In today’s short video we examine the crash of 1929 and the similarities to today’s Dow. This video is not meant to scare anyone, but to educate investors and traders of the possibilities that may exist in today’s market.
We could be, repeat, could be very close to a tipping point similar to that of 1930 when the Dow had ended a 50% correction to the upside. I invite you to watch my latest video and see what makes sense to you.
By Nico Isaac
In case you were hiding out Tiger Woods’ style far away from the mainstream media during the past month, let me be the first to say: January saw an abrupt end to the U.S. stock market’s record-setting winning streak. Last count, the Dow Jones Industrial Average plummeted 4% in its worst monthly loss in a year.
And, according to one Feb. 1, 2010, MarketWatch story, “The time to consider an exit strategy” has officially arrived. Here, the article captures the public’s astonishment turned acceptance of the Dow’s boom-to-gloom shift:
“The Dow has shocked the bulls out of their complacency. After all, analysts were looking for the bull market to last until at least the second half of the year. Investors were not prepared for such a sharp decline and now at least some of the chatter has gone from ‘how high will the market go?’ to ‘how low will it fall?’ [emphasis added]“
Let me get this straight. The powers that be say it’s time to “consider an exit strategy” — AFTER the Dow has already plunged 700-plus points to land at its lowest level in two months. That’s about as helpful as building a life raft AFTER your ship has begun to sink.
Let me get this straight. The powers that be say it’s time to “consider an exit strategy” — AFTER the Dow has already plunged 700-plus points to land at its lowest level in two months. That’s about as helpful as building a life raft AFTER your ship has begun to sink.
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Then, those same sources go on to say investors were “not prepared” for the degree and depth of the stock market’s decline. This is only partly true. On Main Street, the early January flood of bull-is-back-type headlines gushed in and washed all the bears away.
Yet, on our “Elliott wave” Street, preparation for a “sharp” decline in the Dow was fast in place. One week before the market turned down from its Jan. 19 high, Elliott Wave International’s Short TermUpdate went on high bearish alert with this commanding insight:
“The Dow’s diagonal remains in tact and its form is clear. We will afford the pattern a bit of leeway over the next one-two days… but the structure is very late in development. That means a trend reversal is fast approaching. A potential stopping range is 10,725-10,740. A close beneath [critical support] will confirm that the diagonal is over and the market has started a down phase that should draw prices significantly lower. Once a diagonal is complete, prices swiftly retrace to near its origin, which in this case is 10,263.90, the very first downside target.” (Jan. 13 Short Term Update)
Soon after, the Dow peaked within four ticks of our cited upside target; next, it went on to fulfill the second part of its Elliott wave script with a staggering triple-digit slide to “near the origin” of the diagonal triangle pattern, and then some.
That leaves one question: Are the bears now ready to relinquish control of stocks? Don’t wait for the market action to “shock” you.
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A new report by Zillow shows that mid-2009 home price gains are increasingly turning into home price declines and that some major markets may soon see a dreaded “double-dip”.
Here’s the summary graphic that just adds more fuel to the debate about whether home prices are now rising or falling and what the year ahead holds.
Recall that the S&P Case-Shiller Home Price Index from a few weeks ago showed that the month-to-month gains have eased and may already be reversing as index co-creator Robert Shiller has gone on record saying he thinks home prices are headed back down.
December brought signs that the fledgling recovery of home values in many markets is slowing again. U.S. home values got a bit lower again in December relative to November levels and the rate of decline got just a little bit higher as well. The national Zillow Home Value Index (ZHVI) was down 0.21% on a monthly basis in December to $186,200 versus a monthly decline of 0.16% in November. Annualized depreciation was 5.0% nationally.
…
While we’ve had a brief respite in mid-2009 from home value declines in many markets, the larger market correction has still not fully run its course. The recent stabilization owed a lot to policy support in the form of tax credits, lower mortgage rates and increased Federal Housing Administration lending. The remaining correction in home values we’ll see in the first half of this year is a function of market fundamentals, such as the increasing flow of foreclosures, high levels of inventory in the market and a probable decrease in demand as the impact of the tax credit wanes and mortgage rates rise.While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year. Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time. This sustained period of languid real estate performance will really constitute the final leg of the housing downturn, as our possibilities are either sharper depreciation now followed by a sharper rebound off the bottom, or modest depreciation now followed by a long period of minimal appreciation. Either path results in home values getting to the same level ultimately in real, inflation-adjusted terms. The second path appears more likely at this point.
This is a very good summary (in line with my own thinking as one who plans to buy property later this year) and, despite what you may hear from your local realtor, there really is no urgency to buy in the months ahead except for the incentives now being dangled in front of consumers in the form of low interest rates and a check from the government.
All else being equal, once these two supports go away, home prices are likely to fall sharply, negating the benefits of the generous financing terms and the tax credit that were available earlier in the year and, if you plan to pay cash, you’d be a fool to buy anything until much later in the year.
But, don’t be surprised if both the tax credit and the Fed purchases of mortgage backed securities that have helped to keep home loan rates historically low are both extended as the housing market falters.
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Statement as prepared for delivery before the Committee on Financial Service of the House of Representatives. The hearing was postponed due to inclement weather.
Chairmen Frank and Watt, Ranking Members Bachus and Paul, and other members of the Committee and Subcommittee, I appreciate the opportunity to discuss the Federal Reserve’s strategy for exiting from the extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity.
Broadly speaking, the Federal Reserve’s response to the crisis and the recession can be divided into two parts. First, our financial system during the past 2-1/2 years has experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers. The pulling back of private liquidity at times threatened the stability of major financial institutions and markets and severely disrupted normal channels of credit. In its role as liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, mostly short-term credit to the financial system. These programs, which imposed no cost on the taxpayer, were a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit.1 As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.
Second, after reducing short-term interest rates nearly to zero, the Federal Open Market Committee (FOMC) provided additional monetary policy stimulus through large-scale purchases of Treasury and agency securities. These asset purchases, which had the additional effect of substantially increasing the reserves that depository institutions hold with the Federal Reserve Banks, have helped lower interest rates and spreads in the mortgage market and other key credit markets, thereby promoting economic growth. Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding. We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.
Liquidity Programs
With the onset of the crisis in the late summer and fall of 2007, the Federal Reserve aimed to ensure that sound financial institutions had sufficient access to short-term credit to remain sufficiently liquid and able to lend to creditworthy customers, even as private sources of liquidity began to dry up. To improve the access of banks to backup liquidity, the Federal Reserve reduced the spread over the target federal funds rate of the discount rate–the rate at which the Fed lends to depository institutions through its discount window–from 100 basis points to 25 basis points, and extended the maximum maturity of discount window loans, which had generally been limited to overnight, to 90 days.
Many banks, however, were evidently concerned that if they borrowed from the discount window, and that fact somehow became known to market participants, they would be perceived as weak and, consequently, might come under further pressure from creditors. To address this so-called stigma problem, the Federal Reserve created a new discount window program, the Term Auction Facility (TAF). Under the TAF, the Federal Reserve has regularly auctioned large blocks of credit to depository institutions. For various reasons, including the competitive format of the auctions, the TAF has not suffered the stigma of conventional discount window lending and has proved effective for injecting liquidity into the financial system.2
Liquidity pressures in financial markets were not limited to the United States, and intense strains in the global dollar funding markets began to spill over to U.S. markets. In response, the Federal Reserve entered into temporary currency swap agreements with major foreign central banks. Under these agreements, the Federal Reserve provided dollars to foreign central banks in exchange for an equally valued quantity of foreign currency; the foreign central banks, in turn, lent the dollars to banks in their own jurisdictions. The swaps helped reduce stresses in global dollar funding markets, which in turn helped to stabilize U.S. markets. Importantly, the swaps were structured so that the Federal Reserve bore no foreign exchange risk or credit risk.3
As the financial crisis spread, the continuing pullback of private funding contributed to the illiquid and even chaotic conditions in financial markets and prompted runs on various types of financial institutions, including primary dealers and money market mutual funds.4 To arrest these runs and help stabilize the broader financial system, the Federal Reserve used its emergency lending authority under Section 13(3) of the Federal Reserve Act–an authority not used since the Great Depression–to provide short-term backup funding to certain nondepository institutions through a number of temporary facilities.5 For example, in March 2008 the Federal Reserve created the Primary Dealer Credit Facility, which lent to primary dealers on an overnight, overcollateralized basis. Subsequently, the Federal Reserve created facilities that proved effective in helping to stabilize other key institutions and markets, including money market mutual funds, the commercial paper market, and the asset-backed securities market.
As was intended, use of many of the Federal Reserve’s lending facilities has declined sharply as financial conditions have improved.6 Some facilities were closed over the course of 2009, and most other facilities expired at the beginning of this month. As of today, the only facilities still in operation that offer credit to multiple institutions, other than the regular discount window, are the TAF (the auction facility for depository institutions) and the Term Asset-Backed Securities Loan Facility (TALF), which has supported the market for asset-backed securities, such as those that are backed by auto loans, credit card loans, small business loans, and student loans. These two facilities will also be phased out soon: The Federal Reserve has announced that the final TAF auction will be conducted on March 8, and the TALF is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.7
In addition, the Federal Reserve is in the process of normalizing the terms of regular discount window loans. We have reduced the maximum maturity of discount window loans to 28 days, from 90 days, and we will consider whether further reductions in the maximum loan maturity are warranted. Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve’s lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.
In summary, to help stabilize financial markets and to mitigate the effects of the crisis on the economy, the Federal Reserve established a number of temporary lending programs. Under nearly all of the programs, only short-term credit, with maturities of 90 days or less, was extended, and under all of the programs credit was overcollateralized or otherwise secured as required by law. The Federal Reserve believes that these programs were effective in supporting the functioning of financial markets and in helping to promote a resumption of economic growth. The Federal Reserve has borne no loss on these operations thus far and anticipates no loss in the future. The exit from these programs is substantially complete: Total credit outstanding under all programs, including the regular discount window, has fallen sharply from a peak of $1-1/2 trillion around year-end 2008 to about $110 billion last week.
Separately, to prevent potentially catastrophic effects on the U.S. financial system and economy, and with the support of the Treasury Department, the Federal Reserve also used its emergency lending powers to help avoid the disorderly failure of two systemically important financial institutions, Bear Stearns and American International Group. Credit extended under these arrangements currently totals about $116 billion, or about 5 percent of the Federal Reserve’s balance sheet. The Federal Reserve expects these exposures to decline gradually over time. The Board continues to anticipate that the Federal Reserve will ultimately incur no loss on these loans as well. These loans were made with great reluctance under extreme conditions and in the absence of an appropriate alternative legal framework. To preclude any future need for the Federal Reserve to lend in similar circumstances, we strongly support the establishment of a statutory regime for the safe resolution of failing, systemically important nonbank financial institutions.
Monetary Policy and Asset Purchases
In addition to supporting the functioning of financial markets, the Federal Reserve also applied an extraordinary degree of monetary policy stimulus to help counter the adverse effects of the financial crisis on the economy. In September 2007, the Federal Reserve began reducing its target for the federal funds rate from an initial level of 5-1/4 percent. By late 2008, this target reached a range of 0 to 1/4 percent, essentially the lowest feasible level. With its conventional policy arsenal exhausted and the economy remaining under severe stress, the Federal Reserve decided to provide additional stimulus through large-scale purchases of federal agency debt and mortgage-backed securities (MBS) that are fully guaranteed by federal agencies. In March 2009, the Federal Reserve expanded its purchases of agency securities and began to purchase longer-term Treasury securities as well. All told, the Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. The Federal Reserve’s purchases have had the effect of leaving the banking system in a highly liquid condition, with U.S. banks now holding more than $1.1 trillion of reserves with Federal Reserve Banks. A range of evidence suggests that these purchases and the associated creation of bank reserves have helped improve conditions in private credit markets and put downward pressure on longer-term private borrowing rates and spreads.
The FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures. The Federal Reserve has a number of tools that will enable it to firm the stance of policy at the appropriate time.
Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on banks’ holdings of reserve balances. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.8
The Federal Reserve has also been developing a number of additional tools it will be able to use to reduce the large quantity of reserves held by the banking system. Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve’s control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates.
One such tool is reverse repurchase agreements (reverse repos), a method that the Federal Reserve has used historically as a means of absorbing reserves from the banking system. In a reverse repo, the Federal Reserve sells a security to a counterparty with an agreement to repurchase the security at some date in the future. The counterparty’s payment to the Federal Reserve has the effect of draining an equal quantity of reserves from the banking system. Recently, by developing the capacity to conduct such transactions in the triparty repo market, the Federal Reserve has enhanced its ability to use reverse repos to absorb very large quantities of reserves. The capability to carry out these transactions with primary dealers, using our holdings of Treasury and agency debt securities, has already been tested and is currently available. To further increase its capacity to drain reserves through reverse repos, the Federal Reserve is also in the process of expanding the set of counterparties with which it can transact and developing the infrastructure necessary to use its MBS holdings as collateral in these transactions.
As a second means of draining reserves, the Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers. The Federal Reserve would likely auction large blocks of such deposits, thus converting a portion of depository institutions’ reserve balances into deposits that could not be used to meet their very short-term liquidity needs and could not be counted as reserves. A proposal describing a term deposit facility was recently published in the Federal Register, and we are currently analyzing the public comments that have been received. After a revised proposal is reviewed by the Board, we expect to be able to conduct test transactions this spring and to have the facility available if necessary shortly thereafter. Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.
The Federal Reserve also has the option of redeeming or selling securities as a means of applying monetary restraint. A reduction in securities holdings would have the effect of further reducing the quantity of reserves in the banking system as well as reducing the overall size of the Federal Reserve’s balance sheet.
The sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments. One possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation. As the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates. The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves. If economic and financial developments were to require a more rapid exit from the current highly accommodative policy, however, the Federal Reserve could increase the interest rate paid on reserves at about the same time it commences significant draining operations.
I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. The Federal Reserve is currently rolling over all maturing Treasury securities, but in the future it may choose not to do so in all cases. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities. Although passively redeeming agency debt and MBS as they mature or are prepaid will move us in that direction, the Federal Reserve may also choose to sell securities in the future when the economic recovery is sufficiently advanced and the FOMC has determined that the associated financial tightening is warranted. Any such sales would be at a gradual pace, would be clearly communicated to market participants, and would entail appropriate consideration of economic conditions.
As a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets. Accordingly, the Federal Reserve is considering the utility, during the transition to a more normal policy configuration, of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. In particular, it is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates. No decision has been made on this issue; we will be guided in part by the evolution of the federal funds market as policy accommodation is withdrawn. The Federal Reserve anticipates that it will eventually return to an operating framework with much lower reserve balances than at present and with the federal funds rate as the operating target for policy.9
Conclusion
To sum up, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows. As market conditions and the economic outlook have improved, many of these programs have been terminated or are being phased out. The Federal Reserve also promoted economic recovery through sharp reductions in its target for the federal funds rate and through purchases of securities. The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so.
1. Indeed, when the final accounting is complete, these programs are likely to generate significant positive returns for taxpayers. Of course, stabilization of the financial system, not profit, was the principal goal of the programs. Return to text
2. Another possible reason that the TAF has not suffered from stigma is that auctions are not settled for several days, which signals to the market that auction participants do not face an immediate shortage of funds. Return to text
3. In particular, foreign central banks, not the Federal Reserve, bore the credit risk associated with the foreign central banks’ dollar-denominated loans to financial institutions. Return to text
4. Primary dealers are broker-dealers that trade in U.S. government securities with the Federal Reserve Bank of New York. Return to text
5. Section 13(3) of the Federal Reserve Act authorizes Reserve Banks to lend to individuals, partnerships, and corporations in “unusual and exigent circumstances” as determined by the Board of Governors. The Federal Reserve invoked Section 13(3) on two occasions during the 1960s to establish lending facilities for savings associations; however, no credit was extended through either facility. Return to text
6. In designing its facilities, the Federal Reserve in many cases incorporated features–such as pricing that was unattractive under normal financial conditions–aimed at encouraging borrowers to reduce their use of the facilities as financial conditions returned to normal. In the case of other facilities, particularly those that made available fixed amounts of credit through auctions, the Federal Reserve has gradually reduced offered amounts. Return to text
7. The TALF extends three- and five-year loans, which will remain outstanding after the facility closes for new loans. The extension of the CMBS portion of the facility reflects the Board’s assessment that conditions in that sector remain highly stressed, as well as the fact that CMBS securitizations are more complex and take longer to arrange than other types. Return to text
8. Increases in the interest rate paid on reserves are unlikely to prove a net subsidy to banks, as the higher return on reserve balances will be offset by similar increases in banks’ funding costs. Indeed, on balance, banks’ net interest margins will likely decline when short-term rates rise. Return to text
9. The authority to pay interest on reserves is likely to be an important component of the future operating framework for monetary policy. For example, one approach is for the Federal Reserve to bracket its target for the federal funds rate with the discount rate above and the interest rate on excess reserves below. Under this so-called corridor system, the ability of banks to borrow at the discount rate would tend to limit upward spikes in the federal funds rate, and the ability of banks to earn interest at the excess reserves rate would tend to contain downward movements. Other approaches are also possible. Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
Joe Weisenthal of Business Insider
Wow. Robert Prechter, the Elliot Wave guru sure knows how to get quoted, even if his timing is sometimes a little off.
Speaking to the Society of Technical Analysts in London, according to WSJ, Prechter warned that nowhere will be safe in the coming bear market and that the market is at a “grand, supercycle top.”
We’re not sure exactly what that means, but yeah, it definitely doesn’t sound good.
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The win by the Saints yesterday was something of an upset but, nonetheless, the graphic to the right that appears this morning in the “Meet the Press” section over at MSNBC is more than a little bit ironic in light of the predictions that former Fed Chairman Alan Greenspan and former Treasury Secretary Hank Paulson were making a few years back about the future of the economy and financial markets.
I haven’t cued up the Meet the Press video just yet and may wait until later in the day as a glass of wine (or two) may be needed before it is deemed safe to watch these two together, but Bloomberg carried this report of the event in which more warnings were heard from the former Fed chairman about the dangers of falling stock prices.
Former Federal Reserve Chairman Alan Greenspan said a U.S. economic recovery is “going to be a slow, trudging thing,” and that he “would get very concerned” if stock prices continue to fall.
A drop in stock prices is “more than a warning sign,” Greenspan said yesterday on NBC’s “Meet the Press” program. “It’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity.”
It’s surprising that Bloomberg writers Alan Bjerga and Vincent Del Giudice didn’t see fit to include the seemingly mandatory disclaimers that have been included in stories about the former Fed chairman in recent years, something along the lines of, “Many blame years of easy money policies by Alan Greenspan for multiple asset bubbles over the last decade…”
By: Pej Hamidi of T3LiveCan someone explain to me how one converts a “swap” into a “future”? That’s pretty cool: A very short-term commitment to a lot of risk, usually overnight, somehow converted into an exchange tradeable future. (Except custom Swaps for hedgies: think John Paulson Short Housing CDS’s; takes huge capital to even think of structuring one).
An obvious regulatory arbitrage trade: NASDAQ confirms they expect a “nine-figure-per-year opportunity” according to Traders Magazine, page 34 January 2010 “Betting on Swaps”. NASDAQ wants to use their purchase of the PHLX and the PBOT to create a customer & dealer driven clearing platform, especially for esoteric, complex products like Swaps and Futures. Let’s hope the dealers come on board and maybe we can start trading SWAPS in small pieces shorting Emerging Market Debt with other debts of developing countries.
Just for now, I would love to put that trade on. Iran is experiencing a Bank run. Remember: Iran pegs to the almighty USD. By the time a bank run starts, the Iranian Revolution has already begun. If the regime lets the Rial actually float (a comic proposition) only Allah knows where it will floor, or if it will even be worth as much as the Iraqi Dinar. How embarrassing.
On the other hand, let’s say they switch to a managed float like China, where they peg to a basket. Iran has built up their reserves in other assets. They just might be able to pull this off. It may also show who these huge buyers in the Gold markets are that are taking delivery of their gold contracts rather than rolling over. If you haven’t noticed, check out how much “taking delivery” vs. “rolling” the contract has changed. Gold Storage is a profitable business and very much in demand.
Lastly, they could throw SDR’s into the fold. Iran does have quite a few. They can link to SDR’s, or include them in a basket, not sure on this. If you don’t know what SDR’s are:
“The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $324 billion).”
I hope INTERPOL makes a bit of an effort to bring these killers to justice.
Lawrence Delevingne of Clusterstock
One of the most stunning mea culpas following the financial crisis was former Fed chairman Alan Greenspan’s admission in October 2008 that he had put too much faith in the free market to regulate itself.
His reputation damaged, Greenspan is hitting back.
In an interview with FORTUNE’s Geoff Colvin, Greenspan takes on his critics and says the housing bubble was a “once-in-a-century event.”
Colvin writes, “[Greenspan] believes the case against him is wrong. What is surprising is how deeply he analyzes the debate. He studies the data and is confident it will exonerate him. He is marshaling his facts and will present his data-driven analysis in a 12,000-word article, but hasn’t said when. Of course he doesn’t like what’s happening to his reputation, yet he seems sure that when this recession is past and informed people can look at the whole picture dispassionately, they’ll agree that he didn’t cause the crisis and couldn’t have prevented it.”
Some highlights:
- On his “business life,” Greenspan tells FORTUNE: “My actual business life hasn’t changed since 1948…The only thing that has changed is my employer…I have fewer meetings and spend less time on uninspiring matters.” He describes his current role as “studying data and trying to figure out how the world works.”
- On one of his staunchest critics and his good friend John Taylor, who has written scholarly papers intended to show that badly misguided Fed actions under Greenspan created the housing bubble: “He is a very good friend. But his evidence doesn’t show what he says it shows.”
- On the housing bubble: “Mortgage rates started moving down six months before we lowered the Fed funds rate.”
- On the breakdown in the financial system: “Counterparty surveillance failed to protect the system this time…I always thought it would. I held that belief for 60 years.”
- On whether tougher regulation is the answer: “I was on the board of J.P. Morgan prior to becoming Fed chairman…I knew what J.P. Morgan knew about Citi, Bank of America, Wells, and others. When I arrived at the Fed, I quickly learned that J.P. Morgan’s knowledge of those organizations was far greater than what the Fed knew…Counterparty surveillance will remain the regulators’ first line of defense.”
Read the full story here.
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(This post previously appeared at the author’s website)
With today’s unexpected decline in December payrolls, the cry for more job-related stimulus will grow even louder. But the sad truth is that any new stimulus or jobs bills will ultimately swell the ranks of the unemployed, thereby raising calls for an even bigger federal effort. If we are not careful, government regulations, subsidies, and spending, all designed to fight unemployment, could push the labor market into a death spiral.
Regulation acts like a tax on job creation. By subjecting employers to all sorts of extra expenses when they hire people, regulations increase the cost of employment far beyond the wages employers actually pay their workers. In fact, some regulations are specifically tied to the number of workers employed. This provides some employers with a strong incentive to stay small and not hire.
The minimum wage law, which is really just a very visible workplace regulation, actually makes it illegal for employers to hire certain individuals and destroys entire categories of jobs. For instance, faced with high labor costs, some restaurants will avoid hiring dishwashers by switching to plastic utensils and paper plates. On a larger scale, factories may decide to switch to robotic assembly lines if human labor gets too expensive.
Other types of regulations, such as those that prohibit discrimination, create incentives for employers not to hire individuals that fall within the protected class. This is the result of potential litigation costs that may result from wrongful termination lawsuits. In other words, the more expensive government makes it to fire workers, the less likely they are to hire them in the first place.
Subsidies produce the opposite effect of regulation, but sometimes the results can be just as harmful. Government subsidies divert resources towards politically favored activities, resulting in more jobs in areas such as health care and education, but fewer jobs in other sectors such as manufacturing. The net effect of this transfer is to diminish the productive capacity and efficiency of the economy, which lowers real economic growth and diminishes employment opportunities.
Although not as visible as regulations and subsidies, government spending also plays a large role in job destruction. The more money government spends, the more resources it drains from the private sector. The fiscal 2011 budget proposed by President Obama contains $3.8 trillion in federal spending. Think of government as a cancer feeding off the private sector. The larger it grows, the more jobs it kills. Unfortunately, most politicians follow the misguided advice of economist John Maynard Keynes, who advocated government spending as a means of job creation. In reality, government spending merely results in government jobs replacing more efficient private sector jobs.
Some economists point to taxes as the primary job killer, and argue that lower taxes will boost employment. While I have sympathy for this view, it misses the larger issue that the burden of government is not what it taxes but what it spends. The proposed fiscal 2011 federal budget contains “only” 2.4 trillion of taxes. The remaining 1.4 trillion of spending is borrowed (incredibly, for every dollar the government collects in taxes, it now spends almost $1.60). I would argue that a dollar borrowed kills more jobs than a dollar taxed. Therefore, cutting taxes and borrowing the shortfall kills more jobs then it creates. This is true because jobs require capital and government borrowing more directly crowds out private capital investment than taxes do.
In the end, I fully expect the government to directly provide make-work jobs to the armies of the unemployed. This will accelerate the pace of private sector job destruction and make our economy even less productive than it is today. This means that while the government may be able to provide people with jobs, the wages they pay will provide little in the way of purchasing power. In the end, we will become a nation of government employees, with plenty of work but little to show for it.
Hat/Tip Zero Hedge Submitted by OilPrice.com, originally published at: http://www.oilprice.com/article-crude-oil-prices-drop-as-investors-seek-safe-haven-in-the-us-dollar.html
After starting the week on a firmer note, oil prices fell sharply toward the end of the week in a general market sell-off as investors sought the dollar as a safe haven amid worries about European Union economies.
Debt problems that have plagued Greece are now spreading to Portugal and Spain, driving the euro down temporarily below $1.36 and bringing the dollar to an 8-month high. Because oil and other commodities are priced in dollars, gains in the U.S. currency usually translate into declines in oil prices.
Even a decline in the U.S. jobless rate below 10% on Friday could not stop the downward trend in commodities.
Some analysts were predicting that crude oil futures, which crashed through the longtime support level of $72 dollars a barrel to dip briefly below $70 for West Texas Intermediate in Friday afternoon trading, were sliding downward into a new trading range of $65 to $72 a barrel, after oscillating between $72 and $80 the past several weeks. Crude oil, which settled just above $71 a barrel on Friday, has dropped nearly 15% since hitting its 15-month high just above $83 on Jan. 6.
Energy news also depressed prices. Crude oil inventories in the U.S. rose 2.3 million barrels in the week, several times what economists had been expecting. In Asia, China is importing more crude than it needs, analysts said, apparently with intention of exporting more refined products, which would weigh on the global market.
Earlier in the week, positive manufacturing data from several economies had driven up energy prices to above $77 a barrel as market participants saw signs of stronger economic recovery. But that gave way to the concerns about a debt contagion in Europe and the impact of austerity measures to bring debt under control.
The new scramble into the dollar as a safe haven was evident in the sharp drop in gold prices, which fell more than 4% on Thursday, and fell further on Friday to about $1,050 an ounce. Gold had risen in the past few months as a safe haven from the dollar.
Now cash – dollar cash – seems to be the preferred safe haven for many investors. The Dow Jones Industrial Average, which spent most of the day well below 10,000, recovered in a late rally to close above that threshold with a small gain.
