Thursday, July 28, 2011

The Financial Rebalancing Act

Since the return of convertibility among the currencies of most major industrial countries at the beginning of 1959, a crisis affecting at least one major currency has threatened each year; the U.S. balance of payments has been in continuous large deficit; and the stability of the convertible gold-dollar and sterling system has been increasingly questioned. With the transition to convertibility proving to be so turbulent, doubts have arisen over the adequacy of liquidity arrangements for the future and calls for a great reform of the international monetary system have quite understandably been intensified.

Sunday, July 3, 2011

QE3, Geithner’s Stepping Down(?) and Bill Clinton’s Principal Writedown Solution

Since QE2 ended today (and they are still proceeding with zero Fed Funds Rate and reinvestment of MBS and Agency Bond principal payments into Treasuries), the wisdom is the there will be NO QE3.

Yes, probably for July. But I predict that QE3 will be coming shortly. Why? Who wants to buy our debt when The Fed (more specifically, The Fed on New York) stops buying it?

Greece will ultimately default, despite votes for austerity. It’s just a waiting game. Like the James Bond movie, “Die Another Day,” Greece’s Parliament, the ECB, the IMF and others are simply stalling on Greece’s economic death. Along with other peripheral members of the European Union. The collapse of Europe will send money our way — as long as we as the reserve currency for the world.

But China wants to be the Global Reserve Currency, or at least another reserve currency. Why, because China is facing a hard landing because loan losses are huge and growing. Those phantom cities are expensive and don’t generate a heap of rental income to cover debt service. So, China is against a hard wall in terms of THEIR debt issuance. Again, the world will come to us since there isn’t a lot of love for China’s reckless spending policies.

I am guessing that we won’t see a surge in non-Fed Treasuries purchases. So either Treasury will have to offer HIGHER interest rates on their bonds (might be explain Geithner’s hints at leaving as Treasury Secretary), or the Fed will step in and do QE3. We will be watching closely over the summer.

So, either Treasury rates will rise or The Fed will set sail on QE3. Take your pick.

Ex-President Bill Clinton, the architect of the massive surge in mortgage financing through Fannie Mae and Freddie Mac (which ultimately blew up) is now offering his opinions on how to clean up the mess that he helped create. Austerity? Tighten your belts? Move to less expensive rental property? Nope. He is suggesting that Bank of America (and other banks) write down principal on mortgage loans.

“By unclogging the housing market, “you lift not only an economic, but a psychological burden off of the homeowners and the banks,” Clinton said. “And we’re free to start lending again, we’re free to engage in normal economic activity.””

Of course, Clinton is not alone. A number of advocates exist for massive principal write downs (including Glenn Hubbard and Chris Mayer of Columbia University and Laurie Goodman of Amherst Securities). They have mixed motivations (including saving second liens for hedge funds), but the question I always have is the same one: WHO pays for the principal write downs?

Answer: The American taxpayer. That is why Ed DeMarco of FHFA (Fannie Mae and Freddie Mac’s Regulator) is against principal reductions. It is VERY expensive with no clear evidence that it would work. And it would create a “Fool’s Gold” Rush of borrower’s threatening to default on their mortgage. Throw in the massive borrower fraud problem and you have a fiasco on your hands.

Then again, President Clinton didn’t foresee the fiasco that he pushed into motion with Fannie, Freddie and the Affordable Housing Mandates. So, why would he correctly foresee the fiasco of pushing Bank of America or Fannie Mae and Freddie Mac into making principal reductions.

Imagine the amount of Tier 1 capital that banks would have to raise to meet the demands for principal reductions? Hint: look at the difficulty Treasury is having issuing debt. Suppose that a run on principal write downs leads to systemic bank failure because the banks can’t handle the requests?

President Clinton, stick to the Clinton Foundation. If the Foundation wants to fund principal reductions, that would be fantastic. Otherwise, stick to whatever else you do. Your housing policies were ultimately devastating.

Saturday, July 2, 2011

Will Germany-China Ties Hurt the U.S.? - The Curious Capitalist -

The chummy pow wow between Chinese Prime Minister Wen Jiabao and German Chancellor Angela Merkel in Germany this week seemed like all peas and gravy. Fourteen economic deals? Great. Twenty-two cooperation agreements? Even better. Any business is good business in a fragile global economy, right? Not so much. Growing ties between Beijing and Berlin don't all bode well for the U.S., not to mention greater Europe.

For their part, Europeans fear China is taking over their continent by buying its way in. China's recent purchases of Spanish and Greek bonds, for instance, have made it the flailing eurozone's lender of last resort. China's interests are clear: a surviving euro fuels demand for Chinese goods and allows China to diversify its massive dollar holdings. All the better for Germany. China's "bond diplomacy" toward Greece is a godsend for Greek-debt-laden German banks that fear a Greek default.

As Europe's ringleader, Germany could express its gratitude by softening its stance towards China on trade, the environment, and human rights. For example, China wants the EU to designate it a "market economy" within the WTO, which would make trade disputes against China more difficult, a demand the EU has so far resisted. Germany is also vying for the EU to drop its long-held arms embargo with China, a move the U.S. has long opposed.

Ultimately, growing trade ties to China could pull Berlin away from the West. As Marcus Walker argues in the Wall Street Journal this week: "When you've carved out a lucrative niche selling precision machinery and luxury cars to fast-growing emerging economies such as China, who needs stodgy old Europe?" There are already small signs of Germany peeling away. Germany sided with China and Russia in abstaining from NATO's Libya intervention, and it has walked away from the ailing eurozone on numerous occasions.

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