This report is available on wellsfargo.com/research and on Bloomberg WFEC

John Silvia, Chief Economist
wachovia.com

October 05, 2009
Economics Group
I wish to thank Professor Kaufman for the opportunity to speak at this conference and with the chance to catch-up with some long-time friends.
In line with this conferences theme, I will highlight some of the ways that the rules have changed but, even more so and with great disappointment, how much the underlying economic and political forces have not changed.
First, in contrast to the views expressed by a previous speaker I see no reason why stress tests and risk simulations cannot account for the boom/bust cycles of the economy and the financial systems. Moreover, both economic and financial cycles can be and are integrated in a Bayesian Vector-Auto regression model which, in fact, we do work with at Wells Fargo. This approach to stress testing is far superior to the common approach of merely changing one input, often the federal funds rate or the unemployment rate, and then producing a scenario that represents a “valuable” test to a financial institution. Such one-variable tests are unrealistic as we know very well that the real world will often experience several economic series changes moving at the same time. For example, a (lower/higher) federal funds rate is accompanied by changes in inflation, growth, exchange rates as well.
Second, one factor in the economy that has not changed is the underlying social/political bias in public policy towards housing that has been part of our society for most of the post-WWII era. America’s overinvestment in housing has been a chronic complaint with this overinvestment being assisted from federal and state tax laws, bank regulatory policy and credit/interest rate subsidies. This has not changed in recent years and, in fact, has continued this year with the increase in Federal Housing Authority (FHA) in recent months at below market rates/very low down payment requirements even as delinquency rates rise on these same FHA loans.
Third, we have witnessed change in the short-run but without resolution in the long-run of the Fed’s role as policeman in the credit markets. Increased liquidity at the short-end of the yield curve has brought down Libor and TED spreads but are these short rates too low given that current yields are below that of the often-criticized pre-Lehman period? What about long-term rates? Currently, the Fed has indicated that they will reduce their support for Treasuries by the end of October and will gradually withdraw support for mortgage-backed and asset-backed securities by March of next year. Will the Fed’s involvement in these markets really diminish in the face of relatively high unemployment and a likely upward move for interest rates in general?
Fourth, the zero interest rate policy at the Fed has already signaled a change in global financing as increasingly the U.S. finds itself as the source of borrowing in a global carry trade with lending and investing abroad. Moreover, this zero interest rate policy returns policy to the pre-1951 Treasury accord period and brings into question whether such a policy is consistent with an

independent central bank? At this time in the business cycle, Federal Reserve intervention has created a set of below-market interest rates in many financial instruments. These rates are likely to move up as the Federal Reserve exits. Therefore, it is very difficult to know if financial markets have indeed better accounted for risk in setting interest rates.

“Mahmoud Ahmadinejad revealed to have Jewish past (Telegraph) I guess this means he must wipe himself off the face of the earth~!”

BR -

A note as someone who respects your writing and intelligence: I must complain that this throw away joke of yours refers to a malicious mistranslation while implying an anti-semitic/anti-Jewish slur by conflating “the jews” with a particular racist government.

The translation issue has been covered in several places (eg http://www.juancole.com/2006/05/hitchens-hacker-and-hitchens.html). The slur is more serious: I would assume that it is unintentional, but that conflation is exactly the same that is pushed by many anti-semites.

more proof that Engineers do more than wear pocket-protectors.. (;

couldn’t be a bigger Boondoggle, if they tried.

see: http://arencibia.com/technologies.html

the Technology, developed and well-proven, has Existed for Years.
~~
wunsa-

re: links, no prob. it was, more, for those of the “if we were told bubble-gum was valuable”-crowd..

Obama Administration Releases First Funds for Elusive ‘Clean Coal’
by Stacy Feldman – Oct 5th, 2009
The Obama administration announced the winners of the first phase of “clean coal” dollars from the economic stimulus package, with the largest sums going to oil firms.

Only $21.6 million of the $1.4 billion for carbon capture and storage (CCS) technologies was made available in phase one. The money was awarded to 12 companies that will test ways to catch and compress CO2 from polluting plants, transport it by pipeline and pump it underground.

The biggest winners were C6 Resources, a Shell Oil affiliate; ConocoPhillips; and Shell Chemicals, another division of Shell Oil. Each nabbed $3 million to demonstrate their technologies for seven months.

In the announcement, U.S. Energy Secretary Steven Chu recycled the ‘clean coal’ boilerplate of past releases: “These new technologies will not only help fight climate change, they will create jobs now,” although there was no estimate of how many jobs will be generated.

He also repeated this claim:

“The investments will help position the United States to lead the world in carbon dioxide capture technologies.”

America still has a long way to go, though. A few subsidy-funded R&D tests are now being carried out, but none is considered economically feasible on a large scale, or even that clean.

read more @ http://solveclimate.com/

New York man accused of using Twitter to direct protesters during G20 summit .. posted 10-04-09
http://www.guardian.co.uk/world/2009/oct/04/man-arrested-twitter-g20-us
“New York man accused of using Twitter to direct protesters during G20 summitElliott Madison arrested by FBI and charged with using social networking site to help demonstrators evade Pittsburgh police….”

Iran Election TWITTER Feeds: Constant Updates .. posted: 06-14-09
http://www.huffingtonpost.com/2009/06/14/iran-election-twitter-fee_n_215330.html
“With the Iranian government jamming cell phones and text messages and blocking access to many social networking sites such as Facebook, Twitter has emerged as one of the mediums with the most information being passed around ….”

and we gotta cool it .. this is a financial site .. not a capital @ site |-:

It’s quite pathetic that the WSJ should publish such a glib, disingenous article but nothing that comes from a Murdoch-owned media outlet has any credibility with me, so what else is new.

I have 1 question for the author: if the rumours of the dollar being abandoned for oil trading worldwide comes true, does he really believe gold will fall significantly on that news?

I’m staying long of my gold and looking to add on the breakout.

Addis Ababa.

You have to know these things when you’re King.

http://popwatch.ew.com/2009/10/05/monty-pythons-flying-circus-turns-40/

…did Dave Letterman apologize for his previous apology?

http://www.nytimes.com/2009/10/06/business/media/06letterman.html