Quatitative Easing 3 (QE3) “May Get Discussed,” Says Fed’s Hoenig
Here we go again. How many of these failed programs will our dollar have to take until we realize that printing money does not produce real growth. We should see purchases even farther out on the yield curve (10 & 30 year). Commodity prices will begin to raise even more if this happens. We see a constant downplay of the threat of inflation, if we keep this strategy then it will happen. One thing people forget is that bad inflation usually happens very quickly, think of a snowball rolling down a hill.
QE3 may be coming to a central bank near you later this year, according to according to Kansas City Fed President Thomas Hoenig, who said that the Federal Reserve may consider extending its quantitative easing program beyond June 30, 2010 – the current completion date scheduled for QE2 – if U.S. economic data does not meet policymakers expectations in the coming months.
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UK MP Carswell introduces bill to stop fractional reserve banking
This has been a taboo subject since the Great Depression in the 1930′s almost everywhere. Keynesians seems to have won out and making sure the growth of credit was not hampered and the prevention of deflation was the number one priority. The problem is the in a debt-based monetary system where ” P< P+I”, this creates the environment that you have to have growth and inflation or face dire consequences.
Fractional reserve banking is the method that is universally used to let banks generate credit and this is a major reason why we see constant inflation over time without pause. MP Carswell has made a well thought out argument against this form of banking and has introduced a bill to change the system in a way where banks can only do fractional reserve banking is with investment savings accounts and not on demand deposit (checking accounts).
The point where I agree the most is the fact that when the economy heats up, banks use the demand deposits to create more credit and this will be more than normal because demand is greater and with factional reserve banking, it amplifies the effects of this demand. Carswell said that instead of the current system, banks should instead increase the interest rate they pay for investment deposits and that would in effect draw savings into the fold and that would create a natural brake and would create credit proportional the the savings available in the economy. This would limit the major portion of projects that normally get financed that have no chance of being paid back.
Once the boom is over, we bailout and create money to cover losses so the system doesn’t crash and creates more inflation that devalues our money. That system is not fair to everyone and is especially harsh on savers that did not get into the bubbled frenzy. We will need to watch how this plays out in the United Kingdom and we could learn a thing or two and try and reform our credit / debt generation system in the United States. Please comment if you have an opinion.
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Fed officials saw risk Aug decision would send wrong signals
The recovery is finally running out of steam and we are having to face some tough decisions that we have been putting off since we collectively (sort of) chose to bailout the largest banks and backstop real estate. Now that the Federal Stimulus is running out we are seeing all the indicators declining that would point to a recovery. The Fed is going to resume asset purchases including MBS and U.S. Treasuries.
The FOMC mentioned that further shocks will slow growth, any slower than the 1.6% GDP growth will start to go back into recession. The Fed is getting ready to ramp up more credit creation to try and get some positive inflation. This will only work until they stop doing it. We lack income to support the debt in the system so we need to see many more defaults of this bad debt or higher paying jobs need to come back to the U.S. so people can afford their debt load. Until our officials figure out that outsourcing higher paying jobs, dumping cheap goods on the U.S. and running a debt/growth based money system do not work.
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House Democrats agree to put consumer watchdog agency in Federal Reserve
Financial reform is getting more watered down by the day. Derivatives reform has so many exclusions that is basically doesn’t fix anything. Now this is another sign that we are not going to get real financial reform. Putting a consumer protection agency in the Federal Reserve that has a mandate to promote a positive business environment and full employment means that protecting consumers will take backseat.
Fed had the ability to regulate the banks before and they did nothing to stop the predatory practices that were in place before the crisis ie: subprime loans, credit card and debit cards fees. What makes us think they will properly regulate these issues now when they already have a conflicting dual mandate? If we really want to protect consumers, we need a independent non-partisan agency with regulatory authority to handle these issues with that being their sole mandate. We can not think that the Fed is going to put consumers first over having healthy and profitable banks. Currently they are still paying interest on deposits in the Fed instead of forcing that money into the economy as loans and credit. I am not saying we should force the producing of bad loans but we should force the banks to find good loans and business to deploy that money to rebuild their balance-sheets.
Reuters - In a retreat by the House on one of the most contentious parts of historic Wall Street reform legislation, Representative Barney Frank said the House would go along with the Senate’s plan to make the watchdog a part of the U.S. central bank.
House Democrats negotiating final changes to the legislation will also seek to subject payday lenders, check cashers and private student loan providers to the watchdog’s supervision, said a statement from Frank.
House and Senate negotiators are set to resume talks over the wide-ranging reforms on Tuesday.
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Wall Street money floods D.C. to fight finance reform bill
After reading through this MSNBC article, I found it really interesting that the tension is really coming down to derivatives regulation. If you have not been following our conversations on derivatives then here is a little refresher. Derivatives, as the name implies are synthetic financial instruments that are created to either match performance of an instrument that it was derived from or provide some sort of performance if something happens to some underling asset.
They are basically contracts that have terms and they currently traded over the counter (OTC) in a unregulated fashion. This may seem harmless until you find out the over $600 trillion dollars of these contracts exist according to the Bank of International Settlements (BIS). In the light of them being unregulated, their are no capital requirements for holding loss reserves in case the financial institution that is holding this contract is on the wrong side of what ever bet they made. The famous case of this destructive effect was the failure of American Insurance Group (AIG) in their record $180 billion bailout by the U.S. government. They were issuing credit-default swaps which are basically corporate debt insurance on sub-prime loans.
As we saw, they went bad and because AIG did not carry adequate reserves against losses, when the market went down, so did AIG. They were an insurance company but our commercial banks are also in the market and they are suppose to be our safest financial institution and that is why we regulate them so heavily.
It is very mis-guided if the banks and lobbyists get their way and take out the derivative regulation from the bill. In effect we would be setting ourselves up for another crisis and it would be only a matter of time for the banks to get into some risky asset class and they have the market for them turn sour. Call your representatives and explain to them why it is important to regulate derivatives and stop letting banks keep them off the balance-sheet and in the shadows.
The biggest flash point for many Wall Street firms is the tough restrictions on the trading of derivatives imposed in the Senate bill approved Thursday night. Derivatives are securities whose value is based on the price of other assets like corn, soybeans or company stock.
The financial industry was confident that a provision that would force banks to spin off their derivatives businesses would be stripped out, but in the final rush to pass the bill, that did not happen.
The opposition comes not just from the financial industry. The chairman of the Federal Reserve and other senior banking regulators opposed the provision, and top Obama administration officials have said they would continue to push for it to be removed.
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Obama wants to reduce mortgages for unemployed homeowners
This is not good news for the holders of many of these mortgage bond holders that are expecting payments from these financial instruments. These efforts are still focusing on trying to support prices at still elevated levels. If you want a recovery, lets these homes foreclose and have the pricing fall to fair market value which would be closer to 1.5 to 2 times the yearly income of the area you live in.
This is just punishing people who did not participate this our speculative housing craze and were prudent and saved their money to have a real stake in their home purchase. Obama’s heart is in the right place wanting to help homeowners but if he wants to help us all, let market forces do what they do best…determine prices.
First American stated is very clear, “The problem of “underwater” borrowers has bedeviled earlier administration efforts to address the mortgage crisis as home prices plunged. Underwater borrowers now make up about a quarter of all homeowners, according to First American CoreLogic.” Translated, this means that homes are overpriced and until the principal is reduced, they will continue to create problems for the U.S. real estate market.
Washington Post - The Obama administration announced new ways Friday to tackle the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed.
The Treasury Department said adjustments to the Home Affordable Modification Program and the Federal Housing Administration program would help “responsible homeowners who have been affected by the economic crisis through no fault of their own” by expanding flexibility for mortgage servicers and originators to assist more people who are unemployed and who have been hit by falling home values.
“These changes will help the administration meet its goal of stabilizing housing markets by offering a second chance” to as many as 3 million to 4 million struggling homeowners through the end of 2012, Treasury said in a statement. It said costs would be shared between the private sector and the federal government, with the federal costs funded through a $50 billion allocation for housing programs under the Troubled Asset Relief Program.
Source: Washington Post
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Donald Kohn to Leave Fed at End of Term as Vice Chairman
Who Obama chooses as his replacement will be very important and is to be watched. Vice Chairman Kohn has been an establishment at the Federal Reserve for over four decades. Even though I personally have issue with many of the policies responses in crisis, Donald does have a wealth of knowledge after being near the helm for over 40 years and they will lose some of that wisdom when he steps down at the end of his term. Mr. President choose wisely, the markets will be watching very closely.
Vice Chairman of the Fed
Business Week – Donald Kohn will leave the Federal Reserve at the end of his four-year term as vice chairman after helping Ben S. Bernanke and Alan Greenspan steer the U.S. through recessions and crises.
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