Posts filed under “Think Tank”
The back page of section C of today’s WSJ talked about the recent rise in the CDS of sovereign Japan and its recent rise. As of today, 5 year CDS for Japan is at 72 bps (costs $72k per $10mm of notional value), just a few bps off the highest level since April. UK 5 yr CDS has also ticked up to 56 bps, near a two month high. US CDS is at 25 bps, also a two month high. Germany has been more stable at 21 bps. To provide a frame of reference, McDonalds 5 yr CDS is at 30 bps, IBM is at 32 bps, PG is at 48 bps, C is at 198 bps, BAC is at 118 bps, Ford is at 825 bps, the State of CA is at 177 bps, the State of NY is at 85 bps and Massachusetts is at 59 bps. With respect to sovereign CDS, the US will never default as we’ll print all the money needed to pay back our debts and other G10 countries are unlikely too but as Japan’s CDS reflects, the market can vote everyday on where potentially higher funding costs will be.
The Current State of the Economy and a Look to the Future (With Reference to William ‘Sidestroke’ Miles, W. Somerset Maugham, Don Ameche and Kenneth Arrow)
|The Current State of the Economy and a Look to the Future (With Reference to William ‘Sidestroke’ Miles, W. Somerset Maugham, Don Ameche and Kenneth Arrow)
Remarks before the Austin Headliners Club
November 10, 2009
Thank you, Tom [Granger], for that kind introduction.
Coming in from the airport, I again saw that fabled bumper sticker calling on local voters to “Keep Austin Weird.” It reminded me of the old saw that Washington is 10 square miles surrounded by reality.
Austin might be justly proud to consider itself 272 square miles surrounded by normality. But I know better. When I made my hapless run for the U.S. Senate in 1994, I managed to visit every nook and cranny of this state. I know from personal experience that, thankfully, there is nothing normal about Texas.
Take my wife’s family, for example. Her great-great grandfather was William Miles. He hailed from Nip ’n Tuck, a little town near what is now Longview in East Texas. He served gallantly in the Mexican Wars and then, after a substantial interlude, joined the 14th Regiment of the Texas Unmounted Cavalry—they had no horses but they were proud Texans and called themselves “cavalry” nonetheless—and went off to fight for the Confederacy. He had his arm shot off in battle, was discharged and sent home. To get back, he swam across the Mississippi—no small feat for a one-armed man. He is memorialized by the nickname “Sidestroke” in the family annals. Old “Sidestroke” then walked back to Nip ’n Tuck to become a dirt farmer.
He arrived home broke; he could not immediately afford a mule, so until he could, he hitched a plow to his six daughters—there was a seventh but she got smart, married a Yankee and was promptly disowned. William Miles never spent a dime; he saved every penny he earned and prospered handsomely. He died in 1910. His will instructed his executor to auction off all he had accumulated—his house, his equipment, the works—so his net worth could be calculated in hard currency.
All this is captured on his tombstone in the Gum Springs graveyard near Longview. His stone records the dates of his and his wife Nancy’s births and deaths, and the dates of his service in both the Army of the U.S.A. and the Army of Jefferson Davis. On the back of the stone, for all the world to see, are carved the words “Value of my estate $44,378.34.” That’s nearly $1 million in today’s dollars. That’s the good news. He died a rich man. The bad news is that his will required his daughters to buy everything back that was sold in his estate sale.
You cannot tell me that Austin has a corner on the market for being “weird.”
Interesting as all of that is, I know you didn’t ask me to return tonight to regale you with the legends and lore of my wife’s family. You asked me here to provide insight into something even more resilient and more “weird” than William “Sidestroke” Miles—our economy. So let’s get down to business.
As you all know, the Federal Reserve’s principal monetary policymaking group, the Federal Open Market Committee (FOMC), met last Tuesday and Wednesday. Our statement—released like clockwork at the conclusion of every FOMC meeting precisely at 1:15 p.m. Central time—summed up our collective wisdom: With a host of caveats, we noted that activity in the American economy has continued to pick up and appears to be on the mend. Despite this progress, however, we remain vigilant.
Let me explain why.
Fed Pres Fisher last night followed dovish speeches from Lockhart, Yellen and Rosengren where all reiterated that policy will remain easy for longer and “time is not now to tighten.” This of course follows the message of last week’s FOMC statement. Fisher still believes deflation is more of an immediate worry than inflation. The Fed…Read More
Release Date: November 10, 2009 For immediate release The Federal Reserve Board on Tuesday announced the availability of a collection of brief articles that examine ways to improve the availability of housing options for low-income renters. The publication, commissioned in conjunction with the Community Affairs staff at the Federal Reserve Bank of St. Louis, focuses…Read More
Governor Daniel K. Tarullo
At the Institute of International Bankers Conference on Cross-Border Insolvency Issues, New York, New York
November 10, 2009
Proposals for the creation of a special resolution process for large financial firms have rightly assumed prominence in the wake of the financial crisis. Some events during the crisis have also focused attention on the difficult problems often created by the failure of a large, internationally active financial firm. In my remarks this afternoon I want to elaborate a bit on the relationship between resolution processes and an effective overall system of financial regulation and supervision in both the international and domestic spheres.1
At the risk of some oversimplification, I would state that relationship as follows: First, an effective domestic resolution process is a necessary complement to supervision that would bring more market discipline into the decisionmaking of large financial firms, their counterparties, and investors. Second, the high legal and political hurdles to harmonized cross-border resolution processes suggest that, for the foreseeable future, the effectiveness of those processes will largely depend on supervisory requirements and cooperation undertaken before distress appears on the horizon. I would further suggest that the importance of proposed requirements that each large financial firm produce a so-called living will is that this device could better tie the supervisory and resolution processes together.
A Resolution Regime for Large, Interconnected Firms
During the financial crisis, serious distress at a large financial firm presented authorities in the United States and many other countries with only two realistic alternatives. First, they could try to contain systemic risk by stabilizing the firm through capital injections, extraordinary liquidity assistance, or both. Second, they could allow the firm to fail and enter generally applicable bankruptcy processes.
Faced with the possibility of a cascading financial crisis, most governments selected the bailout option in most cases. Yet this option obviously risks imposing significant costs on the taxpayer and supports the notion that some firms are too-big-to-fail, with consequent negative effects on market discipline and competitive equality among financial institutions of different sizes. Indeed, too-big-to-fail perceptions undermine normal regulatory and supervisory requirements. However, as the Lehman Brothers experience demonstrated, permitting the disorderly failure of a large, interconnected firm can indeed unleash just the systemic consequences that motivated the bailouts.
The desirability of a third alternative is thus obvious–a special resolution process that would allow the government to wind down a systemically important firm in an orderly way. As compelling as the case for such a process is, the debate around resolution proposals has shown how challenging it is to craft a workable resolution regime for large, interconnected firms that will effectively advance the complementary–but at times competing–goals of financial stability and market discipline. Still, I think there are certain key features that are essential.
To quantify the fall off in volume seen over the past week of trading, assuming current trends persist to day’s end, today will be the 4th day in a row of total consolidated NYSE volume below 5b shares for the first time since mid July. I’m not going to give a technical prediction based on…Read More
The Federal Reserve’s Lame Attempt To Defend Itself Against Bubble Creation The Financial Times – Frederic Mishkin: Not all bubbles present a risk to the economy There is increasing concern that we may be experiencing another round of asset-price bubbles that could pose great danger to the economy. Does this danger provide a case for…Read More
~~~ The Financial Commentator: Special Update November 5, 2009 As promised in the October 18, 2009 letter, this is a Special Update for gold and the gold stocks. As gold broke out of the triangle discussed in the August letter in early September, it made progressive new highs above the May 2009 peak in September,…Read More
Category: Think Tank
If you sell it, will they come? So far, yes with respect to the ability of the US Treasury to sell debt to fund the ever growing deficits of the US government. With continued falls in the US$, coincident rise in gold and growing inflation expectations, today’s 10 year auction and Thursday’s 30 year will…Read More