"></span><span id="goog_1608364189"></span>
<span id="goog_1650661768"></span><span id="goog_1650661769"></span>
<span id="goog_1377014161"></span><span id="goog_1377014162"></span>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The United States economy is growing. However, the United States economy is not growing very fast and the growth does not appear to be very deep. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">January figures for Industrial Production were released today and about all one can say about the numbers is that the rate of growth is positive but modest. And, the rate of growth seems to be declining. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Year-over-year, industrial production grew at a 3.4 percent annual rate in January 2012. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">However, this is down from a 3.9 per cent, year-over-year, rate of growth in the fourth quarter of 2011 and down from a 6.2 percent, year-over-year, rate of growth in the fourth quarter of 2010. In the fourth quarter of 2009 the economy actually declined by 5.5 percent, year-over-year. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The numbers for industrial production are not inconsistent with the pattern of growth, year-over-year, of real Gross Domestic Product. In the fourth quarter of 2011, the year-over-year rate of increase in real GDP was 1.6 per cent. In the fourth quarter of 2010, the similar measure stood at 3.1 percent. For the fourth quarter of 2009, like the figure for industrial production, the economy actually declined by 0.5 per cent.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Looking at the numbers in this way does not give one the upbeat feeling one can often get from just looking at the month-to-month change in the numbers.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Furthermore, information on the capacity utilization of industry (also released today) and the under-employment of working age people still indicates that there is a massive problem in our use of physical capital and of human capital. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Capacity utilization in manufacturing stands at 78.5 percent in January. That is, more than 20.0 percent of our industrial capacity is standing idle! The important thing to me here is that the capacity utilization in the United States has been on a downward path since the 1960s. Please check the chart below. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Reading the chart from the left to the right shows a dramatic downward trend with each subsequent peak in capacity utilization being lower than the one previous to it. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The question that remains to be answered is whether or not the trend will be continued with the “peak” in capacity utilization we are going to reach this time around. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The United States has a growing mis-match in the industrial capacity it has built and the industrial capacity that is useful. This mis-match must be worked off…there is not an over night solution to this problem. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The same situation exists in the labor markets. The under-utilization of working age people has grown since the 1960s. In the 1960s about one in eleven or twelve people in the United States were under-employed. The measure of under-employment now stands somewhere between one in four or one in five people that are of working age. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The United States has a major problem. Jobs and industrial capacity are not matched with the present makeup of our human and physical capital. These under-employed persons and this under-utilized plant and equipment are not going to be matched up any time soon. Thus, under-employment of labor and under-utilization of industrial capital are going to be around for a long time. And, the rates of economic growth we are experiencing will not do much to help the situation.</span><br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUGKvHL7O26dsF2y9GO3Qa1bleDyggDjedfapRtcwgz3JMTygmRkIWLThpSGrRAWT3w0_SBmh4M1J3Pff5ViS32fL9fsHBBh-Dw-IGCNDa310wNpuOa2LEltny57Y08j-On8cs6_GFBwE/s1600/Untitled.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUGKvHL7O26dsF2y9GO3Qa1bleDyggDjedfapRtcwgz3JMTygmRkIWLThpSGrRAWT3w0_SBmh4M1J3Pff5ViS32fL9fsHBBh-Dw-IGCNDa310wNpuOa2LEltny57Y08j-On8cs6_GFBwE/s320/Untitled.png" width="320" /></a></div><br />
</div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com6tag:blogger.com,1999:blog-3210378500200629631.post-34254135137766041722012-02-14T07:24:00.000-08:002012-02-14T07:24:16.333-08:00The European Model: Broken Beyond Repair?<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I am really tired of the German bashing!</span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The model for the Euro was unsustainable.<span style="mso-spacerun: yes;"> </span>But, the lessons learned from the effort should not be taken lightly.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The major lesson from the experiment with the Euro is that a currency area cannot be set up without a central political body that is strong enough to enforce the rules of the currency area.<span style="mso-spacerun: yes;"> </span>One can have separate states within the area, but, as in the United States, there must be a political union with enough authority to dominate the individual components of the area. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">A second lesson from the experiment is that the economic model based upon “social engineering” is not sustainable.<span style="mso-spacerun: yes;"> </span>The German economic model of low inflation, high labor productivity, and fewer government handouts has worked better than the model that includes substantial credit inflation, an inefficient private sector, and bloated government payrolls.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, as usual, the “losers” in the game cry foul against the successful.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The press review from around Europe does not make pleasant reading for the German foreign ministry these days.<span style="mso-spacerun: yes;"> </span>‘Look at this stuff, it’s just unacceptable,’ laments one diplomat—pointing to a front-page article from Il Giornale, an Italian newspaper owned by Silvio Berlusconi.<span style="mso-spacerun: yes;"> </span>The piece links the euro crisis to Auschwitz, warns of German arrogance and says that Germany has turned the single currency into a weapon.<span style="mso-spacerun: yes;"> </span>The Greek papers are not much better.<span style="mso-spacerun: yes;"> </span>Any taboos about reference to the Nazi occupation of Greece have been dropped long ago.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Across southern Europe, the ‘ugly German’ is back—accused of driving other nations into penury, deposing governments and generally barking orders at all and sundry.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is also a much more polite form of German-bashing going on at the official level.’ (<a href="http://www.ft.com/intl/cms/s/0/9d38ffee-5639-11e1-8dfa-00144feabdc0.html%23axzz1mGnbTALH">http://www.ft.com/intl/cms/s/0/9d38ffee-5639-11e1-8dfa-00144feabdc0.html#axzz1mGnbTALH</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Economics, at one time, was defined as the study of the allocation of scarce resources.<span style="mso-spacerun: yes;"> </span>That is, there are limits to what a country can attain given the amounts of human capital and physical capital that are available to it.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Over the past fifty years, many countries came to believe that they had overcome these limitations and through credit inflation and social engineering they could achieve something beyond the boundaries set by the amounts of human capital and physical capital that existed. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Some of these programs included government created credit inflation that kept workers locked in jobs that were becoming legacy positions and that also promoted a home ownership scam that seemingly created middle-class piggy-banks; government hiring practices that resulted in excessive overstaffing of bureaucratic agencies (about one-third of the Greek workforce is in the public sector); and pension benefits that allowed for very comfortable early retirements.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The economies of these countries just did not have the resources to sustain these programs.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If everyone is following these policies then everyone is basically in the same boat. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">However, a problem occurs if one or more other countries do not follow the same policies.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The eurozone is having a problem because Germany, for one, has not taken the path most travelled.<span style="mso-spacerun: yes;"> </span>And, over time, their more disciplined approach came out on top. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Germany now has the wealth, the resources, that others don’t.<span style="mso-spacerun: yes;"> </span>Consequently, those that don’t have the wealth and are now struggling believe that Germany should compensate them for Germany’s success.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The article quoted above states that the weaker countries in Europe are asking three things from the Germans: first, to commit more money to a European “bailout” fund that would be “so large that it would frighten the markets from speculating against southern European bonds”; second, to commit to Eurobonds to make the debts of individual countries the debts of the eurozone itself; and to stimulate the German economy so that Germans would buy more goods from southern Europe.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">These requests, in my mind, are totally off-the-wall!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Germans should not give in on these issues and they should maintain their position of strength.<span style="mso-spacerun: yes;"> </span>And, the German-bashing should stop!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The eurozone is not going to get stronger by making every one of its members weaker!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is because the eurozone is not the only game going on in the world.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Other areas in the world are maintaining their discipline and can only benefit, competitively, from a weaker eurozone.<span style="mso-spacerun: yes;"> </span>Need I mention China?<span style="mso-spacerun: yes;"> </span>And, Brazil?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, these other areas of the world are growing in relative economic strength as Europe fights its own little family fights.<span style="mso-spacerun: yes;"> </span>The pressures coming from this competition are not going to go away and Europe, as a whole, may have already postponed dealing with its problems for so long that it may still be years away from a resolution in which it becomes as competitive as it needs to be in the world of the 21<sup>st</sup> century. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I still fail to see anyone in Europe that I would call a leader.<span style="mso-spacerun: yes;"> </span>Consequently, I find it hard to defend the continued existence of the Euro, as we now know it.<span style="mso-spacerun: yes;"> </span>At this point in time, I see several countries leaving the Euro over the next couple of years.<span style="mso-spacerun: yes;"> </span>I see a much-diminished role for the eurozone in the world, both economically and financially.<span style="mso-spacerun: yes;"> </span>I also see economic social engineering receding as a government policy in the western world even though Paul Krugman and Joseph Stiglitz will still be around.<span style="mso-spacerun: yes;"> </span>The era of economic social engineering is past its prime, even though this fact is not fully recognized yet. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The United States should be grateful to the eurozone for the way it has conducted itself, otherwise we would be talking more about the fifty-year weakness in the value of the US dollar. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com13tag:blogger.com,1999:blog-3210378500200629631.post-14967681870320978442012-02-13T06:43:00.000-08:002012-02-13T06:43:37.320-08:00Depression in Europe?<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
@font-face
{font-family:"Lucida Grande";
panose-1:2 11 6 0 4 5 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-520090897 1342218751 0 0 447 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There seems to be growing optimism in the United States that the economic recovery is picking up steam.<span style="mso-spacerun: yes;"> </span>This is all fine and good, but I still believe that the major potential bump in the road for the United States is the economic and financial situation in Europe. (See my post of January 4, <a href="http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe">http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe</a>.)</span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Now we have the new austerity program passed by the Greek parliament and the unrest in the streets of Greece protesting the austerity program.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, the new austerity program, at this point, does not end the concern over whether or not this new plan will be sufficient to end the Greek insolvency.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Greece is insolvent.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">With the government’s new austerity program, however, Greece will get a new financial bailout.<span style="mso-spacerun: yes;"> </span>The question now becomes: will this new bailout program buy Greece enough time to get its ship in shape so that it can work its way out of its insolvency?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Some think not.<span style="mso-spacerun: yes;"> </span>For example, Wolfgang M</span><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">ünchau writes in the Financial Times, “My central expectation is that the program will happen.<span style="mso-spacerun: yes;"> </span>A period of calm will set in, but after a few months it will become clear the cuts in Greek wages and pensions have worsened the depression…. Before long, another round of haircuts will be beckoning.” (This from the article “Why Greece and Portugal ought to go bankrupt,” <a href="http://www.ft.com/intl/cms/s/0/57485f60-540a-11e1-8d12-00144feabdc0.html%23axzz1mGnbTALH">http://www.ft.com/intl/cms/s/0/57485f60-540a-11e1-8d12-00144feabdc0.html#axzz1mGnbTALH</a>.)<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">There is another problem on the horizon, however, and that is the fact that a new Greek government will be be elected in April.<span style="mso-spacerun: yes;"> </span>The expected winner at this time is Antonis Samaras.<span style="mso-spacerun: yes;"> </span>The question is, what will this new government do after it assumes power?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">Münchau argues: “I cannot see how this (the bailout) is going to work politically.<span style="mso-spacerun: yes;"> </span>For a new prime minister who contemplates a full term of four years, the temptation to pull the plug and blame the mess on his predecessors must be big. He will then have four years to rebuild the country from the rubble of a eurozone exit.<span style="mso-spacerun: yes;"> </span>It would be politically much riskier for him to stick to a program that he himself says does not work, and which will keep his country in a depression for the length of his mandate—possibly beyond.”<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">And this is exactly the dilemma a “turnaround” leader faces…do I struggle along with the things that were left me…or, do I clean house and start with as clean a slate as possible. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">I have successfully completed three corporate turnarounds and to me there is no choice.<span style="mso-spacerun: yes;"> </span>The nice thing about being brought in to turnaround an organization is that you have a certain time period to blame everything on the previous management and clean house.<span style="mso-spacerun: yes;"> </span>If you don’t do the house cleaning right up front, however, you lose most of your leverage to change things.<span style="mso-spacerun: yes;"> </span>The decision is not difficult: you start with as clean a slate as possible.<span style="mso-spacerun: yes;"> </span>In the case of Greece, then, declare bankruptcy</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">Greece is insolvent.<span style="mso-spacerun: yes;"> </span>“To rebuild itself, Greece needs a functioning economic infrastructure, a modern labor market, and a less tribal political system.”<span style="mso-spacerun: yes;"> </span>It also needs less corruption throughout its culture.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">This is not the only set of problems that Greece…and Europe…faces.<span style="mso-spacerun: yes;"> </span>New data on the economies of Europe coming out this week are expected to be rather dismal.<span style="mso-spacerun: yes;"> </span>The forecasts for the fourth quarter GDP of the eurozone run from a 0.4 percent to a 0.6 percent contraction.<span style="mso-spacerun: yes;"> </span>These figures include the fact that even Germany seems to be in a decline.<span style="mso-spacerun: yes;"> </span>Industrial production figures for December are also to be released this week and some analysts see a decline in this measure of more than one percent. (<a href="http://www.ft.com/intl/cms/s/0/f9558702-53e1-11e1-bacb-00144feabdc0.html%23axzz1mGnbTALH">http://www.ft.com/intl/cms/s/0/f9558702-53e1-11e1-bacb-00144feabdc0.html#axzz1mGnbTALH</a>)<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">There is some feeling that the first quarter of 2012 may find growth in positive numbers, but not by much.<span style="mso-spacerun: yes;"> </span>Germany and others may experience some kind of recovery then, but the southern peripheral countries are not expected to start growing again for some time.<span style="mso-spacerun: yes;"> </span>And, with unemployment in excess of twenty percent in some of these countries and continued government austerity, 2012 prospects remain quite gloomy.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">The next question, though, is where the pressure will be applied next.<span style="mso-spacerun: yes;"> </span>Münchau contends that Portugal is also bankrupt and should follow Greece in declaring bankruptcy.<span style="mso-spacerun: yes;"> </span>Will the international investors now turn their attention to Portugal?<span style="mso-spacerun: yes;"> </span>I wouldn’t be surprised.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Lucida Grande";">Countries…businesses…individuals…do not resolve their financial difficulties until they resolve them.<span style="mso-spacerun: yes;"> </span>Continued bailouts only tend to postpone a final solution.<span style="mso-spacerun: yes;"> </span>They very seldom correct the insolvency that is causing the problem.<span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com2tag:blogger.com,1999:blog-3210378500200629631.post-17480617651066303582012-02-10T07:19:00.000-08:002012-02-10T07:19:00.777-08:00The Problems in Housing and the Labor Markets Will Not Go Away Soon<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"></span>President Obama announced a mortgage plan aimed at giving relief to homeowners that are facing problems with their mortgages.<span style="mso-spacerun: yes;"> </span>Yet, this is just putting a finger in a hole in the dike. </div><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The problem is that after fifty years of governmental credit inflation many homeowners are facing the reality that their homes were grossly over-valued and that they assumed too much debt to finance their “American Dream.” </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">One out of every four or five houses has a mortgage on the property that is greater than the market value of the house.<span style="mso-spacerun: yes;"> </span>Many of these homes are now valued at only 75 percent or less of their mortgage value.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Regardless of a government “solution” to this situation, either through debt relief or a renewed bout of government-induced inflation, the attitudes and expectations of homeowners have changed.<span style="mso-spacerun: yes;"> </span>These homeowners have been “burned” and are unlikely to expose themselves to this possibility again in their lifetimes.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Even if the market stabilizes in the near term and housing prices bottom out, many potential home buyers will be much more financially conservative in the future given the experience that they have just been gone through.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The reluctance to buy a home will also be affected by the situation in the labor market.<span style="mso-spacerun: yes;"> </span>And, here again there is a longer-term problem that will not be resolved in a matter of months.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">One out of every four or five people of employment age are either unemployed, employed in a part time job but would like to be employed full time, or are not seeking employment.<span style="mso-spacerun: yes;"> </span>The percentage of working age people in the labor market has recently dropped to a level not seen for several decades.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">With conditions in the labor market so tenuous, people will not have the same resources to purchase housing as they have had in the recent past.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">But, how is this under-employment situation in the labor market going to be resolved in the short-run?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The fundamentalist preacher Paul Krugman cries out for short-run government “solutions” to put people back into the jobs that were in existence at another time.<span style="mso-spacerun: yes;"> </span>Krugman writes, “We have become a society in which less-educated men have great difficulty finding jobs with decent wages and good benefits.”<span style="mso-spacerun: yes;"> </span>For example, “Adjusted for inflation, entry-level wages of male high school graduates have fallen 23 percent since 1973.” (<a href="http://www.nytimes.com/2012/02/10/opinion/krugman-money-and-morals.html?ref=opinion">http://www.nytimes.com/2012/02/10/opinion/krugman-money-and-morals.html?ref=opinion</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Maybe, part of this problem is that the government has emphasized putting high school graduates into what have historically been entry-level jobs, jobs that are shrinking as a proportion of the jobs available due to changes in technology and needed training.<span style="mso-spacerun: yes;"> </span>And, what about those that do not graduate from high school…they are in an even less-favorable position.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Elsewhere in the New York Times, we read that “Rich and Poor Further Apart in Education.” (<a href="http://www.nytimes.com/2012/02/10/education/education-gap-grows-between-rich-and-poor-studies-show.html?hp">http://www.nytimes.com/2012/02/10/education/education-gap-grows-between-rich-and-poor-studies-show.html?hp</a>) “Education was historically considered a great equalizer in American society, capable of lifting less advantaged children and improving their chances for success as adults.<span style="mso-spacerun: yes;"> </span>But a body of recently published scholarship suggests that the achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">This is a gap that cannot be overcome quickly.<span style="mso-spacerun: yes;"> </span>And, it is a gap that cannot be overcome by national tests and government spending. </span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Since the end of World War II, politicians have generally believed that they could get elected and re-elected by keeping people employed and by helping more and more people become homeowners.<span style="mso-spacerun: yes;"> </span>This underlying emphasis has resulted in the fifty years of credit inflation the United States has experienced since the early 1960s.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">People were kept employed by short-term government economic programs that put the unemployed back into the jobs that held previously before becoming unemployed.<span style="mso-spacerun: yes;"> </span>And, why should someone going through high school be concerned about employment when they knew that the government would continue to stimulate jobs in heavy manufacturing and industry and keep them employed.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The government continued to promote these kinds of stimulus programs even though under-employment increased steadily over the past fifty years and the capacity utilization in manufacturing was declining over the same time period.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The federal homeowner programs and credit inflation created in the housing sector over the same time period created a “piggy bank” for many people not only helping them to own their own home, but also to allow them the ability to borrow more and more money to binge on consumer goods.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">So, we ended up with the “less wealthy” being under-educated and hence not readily employable in the labor markets of the 21<sup>st</sup> century and with many of these same people owning homes and over-their-heads in debt.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">This is a situation that does not have an easy or ready solution.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Under-employment can only be resolved over an extended period of time.<span style="mso-spacerun: yes;"> </span>The same holds for people with too much debt.<span style="mso-spacerun: yes;"> </span>Short-run stimulus is not the answer.<span style="mso-spacerun: yes;"> </span>In fact, the emphasis on short-run stimulation has created and further exacerbated the situation.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">A safety net may be necessary for many of the under-employed and overly leveraged.<span style="mso-spacerun: yes;"> </span>In fact, the efforts to keep people in “legacy” jobs and to put families in homes to make their life better may have resulted in a whole generation of individuals being excluded from the mainstream.<span style="mso-spacerun: yes;"> </span>They are going to need some economic support. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">But, the only real solution to the labor market situation is a long run one and it begins with education and the environment that surrounds the culture of education.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The situation in the housing market will only get better as people lower their expectations and get their balance sheets back in order.<span style="mso-spacerun: yes;"> </span>This, too, will take a substantial amount of time because it is related to a major change in expectations.<span style="mso-spacerun: yes;"> </span>People, in the future, just cannot expect a “free ride.”<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com1tag:blogger.com,1999:blog-3210378500200629631.post-77758424683241142472012-02-06T11:53:00.000-08:002012-02-06T11:53:40.345-08:00Developments in the Banking Sector: Large Amounts of Funds Still Going to Foreign Institutions<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10pt;"></span><span style="font-family: Arial; font-size: 10pt;">There seem to be three major stories in commercial banking these days: first, the cash going to foreign-related institutions; second, the pickup in non-real estate business lending; and three, the continued weakness in consumer borrowing.</span><br />
<div class="MsoNormal"></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Excess reserves at depository institutions in the United States averaged $1,509 billion in the two weeks ending January 25, 2012. Cash assets at commercial banks in the United States were $1,597 billion in the week ending January 25, 2012.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">In December 2010, excess reserves were $1,007 billion and cash assets $1,082 billion. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Both excess reserves and cash assets rose by about 50 percent during this time period.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">In recent years excess reserves at depository institutions and cash assets held by commercial banks have moved closely together. The reserves the Fed has injected into the financial system have gone primarily into cash assets. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">It is interesting to note that of the $590 billion increase in cash assets at commercial banks, $403 billion went onto the balance sheets of foreign-related institutions in the United States.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">For the week ending January 25, 2012, roughly 47 percent of all the cash assets held in commercial banks in the United States were held on the books of foreign-related institutions. This is up from about 32 percent in December 2010. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Note: These foreign-related institutions hold only 14.5 percent of the total assets in the United States banking system (up from about 11 percent a year earlier) so they are now holding a disproportionate share of the cash assets in the banking system. </span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;"> </span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">On the liability side of these foreign-related institutions there was a net increase in “net (deposits) due to foreign offices of $625 billion and a decrease in US held deposits (large time and other deposits) of $185 billion. Thus, the right side of the balance sheets of these foreign related institutions rose by a net amount of $440 billion related to movements of funds “offshore”, i.e., primarily to Europe. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The Federal Reserve has not only supplied liquidity to the European continent through dollar swaps with foreign central bank, it has supplied funds to international financial markets through its open market operation. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">It is not expected that many of the funds going to these foreign-related financial institutions will go into loans in the United States market as these institutions only hold about 8 to 9 percent of all commercial loans in the United States. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Therefore, when we look at what the Federal Reserve has done, we have to realize that only about fifty percent of the funds the Fed has injected into the banking system has gone to domestically chartered banks. It is only this domestic portion of the Fed’s injection of funds that can have the greatest possibility of impact on business lending and hence economic growth. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Cash assets did increase at domestically chartered commercial banks during this time period: the increase was about $112 billion as total assets grew by $243 billion. At the largest twenty-five banks in the country, the increase was $75 billion in cash assets and $130 billion in total assets. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The important thing is that business loans (Commercial and Industrial loans) at commercial banks have been increasing, primarily at the largest twenty-five domestically chartered banks in the United States. From December 2010 to December 2011, C&I loans rose by $123 billion in the commercial banking system, with $94 billion of this increase coming at the largest twenty five banks, a 15 percent year-over-year rate of increase. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Business loans did increase at the rest of the domestically chartered US banks, but they rose by only about $18 billion or about 5 percent year-over-year. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Over the past thirteen-week period, however, C&I loans at these smaller banks hardly increased at all and actually fell over the last four-week period. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">At the largest banks, business loans continued to rise over the past four weeks ($15 billion) and over the past thirteen weeks ($35 billion). My question about these increases has to do with the uses that the funds are being put to. The national invome statistics showed that inventories increased in the latter part of last year and these loans could have gone to increase the inventory buildup. Many economists seem to believe that given the weak consumer behavior (see below) that the inventories will decline in the first quarter of 2012 and this will result in some weakness in business loans. Alternatively, some of the borrowing could be so that corporations could buildup cash positions for either acquisitions or for stock repurchases. There does not seem to be any inclination to increase spending on business plant or equipment. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Commercial real estate loans continue to decline at the smaller banks in the country although there has been a pickup in these loans at the largest banks. All-in-all, lending on commercial real estate continues to go down: and given all the loans that will mature over the next 12 to 18 months, with many of them being unable to re-finance, there is a continued likelihood that these loans will continue to decline in the near future. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">On the other hand, residential mortgage lending rose across the board at commercial banks. Although residential mortgages fell on the books of the banks from December 2010 to December 2011 by $12 billion, over the past thirteen-week period, these mortgages grew by almost $19 billion, with $11 billion of this increase coming in the last four weeks. And, the increases came in all sizes of banks.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">This line item will be interesting to watch over the upcoming months since housing prices continue to decline and foreclosures and bankruptcies seem continue to occur at a rapid pace. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Just a further note on real estate lending: home equity loans have declined over the last thirteen weeks and held roughly constant over the past four. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Counter to this increase in residential spending is the decline in the dollar amount of consumer loans on the books of the banks. Over the past six months consumer lending has dropped by a little more than $6 billion with a major decline of roughly $15 billion coming over the last four weeks. Most of this decline has come in credit card debt outstanding at the banks. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">This information on consumer lending seems to point to a continued weakness in consumer expenditures. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">In terms of the domestic economy it seems as if there is not much encouragement for a stronger economic recovery in the banking numbers. There seems to be little demand for any kind of loans in the current environment, but, one also gets the feeling that the banks, especially the smaller ones, are not willing to lend even if there were an increasing demand for loans. </span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com8tag:blogger.com,1999:blog-3210378500200629631.post-41891341799837104852012-02-03T07:59:00.000-08:002012-02-03T07:59:48.054-08:00Federal Reserve Report: No Need for QE3<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I keep reading that some people want to have the Federal Reserve begin a new round of quantitative easing…QE3.</span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I see nothing in the financial figures that calls for more quantitative easing. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">For one, there seems to be no pressure on interest rates.<span style="mso-spacerun: yes;"> </span>Looking over the last 13-week period the yield on the 10-year US Treasury (constant maturity) has remained relatively constant.<span style="mso-spacerun: yes;"> </span>The weekly average for the week of November 4, 2011 was 2.07 percent: for the week of January 27, 2012 the weekly average was 2.01.<span style="mso-spacerun: yes;"> </span>And, the market yield on 10-year Treasuries has been below 2.00 percent all of this week. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The European sovereign debt situation has certainly contributed to this weakness in yields.<span style="mso-spacerun: yes;"> </span>Hence, there does not seem to be any demand pressure on interest rates at this time. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Economic growth continues to be modest and consequently is not adding any demand pressure on rates. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The commercial banking system is quiet and even though bank closures average around 2 per week adjustments are being made smoothly and with little or no disruption to the industry.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Excess reserves in the banking system have fluctuated around $1.5 trillion over the past three months indicating little or no pressure on the financial system on the loan demand front.<span style="mso-spacerun: yes;"> </span>This, too, is consistent with the modest economic growth. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Overt Federal Reserve actions have been absent over the past 13-week period indicating that the Fed is allowing operating factors to work themselves out without undue disturbance to the monetary system.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The big change on the Fed’s balance sheet has to do with the European debt crisis.<span style="mso-spacerun: yes;"> </span>Central bank liquidity swaps have risen by a little more than $100 billion since November 2, 2011 as the Fed moved to assist central banks in Europe.<span style="mso-spacerun: yes;"> </span>It appears as if part of this increase went to take pressure off the market for Reverse Repurchase agreements with foreign official and international accounts.<span style="mso-spacerun: yes;"> </span>The account recording this activity fell by about $41.0 billion over the same time period.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This has resulted in a net increase of about $53 billion in Reserve Balances at Federal Reserve banks but this has had little or no immediate impact on the United States banking system.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Actually, Reserve Balances at Federal Reserve banks declined by $7.0 billion over the past four-week period.<span style="mso-spacerun: yes;"> </span>The increase in central bank liquidity swaps was just about totally matched by the decline in reverse repos with foreign official and international accounts as other factors removed reserves. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In terms of Federal Reserve open market operations, the securities account at the Fed actually declined in both the latest 4-week and 13-week periods.<span style="mso-spacerun: yes;"> </span>Securities bought outright dropped by a little more than $11.0 billion since November 2 and by a little more than $5.0 billion since January 4.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Over the past 13 weeks, about $20.0 billion in federal agency issues and mortgage-backed securities ran off in the portfolio.<span style="mso-spacerun: yes;"> </span>The Fed only replaced this runoff by a little more than $8.0 billion.<span style="mso-spacerun: yes;"> </span>In the latest 4-week period, the runoff in securities was across the board. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The conclusion I draw from the latest Federal Reserve statistics is that the Fed has had a relatively peaceful 13 weeks.<span style="mso-spacerun: yes;"> </span>Money continues to flow into the United States Treasury markets seeking a “safe haven” from what is going on in Europe.<span style="mso-spacerun: yes;"> </span>This, along with the mediocre economic growth in the country, has taken pressure off the Fed to buy more securities in order to keep interest rates low.<span style="mso-spacerun: yes;"> </span>The fact that the securities portfolio at the Fed has declined over the past 13 weeks indicates that the Federal Reserve is letting market forces keep interest rates low and, for a change, is staying out of the market.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If these conditions continue, I see no justification for any talk about another round of quantitative easing. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The money stock numbers are continuing to maintain excessive growth rates.<span style="mso-spacerun: yes;"> </span>The year-over-year rate of growth of the M1 measure of the money stock for the week ending January 24, 2012 is 18.7 percent; the M2 measure of the money stock is growing at 9.7 percent. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Over the past three years I have been arguing that the reason that these money stock growth rates are so high, given the fact that commercial banks did not seem to be lending and that the reserves being pumped into the system by the Fed were going into excess reserves, is that the dire economic conditions have caused individuals and businesses to move their funds from interest bearing assets to transaction assets like currency and demand deposits.<span style="mso-spacerun: yes;"> </span>The very low interest rates on the interest bearing assets also contributed to this movement. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Now, however, it seems as this re-arrangement of liquid asset holdings has slowed down.<span style="mso-spacerun: yes;"> </span>This is something I think we want to keep our eyes on, for it could be that households and businesses have done all they can do to “be liquid” in bad times.<span style="mso-spacerun: yes;"> </span>Thus, we will either see a slow-down in money growth measures (the rates have dropped since the first of November from a 20.0 percent year-over-year rate of growth for M1 and a 10.0 percent rate for M2) or we will see spending starting to increase as these transactions accounts are being used to actually buy things.<span style="mso-spacerun: yes;"> </span>It will be interesting to see what happens here. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If people and businesses do speed up their expenditures, this fact would be another reason why another round of quantitative easing would not be necessary. <span style="mso-spacerun: yes;"> </span>The Fed would have done enough. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com11tag:blogger.com,1999:blog-3210378500200629631.post-64767750037200336032012-02-01T07:54:00.000-08:002012-02-01T07:54:22.238-08:00What Economic Growth in the United States? And, in Europe?<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>The Congressional Budget Office (CBO) just released its forecast for economic growth and what it sees seems to differ substantially from what the Federal Reserve sees. <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The CBO forecast places economic growth (real GDP growth) for the United States at 2.0 percent this year and at 1.1 percent in 2013. (<a href="http://www.nytimes.com/2012/02/01/us/politics/deficit-tops-1-trillion-but-is-falling.html?_r=1&ref=todayspaper">http://www.nytimes.com/2012/02/01/us/politics/deficit-tops-1-trillion-but-is-falling.html?_r=1&ref=todayspaper</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Federal Reserve just released its projections last week.<span style="mso-spacerun: yes;"> </span>Taking the average of the ranges given, the Fed is forecasting that economic growth in 2012 will be 2.5 percent, and, for 2013 will be 3.0 percent. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Hey, these forecasts are going in opposite directions!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The one forecast, that of the CBO, emphasizes the future of the federal deficit: “The deficit will be $1.1 trillion in the current fiscal year, about $200 billion less than in 2011, and will fall sharply in the next three years as a result of tax increases and spending cuts required by existing law…”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The other forecast, that of the Federal Reserve, emphasizes the future of interest rates: short-term interest rates will remain close to zero until well into 2014.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In one sense, it seems as if the consequences of the two forecast are backward.<span style="mso-spacerun: yes;"> </span>In order for the deficit to decline, the economy needs to be growing so that tax revenues will increase and welfare payments will decrease.<span style="mso-spacerun: yes;"> </span>This will not happen if economic growth slows and unemployment increases…as it does in the CBO projection. (See a strong argument on this point, <a href="http://professional.wsj.com/article/SB10001424052970204740904577195352148844134.html?mod=WSJ_Opinion_LEADTop&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204740904577195352148844134.html?mod=WSJ_Opinion_LEADTop&mg=reno-secaucus-wsj</a>.)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Federal Reserve, on the other hand, has short-term interest rates staying extremely low despite the fact that they predict rising rates of economic growth, a condition that usually produces higher levels of interest rates.<span style="mso-spacerun: yes;"> </span>This is because the demand for money generally increases with the rising level of incomes produced by the economic growth.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The major point is, however, that the CBO has produced a pretty dismal economic forecast.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The CBO projection has unemployment rates rising to 8.9 percent in the last quarter of this year, up from 8.5 percent in December 2011.<span style="mso-spacerun: yes;"> </span>Furthermore, the unemployment rate is expected to rise to 9.2 percent in the final quarter of 2013.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is not good!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, what happens to the amount of under-employment if the CBO forecast takes place.<span style="mso-spacerun: yes;"> </span>We certainly would see the under-employment rate stay in the 20 to 25 percent range.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">On top of this is the real threat of recession in Europe.<span style="mso-spacerun: yes;"> </span>The question is, how much does a European recession play into the forecasts of the Congressional Budget Office?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My big fear has been that a recession in Europe will have very negative connotations for growth in the United States.<span style="mso-spacerun: yes;"> </span>(See my post, “Issue Number 1 for 2012: Recession in Europe,” <a href="http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe">http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe</a>.)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Data released yesterday and presented by the Financial Times indicates that the unemployment rate for the eurozone was at 10.4 percent at the end of 2011 for the whole workforce, and was at 21.3 percent for the category “youth.”<span style="mso-spacerun: yes;"> </span>Furthermore, the consensus real GDP growth for the eurozone is at negative 0.3 percent, not a level that is conducive to the reduction in the unemployment rate.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The unemployment rate ranges from 22.9 percent in Spain and 19.2 percent in Greece to 5.5 percent in Germany and 4.1 percent in Austria showing the split that exists within the eurozone, itself. (See ”Eurozone Jobless Rate at Euro-era High,” <a href="http://www.ft.com/intl/cms/s/0/dca5fe48-4bf3-11e1-98dd-00144feabdc0.html%23axzz1l92ForcZ">http://www.ft.com/intl/cms/s/0/dca5fe48-4bf3-11e1-98dd-00144feabdc0.html#axzz1l92ForcZ</a>, and, “Contraction Threat Clouds Euro Zone,” <a href="http://professional.wsj.com/article/SB10001424052970204740904577194442237686180.html?mod=ITP_pageone_3&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204740904577194442237686180.html?mod=ITP_pageone_3&mg=reno-secaucus-wsj</a>.) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">How much impact will this “European Recession” have on the economy of the United States and has it really been taken into account by the forecasters of the CBO and the Federal Reserve System? </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, given the over-extended position of consumers (<a href="http://seekingalpha.com/article/328252-where-is-the-u-s-consumer">http://seekingalpha.com/article/328252-where-is-the-u-s-consumer</a>), corporations (http://seekingalpha.com/article/326412-corporate-confidence-continues-to-wane) , and banks (<a href="http://seekingalpha.com/article/320698-what-s-to-like-about-the-united-states-banking-system">http://seekingalpha.com/article/320698-what-s-to-like-about-the-united-states-banking-system</a>), where might a pickup in spending take place?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Given these facts, I tend to agree more with the economic projections of the Congressional Budget Office than I do with those of the Federal Reserve.<span style="mso-spacerun: yes;"> </span>However, if we do achieve the growth rates of the Congressional Budget Office it would seem that the cumulative federal deficit for the next five years would be closer to the cumulative federal budget deficit of the past five years…in excess of $6 trillion, than what is now being forecast. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In essence…we are going nowhere…fast!</span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-48984083899091878122012-01-31T13:37:00.000-08:002012-01-31T13:37:52.432-08:00Where is the US Consumer?--Part 2<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt;"></span><span style="font-family: Arial; font-size: 10.0pt;">Two pieces of news today that go along with my earlier post about the pressures families are facing in the United States. (<a href="http://seekingalpha.com/article/328252-where-is-the-u-s-consumer">http://seekingalpha.com/article/328252-where-is-the-u-s-consumer</a>). <span style="mso-spacerun: yes;"> </span></span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">First, “Home Prices Tumble.” (<a href="http://professional.wsj.com/article/SB10001424052970204652904577194752102528744.html?mod=WSJ_hp_LEFTWhatsNewsCollection">http://professional.wsj.com/article/SB10001424052970204652904577194752102528744.html?mod=WSJ_hp_LEFTWhatsNewsCollection</a>) “</span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">For November, the Case-Shiller index of 10 major metropolitan areas and the 20-city index both fell 1.3% from the previous month. David M. Blitzer, chairman of the index committee at S&P Indices, also noted that 19 of the 20 major U.S. metropolitan markets covered by the indices in November saw prices decline from October…</span><span style="font-family: Arial; font-size: 10.0pt;"> </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The 10-city and 20-city composites posted annual returns of negative 3.6% and negative 3.7%, respectively, compared with November 2010.”</span><span style="font-family: Arial; font-size: 10.0pt;"> </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Second, “Consumer Confidence Unexpectedly Declines.” (<a href="http://blogs.wsj.com/economics/2012/01/31/consumer-confidence-unexpectedly-declines/">http://blogs.wsj.com/economics/2012/01/31/consumer-confidence-unexpectedly-declines/</a>)<span style="mso-spacerun: yes;"> </span>“U.S. consumer confidence in January gave back some of the huge gains posted in the previous two months, according to a report released Tuesday. Views on labor markets darkened.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">The <strong><span style="font-family: Arial; font-weight: normal; mso-bidi-font-weight: bold;">Conference Board</span></strong>, a private research group, said its index of consumer confidence retreated to 61.1 this month from a revised 64.8 in December, first reported as 64.5. The January index was far less than the 68.0 expected by economists surveyed by Dow Jones Newswires.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Perceptions about the job markets worsened this month. The survey showed 43.5% think jobs are “hard to get” up from 41.6% saying that in December, while only 6.1% think jobs are “plentiful” down from 6.6% in December.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">These data are consistent with the material presented in the earlier post.<span style="mso-spacerun: yes;"> </span>The United State consumer has lots to worry about and, for a large portion of this consumer base, spending is not expected to be very robust in future months.<span style="mso-spacerun: yes;"> </span>And, their situation cannot be turned around soon by either monetary or fiscal policies.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: Arial; font-size: 10.0pt;"></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-13746394696897829842012-01-31T06:54:00.000-08:002012-01-31T06:54:34.020-08:00Where is the US Consumer?<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>“Rising Income is Saved, Not Spent,” reads the Wall Street Journal Tuesday morning. (<a href="http://professional.wsj.com/article/SB10001424052970204740904577192702993936344.html?mod=ITP_pageone_1&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204740904577192702993936344.html?mod=ITP_pageone_1&mg=reno-secaucus-wsj</a>) <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Personal income increased 0.5% in December from November adjusted for seasonality, the largest monthly increase since March…but spending was flat over the month—actually fell when inflation is factored in.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The savings rate, around 5.0% for the first half of 2011, was near 4.0% for much of the second half of the year…. Economists warned that consumers would soon resume socking away cash at the expense of spending, and that appears to be playing out now.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">With unemployment still high and the housing market in the doldrums, consumers are reluctant—and in many cases unable—to increase their spending in a big way.”</span> <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Federal Reserve’s recently released forecast projected unemployment rates remaining at high levels through 2014, declining only slightly throughout the next three years.<span style="mso-spacerun: yes;"> </span>And, even worse, underemployment is also expected to remain high with the rate of underemployment staying near to one out of every five people of working age. <span style="mso-spacerun: yes;"> </span>No help coming here.(</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, a large proportion of homeowners still find themselves “under water” with mortgages that exceed the market value of their houses.<span style="mso-spacerun: yes;"> </span>This situation is not expected to improve in the near future. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Robert Shiller, the Yale economist, was just interviewed at Davos and responded to questions about home prices by saying that prices will probably continue to decline, although not at the rate they declined in recent years.<span style="mso-spacerun: yes;"> </span>He added that even if housing prices did stop declining, there is no reason to expect that they would start to rise anytime soon.<span style="mso-spacerun: yes;"> </span>In addition, he added, that even though housing prices were returning to something more like a “fair value” that historically, the tendency was for the market to “overshoot” the “fair value” until all the previous exuberance is wrung out of the market. (<a href="http://professional.wsj.com/article/SB10001424052970204740904577192702993936344.html?mod=ITP_pageone_1&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204740904577192702993936344.html?mod=ITP_pageone_1&mg=reno-secaucus-wsj</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">A White House effort to lessen the impact of these homes that are “under water” seems to have failed in that the program developed by the administration has not reached enough borrowers to have much impact on the market. (<a href="http://www.ft.com/intl/cms/s/0/cf9fed00-4a89-11e1-8110-00144feabdc0.html%23axzz1l2qSCMaM">http://www.ft.com/intl/cms/s/0/cf9fed00-4a89-11e1-8110-00144feabdc0.html#axzz1l2qSCMaM</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Even more chilling is the report released today by the Corporation for Enterprise Development (CFED) titled “The 2012 Assets & Opportunity Scorecard: How Financially Secure are Families?” (Go to <a href="http://cfed.org/">http://cfed.org/</a>.) <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>This study presents what it calls the households that are in “liquid asset poverty”.<span style="mso-spacerun: yes;"> </span>A household is considered in liquid asset poverty if it owns a home, yet has no savings to speak of.<span style="mso-spacerun: yes;"> </span>These people are just one significant emergency away from a real financial crisis.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The emergency could take the form of a major car breakdown or a health problem.<span style="mso-spacerun: yes;"> </span>Most of these people are earning a regular paycheck, CFED says, but they don’t really realize how close to the edge they are living.<span style="mso-spacerun: yes;"> </span>Many have some other form of debt, but in an emergency would have to rely on very expensive sources of debt to try and carry them through the emergency.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The study reports that 43 percent of the households in the United States are liquid asset poor.<span style="mso-spacerun: yes;"> </span>This amounts to roughly 128 million households.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Again, we seem to see the country bifurcating.<span style="mso-spacerun: yes;"> </span>There are those households that are doing OK and are continuing to spend through these tough times.<span style="mso-spacerun: yes;"> </span>Yet, there are a large number of people that have to watch out where every penny of their income is going.<span style="mso-spacerun: yes;"> </span>This means that the economic recovery will not only remain week, but it will be fragile and susceptible to unexpected shocks.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Saving and deleveraging are still needed and being sought by many families, but this will just mean that the recovery will be missing any strong support from consumer spending in the near term.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, it means that banks and other financial institutions cannot be sure of value of many of the assets on their balance sheets, both mortgages and consumer loans, but also face the fact that loan demand will also not be strong in the future.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">We are still looking for where the surge in economic activity will come from.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-31967802194152683802012-01-30T07:20:00.000-08:002012-01-30T07:20:57.067-08:00Corporate Confidence Continues to Wane<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">I closed my review of the 2012 prospects for mergers and acquisitions with this paragraph: “Let’s hope the boom in M&A business does take place. Let’s hope that the corporate cash and corporate borrowing do not go just to corporations buying back their own stock. Let’s hope that the unwinding and restructuring takes place because that is one prerequisite for business to get back to the capital investment activities that do drive economic growth.”</span><div class="MsoNormal"> </div><span style="font-family: Arial; font-size: 10.0pt;"></span> <div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">(<a href="http://seekingalpha.com/article/321037-the-outlook-for-mergers-and-acquisitions-in-2012">http://seekingalpha.com/article/321037-the-outlook-for-mergers-and-acquisitions-in-2012</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">However, at the end of January we see the headlines: “M&A volumes at lowest for a decade.” (<a href="http://www.ft.com/intl/cms/s/0/f23718f6-4a76-11e1-8110-00144feabdc0.html%23axzz1kx2Cicvs">http://www.ft.com/intl/cms/s/0/f23718f6-4a76-11e1-8110-00144feabdc0.html#axzz1kx2Cicvs</a>) “Dealmaking has had its slowest start to a year for nearly a decade, as companies’ appetite for mergers and acquisitions remains suppressed by the uncertain outlook for the global economy.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">The deal volumes announced so far this year…about half the level of 2011 at this time according to S&P Capital IQ.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Additionally, we read “Hordes of hoarders,” concerning corporate cash hordes…with corporate entities holding onto well over $1.7 trillion at last count. “ (<a href="http://www.ft.com/intl/cms/s/0/4cd6cb8c-48e0-11e1-974a-00144feabdc0.html%23axzz1kx2Cicvs">http://www.ft.com/intl/cms/s/0/4cd6cb8c-48e0-11e1-974a-00144feabdc0.html#axzz1kx2Cicvs</a>) “At present, cash accounts for more than 6 percent of US non-financial companies.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">In one specific case, Apple has almost $100 billion in cash on its balance sheet, about level with the market value of firms like McDonalds, or ConocoPhillips, or Cisco Systems.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">This pales against the cash holdings of US commercial banks who in January 2012 hold almost 13 percent of their assets in cash balances, up from 9.3 percent at the end of 2010.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">I know that this is early in the year, but with everyone looking for positive signs that the economy is picking up steam we need to consider other signs as well. Furthermore, the current situation is not unlike the situation that existed at the start of last year…and the actual commitments never really came about.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">The one word that seems to be on almost everyone’s lips concerning this situation is…uncertainty. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">There is just so much uncertainty that exists in the world right now that people are unwilling to commit substantial resources to acquisitions…or capital investments. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Where is this uncertainty coming from?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">In my mind this uncertainty exists from the lack of economic leadership in the world today.<span style="mso-spacerun: yes;"> </span>Europe continues to dither…and so does the UK…and so does the US.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">No one seems to know where they are going…or where we are going.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">How can anyone commit in such an environment?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Who knows what economic policies are going to prevail in these areas over the next year or two…let alone the next three months?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Who knows how the people in these areas are going to react to whatever economic policies are going to be enacted by their governments?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">We’ve seen how the governments have acted in the recent past…and these examples cannot give anyone much confidence. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Right now, I am concentrating on factors such as these to try and understand the state of the economy.<span style="mso-spacerun: yes;"> </span>Business leaders may be prepared to commit in the future and certainly they have the means to borrow additional funds if they need them.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">These leaders still face the following question: “Why should I commit to buy another company now when the economy could get worse and I could buy the same company for a lower price at some time in the near future?”<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Right now, the probability of this happening is still apparently large enough that it is causing these business leaders to hesitate to commit on acquisitions…or capital investment.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">I keep asking people to name one person in a position of political authority in the world that they would apply the title “leader” to…and I keep coming up with silence. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Unfortunately, I don’t believe that business leaders are going to commit resources until some sort of political leadership is forthcoming.<span style="mso-spacerun: yes;"> </span><br style="mso-special-character: line-break;" /> <br style="mso-special-character: line-break;" /> </span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">I still believe that we can look at how corporations are using their “cash” as an indicator of future economic performance.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">For right now, though, the “cash” stays on the balance sheets!</span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-40984036030528352732012-01-27T03:36:00.000-08:002012-01-27T03:36:50.502-08:00Mr. Bernanke Gets His Way<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:1 134676480 16 0 131072 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:1 134676480 16 0 131072 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>Well, Mr. Bernanke has moved the Federal Reserve to a position of greater transparency. <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"></span></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">We now have projections of interest rates out until the end of 2014.<span style="mso-spacerun: yes;"> </span>It is now believed by most members of the Fed’s Open Market that the Federal Funds rate will remain close to zero until the end of 2014.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">What is the probability that the Federal Funds rate will be close to zero for the last six months of 2014?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In my mind, zero or close to it!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">What is the probability that the Federal Funds rate will be close to zero for the first six months of 2014?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In my mind, zero or close to it!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">What is the probability that the Federal Funds rate will be close to zero for the last six months of 2014?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">You guessed it!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, so on…</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Seems like I don’t have a lot of confidence in these forecasts.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">What are these forecasts for, then?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I have already written my answer to this question.<span style="mso-spacerun: yes;"> </span>These forecasts are to make Mr. Bernanke feel better. (</span><a href="http://seekingalpha.com/article/317453-bernanke-transparent-about-his-lack-of-self-confidence"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">http://seekingalpha.com/article/317453-bernanke-transparent-about-his-lack-of-self-confidence</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Mr. Bernanke doesn’t want to be misunderstood.<span style="mso-spacerun: yes;"> </span>Apparently, in the past, Mr. Bernanke feels that he has been misunderstood.<span style="mso-spacerun: yes;"> </span>Now, with the “new transparency” there should be no doubt where Mr. Bernanke and the Fed stand…and Mr. Bernanke should feel justified.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is the first time in my mind that the Federal Reserve has done something of this magnitude so as to make the Chairman of the Board of Governors feel better. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I hope it achieves its goal because as far as I am concerned this new transparency program does absolutely nothing for me in terms of understanding where interest rates are going to be for the next two to three years.<span style="mso-spacerun: yes;"> </span>It does absolutely nothing for me in terms of understanding what the monetary policy of the Federal Reserve is going to be for the next two to three years.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If anything this new transparency program will assist, in the shorter-term, speculators in making lots of money.<span style="mso-spacerun: yes;"> </span>George Soros, and others like him, loves a situation in which a government says it is going to maintain a price for as long as it can.<span style="mso-spacerun: yes;"> </span>This type of government activity creates “sure thing” bets.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The economy is in the condition it is in because there is still a lot of insolvency around.<span style="mso-spacerun: yes;"> </span>By keeping short-term interest rates as low as they are helps financial institutions and other private or public organizations remain open hoping that they will be able to work themselves out of their insolvency.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">According to a report released Wednesday put together by the American Bankers Association and State Bankers Associations, </span><span style="font-family: Arial; font-size: 10.0pt;">thirty percent of the commercial banks reporting were under some form of written agreement with regulators.<span style="mso-spacerun: yes;"> </span>A total of 1000 banks responded to the survey, so the study should be fairly representative.<span style="mso-spacerun: yes;"> </span>Extrapolating this to the total number of banks in the banking system we would get some 1,900 banks under some kind of agreement with the regulators. <span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">This is when there are still some 864 commercial banks on the FDIC’s list of problem banks, which we know does not include all the banks under some kind of agreement with the FDIC.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Many home owners still find the market values of their homes below the amount of the mortgage that exists on the property.<span style="mso-spacerun: yes;"> </span>Commercial real estate loans are still defaulting at a very rapid pace and many businesses are declaring bankruptcy or are near filing for bankruptcy, especially small ones.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">It is understood that the Federal Reserve must continue to protect against further economic deterioration and must continue to protect those individuals and institutions that are insolvent or near insolvency.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Because of this and the consequent slow pace of economic growth the Fed must continue to keep the economy excessively liquid.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">I don’t know that publishing interest rate forecasts for the next three years will convince us any more that the Fed is attempting to protect the banking system and the economy.<span style="mso-spacerun: yes;"> </span>I guess it must help Mr. Bernanke to sleep better to know that he is releasing all this information even if it does little or nothing for anyone else.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-89604033218763755792012-01-26T06:27:00.000-08:002012-01-26T06:28:53.163-08:00European Defaults: Portugal is Next After Greece<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10pt;"></span><span style="font-family: Arial; font-size: 10pt;">It ain’t over until it’s over…</span><br />
<div class="MsoNormal"></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The yield on the 10-year Portuguese government bond closed above 14.80 percent yesterday, a new record for the euro-era. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">“The markets are pricing in a Portuguese default with 10-year bonds trading at about 50 percent of par, a deeply distressed level in the eyes of many investors.” (<a href="http://www.ft.com/intl/cms/s/0/49916f7a-468a-11e1-89a8-00144feabdc0.html%23axzz1kTbnc8Yy">http://www.ft.com/intl/cms/s/0/49916f7a-468a-11e1-89a8-00144feabdc0.html#axzz1kTbnc8Yy</a>)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">“Friday the 13<sup>th</sup> may be an unlucky omen for Portugal. On that day, almost two weeks ago, Standard & Poor’s became the last rating agency to downgrade Lisbon to junk, marking the moment for many investors when default looked inevitable for Portugal as well as Greece.” </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">For more on this see my post on blogspot “Credit Downgrades and Europe” for January 16, 2012. (<a href="http://maseportfolio.blogspot.com/">http://maseportfolio.blogspot.com/</a>).</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The downward spiral in defaults will continue as long as Europe fails to honestly face its problems. (See my post on blogspot for January 25, 2012 titled “How Long Will Europe Continue to Lie to Itself”: <a href="http://maseportfolio.blogspot.com/">http://maseportfolio.blogspot.com/</a>.) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">In the past, analysts, including myself, tried to explain what officials in Europe were doing by casually remarking that their actions amounted to “kicking the can down the road.” Basically, the actions of the European officials were an effort to postpone dealing with the real issues, hoping that by delaying what was needed to be done the situation would eventually correct itself. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Now, it seems that the days of “kicking the can down the road” are reaching a climax. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">European officials hope to reach a deal on the Greek debt situation by the end of this month. The current write down seems to be somewhere around 50 percent of face value, but there still remain issues to be decided like whether or not the European Central Bank will have to write down the Greek debt it has on its books. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Bond markets have responded to this reality by dumping Portuguese debt. Note that the yield on the ten-year government bond was about 10.40 percent (compared with 14.80 percent yesterday) around the middle of November, a time when it still seemed that maybe the European Union might be able to pull things together and avoid a Greek default. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">As the officials of Europe finally seriously travelled down the path to restructure Greed debt, the price of Portuguese debt started to weaken. The price declines accelerated, as the possibility of a Greek write-down became more of a reality. Today, the yield on the 10-year bond was around 15.00 percent. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">I know that governmental officials hate to give in on these write-downs because they hate to concede to the “bond markets” and “speculators”. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">It is hard for governmental officials to admit that maybe the “bond markets” and the “speculators” might be right. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">It is a very difficult lesson for governmental officials to accept the fact that they cannot continue to cater to their constituencies with jobs and other benefits <i style="mso-bidi-font-style: normal;">ad infinitum</i>. Over the longer-run, either taxes have to be raised or money has to be printed because the bond markets will not continue to underwrite debt that will be repaid, both principal and interest, by the issuance of more debt. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The economist Hy Minsky referred to this kind of debt financing as a “Ponzi” scheme. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;"> “Ponzi” schemes come to an end and the end cannot just be blamed on the “bond markets’ and the “speculators”. In fact, the governments just line the pockets of the “bond markets” and the “speculators” by extending their uncontrolled spending until the collapse of the market becomes a “sure thing.” </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">So the charade continues and Portugal seems to be next. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Who will follow Portugal? Spain…or Italy…who knows?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">Yet, this is not the only concern that many of these officials are facing. The austerity programs enacted by governments throughout Europe are not setting well with the people. There is “discontent” and “upheaval” arising in many countries. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">“The only consistent messages seem to be that leaders around the world are failing to deliver on their citizens’ expectations and that Facebook, Twitter, and other social media tools allow crowds to coalesce at will to let them know it. That is not a comforting picture for the 40 heads of state or leaders of governments who are attending the World Economic Forum (in Davos, Switzerland)…” (<a href="http://www.nytimes.com/2012/01/26/world/europe/across-the-world-leaders-brace-for-discontent-and-upheaval.html?_r=1&scp=1&sq=across%20the%20world,%20leaders%20brace%20for%20discontent%20and%20upheaval&st=cse">http://www.nytimes.com/2012/01/26/world/europe/across-the-world-leaders-brace-for-discontent-and-upheaval.html?_r=1&scp=1&sq=across%20the%20world,%20leaders%20brace%20for%20discontent%20and%20upheaval&st=cse</a>)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The situation is quite uncomfortable. But this is what happens when you fail to deal with a problem…when you continually try to “kick the can down the road.” The situation does not go away and the delay in dealing with the situation often turns out messier than if the situation had been dealt with earlier. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">The only way for the officials to resolve a condition like this is to get in front of it. I don’t see anyone around in a position to do this. The only real possibility is Merkel but the resentment that already exists against Germany makes it that much more difficult for her to achieve what is needed. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">If no leader arises then the defaults will continue…and the austerity will grow…as will the “discontent” and the “upheaval.” </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10pt;">“Europe risks being handicapped if it doesn’t deal decisively with this challenge to democracy.” Thought provoking way to end the New York Times article. </span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com2tag:blogger.com,1999:blog-3210378500200629631.post-27403252730428574242012-01-25T06:00:00.000-08:002012-01-25T06:00:21.846-08:00How Long Will Europe Continue to Lie to Itself?<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Bank Seeks To Avoid Taking Loss On Bonds.”</span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">So reads the headline for the New York Times article on the dilemma of the European Central Bank. (<a href="http://www.nytimes.com/2012/01/25/business/global/eu-officials-continue-to-press-for-a-quick-deal-on-greek-debt.html?_r=1&ref=business">http://www.nytimes.com/2012/01/25/business/global/eu-officials-continue-to-press-for-a-quick-deal-on-greek-debt.html?_r=1&ref=business</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“European leaders have begun discussions with the European Central Bank on several options that might keep it from having to take a loss on its 55 billion-euro portfolio of Greek bonds.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The deal could address what has long been one of the more vexing questions in reaching a broad agreement on reducing Greece’s mountain of debt: how to get the central bank, the largest holder of Greek bonds, to participate in a debt restructuring without having to take a large loss that would have to be covered by European taxpayers, German ones in particular.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Private sector investors, including large European banks and hedge funds, have complained bitterly—and in some cases threatened legal action—over the central bank’s insistence that its 55 billion euros in Greek bonds were exempt from the loss that the private sector is facing, which some have estimated at 60 cents on the euro.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The European Central Bank cries, “You can’t hold me responsible for my actions!”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There are articles all over the place on this issue.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">For example, on the front page of the Financial Times: “IMF urges ECB to take a hit on 40 billion-euros in Greek bond holdings.” (<a href="http://www.ft.com/intl/cms/s/0/74d2b31a-46b2-11e1-bc5f-00144feabdc0.html%23axzz1kTbnc8Yy">http://www.ft.com/intl/cms/s/0/74d2b31a-46b2-11e1-bc5f-00144feabdc0.html#axzz1kTbnc8Yy</a>)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Greek debt will be written down…finally.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, will people still be avoiding reality in some affected areas?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, remember, this is all voluntary to avoid kicking off the credit default swaps outstanding…what a crock!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Still on the list of lies…Portugal…Spain…Italy…</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Lies have a long life and can come back to haunt you in many…often, unfortunate…ways.<span style="mso-spacerun: yes;"> </span>Just ask people up at Penn State these days.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The resolution of a situation in which people cover up and try to avoid the truth never ends well.<span style="mso-spacerun: yes;"> </span>The leaders (and I use this term lightly) of Europe that are perpetuating this comedy continue to draw it out as long as possible.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The problem is that the European dilemma will continue to exist until it is dealt with.<span style="mso-spacerun: yes;"> </span>For more on this see my blogpost “Credit Downgrades and Europe” posted on January 16, 2012 on my blogspot site (<a href="http://maseportfolio.blogspot.com/">http://maseportfolio.blogspot.com/</a>). <span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com1tag:blogger.com,1999:blog-3210378500200629631.post-44073115429592120632012-01-20T07:29:00.000-08:002012-01-20T07:29:14.738-08:00The Outlook for Mergers and Acquisitions in 2012<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:1 134676480 16 0 131072 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:1 134676480 16 0 131072 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;"><span style="mso-spacerun: yes;"></span></span><span style="font-family: Arial; font-size: 10.0pt;"></span><span style="font-family: Arial; font-size: 10.0pt;">The key issue in the area of mergers and acquisitions in 2012 is still uncertainty. </span><span style="color: black; font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">There seems to be a lot of anticipation that the activity in this area could pick up during the year, but, like last year, there may be little to come of it. (</span><a href="http://www.ft.com/intl/cms/s/0/a2939210-41d0-11e1-a1bf-00144feab49a.html#axzz1jqA4rKTp"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">http://www.ft.com/intl/cms/s/0/a29392 10-41d0-11e1-a1bf-00144feab49a.html#axzz1jqA4rKTp</span></a>)<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"> </div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Many corporations still seem to have a “ton” of cash around.<span style="mso-spacerun: yes;"> </span>Furthermore, the corporate bond market is flush; companies “sold $44.2 billion of both high- and low-rated corporate bonds this year, the highest on record for the time period….” Investors are “snapping up bonds…pushing the cost of borrowing for some issuers to record lows.” (</span><a href="http://professional.wsj.com/article/SB10001424052970203750404577171341742782200.html?mod=ITP_moneyandinvesting_3&mg=reno-secaucus-wsj"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">http://professional.wsj.com/article/SB10001424052970203750404577171341742782200.html?mod=ITP_moneyandinvesting_3&mg=reno-secaucus-wsj</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">) </span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The yield on below-investment-grade, or ‘junk’ bonds fell to 7.93% Wednesday, the lowest since August 5 according to a Barclays Capital index.<span style="mso-spacerun: yes;"> </span>An index for investment-grade bonds, which are of a higher credit quality, was at 3.62%.<span style="mso-spacerun: yes;"> </span>In comparison, on Thursday the 10-year Treasury note yield rose to 1.972%.”</span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Funds are available.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Corporate breakups are likely to continue or even accelerate in 2012.<span style="mso-spacerun: yes;"> </span>Economic growth is not picking up speed.<span style="mso-spacerun: yes;"> </span>Europe looks as if it is in another recession and this does not bode well for the rest of the west. <span style="mso-spacerun: yes;"> </span>Companies are finding that the conglomerate structures they built up in recent are not very helpful in times like these, especially for those organizations that are suffering under the burden of too much debt.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The western world is re-grouping from the excesses of the past ten to twenty years.<span style="mso-spacerun: yes;"> </span>Those that still have the time to adjust are downsizing…laying off employees and discarding non-central businesses.<span style="mso-spacerun: yes;"> </span>Those that don’t have this time are attempting to sell outright. </span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Those looking for deals have the ammunition to pull off these deals and they know that this is a “buyers” market with depressed valuations available.<span style="mso-spacerun: yes;"> </span>They have the capability of being aggressive. <span style="mso-spacerun: yes;"> </span>Whether or not they activate this aggressiveness is another question. </span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is because a cloud remains over the M & A market, a cloud that kept many firms on the sidelines in 2011.<span style="mso-spacerun: yes;"> </span>First off, a great deal of uncertainty exists with respect to the future of the economy.<span style="mso-spacerun: yes;"> </span>Government stimulus policies, both monetary and fiscal, have not worked to any degree and it is debatable whether or not any additional actions will achieve much more.</span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In addition, Europe appears to be in recession right now and, given its sovereign debt crisis and the state of its banks, any recovery seems to be some way off.<span style="mso-spacerun: yes;"> </span>It is uncertain how the situation in Europe might play out in the United States. (</span><a href="http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe</span></a><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">) </span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Second, there is the upcoming election in the United States.<span style="mso-spacerun: yes;"> </span>The uncertainty surrounding the policies of the American government with respect to business and finance over the past three years has been enormous…and largely uncalculable. At this time, we just don’t know how much the uncertainty in this area has retarded the recovery of American business and economic growth.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Further uncertainties exist with respect to the impact of other actions of the federal government in areas like health care, the environment, and foreign affairs.<span style="mso-spacerun: yes;"> </span>Some people are just learning about the expenses they are going to have to absorb with respect to Medicare, doctors fees, and health insurance.<span style="mso-spacerun: yes;"> </span>As people learn more and more how their budgets are going to be affected, adjustments will be made to spending patterns and they won’t be up. </span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Third, in addition to the uncertainties created by new financial regulations and the complexity of these new regulations, there appears to be a growth in the government’s application of the anti-trust laws.<span style="mso-spacerun: yes;"> </span>The recent treatment of the AT&T/T-Mobile merger is a case in point.<span style="mso-spacerun: yes;"> </span>The government, ‘feeling its oats’ from this action, will probably step-up its aggressive behavior in this area, leading to even greater uncertainty relative to M&A activity. </span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Early in 2011, it looked as if there might be a big pickup in merger activity for the year.<span style="mso-spacerun: yes;"> </span>Many of the same conditions we see today existed at that time.<span style="mso-spacerun: yes;"> </span>And, what happened?</span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">M&A activity did pick up in 2011 from previous years but we did not see the ‘big jump’ that many of us expected.<span style="mso-spacerun: yes;"> </span>Instead of buying companies, many firms used their cash on hand or their ability to borrow at ridiculously low interest rates to buy back their stock.<span style="mso-spacerun: yes;"> </span>This, of course, helped stock prices but it did not help the economy.</span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, even a pick up in M&A activity will not do a lot to help the economy, especially in the short-run.<span style="mso-spacerun: yes;"> </span>Buying companies outright or buying pieces of companies will initially result in efforts to achieve greater corporate efficiencies, higher levels of productivity, and will mean more reductions in employment.<span style="mso-spacerun: yes;"> </span>This is a part of the “creative destruction” of a market economy.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, this should not be surprising.<span style="mso-spacerun: yes;"> </span>The American economy has been subject to fifty years of credit inflation.<span style="mso-spacerun: yes;"> </span>In such a time, among other things, businesses come to focus more on finance rather than production, they acquire other businesses that are not related to their core operations, and they hoard labor.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The other side of the business structure created by credit inflation is the need to unwind and restructure what was built earlier.<span style="mso-spacerun: yes;"> </span>That is what we face now.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal" style="background: white; margin-bottom: 12.0pt;"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Let’s hope the boom in M&A business does take place.<span style="mso-spacerun: yes;"> </span>Let’s hope that the corporate cash and corporate borrowing do not go just to corporations buying back their own stock.<span style="mso-spacerun: yes;"> </span>Let’s hope that the unwinding and restructuring takes place because that is one prerequisite for business to get back to the capital investment activities that do drive economic growth.<span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com1tag:blogger.com,1999:blog-3210378500200629631.post-82946288192661050532012-01-19T08:40:00.000-08:002012-01-19T08:40:04.243-08:00What's to Like About the United States Banking System?<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>I really don’t see much to like in the United States banking system. <span style="mso-spacerun: yes;"></span><br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">With interest rates so low across the board, commercial banks have very little interest rate spread to work with. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">With Congress and the regulators so screwed up and yet so anxious to pass laws and regulate, the “regulatory risk” and the “complexity risk” facing the industry is enormous. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There is still plenty of evidence that commercial banks have a lot of unrecognized overvalued assets on their balance sheets. (<a href="http://seekingalpha.com/article/320370-bank-stress-tests-a-substitute-for-mark-to-market-accounting">http://seekingalpha.com/article/320370-bank-stress-tests-a-substitute-for-mark-to-market-accounting</a>)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There seems to be growing interest in suing banks that are alleged of “making misleading public statements as the property market crumbled in 2007 to hide internal downgrades of loans from investors” (<a href="http://professional.wsj.com/article/SB10001424052970203735304577169360314402158.html?mod=ITP_moneyandinvesting_2&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970203735304577169360314402158.html?mod=ITP_moneyandinvesting_2&mg=reno-secaucus-wsj</a>) or for other reasons that banks failed to appropriately disclose their financial condition.<span style="mso-spacerun: yes;"> </span>There are also other settlements coming related to bank lending practices in the 2000s.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Bank earnings are a mixed bag, at best.<span style="mso-spacerun: yes;"> </span>The larger banks are not performing well because trading profits and profits on many non-traditional banking operations are off.<span style="mso-spacerun: yes;"> </span>(See JPMorgan and Citigroup)<span style="mso-spacerun: yes;"> </span>The returns to trust banks (BNY Mellon, State Street Corp. and Northern Trust Corp.) are sagging because these institutions have taken a “defensive position” with respect to the financial markets and shifted a substantial amount of funds into cash and ultra-safe assets. (<a href="http://www.ft.com/intl/cms/s/0/140b9e70-41da-11e1-a586-00144feab49a.html%23axzz1jqA4rKTp">http://www.ft.com/intl/cms/s/0/140b9e70-41da-11e1-a586-00144feab49a.html#axzz1jqA4rKTp</a>)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Only the banks that have stayed pretty much as traditional banks (like Wells Fargo, U. S. Bankcorp, and PNC Financial Services Group) have held up, profit-wise, in recent periods. This performance seems to be connected with some minor pickup in loan growth.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Even in the case of loan growth, analysts are relatively pessimistic about the future.<span style="mso-spacerun: yes;"> </span>“It appears that much of the commercial loan growth we have seen at the large cap banks is coming from large corporate syndicated lending.<span style="mso-spacerun: yes;"> </span>Not all banks are players in this market.” This from Christopher Mutascio at Stifel, Nicolaus & Co.<span style="mso-spacerun: yes;"> </span>Note that Mutascio is expecting “total loan growth and commercial loan growth” to slow in 2012.<span style="mso-spacerun: yes;"> </span>No bounce here. (<a href="http://professional.wsj.com/article/SB10001424052970204555904577168510658669178.html?mod=ITP_moneyandinvesting_2&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204555904577168510658669178.html?mod=ITP_moneyandinvesting_2&mg=reno-secaucus-wsj</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In my most recent blog I discussed the effort of BankUnited, a Florida-based bank, to sell itself because of the condition of the banking industry, especially in Florida.<span style="mso-spacerun: yes;"> </span>BankUnited wanted to grow and yet could find no other banks to acquire…and they had looked at about 50 banks in the Florida region and elsewhere.<span style="mso-spacerun: yes;"> </span>Because of the state of the banks available to acquire, BankUnited decided to sell.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Well, yesterday, BankUnited pulled itself “off the market”.<span style="mso-spacerun: yes;"> </span>The bank had attempted to set up an auction for itself but only Toronto-Dominion Bank and BB&T Corp. submitted preliminary offers.<span style="mso-spacerun: yes;"> </span>These offers did not come up to the price of that BankUnited received when it went public last year.<span style="mso-spacerun: yes;"> </span>Thus, the bank withdrew its offer to sell. (<a href="http://professional.wsj.com/article/SB10001424052970203735304577169400198108514.html?mod=ITP_moneyandinvesting_1&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970203735304577169400198108514.html?mod=ITP_moneyandinvesting_1&mg=reno-secaucus-wsj</a>)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Some of the banking statistics reflect the stagnant nature of the banking system as a whole.<span style="mso-spacerun: yes;"> </span>For example, total commercial banking assets in the United States rose by about $700 billion last year.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Note, however, that cash assets at commercial banks rose by about $515 billion!<span style="mso-spacerun: yes;"> </span>That is, almost 75 percent of the growth in bank assets came from an increase in the cash holdings of the banks.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Also, note that about 80 percent of this increase in cash assets at commercial banks in the United States occurred at foreign-related financial institutions.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, these foreign-related financial institutions increased their commitment to Net Deposits Due to Foreign-related offices by almost $650 billion.<span style="mso-spacerun: yes;"> </span>Thus, these foreign related institutions took U. S. dollars and shipped them off-shore!<span style="mso-spacerun: yes;"> </span>Thank you Federal Reserve System!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In all, the share of United States banking assets going to foreign-related financial institutions rose from about 11 percent to almost 15 percent from December 2010 to December 2012.<span style="mso-spacerun: yes;"> </span>The largest twenty-five domestically chartered banks in the United States continue to account for almost 60 percent of the banking assets in the country.<span style="mso-spacerun: yes;"> </span>The smallest domestically chartered banks (about 6,300 of them) continue to shrink as a proportion of banking assets.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The American banking system is welcoming more foreign-related financial institutions to the ownership of its assets…note that one of the two bidders for BankUnited was Toronto-Dominion Bank…and is also seeing more and more of its assets being held by larger banks.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Right now, the commercial banking system seems to be going nowhere, just restructuring.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is just a very, very tough time for the banking system.<span style="mso-spacerun: yes;"> </span>It is a time of transition.<span style="mso-spacerun: yes;"> </span>The whole industry is changing. (<a href="http://seekingalpha.com/article/319449-the-banks-they-are-a-changing">http://seekingalpha.com/article/319449-the-banks-they-are-a-changing</a>) But, then, the whole world seems to be going through a period of transition. <span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-72273896834994872862012-01-18T06:57:00.000-08:002012-01-18T06:57:02.989-08:00Bank Stress Tests: A Substitute for "Mark-to-Market" Accounting?<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style><b><span style="font-family: Arial; font-size: 10.0pt;"></span></b><b><span style="font-family: Arial; font-size: 10.0pt;">“</span></b>The FDIC Board yesterday issued a notice of proposed rulemaking that would require FDIC-insured state nonmember banks and state-chartered savings associations with more than $10 billion in total consolidated assets to conduct annual capital-adequacy stress tests. As of Sept. 30, 2011, the FDIC regulated 23 state nonmember banks with more than $10 billion in total assets. The Dodd-Frank Act-mandated proposal defines the term “stress test”; establishes methodologies for conducting stress tests that provide for three different sets of conditions, including baseline, adverse and severely adverse conditions; establishes the form and content of a stress-test regulatory report; and requires covered banks to publish a summary of stress-test results. The proposal is similar to one the Federal Reserve published in December.”<span style="mso-spacerun: yes;"> </span>(Daily Newsbyte release of the American Bankers Association, January 18, 2012)<br />
<span style="font-family: Arial; font-size: 10.0pt;"></span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">The commercial banking industry has not wanted to adopt “mark-to-market” accounting.<span style="mso-spacerun: yes;"> </span>There are several reasons bankers do not want to do so, but, in my mind, the most prominent reason is that they don’t want to be accountable for taking on risk…both credit risk and interest rate risk.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Remember, I have been a banker for a large part of my professional life. <span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Generally, you hear bankers complain about mark-to-market accounting after-the-fact.<span style="mso-spacerun: yes;"> </span>That is, they complain when the value of their assets have declined.<span style="mso-spacerun: yes;"> </span>The decline in the value of an asset has either come because the asset has “gone bad” (for whatever reason), or, because interest rates have risen and the price of a security has declined.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">In the first case, the argument forthcoming from the bankers is that either the asset needs time for the economy to recover or the asset needs time for the bank to help “work out” its problems. <span style="mso-spacerun: yes;"> </span>In the second case, bankers argue that they will hold the asset to maturity so that no capital loss will need to be realized on the asset.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Thus, the bankers have put on assets that have higher than average credit risk or long term assets that possess interest rate risk and have not had to account for any increase in the over all riskiness of bank assets until they either write off the asset or sell the asset for a price that is below its purchase price.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">But, that can mean that there are a lot of “over-valued” assets on the books of the banks. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Because banks do not have to mark their assets to market, the banking system can have lots of “zombie” banks around, banks whose financial condition is unknown to their investors or depositors. (<a href="http://seekingalpha.com/article/319205-there-are-still-zombie-banks-around">http://seekingalpha.com/article/319205-there-are-still-zombie-banks-around</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">The presence of these banks, and not just the largest banks, can be noted in the Wall Street Journal article about Florida’s BankUnited. (<a href="http://professional.wsj.com/article/SB10001424052970203735304577167241414198390.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970203735304577167241414198390.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj</a>) The BankUnited situation is unique in that it is a bank that was acquired by an individual, John Kanas, and a group of private-equity firms.<span style="mso-spacerun: yes;"> </span>BankUnited was a failing bank that was purchased from the FDIC and made into a profitable organization, one that is well capitalized and growing.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Yet, the desire was for the bank to grow more, and grow by acquisition, but this has not been possible because “other Florida banks are either too sick or too expensive…“Mr. Kanas’s team has examined more than 50 potential targets in the past few years but pulled the trigger on just one.”<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">The banking system is still not healthy and when “outsiders”, like Mr. Kanas and his team, actually get to review the assets of a bank during a due diligence, they find out just how fragile the banking system is.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">The original acquisition of BankUnited was done in an assisted deal that “The FDIC estimates that the failure will ultimately cost its deposit-insurance fund $5.7 billion.”<span style="mso-spacerun: yes;"> </span>Deals are still being made for “failed” or “troubled” banks, (there are still about 850 banks on the FDIC’s list of problem banks) but the efforts to complete them and the frustration connected with “the regulatory red tape that is increasingly gripping the industry” are costly and tiresome.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Mr. Kanas is in the process of selling BankUnited and is leaving the industry.<span style="mso-spacerun: yes;"> </span>“’He is just tired,’ said a person who knows Mr. Kanas well.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">It seems to me that the imposition of “stress tests” on the banks with more than $10 billion in assets is a way to for the regulators to “mark-to-market” the assets of these banks! <span style="mso-spacerun: yes;"> </span>The regulators are to see what happens to the value of the assets of a bank under “three different sets of conditions, including baseline, adverse and severely adverse conditions.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">These “stress tests” are just simulations, but, the purpose of the tests are on to determine how vulnerable banks are to changing market conditions.<span style="mso-spacerun: yes;"> </span>In other words, are the banks sufficiently capitalized to withstand detrimental movements in financial markets. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">This exercise basically “marks-to-market” the loans and securities held by a bank under different scenarios.<span style="mso-spacerun: yes;"> </span>And, the exercise is conducted by the bank regulators and not by the banks themselves.<span style="mso-spacerun: yes;"> </span>Furthermore, the Dodd-Frank mandate “requires covered banks to publish a summary of stress-test results.”<span style="mso-spacerun: yes;"> </span>That is, the results of these tests cannot be hidden. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">Because the commercial banks would not reveal their risk exposure voluntarily and of their own making, the regulators will now design the tests relating to the risk exposure of the banks and will force the banks to reveal the results of the tests publically. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">One just wonders how long it will take for the regulators to extend these “stress tests” to all financial institutions with assets of $1.0 billion or more.<span style="mso-spacerun: yes;"> </span>And, then...</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">I hope the bankers are happy with the consequences of their failure to disclose! <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-47916255165785457422012-01-16T17:41:00.000-08:002012-01-16T17:41:54.470-08:00Credit Downgrades and Europe<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>The problem is the free flow of capital throughout most of the world. <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"></span></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">When capital flows freely you cannot escape the consequences of your actions. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">What is called the “trilemma” problem of international economics makes this very clear.<span style="mso-spacerun: yes;"> </span>The “trilemma” problem states that a country can only choose two of the following three options.<span style="mso-spacerun: yes;"> </span>The three options are to be a part of world capital markets where capital flows freely; have a fixed exchange rate; or, be free to run an independent economic policy. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If there is a free flow of capital internationally, then the choice is reduced to just one of the two remaining options.<span style="mso-spacerun: yes;"> </span>But, there are consequences to either choice. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">First, if a country choses to run its economic policy independently of all other nations, then it must let it currency float in the foreign exchange markets.<span style="mso-spacerun: yes;"> </span>Generally, a nation that wants to run an independent economic policy has particular domestic economic goals it wants to achieve and so wants to be able to choose an independent economic policy that supports these goals. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The goals most often chosen in the latter part of the twentieth century have been full employment and social welfare programs like government jobs, early retirement, substantial amounts of vacation, and high pension levels.<span style="mso-spacerun: yes;"> </span>The means of achieving these goals has often been a policy of public sector credit inflation.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">If a country chooses the path of credit inflation then the price of its currency in foreign exchange markets must be allowed to float.<span style="mso-spacerun: yes;"> </span>And, if credit inflation becomes extreme, the value of the currency in the foreign exchange markets will decline.<span style="mso-spacerun: yes;"> </span>And, this will bring on other problems.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is one reason John Maynard Keynes wanted restrictions on the international flow of capital in the 1920s and 1930s. (<a href="http://seekingalpha.com/article/167893-john-maynard-keynes-and-international-relations-economic-paths-to-war-and-peace-by-donald-markwell">http://seekingalpha.com/article/167893-john-maynard-keynes-and-international-relations-economic-paths-to-war-and-peace-by-donald-markwell</a>)<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>A limited flow of capital internationally was a reality when Keynes helped to craft the Bretton Woods agreement that created the rules for the post-World War II international monetary system.<span style="mso-spacerun: yes;"> </span>This agreement also included fixed exchange rates between the currencies of the participant nations.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The purpose of this system was to allow member countries to follow their own economic policies aimed at achieving high levels of employment in their own country.<span style="mso-spacerun: yes;"> </span>Therefore, a policy of credit inflation could be followed in each country without disrupting changes in foreign currency rates. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Bretton Woods system fell apart as international capital markets opened up in the 1950s and 1960s and the credit inflation created in the United States in the 1960s resulted in a situation where the United States could not maintain its fixed exchange rate.<span style="mso-spacerun: yes;"> </span>On August 15, 1971, President Nixon choose to float the value of the U. S. dollar. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">A second choice, given the unrestricted flow of capital internationally, is to choose a fixed exchange rate.<span style="mso-spacerun: yes;"> </span>But, if a nation chooses a fixed exchange rate then it must give up its sovereignty with respect to running an economic policy that is independent of other nations.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is what the European nations did when they choose to form a monetary union based on a single currency, the euro: in essence, they choose to have a fixed exchange rate between member nations.<span style="mso-spacerun: yes;"> </span>But, the nations forming the union did not want to give up their sovereignty with regards to the formation of their government budgets.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Oh, they allowed for budget deficits to be run, but they were to be limited in scope.<span style="mso-spacerun: yes;"> </span>This, they felt, gave the included nations some flexibility in creating their budgets, but, they were not supposed to exceed the set limits.<span style="mso-spacerun: yes;"> </span>The problem was that these limits were unenforceable.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Which brings us to the current time.<span style="mso-spacerun: yes;"> </span>Budget limits have been grossly exceeded and the nations forming the European currency union and these eurozone nations are unable…or unwilling…to give up the sovereignty of running their own economic policy or abiding by the rules of the union.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The “trilemma” analysis states very clearly that in circumstances like this the monetary union must be broken up and the countries must form a central budgetary unit or must once again establish their own currency units whose price will be floated against the other currencies of the former eurozone countries.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The ultimate cost of running independent economic policies and trying to run a single currency monetary union will be the destruction of the sovereign political bodies as we know them in Europe or the euro, as we know it now, will have to become history. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Current events now relate to the break down of solvency talks, which had been taking place between the Greek government and private investors in Greek debt.<span style="mso-spacerun: yes;"> </span>An “unrealistic” proposal has been rejected by the debt holders. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, the credit downgrades of France and other nations, which took place over the past week, were expected, yet no one really exhibited any sense of urgency.<span style="mso-spacerun: yes;"> </span>Now that the downgrades have taken place a downward spiral seems to be starting.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Both events are important because they show us the mechanism behind this year’s likely unfolding of events.<span style="mso-spacerun: yes;"> </span>The eurozone has fallen into a spiral of downgrades, falling economic output, rising debt and further downgrades.<span style="mso-spacerun: yes;"> </span>A recession has started.<span style="mso-spacerun: yes;"> </span>Greece is now likely to default on most of its debts and may even have to leave the eurozone.<span style="mso-spacerun: yes;"> </span>When that happens, the spotlight will fall immediately on Portugal, and the next contagious round of downgrades will begin.” (<a href="http://www.ft.com/intl/cms/s/0/987fd2fe-3ddc-11e1-91ba-00144feabdc0.html%23axzz1jd5VycTs">http://www.ft.com/intl/cms/s/0/987fd2fe-3ddc-11e1-91ba-00144feabdc0.html#axzz1jd5VycTs</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The European Financial Stability Facility has also been downgraded and this means that its effective lending capacity has been reduced.<span style="mso-spacerun: yes;"> </span>The ability to “bailout” distressed countries has declined.<span style="mso-spacerun: yes;"> </span>And, the European Central Bank cannot resolve the longer-term issues.<span style="mso-spacerun: yes;"> </span>There is very little still available to the European officials to “kick the can down the road” any more. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I just do not see the European countries at this time getting over their resistance to form “a strong central fiscal authority with power to tax and allocate resources across the eurozone.”<span style="mso-spacerun: yes;"> </span>Hence, I don’t have much confidence for the continued existence of a common currency for Europe, except maybe, on a much more limited scale.<span style="mso-spacerun: yes;"> </span>Right now, I don’t see alternatives to the downward spiral mentioned above. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The bottom line is that the conditions of the “trilemma” problem seem to hold.<span style="mso-spacerun: yes;"> </span>Given that capital is flowing freely throughout the world nations cannot just totally ignore the consequences of their choice of economic policy.<span style="mso-spacerun: yes;"> </span>And, if the consequences of that economic policy are not realized immediately, the evidence shows that they will be realized sooner or later.<span style="mso-spacerun: yes;"> </span>This is a lesson in macroeconomic decision-making that all countries need to take into account when determining what economic policy they should be following.<span style="mso-spacerun: yes;"> </span>Are you listening America?<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-84076173377026617142012-01-13T06:21:00.000-08:002012-01-13T06:21:10.077-08:00The Banks, They Are A Changin'<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>The banking system is going through massive changes.<span style="mso-spacerun: yes;"> </span>The morning papers are filled with stories about what is happening in the banking area, although they cover only a minor portion of what is going on in the industry. <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Wall Street Journal trumpets, “Bank of America Ponders Retreat.” (<a href="http://professional.wsj.com/article/SB10001424052970204409004577156881098606546.html?mod=ITP_pageone_0&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204409004577156881098606546.html?mod=ITP_pageone_0&mg=reno-secaucus-wsj</a>) The current Bank of America represents, perhaps as well as any organization the excesses of the financial institutions over the past twenty years or so.<span style="mso-spacerun: yes;"> </span>Currently selling at 33 percent of book value, the Bank of America can be potentially classified as one of the “Zombie” banks that now meander through the environment. (<a href="http://seekingalpha.com/article/319205-there-are-still-zombie-banks-around">http://seekingalpha.com/article/319205-there-are-still-zombie-banks-around</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Journal article does not give us much faith that management has a firm grasp on the situation…or, at least, is not revealing to us the reality that they face.<span style="mso-spacerun: yes;"> </span>“Bank of America Corp. has told U. S. regulators that it is willing to retreat from some parts of the country if its financial problems deepen…”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The crucial hedge word is “if”.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Commercial banks have to recover from the binge that has taken place in the banking industry over the past fifty years.<span style="mso-spacerun: yes;"> </span>This binge has seen commercial banks grow to enormous size and many have become “too big to fail.”<span style="mso-spacerun: yes;"> </span>It has resulted in a massive shift in employment in the United States as the proportion of people working in the manufacturing trades has declined substantially relative to those working in the financial industry.<span style="mso-spacerun: yes;"> </span>It has resulted in a huge shift in risk-taking in the industry, a move to more and more financial innovation, and a substantial increase in the amount of financial leverage used in the industry.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Several of the articles in the morning paper discuss the reductions that are taking place employment.<span style="mso-spacerun: yes;"> </span>For example, yesterday the Royal Bank of Scotland Group PLC announced that it will be laying off 3,500 people.<span style="mso-spacerun: yes;"> </span>Cutbacks have also been announced by UBS AG and UniCredit SpA and well as Credit Suisse Group AG and many other major players.<span style="mso-spacerun: yes;"> </span>The reductions in staff of the smaller institutions do not get as much publicity and play in the press.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Some have argued that the industry is going through a cyclical shift that generally happens after a downturn in the economy but more and more industry analysts are claiming that they see a more permanent shift taking place.<span style="mso-spacerun: yes;"> </span>And this is true of other parts of the financial industry than just the commercial banks.<span style="mso-spacerun: yes;"> </span>“It isn’t just the lackluster business environment that is prompting banks to rein in their lofty investment-banking ambitions.<span style="mso-spacerun: yes;"> </span>A realization is sinking in among securities-industry executives that because of the huge potential losses they are exposed to in bear markets, the business just isn’t as attractive as it once seemed.” (<a href="http://professional.wsj.com/article/SB10001424052970204409004577156833880721736.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204409004577156833880721736.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj</a>) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The fifty year period of credit inflation bought out over time many of the bad decisions and allowed the banks to go merrily on their way.<span style="mso-spacerun: yes;"> </span>As “Chuck” Prince, former CEO of Citigroup expressed it…”As long as the music continued to play, people had to keep dancing.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, this continual pressure to grow and expand and take on more risk resulted in a massive change in the banking industry itself.<span style="mso-spacerun: yes;"> </span>Going from around 14,000 commercial banks in the 1960s the commercial banking industry now contains less than 7,000 banks.<span style="mso-spacerun: yes;"> </span>My forecast is for this number to drop below 4,000 in the next several years.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, the banking industry is bifurcating: almost two-thirds of the assets in the banking system are owned by the largest 25 banks in the country.<span style="mso-spacerun: yes;"> </span>That leaves just one-third of the assets in the hands of about 6,300 banks.<span style="mso-spacerun: yes;"> </span>More and more wealthier personal banking relationships are being handled by firms that cannot be considered to be community banks.<span style="mso-spacerun: yes;"> </span>The products and services in these banks are many and the electronic interchange and access between financial assets and transactions are seamless and almost instantaneous.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One could imagine a banking system in which the wealthier people worked with institutions like these and the less wealthy “banked” at non-profit credit unions, the non-profit institutions being the only ones that could provide the products and services needed without having to achieve a competitive return on shareholder’s equity. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The last factor producing major changes in the banking industry is the advances taking place in information technology.<span style="mso-spacerun: yes;"> </span>Finance is nothing more than information.<span style="mso-spacerun: yes;"> </span>That is, finance can ultimately be just a recording of 0s and 1s.<span style="mso-spacerun: yes;"> </span>Thus, as information technology advances, so does the innovation in the financial industry.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, don’t think of how you use banking services right now…think about the electronic gadgets that your children or your grandchildren are using.<span style="mso-spacerun: yes;"> </span>This is where you will see what financial institutions are going to need to provide for in the coming years.<span style="mso-spacerun: yes;"> </span>What goes on in “electronic stuff” is real to these children and will become a part of the financial system as electronic finance becomes ubiquitous in the future.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, as advances in information technology has allowed “finance” to become more innovative, my guess is that for the future…we haven’t really seen what financial innovation can do. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This has tremendous implications for the regulatory efforts going on in the United States and the world.<span style="mso-spacerun: yes;"> </span>I have argued for three years now that the efforts of the United States Congress and others throughout the world have been to create a regulatory system that will prevent a 2007-2008 financial collapse.<span style="mso-spacerun: yes;"> </span>To me, the commercial banks in the United States are way beyond this system already.<span style="mso-spacerun: yes;"> </span>Oh, the banks fight Congress and the regulators all along the way.<span style="mso-spacerun: yes;"> </span>But, how much of this is real and how much of this is a smokescreen.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Throughout my professional career…and I have run three banks…the banks have always been ahead of the legislators and the regulators in terms of what is going on in the banking system.<span style="mso-spacerun: yes;"> </span>I am no less confident now that the banks are still far ahead of legislation and regulation and will continue to be so into the future.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I can’t imagine what banking will be like in five years…but, it will be something substantially different than it is now.<span style="mso-spacerun: yes;"> </span>It will be more electronic, it will be more innovative, and it will be harder to control.<span style="mso-spacerun: yes;"> </span>The only way we can hope to keep up with what is going on is to increase the openness and transparency with which the banking system operates. <span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-70425281641015691452012-01-12T09:01:00.000-08:002012-01-12T09:01:28.474-08:00There Still Are "Zombie" Banks Around<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In Europe, “On average the 31 companies in the Euro Stoxx Banks Index (SX7E) trade for 39 percent of common equity, or book value, according to data compiled by Bloomberg.<span style="mso-spacerun: yes;"> </span>France’s Credit Agricole SA (ACA) trades for 23 percent of book.<span style="mso-spacerun: yes;"> </span>Yet somehow the European Banking Authority last month concluded it had no capital shortfall.</span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The situation in the U. S. is better, but not good.<span style="mso-spacerun: yes;"> </span>Bank of America Corp. (BAC), for example, trades for 33 percent of book and insists it doesn’t need to sell new common shares, in spite of the markets’ contrary verdict.”<span style="mso-spacerun: yes;"> </span>(See <a href="http://www.bloomberg.com/news/print/2012-01-12/financial-frankness-is-a-bad-dream-for-a-bank-commentary-by-jonathan-weil.html">http://www.bloomberg.com/news/print/2012-01-12/financial-frankness-is-a-bad-dream-for-a-bank-commentary-by-jonathan-weil.html</a>.)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Zombie” banks are banks that have substantial amounts of worthless assets on their balance sheets but are afraid to write them down.<span style="mso-spacerun: yes;"> </span>In essence, the financial markets are doing the “writing down” for them. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Bankers are reluctant to write down assets in the first place.<span style="mso-spacerun: yes;"> </span>First of all it is an admission of a failure…of underwriting, of intuition, of forecasting, of lax behavior.<span style="mso-spacerun: yes;"> </span>The bankers that are holding your deposits don’t like to admit that they have made a mistake. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I know this is true…I have completed three (successful) bank turnarounds in my career…so I have seen the other side of the asset acquisition process in commercial banks. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, bankers don’t like to write down assets way after the time in which they should have written them down.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Bad assets accumulate and the longer that bankers<span style="mso-spacerun: yes;"> </span>“paper over” their bad asset problems the problems tend to grow and “the eventual clean up” becomes even worse.<span style="mso-spacerun: yes;"> </span>Rather than admitting that a problem exists and allocating resources to “clean up” the problem at an early stage, the bankers postpone devoting enough effort to resolving these issues and, in consequence, they find that the difficulties of their job increases in a non-linear fashion as the number and complexity of bad assets grow and multiply. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The problem now is that most of these “zombie” banks want to raise more capital to satisfy the new, higher regulatory requirements for capital but find that their stock prices are so depressed that raising additional capital can be extraordinarily expensive.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The author of the Bloomberg piece, Jonathan Weil, discusses this in the above quoted article.<span style="mso-spacerun: yes;"> </span>He focuses on UniCredit, the Italian bank that took a large writedown in the third quarter of 2011, which resulted in a 10.6 billion euro loss.<span style="mso-spacerun: yes;"> </span>On top of this the European Banking Authority determined, after the latest stress tests, that UniCredit had an 8 billion euro capital shortfall. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As of September 30, 2011, UniCredit had 950 billion euros in assets and only 52.3 billion in euros in common shareholder equity on its balance sheet.<span style="mso-spacerun: yes;"> </span>The stock market value of the bank is 14.8 billion euros.<span style="mso-spacerun: yes;"> </span>Something doesn’t add up here. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, that is where the concern over the other European (and American) banks comes in.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">With bank valuations in the range of those mentioned in the first two paragraphs of this post, the financial markets seem to be indicating that many of these banks have substantial amounts of questionable assets on their books that they have failed to publically acknowledge.<span style="mso-spacerun: yes;"> </span>And, this is one of the problems financial markets face…if the institutions they invest in are not brave enough…nor honest enough…to reveal this to the marketplace…then investors just have to guess at how serious the problems are.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In times like these, the guesses will tend to be on the negative side.<span style="mso-spacerun: yes;"> </span>And, this certainly doesn’t help the bankers to raise the capital they need to get back onto a solid capital footing.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Are there still a lot of “zombie” banks “out there”?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I believe there are.<span style="mso-spacerun: yes;"> </span>Although the FDIC only closed 92 banks in calendar year 2011, the number of banks in the United States shrunk by more than double this number.<span style="mso-spacerun: yes;"> </span>In the third quarter alone, only 26 banks were closed yet a total of 61 banks left the banking system.<span style="mso-spacerun: yes;"> </span>While the number of banks closed in the 12-month period ending September 30 was around 100 in number, the banking system had 271 fewer banks.<span style="mso-spacerun: yes;"> </span>So for 2011 it seems as if the number of banks leaving the banking system were two- to three-times the number of banks that the FDIC actually closed. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There was cheering when the number of banks listed on the FDIC’s problem list fell in the third quarter to 844 banks, down from 865 banks the quarter before.<span style="mso-spacerun: yes;"> </span>But, this means that although the problem list dropped by 21 banks, 61 banks, most of them troubled in one way or another, dropped out which means that maybe around 40 new problem banks got added to the FDIC’s list. </span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">(For more on this see my post <a href="http://seekingalpha.com/article/310644-while-small-banks-disappear-big-banks-get-bigger">http://seekingalpha.com/article/310644-while-small-banks-disappear-big-banks-get-bigger</a>.)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">My point here is that I don’t believe that either Europe or the United States is finished with its banking problems. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I still contend that one of the major reasons that he Federal Reserve pumped so much money into the banking system was to keep banks liquid enough so that they didn’t have to write off bad assets at too fast a pace, so that the banks had more time to try and work out these bad assets, and so that the FDIC had sufficient time to either close these banks as smoothly as possible or arrange for acquisitions to eliminate a substantial number of the “bad” banks. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Sooner or later, however, the bad assets on the balance sheets of banks are going to have to be recognized.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The problem is still sufficiently severe so that these “zombie” banks are unwilling to admit to the world that they remain troubled.<span style="mso-spacerun: yes;"> </span>For a more realistic valuation of their assets we will just have to look at market values. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, these banks are not out of the woods yes, for in Europe the “next” recession seems to be in progress.<span style="mso-spacerun: yes;"> </span>How this recession will play in the United States is, of course, unknown. (See my post, <a href="http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe">http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe</a>.) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">How much better it would have been for these banks to “recognize” and “claim” these bad assets earlier and to have fully disclosed them and then set out to work to correct the situation than to postpone recognition and “paper over” the problems which, in the end, creates major difficulties. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Bankers vociferously fight mark-to-market accounting and the timely writing down of “worthless assets” after-the-fact, that is, after the damage has been done.<span style="mso-spacerun: yes;"> </span>The problem is that mark-to-market accounting and the timely writing down of “worthless assets” are aimed at getting bankers to do their jobs before the financial crisis occurs.<span style="mso-spacerun: yes;"> </span>The hope is that the early proper recognition of the problems will lead to earlier resolution of them thereby avoiding major cumulative collapses.<span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-77789261369384858512012-01-09T06:58:00.000-08:002012-01-09T06:58:25.148-08:00Where Does Sovereign Credibility Come From? The European Sitaution<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>As usual, when Bob Barro of Harvard writes something it usually contains some provocative ideas.<span style="mso-spacerun: yes;"> </span>In the Monday morning Wall Street Journal, Barro writes about how Europe might get out of the Euro. (<a href="http://professional.wsj.com/article/SB10001424052970203462304577134722056867022.html?mod=ITP_opinion_0&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970203462304577134722056867022.html?mod=ITP_opinion_0&mg=reno-secaucus-wsj</a>) <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">What interested me most in Barro’s piece was the emphasis he placed on the credibility of the organizations that issue a currency.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In essence, as I read the article, Barro argues that the credibility of the Euro comes from those within the eurozone that are fiscally sound and carry those that are not fiscally sound, the “free riders”, along with them.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This credibility is maintained for as long as the “free riders” conduct their irresponsibility within limits.<span style="mso-spacerun: yes;"> </span>In fact, this is what the original charter of the eurozone called for…limits to how irresponsible the “free riders” could be. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, the limits must be enforced. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“Greece…has been increasingly out of control fiscally since the 1970s.<span style="mso-spacerun: yes;"> </span>But instead of expulsion, the EU reaction has been to provide a sufficient bailout to deter the country from leaving.”<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The bailouts have become serial, as bailouts have also been given to Portugal, Ireland, Italy, and Spain.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Thus, the only way credibility can be maintained is for Germany to continue to be fiscally strong while the union continues to provide bailout packages that will carry the “free riders” along for as long as possible. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Meanwhile, the internal effort of the members of the eurozone has been to create a stronger “fiscal” bond within the zone itself…ultimately moving to a “centralized political entity” that will oversee the fiscal and currency policy of the whole eurozone.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Europe, to achieve such a “centralized political entity”, would have to overcome many, many issues that have existed on the continent for a long time.<span style="mso-spacerun: yes;"> </span>For one, the internal rivalries that have existed for centuries would have to be overcome.<span style="mso-spacerun: yes;"> </span>Already the resentment against Germany has grown as Germany has become a more demanding partner within the union.<span style="mso-spacerun: yes;"> </span>Even statements like “Germany is achieving through economics what it could not achieve militarily at an earlier date” demonstrate some of the underlying emotions that exist on the continent.<span style="mso-spacerun: yes;"> </span>Then you have the cultures, languages, and other hurdles to overcome to achieve the needed unity.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Even so, Barro continues, in the shorter run, the credibility of the nations is vitally important because of the sovereign debt that has already been issued by the governments of Europe and that rest on the balance sheets of the banks within the eurozone.<span style="mso-spacerun: yes;"> </span>This is the reason there is rush to achieve the near term austerity in the budgets of Italy, Spain,…and France…among others.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Greek debt is now yielding more than 34 percent on its ten-year bonds.<span style="mso-spacerun: yes;"> </span>Portuguese bonds are yielding more than 13 percent.<span style="mso-spacerun: yes;"> </span>The debt of Italy is yielding more than 7 percent.<span style="mso-spacerun: yes;"> </span>And Spanish bonds are above 5.5 percent.<span style="mso-spacerun: yes;"> </span>These rates are unsustainable!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">French debt is yielding around 3.5 percent and the rating agencies are soon expected to remove their AAA rating. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The status of this debt is important because, “the issue that has prompted ever-growing official intervention in recent months has been actual and potential losses of value of government bonds of Greece, Italy and so on.<span style="mso-spacerun: yes;"> </span>Governments and financial markets worry that these depreciations would lead to bank failures and financial crises in France, Germany, and elsewhere.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Credibility is lacking because “it is unclear whether Italy and other weak members will be able and willing to meet their long-term euro obligations.”<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Not only is the banking system threatened by this lack of confidence, the uncertainty that exists surrounding the future structure and performance of this area does not contribute to the achievement of stronger economic growth.<span style="mso-spacerun: yes;"> </span>If anything, this uncertainty works to reduce growth. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Only as independent nations with their own currencies would these countries be able to meet their own obligations and achieve the credibility a nation needs to function within the global economy.<span style="mso-spacerun: yes;"> </span>“This credibility underlay the pre-1999 system in which the bonds of Italy and other eurozone countries were denominated in their own currencies.<span style="mso-spacerun: yes;"> </span>The old system was imperfect, but it’s become clear that it was better than the current setup.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The issue is one of credibility.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Right now, Germany seems to possess credibility.<span style="mso-spacerun: yes;"> </span>But this credibility is based on its maintaining the position of fiscal responsibility it has already achieved.<span style="mso-spacerun: yes;"> </span>And, this is just what the Germans seem to be doing. (“Germany Resists Europe’s Plea to Spend More,” <a href="http://www.nytimes.com/2012/01/09/business/global/germany-resists-europes-pleas-to-spend-more.html?_r=1&ref=business">http://www.nytimes.com/2012/01/09/business/global/germany-resists-europes-pleas-to-spend-more.html?_r=1&ref=business</a>) <span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As long as the current economic structure exists for the eurozone, the credibility of the eurozone will depend upon it’s ability to provide sufficient “band aides” to piggy-back on the credibility of Germany. <span style="mso-spacerun: yes;"> </span>My guess is that it will become harder and harder for financial markets to buy-into this piggy-back arrangement.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Credibility requires the provision of actions that backup promises.<span style="mso-spacerun: yes;"> </span>Barro is suggesting that the only way that the fiscally irresponsible will become credible is for them to be “out-on-their-own” again where they will have to be totally responsible for their own actions.<span style="mso-spacerun: yes;"> </span>Unless this happens, there is too much historical baggage carried by the eurozone that will not be overcome.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-38405562543690623152012-01-06T08:01:00.000-08:002012-01-06T08:01:16.925-08:00Monetaray Policy in 2011: Looking Back<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Total reserves in the banking system rose by almost 50 percent in 2011 to average around $1.6 trillion.<span style="mso-spacerun: yes;"> </span>The increase during the year was slightly more than $511 billion. (Remember in August 2008 when total reserves in the banking system averaged less than $45 billion?)</span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Excess reserves in the banking system rose by about $490 billion from December 2010 to December 2011 to a total of about $1.5 trillion. (Remember in August 2008 when excess reserves in the banking system averaged less than $2 billion?) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The Federal Reserve continued to pump reserves into the banking system in 2011 and about 95% of the reserves going into the banking system went into excess reserves.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Bank loans fell during the year by approximately $50 billion.<span style="mso-spacerun: yes;"> </span>There was a pickup in business loans (commercial and industrial loans) of about $122 billion, but real estate loans (primarily commercial real estate loans) fell by $150 billion and consumer loans dropped by $22 billion.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Note that the pickup in business loans was predominately located in the largest 25 domestically chartered banks in the United States.<span style="mso-spacerun: yes;"> </span>The increase here was approximately $95 billion.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One can conclude from this that the reserves that the Fed pumped into the banking system did not, on balance, go to support an increase in lending. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Yet, the growth rate in both measures of the money stock rose during the year.<span style="mso-spacerun: yes;"> </span>For the M1 measure of the money stock, the year-over-year rate of increase rose from 7.5 percent in December 2010 to 19.1 percent in December 2011. (This is using the 13-week average of the measure.)<span style="mso-spacerun: yes;"> </span>The year-over-year rate of growth of the M2 measure of the money stock rose from 3.3 percent in December 2010 to 9.8 percent in December 2011. (Again using the 13-week average.) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The increase was highlighted by a whopping 45% rise in demand deposits!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, this increase in demand deposits did not come from an increase in bank lending because the bank lending that might have resulted in an increase in demand deposits and hence the M1 money stock actually declined!</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The reason for the huge increase in demand deposits seems to be that people are moving assets from short-term investment vehicles to demand deposit accounts.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">For the past two years or so I have been arguing that this movement into demand deposits is coming for two reasons.<span style="mso-spacerun: yes;"> </span>The first reason is that interest rates on short term investments are so low that people do not believe that it is worthwhile to keep their money in interest bearing assets rather than demand deposits. (For example, Federal Reserve data record a drop of almost $90 billion in Institutional Money Funds over the past year.) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The second reason is that many people are still is difficult financial condition.<span style="mso-spacerun: yes;"> </span>Hence, they are keeping what funds they have in transaction-type accounts so as to pay for necessary living expenses.<span style="mso-spacerun: yes;"> </span>Additional information that supports this argument is that the currency component of the money stock rose by more than 9 percent this last year.<span style="mso-spacerun: yes;"> </span>This is, historically, an extremely high number.<span style="mso-spacerun: yes;"> </span>People in tough economic situations also hold more cash.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The evidence from the banking system is not very encouraging with regards to a pickup in economic activity.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">How did the Federal Reserve inject more than $500 billion reserves into the banking system this last year?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">First, the Federal Reserve increased its holdings of securities by roughly $442 billion.<span style="mso-spacerun: yes;"> </span>Actual acquisitions of Treasury securities amounted to about $640 billion but these purchases were offset by a $43 billion decrease in the Fed’s holdings of Federal Agency issues and a $154 decline in the Fed’s holdings of mortgage backed securities.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One should also note that there was a net decrease in funds associated with the bailout actions of 2007 and 2008 of approximately $140 billion. Also, primary borrowings from the Fed’s discount window declined by $36 billion.<span style="mso-spacerun: yes;"> </span>One generally assumes that these “operating” factors are offset by the Fed’s purchase of securities.<span style="mso-spacerun: yes;"> </span>Thus the “net” addition of funds from the increase in the Fed’s outright holdings of securities totaled about $266 billion.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Second, the United States Treasury also played a role in the increase in bank reserves.<span style="mso-spacerun: yes;"> </span>At the end of 2010, the Treasury held almost $200 billion in something called the U. S. Treasury Supplementary Financing Account. (I have mentioned the use of this account many times in 2010…here is one post: <a href="http://seekingalpha.com/article/256497-qe2-watch-version-4-0-fed-is-tone-deaf-and-spaghetti-tossing">http://seekingalpha.com/article/256497-qe2-watch-version-4-0-fed-is-tone-deaf-and-spaghetti-tossing</a>.) These funds were injected into the banking system this past year…the full $200 billion of them.<span style="mso-spacerun: yes;"> </span>This can be added to the $376 billion mentioned in the previous paragraph to account for $466 billion of reserves going into the banking system.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Third, the currency being demanded by the public mentioned above is supplied to the public by the Federal Reserve “on demand”.<span style="mso-spacerun: yes;"> </span>That is, the Federal Reserve generally replaces the currency flowing out of the banking system into general circulation, dollar for dollar.<span style="mso-spacerun: yes;"> </span>This past year, currency in circulation rose by about $93 billion.<span style="mso-spacerun: yes;"> </span>Thus the $466 billion of the previous paragraph drops to $373 billion.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Fourth, the Federal Reserve has “pumped” dollars into the European banking system due to the sovereign debt crisis in Europe.<span style="mso-spacerun: yes;"> </span>For example, Central bank liquidity swaps have increased by about $100 over the past year, most of the increase coming in the past six months.<span style="mso-spacerun: yes;"> </span>This is not the only way the Fed influences what is going on internationally as the Fed holds other assets denominated in foreign currencies and also engages in reverse repurchase agreements with “foreign official and international accounts”.<span style="mso-spacerun: yes;"> </span>If one roughly nets out the accounts associated with all of these type of transactions, we can say that the Fed roughly added another $104 billion to bank reserves which brings the total injection to $477 billion<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">One final operating factor influences this total figure, payments into and out to the general account of the United States Treasury.<span style="mso-spacerun: yes;"> </span>This fluctuates with tax payments and actual government expenditures.<span style="mso-spacerun: yes;"> </span>The year-over-year drop in this account is about $28 billion and this brings the total increase in “reserve balances at Federal Reserve banks to $505 billion, which matches very closely with the $490 increase in excess reserves mentioned in the second paragraph of this post. (The difference is due to minor operating factors that we do not need to discuss.)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In summary, the Federal Reserve (and the U. S. Treasury) put a lot of reserves into the banking system this past year.<span style="mso-spacerun: yes;"> </span>As usual, the Fed needs to take care of other operating factors that constantly impact the banking system, but in general, the injection of reserves came from the securities the Fed purchased as a part of the QE2, the dollars being advanced to European central banks to help relieve the pressures of the sovereign debt crisis, and the injection of funds into the banking system from the fiscal activities of the United States Treasury. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As of this time, the reserves going into the banking system have not been lent out…they are just sitting on the balance sheets of the commercial banks.<span style="mso-spacerun: yes;"> </span>The extraordinary increase in the money stock measures are the result of the low interest rates that people can earn on their money balances and the need of people who are economically distressed to hole transaction accounts. </span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The efforts of the monetary authorities are not being felt, yet, by an increase in economic activity.</span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-9042479866322461902012-01-05T08:16:00.000-08:002012-01-05T08:16:57.258-08:00What the Federal Reserve is Risking<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">There are two articles in the Wall Street Journal today that I believe are very important responses to the announcement of the Federal Reserve that it will release interest rate projections for several years out.</span><div class="MsoNormal"> </div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The first of these by Kelly Evans says a mouthful: “Boosting Transparency, Fed Puts Its Reputation on the Line.” (<a href="http://professional.wsj.com/article/SB10001424052970204331304577141034029100316.html?mod=ITP_moneyandinvesting_5&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970204331304577141034029100316.html?mod=ITP_moneyandinvesting_5&mg=reno-secaucus-wsj</a>)<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I love the quote that Evans leads the article with…it is from Abraham Lincoln: “it is better to remain silent and be thought a fool than to open one’s mouth and remove all doubt.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">First of all, to produce projections of interest rates three years into the future?<span style="mso-spacerun: yes;"> </span>Come on…</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, to release the forecasts from all 17 members of the Federal Reserve’s open-market committee…</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is to produce credibility?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Come on…</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, the projections are to “make monetary policy more effective by lowering volatility and uncertainty in the market around the path of future rates.”<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Formerly, those in the Federal Reserve believed that some uncertainty should surround its goals because this allowed markets to move incrementally due to the fact that market participants had to search for where the Fed was moving.<span style="mso-spacerun: yes;"> </span>At least this was the way it was when I worked at the Fed. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Knowing what the target will be results in markets that take discrete leaps…up or down…as market participants jump to the place where the wizards at the Fed now presume interest rates should be. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, two points on this.<span style="mso-spacerun: yes;"> </span>The first one is that making everything depend on the Fed’s prognostications and the persistence with which the Fed holds onto the projections, can lead to “sure-thing” bets on the part of market participants.<span style="mso-spacerun: yes;"> </span>There are plenty of examples around in which “the market” bets against the ability of a government or a central bank to hold onto a desired “goal”.<span style="mso-spacerun: yes;"> </span>As the pressure builds up, the probability that the government or central bank will have to adjust to the reality of the situation can approach 100 percent.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The second point is that the Federal Reserve may actually be the cause of the volatility and uncertainty it is attempting to reduce.<span style="mso-spacerun: yes;"> </span>As the very actions of the Fed become less recognizable and as, as Evans states, the forecasts “differ significantly from reality” the authority of the Fed decreases and this, in itself, creates “volatility and uncertainty.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I would argue very strongly that the actions of the Federal Reserve over the past four years…if not longer…have been a large part of the uncertainty it abhors and this has resulted in the increase in market volatility that it would like to reduce.<span style="mso-spacerun: yes;"> </span>But, this increase has not been due to a lack of “transparency” on the part of the Fed but has been due to a lack of understanding on the part of the Fed.<span style="mso-spacerun: yes;"> </span>And, this lack of understanding has been transmitted from the Fed to the financial markets.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This is where the other article in the Journal comes in: “Fed Rate Outlook to Bite Traders.” (<a href="http://professional.wsj.com/article/SB10001424052970203471004577141182345031606.html?mod=ITP_moneyandinvesting_3&mg=reno-secaucus-wsj">http://professional.wsj.com/article/SB10001424052970203471004577141182345031606.html?mod=ITP_moneyandinvesting_3&mg=reno-secaucus-wsj</a>) In this piece, Cynthia Lin argues that “With its push to provide a clearer policy road map, the Federal Reserve is about to give bond traders one less reason to like medium-term bonds as it pins down yields that already are at historic lows.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Ms. Lin quotes Kent Engelke, chief economic strategist at Capitol Securities Management as saying, “The short end of the (yield) curve is dead.”<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Ms. Lin goes on, “Some investors even are suggesting that the new policy may give little reason to trade bonds maturing as late as 2019.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Doesn’t someone at the Fed understand this possibility?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I have always assumed that volatility was a function of the depth and breadth of the market.<span style="mso-spacerun: yes;"> </span>If the policy of the Fed has the result that it will tend to reduce the number of traders in the market, then it would seem to me that this is a movement will have the wrong consequences for the market.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">As I stated yesterday, I believe that the move made by Mr. Bernanke and the Fed to achieve greater “transparency” of Federal Reserve operations is more an effort to justify what Mr. Bernanke and the Fed have done over the past four years or so. (See “Bernanke “Transparent about his lack of self-confidence,” <a href="http://seekingalpha.com/article/317453-bernanke-transparent-about-his-lack-of-self-confidence">http://seekingalpha.com/article/317453-bernanke-transparent-about-his-lack-of-self-confidence</a>.)<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, I believe that what has been done to the Fed over the past decade has changed central banking in the United States more that we can possibly imagine at this time.<span style="mso-spacerun: yes;"> </span>And, as most of you know that have read my blog over the past, almost four years, I am not convinced that the movement has been in the right direction.<span style="mso-spacerun: yes;"> </span>Unfortunately, I believe that we will be paying for this movement, in one way or another, over the next four or five years.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-37235043699691910442012-01-04T07:29:00.000-08:002012-01-04T07:29:58.480-08:00Bernanke "Transparent" About His Lack of Self-Confidence<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
a:link, span.MsoHyperlink
{mso-style-priority:99;
color:blue;
mso-themecolor:hyperlink;
text-decoration:underline;
text-underline:single;}
a:visited, span.MsoHyperlinkFollowed
{mso-style-noshow:yes;
mso-style-priority:99;
color:purple;
mso-themecolor:followedhyperlink;
text-decoration:underline;
text-underline:single;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>This post is about the Fed’s latest effort to build confidence in the financial system by “providing the predictions of its senior officials about their own decision, hoping to increase its influence over economic activity by guiding investor expectations.” (<a href="http://www.nytimes.com/2012/01/04/business/economy/fed-to-start-publicly-forecasting-its-rate-actions.html?_r=1&ref=business">http://www.nytimes.com/2012/01/04/business/economy/fed-to-start-publicly-forecasting-its-rate-actions.html?_r=1&ref=business</a>) <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">“The inaugural forecast will show the range of predictions made by Fed officials about the level of short-term interest rates in the fourth quarter of 2012, 2013, and 2014….<span style="mso-spacerun: yes;"> </span>It will also summarize when they expect to start raising short-term rates….”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">To me, this is Ben Bernanke’s latest effort to justify himself and what he has done.<span style="mso-spacerun: yes;"> </span>It is Mr. Bernanke’s cry to financial markets: “please understand me.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, the more Mr. Bernanke cries for understanding, the more he digs a hole for himself with respect to the future.<span style="mso-spacerun: yes;"> </span>For one, who can believe that anyone can forecast short-term interest rates for a three-month period let alone for a three-year time frame?<span style="mso-spacerun: yes;"> </span>The record of the people at the Fed is no better than that any other group of forecasters.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Second, by telegraphing the Fed’s intention, the Fed will be setting itself up for financial markets to “bet” against it.<span style="mso-spacerun: yes;"> </span>This is always a possibility when central banks or governments explicitly state their policy goals.<span style="mso-spacerun: yes;"> </span>And, the “bet” many times can become a “sure thing.”<span style="mso-spacerun: yes;"> </span>Perhaps the best, most recent example of this is the Soros “bet” against the British government in the 1990s about the value of the pound.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Ultimately, to me, this effort at “transparency” is a sign of Mr. Bernanke’s real lack of self-confidence in his ability to lead the Federal Reserve through this difficult time.<span style="mso-spacerun: yes;"> </span>He can’t understand why people don’t understand what he is doing and so he tries, harder and harder, to create this understanding.<span style="mso-spacerun: yes;"> </span>His steps to gain greater “transparency” over the past six months is just evidence of his struggle.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I will admit that I am not, nor have I ever been, a fan of Ben Bernanke as the Chairman of the Board of Governors of the Federal Reserve System.<span style="mso-spacerun: yes;"> </span>I was in favor of him being the Chair of the Economics Department at Princeton University…but not Chair of he Fed.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">I was against Bernanke’s re-appointment as the Chairman (<a href="http://seekingalpha.com/article/151474-exit-strategy-an-argument-against-bernanke-s-reappointment">http://seekingalpha.com/article/151474-exit-strategy-an-argument-against-bernanke-s-reappointment</a>) and disappointed in President Obama for actually re-appointing him (<a href="http://seekingalpha.com/article/158762-bernanke-s-disappointing-reappointment">http://seekingalpha.com/article/158762-bernanke-s-disappointing-reappointment</a>).</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In reviewing Bernanke’s record since being a member of the Board of Governors, I see nothing but a competent academic, out of his element and over-his-head in the deep water of a twenty-first century whirlpool.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt;">In more peaceful times when he was just a member of the Board of Governors (</span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">August 5, 2002 – June 21, 2005) he was a lackey of the then Fed Chairman Alan Greenspan, developing the argument for Greenspan’s defense of recent monetary policy that used the savings of China and the Middle East to finance U. S. Treasury debt.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">He was a strong supporter of Greenspan’s effort to keep the Federal Funds rate at one percent in the 2003-2004 period to combat the possibility of the economy going into a deep recession.<span style="mso-spacerun: yes;"> </span>This effort helped to underwrite the “bubble” that took place at this time in the U. S. housing market.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Then, once he was became Chairman of the Federal Reserve on February 1, 2006, he was a firm advocate of pushing the target rate for the Federal Funds rate to 5.25 percent and keeping it there into August of 2007 so as to combat the possibility that inflation might get out-of-hand. <span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The Fed move was in response to the financial market meltdown of “Quant” financial firms that took place in August 2007. (See book review on “The Quants”, <a href="http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson">http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson</a>.) </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The recession in the United States began in December 2007.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">The next episode of Bernanke’s “steady hand on the tiller” came in the fall of 2008.<span style="mso-spacerun: yes;"> </span>I have characterized Bernanke’s reaction to the Lehman Brothers failure as one of panic.<span style="mso-spacerun: yes;"> </span>(See my post “The Bailout Plan: Did Bernanke Panic”, </span><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><a href="http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic">http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic</a>.)</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, what Bernanke and the Fed did next has been the basis for the claim that Mr. Bernanke saved the United States from a second Great Depression.<span style="mso-spacerun: yes;"> </span>The Federal Reserve acted to increase its balance sheet from slightly less than $900 billion is assets to more that $2.0 trillion in assets by the beginning of 2009.<span style="mso-spacerun: yes;"> </span>Through various stages of Quantitative Easing (QE), the Fed’s total assets now amount to more than $2.8 trillion. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">This injection of funds into the banking system has resulted in around $1.6 trillion in</span><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";"> excess reserves on the balance sheets of U. S. banks.<span style="mso-spacerun: yes;"> </span>It has created little in the way of bank lending or economic growth.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">However, many people have given credit to Mr. Bernanke for saving the country and this may be an appropriate gesture on the part of a grateful country.<span style="mso-spacerun: yes;"> </span>My concern has been that this policy is nothing more than a policy of throwing sufficient “stuff” against the wall to see what would stick.<span style="mso-spacerun: yes;"> </span>As a consequence, monetary policy in the United States has become a tool of ignorance, not of professional competence.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">And, that is exactly where we are today.<span style="mso-spacerun: yes;"> </span>That is why there is so little confidence in the Chairman of the Federal Reserve System in world financial markets. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">Thus, that is why the Chairman of the Federal Reserve System is struggling to reach out to the financial markets to justify what he has done…and is doing.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-fareast-font-family: "Times New Roman";">This effort, in my mind, will achieve little or nothing…and could do much harm.</span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0tag:blogger.com,1999:blog-3210378500200629631.post-71244239255229592732012-01-03T10:15:00.000-08:002012-01-03T10:15:21.914-08:00No. 1 Issue of 2012: Recession in Europe<style>
<!--
/* Font Definitions */
@font-face
{font-family:Arial;
panose-1:2 11 6 4 2 2 2 2 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536859905 -1073711037 9 0 511 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:"MS 明朝";
mso-font-charset:78;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1791491579 18 0 131231 0;}
@font-face
{font-family:Cambria;
panose-1:2 4 5 3 5 4 6 3 2 4;
mso-font-charset:0;
mso-generic-font-family:auto;
mso-font-pitch:variable;
mso-font-signature:-536870145 1073743103 0 0 415 0;}
/* Style Definitions */
p.MsoNormal, li.MsoNormal, div.MsoNormal
{mso-style-unhide:no;
mso-style-qformat:yes;
mso-style-parent:"";
margin:0in;
margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
.MsoChpDefault
{mso-style-type:export-only;
mso-default-props:yes;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"MS 明朝";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
@page WordSection1
{size:8.5in 11.0in;
margin:1.0in 1.25in 1.0in 1.25in;
mso-header-margin:.5in;
mso-footer-margin:.5in;
mso-paper-source:0;}
div.WordSection1
{page:WordSection1;}
-->
</style> <br />
<span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"></span>I believe that the number one economic issue for 2012 will be a recession in Europe.<span style="mso-spacerun: yes;"> </span>I don’t see how this will be avoidable. <span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"></span></span> <div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The sovereign debt crisis in Europe has not ended and a lot of the debt is turning over this year and must be financed in the face of greater scrutiny by the rating agencies.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The solvency problems in the European banking system has not been resolved and with more severe capital requirements and a rising level of troubled loans on their balance sheets, commercial banks are not going to be in the mood to increase lending levels.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And the governmental austerity programs of Greece, Italy, and Spain are just beginning to hurt.<span style="mso-spacerun: yes;"> </span>The pain will only rise over the next year or two.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Furthermore, the lack of leadership on the European continent (and elsewhere) is astounding!<span style="mso-spacerun: yes;"> </span>How do you resolve a difficult situation when there are no leaders around to realistically deal with the problems embedded within the situation?</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">A European recession has a high probability of occurring, but the depth of the recession is still to be determined.<span style="mso-spacerun: yes;"> </span>On the surface, one might think that the recession would be relatively shallow, but there are other factors one must filter into the picture that adds to the uncertainty of how deep the recession might be. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Given this picture as the most likely leading scenario for 2012, I believe that we must further focus our sights on two other factors.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">The first of these is how the recession might spread to other nations.<span style="mso-spacerun: yes;"> </span>Contagion is obviously the biggest concern here.<span style="mso-spacerun: yes;"> </span>If a recession hits an area as large as the eurozone, even if it is a modest one, the effects of that recession will spread to others.<span style="mso-spacerun: yes;"> </span>The exports of non-European nations will drop.<span style="mso-spacerun: yes;"> </span>And there will be financial markets consequences.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">It is highly unlikely that a European recession will be contained just to the continent.<span style="mso-spacerun: yes;"> </span>And, since many of Europe’s trading partners are already facing economic expansion that is modest, at best, the repercussions could spread to a relatively large part of the world. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;"><span style="mso-spacerun: yes;"> </span>The second factor is even more disturbing.<span style="mso-spacerun: yes;"> </span>If we have a European recession in 2012, given the austerity programs that are being embedded in the economic policies of eurozone states, the likelihood that social unrest in these nations will accelerate both in the current year and beyond.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">We have already seen outbursts of social unease in 2011 and with the increasing information on greater income inequalities, higher levels of unemployment, lower pensions, and so forth, that will be in the news, social unrest can only increase.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">But, these protests will have the examples of the Arab spring to build upon.<span style="mso-spacerun: yes;"> </span>As was seen in 2011, the use of modern information technology can only strengthen the capability of protesters to organize and to disrupt.<span style="mso-spacerun: yes;"> </span>What happened in 2011 has not been lost on the discontented of the developed world. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">And, what happens if a European recession spreads to other areas of the world.<span style="mso-spacerun: yes;"> </span>The seeds of protest have already been planted in many areas, including the United States.<span style="mso-spacerun: yes;"> </span>Just mention the word “occupy” and you will get your response.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Which leads me to one final point.<span style="mso-spacerun: yes;"> </span>I believe that modern society is now going through a period of substantial transition, and, like most periods of substantial transition there will be a lot of suffering as the “new world” emerges and there will be a substantial period of uncertainty as we grapple with the issues and move into this “new world.”</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Of course, this will be one of the major problems we have to face…the problem of identifying what needs major changes and what needs only minor adjustments. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">With certainty, however, I will argue that the evolving information technology is going to play a huge role in whatever results.<span style="mso-spacerun: yes;"> </span>People are going to be dealing with more and more information and they will have this information is “real time.”<span style="mso-spacerun: yes;"> </span>There will be much greater connectivity between people.<span style="mso-spacerun: yes;"> </span>Due to this there is going to have to be greater openness and transparency in life and this is going to force major changes on the way we do things and the speed at which people react.<span style="mso-spacerun: yes;"> </span>Governments are going to have to respond to this.<span style="mso-spacerun: yes;"> </span>Corporations are going to have to respond to this.<span style="mso-spacerun: yes;"> </span>And, whole societies and their social structures are going to have to respond to this.<span style="mso-spacerun: yes;"> </span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">Changes in the availability of information have resulted in major upheavals in the world from the use of mobile type in printing which occurred around 1450 CE and resulted in societal changes like the Renaissance and the Reformation…and the Enlightenment…to the creation of the typewriter, the telephone, the telegraph, the radio, and television.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: Arial; font-size: 10.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi;">In a very real sense, I believe that a worldview is passing.<span style="mso-spacerun: yes;"> </span>A recession in Europe during 2012 would accelerate changes that are already in motion.<span style="mso-spacerun: yes;"> </span>If I am correct, this conclusion does not present a real comfortable picture for the next five to ten years but in terms of the human suffering that will result and in terms of the needs involved in adapting to the changes.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>Mase: Economics and Financehttp://www.blogger.com/profile/16730994070959040962noreply@blogger.com0