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HomeQuantitative Easing? Welcome to Vegas!!
Posted by Larry Doyle on March 19th, 2009 9:07 AM |
The Federal Reserve has ZERO room to maneuver on its interest rate policy given the fact that its interest rate tool, the Fed Funds Rate, is currently set at 0-.25%. Could that rate be set at a negative level? Well, let’s just say that it has never happened with any central bank in the world. With no more arrows left in its interest rate quiver, what is a Federal Reserve to do to manage an economy? Let’s enter the world of “quantitative easing.”
Quantitative easing by any central bank is a policy in which that bank grows its balance sheet to purchase assets (government bonds, mortgage securities, government agency debentures, etc). The purpose of purchasing these assets is to drive the prices for these assets higher which in turn brings the interest rates on these assets lower (bond prices and interest rates on those bonds have an inverse relationship). The hope the Federal Reserve holds is that in bringing rates down (government rates and mortgage rates dropped by .3% to .5% yesterday) consumer and institutional demand for money will go higher and spur the economy in the process. (more…)
The Fed Levers Up
Posted by Larry Doyle on March 18th, 2009 6:30 PM |
When the economy experiences a massive delevering process, the void in the economy needs to be filled. There has been and will continue to be ongoing debate about the effectiveness of the stimulus plan, Obama’s proposed budget, ongoing government bailouts of a variety of industries, and moves made by the Treasury and Federal Reserve. Has enough been done? Is too much being done? Are our global partners pulling their weight? Are protectionist measures likely to exacerbate our economic problems? The answers to these questions will not be known for years.
Today’s action, Fed’s New Steps Shake Up Markets, is a sign that as everybody is delevering (selling assets purchased with borrowed money), the Federal Reserve is levering up. The Fed has indicated they will purchase billions more than previously advertised in U.S Treasury securities, mortgages, and consumer related assets. Why? By making these purchases, the Fed will attempt to drive the rates for these products lower and reignite consumer and institutional demand for credit. The market responded in startling fashion as 10yr government rates dropped an unprecedented .50% !! Equity markets responded by moving higher by 1-2%. (more…)
AIG and LTCM
Posted by Larry Doyle on March 18th, 2009 3:50 PM |
A precursor to the turmoil roiling our economy and markets today occurred on a smaller, but certainly very dramatic, scale in 1998. The meltdown of the hedge fund Long Term Capital Management brought the market to its knees at the time. LTCM was effectively taken over by a consortium of Wall Street banks at the behest of New York Federal Reserve Chairman, William McDonough. The firms injected approximately $3 billion dollars in order to stabilize LTCM and then unwound it in an orderly fashion.
The lessons learned in the LTCM crisis were obviously not learned well enough because we are experiencing them again a multiple hundred fold. The centerpiece of our current fiasco is AIG (known here at Sense on Cents as “Ain’t It Great”).
The dramatic story of Long Term Capital Management is captured in a book I strongly recommend for anybody interested in the history of the financial markets. When Genius Failed, by Roger Lowenstein, is a great read and truly captures the intrigue, egos, and tension of that period. As the current turmoil unwinds I look forward to the books published on this period as well. (more…)
Housing Index Revisited
Posted by Larry Doyle on March 18th, 2009 1:11 PM |
A week or so ago, I introduced two indexes that track the outlook for housing in our country. The S&P/Case-Shiller Index is released on a monthly basis. The ABX is an index that can be traded daily by institutional money managers and thus allows them to reflect their opinions on the outlook for housing. The ABX is a very broadly defined index that tracks housing by the underlying year of origination of the mortgage.
Yesterday, the monthly housing starts number surprisingly jumped 22%. The government program TALF (Term Asset-Backed Lending Facility) to restart the consumer finance markets is set to launch next week. Hopefully that program will bring added liquidity to our consumer finance markets and support housing as well. The mortgage modification program to support housing is underway. (more…)
Let’s Listen to Stephen Harper
Posted by Larry Doyle on March 18th, 2009 11:22 AM |
A month or so ago, I introduced former Australian Prime Minister and Treasury Secretary Paul Keating to our readers here at Sense on Cents. Keating offered a wealth of piercing and insightful perspectives on the world of global finance. He forecasted the likely shift of global financial power toward the surplus countries in Asia. While I have never seen nor heard Keating’s views broadcast here in the United States, I appreciated his sobering analysis.
In a similar vein, Canadian Prime Minister Stephen Harper is not exactly a household name in the United States. We were provided the political strappings of President Obama’s initial foreign trip when he traveled to Ottawa to meet Harper 6 weeks ago. The pomp and circumstance along with the Royal Canadian Mounties made for some nice theatre. (more…)
AIG: Ain’t It Great!!!
Posted by Larry Doyle on March 18th, 2009 8:54 AM |
Where can one generate billions in losses and still walk out the door with millions in compensation? Welcome to AIG, now known here at Sense on Cents as “Ain’t It Great!!”
As details leak out of Congress as to who knew what and when did they know it, the level of political posturing is soaring. Senator Charles Schumer (D-NY), who has fed at the Wall Street trough for years, offers us these pearls of wisdom: “We intend to do everything in our power to prevent the payments from being made and to recoup the payments that have already been made. We will take this back and return it to its rightful owners, the American taxpayers.” Chuck, where were you six months ago when the initial AIG loan was negotiated? (more…)
St. Patrick Smiles on the Market!
Posted by Larry Doyle on March 17th, 2009 5:34 PM |
When trading bonds, I used a rule that Tuesday’s price action often reversed Monday’s. While that rule of trading was strictly a quirk based upon years of experience, I found it happen so regularly that I never discounted it.
Supported by a surprisingly strong housing starts number (+22% to 583K) and a relatively mild increase in PPI (producer price index) of .1%, the market opened relatively flat today but firmed all day right into the close. The major stock market averages closed up 2.5%-4%!! (more…)
Wall Street’s New Mousetrap?
Posted by Larry Doyle on March 17th, 2009 11:33 AM |
Populist outrage is growing at the egregious bonus payments made at firms which took government money. Not every firm voluntarily took government money and, in my opinion, should not be restricted by government controls over bonus payments. However, the entry of the government into the financial industry is quickly creating a sea change in Wall Street’s outlook on compensation.
Is Wall Street working on building a better mousetrap to sidestep the government’s involvement? You can bet on it. Wall Street Pursues Pay Loopholes highlights some of the early maneuvers firms are looking to make to address this issue. (more…)
AIG Contracts a Brain Freeze
Posted by Larry Doyle on March 17th, 2009 9:27 AM |
Given the public outrage over the millions in bonus payments at AIG, is there any doubt that there has been a massive failure to perform by all involved?
When AIG was on the verge of bankruptcy last September, I am willing to bet the topic of employment contracts was not the lead item on the agenda. In fairly short order, though, as AIG was moving ahead with its attempt to sell divisions and repay the government loan, I have to believe outstanding liabilities, such as employment contracts, became a topic of discussion.
Let’s bring the main players at that point in the process back to the table. What does Hank Paulson have to say? How about Robert Willumstad, former AIG CEO? How about current AIG CEO, Edward Liddy?
Make no mistake, both the government and AIG executives could have imposed their will to renegotiate – if not outright dismiss – any outstanding contracts. How? When an entity such as the government takes over a company, a change of control occurs. That change of control does not unilaterally extinguish outstanding liabilities, but it certainly opens them for renegotiation. The fact that these contracts were not seriously renegotiated is a massive failure to perform on behalf of the government officials and AIG executives. (more…)
