In a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don’t pay much if anything.
Am I missing something?
Read more...By William Hogeland, the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History who blogs at http://www.williamhogeland.com. Cross posted from New Deal 2.0
How a farmer, a weaver, and a backwoods prophet took on the money interest in founding-era politics — and won.
One of the better-known episodes in American founding finance occurred in 1791, when Alexander Hamilton, the first Treasury Secretary, proposed forming the United States’ first central bank. James Madison of Virginia, serving in the House of Representatives, objected. Prefiguring the Republican lawmakers who recently pledged not to introduce legislation without first citing the constitutional provision enabling it, Madison asserted that because the Constitution doesn’t grant Congress a specific power to form banks, a national bank would be unconstitutional.
Hamilton famously responded by arguing that if a power to do something is constitutional, then powers necessary to doing it must be constitutional too, even when not enumerated. If Congress determines that exercising its power to do anything “necessary and proper” in the discharge of its duties calls for forming a bank, it can form a bank. Any unconstitutionality, for Hamilton, would require a specific prohibition against banks (”Congress shall make no law…,” etc.).
So that’s typically how history students and readers get introduced to a key founding moment in American public finance: ideologically, intellectually and legally, in the context of a constitutional dispute between the lions of ratification Hamilton and Madison, two thirds of the “Publius” who authored “The Federalist,” now coming at odds in the fledgling republic. Anyone hoping to find anything related to how money and credit might flow to ordinary Americans will be disappointed.
Read more...I have mixed feelings about an article by Robert Kuttner, “Blowing a Hole in Dodd-Frank.” On the one hand, he’s found an important example of the Administration’s lack of interest in meaningful financial reforms, which is its intent to exempt foreign exchange derivatives from the implementation of Dodd-Frank. But his discussion of what this matters at critical junctures confuses foreign exchange cash market trading with derivatives and thus leaves the piece open to criticism.
Kuttner warns that Geithner has signaled strongly his preference to exempt foreign exchange from Dodd Frank implementation:
Read more...Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole.
This program on RTEOne from the Ides of March gives a window on how the prospect of default looks from Irish perspective (hat tip Richard Smith). Note that it is the chairman of Goldman Sachs International who argues against debt repudiation.
We’ve argued that it’s rational for the Irish to threaten default and if the debt is not restructured, to act on its promise. The EU has more to lose, since one country rebelling against austerity demands will embolden others, and also brings the real underlying problem, that of Eurobank undercapitalization, to the fore.
Read more...By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”
The behaviour of financial markets over recent days confirms British Prime Minister Lloyd George’s observation that “financiers in a panic do not make a pretty sight”. While workers in the Fukushima nuclear plant risked death trying to bring damaged reactors under control, financiers cowered in fear. Oscillating between boom and doom, they sought opportunities to benefit from death and destruction.
Instant experts on the nuances of nuclear power generation and the Japanese economy have crowded the airwaves providing ‘analysis’.
Read more...The stock market decline in Japan thus far today is second worst to the 1987 crash. As a mere mortal with delayed Bloomberg readings, Topix is now down “only” 12.64 versus a recent 13.18% and the Nikkei is off 12.74%, having recovered a smidge from down 14.1%. Good thing I didn’t listen to some recent stock market recommendations that the Japanese stock market would be up 20% in the first six months of this year.
The yen has firmed only modestly, to 81.55, due to Bank of Japan emergency liquidity operations only partially offsetting a rally. Note the BoJ’s operations are being criticized for being inadequate (ahem, do you think even a central bank can stand in front of a freight train of a major reset in economic fundamentals, unless it chooses to intervene in the stock market directly? Given the current and potential economic damage, the Japanese bond and money markets don’t sound too terrible with call money rates in a much wider trading range than normal. 008% to 0.13% versus the BofJ’s target of 0.1%, so the BoJ appears to be addressing what it considers to be its main priority). From Bloomberg:
Read more...By Marcus Kappler, Helmut Reisen, Moritz Schularick, and Edouard Turkisch. Cross posted from VoxEU.
If China only allowed its currency to appreciate, the global economy would rebalance and stabilise – or so the argument goes. This column studies the historical record of large exchange-rate revaluations. It supports the idea that currency appreciations have an impact on the current account but argues that this can come at a cost – the reduction in exports risks putting the brakes on global growth.
Is the old Gillian Tett back? The one-time Financial Times capital market editor has taken to writing less frequently (understandable now that she has head the US operation) and less intrepidly (much of her commentary was prescient, particularly on my pet topic, collateralized debt obligations).
But her latest piece sounds a wee warning, and it’s one we’ve commented on as well, namely, that central banks are vulnerable to losses, and just like the banks they mind, may need a rescue by taxpayers if the err badly enough.
Her object lesson is the Swiss National Bank. Unlike most central banks, the SNB is quite transparent, and publishes periodic statements of the value of its assets on a mark to market basis. The usually conservative SNB made a uncharacteristically aggressive move last year, intervening in currency markets in an effort to suppress the value of its levitating franc.
Even though the locals applauded the move, the central bank was outgunned by currency traders and threw in the towel mid year. As the swissie continued to rise, the bank showed losses at the end of 2010 of SFr 21 billion. The only saving grace was that the gains on the bank’s hefty gold positions exceeded the damage. But that does not reassure its shareholders, who have become accustomed to annual payments out of bank “profits”, and are concerned that the profits this year will be too meager for them to enjoy their customary level of income.
Read more...The Shanghai Index fell 2.6% overnight. Italian bonds are blowing out. If sustained, this is bigger deal than the stock market swoon across Europe: CAC down 1.45%, FTSE down 1.1%, Dax off .4%. A lot of Libyan shares apparently in Italy and Libyan interests own over 7% of Unicredit, the biggest bank in Italy. Ouch. […]
Read more...By Alexander Gloy, CIO of Lighthouse Investment Management
As I was traveling through Vietnam in the mid-nineties our bus drove through an area visited by a taifun. The road was running on a slightly elevated dam, so initially there was no obstacle to continue the journey. Looking out of the window there was water on both sides as far as the eye could see. Eventually the water rose to overflow the road, but the bus kept going.
A Volkswagen transporter, after having passed the bus in a moment of exuberance, was soon found in the ditch with water up to the roof – there was no way to tell where the road ended and the ditch began. The water rose further and started entering the bus through the front door. Still, the driver kept going. I was amazed at how little damage occurred despite the vast flooding. The flood waters slowly receded towards the ocean. Uninhibited by any dams, the water had enough space to expand.
At one point, the water had washed out the elevated road, and a gaping hole forced even our bus to stop. I thought this to be the end of the trip. Miraculously, a bunch of locals showed up, and, with the help of a bulldozer, quickly filled the hole with large rocks. All passengers were asked to de-board as the bus slowly wiggled across the rocks. And we were ready to resume our trip. Closer to the coast we saw the effects of wind damage; at least every third home had been cut in half by a fallen palm tree. Pigs and chicken ran around disoriented, as their barn had probably disintegrated. Despite the damage there was no feeling of this being a catastrophic event; the houses would probably be repaired (they were covered with palm leaves) within a few days, and life would get back to normal.
Compare this to what happens in our “developed” countries when house prices decline by 10 or 20 per cent: the wheels of the entire financial system come off.
I am not suggesting we all live in thatch covered huts. But building higher and higher dams with flimsy sandbags just increases the pressure (and leads to much greater damage when the dam finally breaks).
Look at how Euro-zone politicians and central bankers are increasing the risks by building higher and higher dams with flimsy sand bags.
Read more...A letter signed by over 250 economists opposing restrictions on capital controls is more of a shot across the bow than it might appear to be. The letter with signatories appears here, and it includes highly respected trade and development economists like Ricardo Hausmann, Dani Rodrik, Joe Stiglitz, and Arvind Subramanian; we are reproducing the text below:
Read more...By Matt Stoller, the former Senior Policy Advisor for Rep. Alan Grayson. His Twitter feed is @matthewstoller
The Federal Open Market Committee releases its transcripts on a five year time lag. Last week, we learned what they were saying in 2005. Dylan Ratigan blogged an interesting catch: Dallas Fed President Richard Fisher expressed his frustration about Chinese imports. Not, of course, that there were too many imports, but that our ports weren’t big enough to allow all the outsourcing American CEOs wanted.
Read more...Fisher is just the latest Fed official to applaud this trend. Here’s the backstory. In the 1970s, there was a lot of inflation. The oligarchs of the time didn’t like this, because it made their portfolios worth less money. So they decided they would clamp down on inflation by no longer allowing wage increases. To get the goods they needed without a high wage work force, they would ship in everything they needed from East Asia and Mexico. The strategy worked. Inflation collapsed. Wages stopped going up. There were no more strikes. Unemployment jumped….But basically this was a way of ensuring that banks and creditors could make a lot of money that would instead go to workers.
By Marshall Auerback, a portfolio strategist and hedge fund manager; first posted at New Deal 2.0
Focusing on currency isn’t going to cut it for America’s workers.
You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.
Read more...By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”
Politics now increasingly dominates the economics. Commenting about the EU bailout of Ireland, the Irish Times referred to the Easter Rising against British rule asking: “was what the men of 1916 died for a bailout from the German chancellor with a few shillings of sympathy from the British chancellor on the side”. An Irish radio show played the new Irish national anthem to the tune of the German anthem.
In Greece, the severe cutbacks in government spending have resulted in strikes and violent protests on the streets of Athens. Faced with cutbacks in living standards, Europeans are fighting back. The Rolling Stones’ late sixties anthem has been resurrected in Europe: “Everywhere I hear the sound of marching, charging feet, boy/ Summer’s here and the time is right for fighting in the street, boy.”
Read more...One of the noteworthy features of 2007 was a pronounced divergence in sentiment between the bond and stock markets, with the credit indices sending out warning signals while equities continued to soar higher. This is hardly surprising; an old joke is that the bond market predicted 9 of the last 4 recessions.
We are seeing the same type of divergence again, this time in European bank stocks. And if the credit worry warts are correct, this could be a harbinger of bigger shocks.
Read more...