Federal Reserve

The Recession is Hiding in Housing

Sam Sherraden — Tue, 06 May 2008 17:05:00 -0400

Some are questioning whether the US is in a recession. Job losses last week were less than expected at -20,000. Many expected between -75,000 and -80,000. The stock market has rallied and the Dow Jones Industrial Average broke through the 13,000 mark last week. The Federal Reserve cut interest rates by 25bp but two members of the FOMC dissented. Richard Fisher, president of the Dallas Fed, and Charles Plosser, president of the Philadelphia Fed, argued there was no need for a cut. Despite a blip of positive news, the prospects for the U.S. housing market and American consumer are likely to continue to drag on the economy. For a graphic representation of how damaged the US housing market is, see Ben S. Bernanke's Mortgage Delinquencies and Foreclosures.

Snapshot asks, if this recession is led by falling housing prices and damaged consumers, when will it be worst?

Financial Times - US Jobs Surprise
BNP Paribas - US: Employment Falls Less Than Expected
US Department of Labor - U.S. Employment Situation April 2008
Wall Street Journal - Jobs Data Show Hopeful Sign, Though Economy Still Ails
Ben S. Bernanke - Mortgage Delinquencies and Foreclosures

Euro Rising, Dollar Falling

Sam Sherraden — Wed, 23 Apr 2008 14:53:00 -0400

The euro may be overvalued, but don't expect it to fall anytime soon. Rising commodity prices have pushed eurozone inflation to a sixteen year high at 3.6% and the European Central Bank remains committed to inflation targeting monetary policy. The ECB recently pushed back against the Bank of England and IMF who claim there is room for rate cuts. On the other side of the Atlantic, recession fears led to aggressive interest rate cuts in the United States. The weak dollar has caused a rise in the price of imports increasing inflation, but also made exports cheaper and more attractive to foreign consumers. The earnings reports from internationally exposed companies in the first quarter of 2008 cited strong foreign demand and better than expected earnings.

Snapshot asks, where will the euro be at the end of 2008?

Daily FX - Euro breaks 1.60, where is it headed next?
Guardian - Corporate hedging may be adding to euro's gains
Morgan Stanley - Why the euro is so strong: a new hypothesis
Societe Generale - Forex Weekly
Bank of Ireland - The euro is overvalued against the dollar
Financial Times - Euro hits record high against dollar
Financial Times - Hawkish ECB drives euro to new high

Greenspan’s Gaff?

Sam Sherraden — Wed, 09 Apr 2008 16:36:00 -0400

Alan Greenspan wrote in Monday's Financial Times that he was blameless for the development of the real estate bubble, echoing his dismissal of blame during the popping of the tech bubble. Greenspan is right to point out that the ability of regulators to foresee crises are exaggerated and housing bubbles in other countries have risen despite tight monetary policy. However, he is wrong that tighter monetary policy, further regulation over both mortgage lending and complex financial instruments would not have helped slow soaring housing prices. As Martin Wolf points out in his column linked below, a rise in interest rates of 1% would not lead to market collapse if people expected their houses to rise in value by 10%.

Alan Greenspan - The Fed is blameless on the property bubble
Martin Wolf - Why Greenspan does not bear most of the blame
Desmond Lachman - The Economic Consequences of Mr. Greenspan

Paulson’s Plan

Sam Sherraden — Tue, 01 Apr 2008 03:12:00 -0400

The first proposal to reform the financial system since the subprime crisis was announced yesterday by Treasury Secretary Hank Paulson. The proposal aims to create a regulatory environment in which "capital can seek out its most productive uses in an efficient matter." Before his time as Treasury Secretary he worked as co-chief executive at Goldman Sachs, where he argued for reduced regulation and consolidation of regulatory agencies. Yesterday's proposal sought to combine regulatory agencies and expand the powers of the Fed.

Snapshot asks, what parts of the Paulson plan will survive?

Treasury Department - Paulson's Blueprint
Cumberland Advisors - The Paulson Report: "Something Old, Something New, Something Borrowed..."
Fortune - Fed Up with the FED
Wall Street Journal - Paulson Plan Begins Battle Over How to Police Market
Financial Times - Paulson's Gamble

Discussing Rescue for Mortgage Backed Securities

Sam Sherraden — Mon, 24 Mar 2008 14:19:00 -0400

The Fed's move to protect Bear Stearns last week may only be a preview of what is to come. Last weekend, the Federal Reserve Bank of New York held the mortgage backed securities of Bear Stearns as collateral. This weekend, the Financial Times reported that the Federal Reserve, European Central Bank, and the Bank of England are discussing the purchase of some of the $6 trillion in mortgage backed securities (MBS).

Snapshot asks, are the risks this poses to the taxpayer outweighed by the stabilization of financial markets?

Financial Times - Central banks float rescue ideas
Financial Times - US can learn from Japan's crisis
Bloomberg - Fed May Buy Mortgages Next, Treasury Investors Bet
Bloomberg - Federal Home Loan Banks May Buy $100 Billion of Mortgage Bonds

Financial Meltdown or Bailouts for Banks?

Sam Sherraden — Wed, 19 Mar 2008 22:04:00 -0400

Over the weekend, the government provided liquid assets to Bear Stearns and held $30bn of Bear's most questionable assets - mortgaged backed securities. In addition, the Fed opened the discount window to include investment banks and dropped interest rates by another 75bp. These signs indicate that the Fed has pulled out all the stops to provide stability to financial markets. To date, the Fed has made $650bn available. But, there is also an implicit guarantee that the Fed will provide more money to other struggling financial institutions. Had these measures not been taken, the financial system may have become completely crippled and had disastrous effects on the "real economy."

Snapshot asks, should tax payers, who will ultimately pay for these losses, support this rescue?

Wall Street Journal - The Bear Precedent
Econbrowser - Not a Bailout
Washington Post - The Fed Can't do it Alone
Bloomberg - Reid Calls Bear Stearns `Bailout' Unfair to Taxpayers

Any Levers Left?

Sam Sherraden — Tue, 04 Mar 2008 19:39:00 -0500

It is unclear what response, if any, will right the U.S. economy. Chairman of the Federal Reserve, Ben Bernanke, gave a speech today calling for "a vigorous response" to the mortgage crisis and suggested reinvigorating government-sponsored enterprises, like Fannie Mae and Freddie Mac, with increased regulation and possibly writing down the principal on home mortgages. Treasury Secretary Henry Paulson said in a speech yesterday, "Let me be clear: I oppose any bailout." It appears policy makers, officials, and economists still cannot agree on appropriate solutions to the mortgage crisis.

Snapshot asks, what policy will get the U.S. economy out of its current slump and not threaten long run growth?

Bloomberg - U.S. Stocks Fall on Bernanke Plan
Ben Bernanke - Reducing Preventable Mortgage Foreclosures
Morgan Stanley - If Monetary Policy Can’t Do the Job, Then What?
David Greenlaw - Leveraged Losses: Lessons from the Mortgage Market Meltdown
Henry Paulson - U.S. Housing and Mortgage Market Update before the National Association of Business Economists

Growth Prioritized over Inflation, A Global Trend?

Sam Sherraden — Wed, 27 Feb 2008 17:39:00 -0500

Ben Bernanke said this morning that the Federal Reserve “will act in a timely manner as needed” to keep the economy growing, implying more interest rate cuts in March. In today's speech before the House Financial Services Committee, Bernanke said the threat of core inflation and overall inflation has risen, but that growth and stability are now the immediate priorities.

Snapshot asks, will the Federal Reserve make inflation an equal priority again? Is recent Fed policy emblematic of a global move away from inflation targeting?

Wall Street Journal – Bernanke Hints at More Rate Cuts
Ben Bernanke – Semiannual Monetary Policy Report to the Congress
EVRO Intelligence – Out of Control: Inflation
Princeton University – Does Inflation Targeting Matter? A Reassessment
Federal Reserve Bank of Philadelphia – A Review of Inflation Targeting in Developed Countries

Has Stagflation Returned?

Sam Sherraden — Thu, 21 Feb 2008 00:00:00 -0500

The threat of a recession occurring at the same time as higher than expected inflation raises concerns about stagflation, a combination of inflation and stagnant growth not seen since the 1970s. Minutes from the January Open Market Committee meeting indicate the Fed will raise rates quickly to avoid inflationary pressures when concerns over slow growth subside. Despite inflationary pressure, investors predict the Fed will ease rates 50 basis points during their next meeting on March 18th.

Snapshot asks, are we or will we experience stagflation?

New York Times: That 70s Look: Stagflation
Federal Reserve Board: Minutes of the Federal Open Market Committee January 29-30, 2008
Bureau of Labor Statistics: Consumer Price Index Summary
Wall Street Journal: Two Front Fight for the Fed
Wall Street Journal: Fears of Stagflation Return As Price Increases Gain Pace
Bloomberg: Fed Sees Rate Low `for a Time' Then Possible Reversal
Frederic S. Mishkin: The Federal Reserve's Tools for Responding to Financial Disruptions, February 15, 2008