Former Federal Reserve Chairman Alan Greenspan said the U.S. may soon face higher borrowing costs on its swelling debt and called for a “tectonic shift” in fiscal policy to contain borrowing.
“Perceptions of a large U.S. borrowing capacity are misleading,” and current long-term bond yields are masking America’s debt challenge, Greenspan wrote in an opinion piece posted on the Wall Street Journal’s website. “Long-term rate increases can emerge with unexpected suddenness,” such as the 4 percentage point surge over four months in 1979-80, he said.
Greenspan rebutted “misplaced” concern that reducing the deficit would put the economic recovery in danger, entering a debate among global policy makers about how quickly to exit from stimulus measures adopted during the financial crisis. U.S. Treasury Secretary Timothy F. Geithner said this month that while fiscal tightening is needed over the “medium term,” governments must reinforce the recovery in private demand.
“The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy,” said Greenspan, 84, who served at the Fed’s helm from 1987 to 2006. “Incremental change will not be adequate.”
Pressure on capital markets would also be eased if the U.S. government “contained” the sale of Treasuries, he wrote.
“The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms,” Greenspan said. The “very severity of the pending crisis and growing analogies to Greece set the stage for a serious response.”
Yields on U.S. Treasuries have benefitted from safe-haven demand in recent months because of the European debt crisis, a circumstance that may not last, said Greenspan, who now consults for clients including Pacific Investment Management Co., which has the world’s biggest bond fund.
Benchmark 10-year Treasury notes yielded 3.20 percent as of 12:11 p.m. in Tokyo today, down from the year’s high of 4.01 percent in April and compared with as high as 5.32 percent in June 2007, before the crisis began. Yields have remained low “despite the surge in federal debt to the public during the past 18 months to $8.6 trillion from $5.5 trillion,” Greenspan said.
The swing in demand toward American government debt and away from euro-denominated bonds is “temporary,” he said.
“Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis,” Greenspan said. “Our policy focus must therefore err significantly on the side of restraint.”
Friday, June 18, 2010
Thursday, June 17, 2010
The four-week moving average of weekly unemployment claims has risen slightly over the past month and is now hovering around the 460,000 level. Lower levels were seen in December of 2009. Economists expected the number to move lower.
It appears to have bottomed, and is poised to turn higher again in Q3. This is one indicator that we want to keep dropping, but it doesn't look like its going to.
But at least stocks were higher! We appear to be back in the "ignore the risk" mode. It was less than two weeks ago that the jobless figure shocked the market to the downside. Now, all that if forgotten and we are ignoring the risks again.
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased notably from a reading of 21.4 in May to 8.0 in June. The index, which had edged higher for four consecutive months, fell back to its lowest reading in 10 months.
But at least stocks were higher!
Wednesday, June 16, 2010
The black hole grows deeper.
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.
“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.
The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.
If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.
Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.
“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.
Foreign governments, including China’s and Japan’s, hold $908 billion of [Fannie and Freddie] bonds, according to Fed data.
“Do we really want to go to the central bank of China and say, ‘Tough luck, boys’?
The terms of the 2008 Treasury bailout create further complications. Fannie and Freddie are required to pay a 10 percent annual dividend on the shares owned by taxpayers. So far, they owe $14.5 billion, more than the companies reported in income in their most profitable years.
“It’s like a debt trap,” said Qumber Hassan, a mortgage strategist at Credit Suisse Group AG in New York. “The more they draw, the more they have to pay.”
But Build America Bonds, part of President Obama’s economic stimulus plan, are also building something else: controversy.
States and cities have embraced these taxable bonds to borrow money at what they assume are favorable interest rates. The federal government pays 35 percent of the interest costs on the bonds, a huge potential saving.
For one, Wall Street banks are charging larger commissions for selling Build America Bonds than they do for normal municipal bonds, increasing the costs to the states and cities. For another, the new bonds may be priced too cheaply, enabling quick-footed investors to turn a fast profit as the prices climb, but raising interest costs for taxpayers.
this was inevitable. Can you say, "double dip"? from NYT:
Federal Reserve officials may trim forecasts for U.S. economic growth when they meet next week to set interest rates as Europe’s debt crisis saps demand for American goods and roils financial markets.
Central bankers may reduce their 2010 estimates by “several tenths” of a percentage point and as much as 0.75 point for 2011, said former Fed Governor Lyle Gramley. That would mark a reversal from April, when officials raised their projections for this year to a range of 3.2 percent to 3.7 percent and left 2011 and 2012 forecasts little changed.
The new estimates are likely to reinforce the Fed’s pledge, in place since March 2009, that interest rates will stay very low for an “extended period,” said former Fed researcher John Ryding. Some Fed officials are concerned that results of stress tests planned for European banks may further shake confidence in the continent’s financial system.
Russia may add the Australian and Canadian dollars to its international reserves for the first time after fluctuations in the U.S. dollar and euro.
“Adding the Australian dollar is being discussed,” Alexei Ulyukayev, the central bank’s first deputy chairman, said in an interview at an event hosted by Bloomberg in Moscow last night. “There are pros and cons. We have added the Canadian dollar but haven’t yet begun operations” with the currency.
Nearly 40 years ago the Garden State borrowed $302 million to begin constructing the Meadowlands. The goal was to pay off the bonds in 25 years. Although the project initially went according to plan, politicians couldn't resist continually refinancing the bonds, siphoning revenues from the complex into the state budget, and using the good credit rating of the New Jersey Sports and Exposition authority to borrow for other, unsuccessful building schemes.
Today, the authority that runs the Meadowlands is in hock for $830 million, which it can't pay back. The state, facing its own cavernous budget deficits, has had to assume interest payments—about $100 million this year on bonds that still stretch for decades.
California's redevelopment regime is an object lesson. Starting in the 1950s, the state gave localities the right to create public agencies, funded by increases in property taxes, which can issue debt to finance redevelopment. A whopping 380 such entities now exist. They collect 10% of all property taxes—nearly $6 billion annually—and they have amassed $29 billion in debt never approved by voters for projects ranging from sports facilities to concert venues to retail malls, museums and convention centers.