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February 25, 2010
For those interested in the housing market, this video of Robert Shiller is quite informative.
We continue to think the housing market, despite its recent price stabilization, is an ongoing risk for consumer confidence and the general economy. With as much government support, which among other things includes about 95% of all mortgages being purchased or guaranteed by Fannie, Freddie or FHA, we couldn't agree more with Shiller's worry that the direction of housing prices is uncertain at best. The last minute is the part of most interest.
February 24, 2010
With the announcement by the US Treasury last night – which was short and uninformative - we are a bit confused. Essentially, the US Treasury is going to pull $200 billion of cash out of the financial system over the next eight weeks. They will be taking the cash – not using it to fund government spending – and depositing at the Federal Reserve. A WSJ article on this was less than helpful in understanding the ramifications of the announcement.
This program, Supplemental Financing Program or SFP, was created at the outset of the financial crisis in late 2008 and was allowed to fade away when the Fed decided to just let short-term interest rates go to zero. With the ability to pay interest on reserves, over $1.1 trillion in excess reserves via new printed cash was injected into our economy.
We’ve previously written on this blog about the tools the Fed has to try to conduct monetary policy going forward. It’s most simple tool is to simply raise short-term interest rates by paying banks enough interest to entice them to just leave the money on deposit with the Fed. See our November 20, 2009 blog post for more background.
But, this re-introduction of the SFP program seems to be a big deal. The markets don’t seem to care at all.
As of now, the markets seem to see this as simply an administrative move. The Treasury pulls $200 billion from the private economy by borrowing from the public. We know that the Fed still has $200 billion of mortgage-backed-securities to buy before March 31. They were going to just print money to fund those purchases. Now that the Fed is going to get the Treasury to hand $200 billion of borrowed cash, the Fed can fund those purchases without having to print money. We understand this much.
However, this move could be accomplished by the Fed just selling its own securities – it owns Treasuries, Agency debt that it could just sell to raise money for its remaining mortgage purchases. Why use the Treasury instead of just selling off securities on its own balance sheet? Our contention is this action would freak the market out considerably. The Treasury doing it is much more behind the scenes. Regardless, it is a big shift in policy, nonetheless.
But, the markets don’t seem to care. It is quite confusing, in our view. Maybe more will be explained in the days to come.
Also, Bernanke’s testimony linked here goes to great lengths to make reference to other excess reserve draining tools like their new Term Deposit Facility and Reverse Repurchase Agreements. He even mentions that they could sell securities to drain reserves. But, there is no mention of this news from the Treasury. This all deserves more coverage.
February 18, 2010 |
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We ran across the article below about consumer spending today that we found interesting. The retail sales figures released last week were quite surprising in their strength. However, the article below strikes us as quite contradictory but also quite logical given our view of how real people are still adjusting to the current economic environment.
Reuters Thursday February 18, 2010, 10:12 am EST
By David Morgan
WASHINGTON (Reuters) - American consumers say they reduced their spending in January to levels similar to early 2009, when the U.S. economy was still in recession, according to a Gallup poll released on Thursday.
The findings, which contradict U.S. data suggesting spending strength in January, showed consumers in all income brackets and geographic regions spending less in January vs. December in stores, restaurants, gas stations and online.
In many cases, Gallup said consumers spent less in the first month of 2010 than in January 2009, a weak economic period when monthly retail sales fell nearly 10 percent and the economy headed for a 6.4 percent first-quarter contraction.
"Consumer spending during the first two weeks of February shows a similar pattern. Year-over-year comparisons show consumer spending returning to the new-normal range of last year," Gallup said.
<click for the rest of the article>
