Posts filed under “Think Tank”

Stocks and risky assets stumble

Stocks and risky assets stumble

I concluded a post on stock markets over the weekend saying: “After equities’ seven-month climb, stock markets certainly look vulnerable for a decline. Two downside reversal days – on Wednesday and Friday – would seem to indicate that stocks could commence a pullback to work off the overbought condition, allowing fundamentals to reassert themselves.”

Global stock markets, as well as other risky assets, closed sharply lower over the past few days as concerns mounted over the sustainability of the global economic recovery and the outlook for central bank policy.

The performance of the major asset classes is summarized by the charts below, with the top one showing the period from the March 9 stock market lows until October 19 peak and the second one the subsequent period. The numbers indicate an all-change pattern in the performances as risk aversion re-entered financial markets and government bonds and the US dollar regained some favor.





A summary of the movements of major global stock markets since the March 19 peak, as well as various other measurement periods, is given in the table below.

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Category: Think Tank

Governor Daniel K. Tarullo on Regulatory Reform

Governor Daniel K. Tarullo

Regulatory reform

Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., October 29, 2009

Chairman Frank, Ranking Member Bachus, and other members of the Committee, thank you for the invitation to testify this morning on systemic regulation, prudential matters, resolution authority, and securitization. The financial crisis was the product of many factors, including the tight integration of lending activities with the issuance, trading, and financing of securities; gaps in the financial regulatory structure; widespread failures of risk management across a range of financial institutions; and, to be sure, significant shortcomings in financial supervision. More fundamentally, though, it demonstrated that the regulatory framework had not kept pace with far-reaching changes in the financial sector, and the concomitant growth of new sources of risk to both individual institutions and the financial system as a whole.

Because the roots of the crisis reached so deeply into the very nature of the financial system, a broad program of reform is required. Much can be, and needs to be, done by supervisors–under their existing statutory authorities–to contain systemic risk generally and the too-big-to-fail problem in particular. As the discussion draft released by Chairman Frank recognizes, there is also a clear need for the Congress to provide significant additional authority and direction to the regulatory agencies.

Essential elements of this legislative agenda include: ensuring that all financial institutions that may pose significant risk to the financial system are subject to robust consolidated supervision; establishing a systemic risk oversight council to identify, and coordinate responses to, emerging risks to financial stability; directing all financial supervisors to take account of risks to the broader financial system as part of their normal oversight responsibilities; establishing a new special resolution process that allows the government to wind down in an orderly way a failing financial institution that threatens the entire financial system while also creating a credible process for imposing losses on the firm’s shareholders and creditors and assuring that the financial industry, not taxpayers, ultimately bears any additional costs associated with the resolution process; providing for consistent and robust prudential supervision of key payment, clearing, and settlement arrangements; and addressing weaknesses in the securitization process that came to light during the crisis.

Chairman Frank’s discussion draft addresses each of these areas and, in the Board’s view, provides a strong framework for achieving a safer, more stable financial system. In addition to addressing these areas for legislative change, I will discuss some of the actions the Federal Reserve and our supervisory colleagues are taking under existing authorities to strengthen the supervision and regulation of financial institutions–particularly large, complex institutions–and to prevent regulatory arbitrage.

Consolidated Supervision of Systemically Important Financial Institutions
The current financial crisis has clearly demonstrated that risks to the financial system can arise not only in the banking sector, but also from the activities of other large, interconnected financial firms–such as investment banks and insurance companies–that traditionally have not been subject to the type of mandatory prudential regulation and consolidated supervision applicable to bank holding companies. Chairman Frank’s discussion draft would close this important gap in our regulatory structure by providing for all financial institutions that may pose significant risks to the financial system to be subject to the framework for consolidated prudential supervision that currently applies to bank holding companies. As I will discuss shortly, it also provides for these firms to be subject to enhanced standards, reflective of the risk they pose to the financial system. These provisions should prevent financial firms that do not own a bank–but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities–from avoiding comprehensive supervisory oversight.

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Category: Federal Reserve, Think Tank

The evils of inflation

The better than expected Q3 Real GDP report has raised the debate over whether the American Recovery and Reinvestment Act of 2009, aka the stimulus package, was a positive catalyst in helping. I will not get into the political discussion and will only specifically discuss the tax cut that was given to individuals that qualified…Read More

Category: MacroNotes

Today’s Regulatory Hearings

Full Committee Hearing Systemic Regulation, Prudential Matters, Resolution Authority and Securitization 9:30 a.m., October 29, 2009, 2128 Rayburn House Office Building Full Committee Click here to watch live webcast of this hearing. Witness List & Prepared Testimony: Panel one: The Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury Panel two: The Honorable Sheila…Read More

Category: Think Tank



Traders again bought stocks on Wednesday’s open but an unexpectedly soft New Home Sales report chilled bullish proclivities. September New Home Sales declined 3.6% to 402k; 440k was expected. And once again, the previous month’s data was revised lower, from 429k down to 417k.

Though inventories are reported at 7.5 months, this is an illusionary number because there are beaucoup homes in the hidden inventories of investors, banks, mortgage holders, builders, etc. that are not listed.

Mark Hanson: New Home Sales just can’t get going despite foreclosure moratoria and national mortgage mod initiatives that have kept competing low-end inventory levels historically low and demand for existing houses from low-end buyers throughout the 2009 purchase season up.

Not Seasonally Adjusted, only 31k New Homes were sold in September, slightly greater than 1500 units per day. This was down a sharp 11.4% YoY and 16.2% MoM – the normal Aug to Sept decline is closer to 10%. To keep the 1500 daily sales in perspective, today there will be 2000 foreclosure starts in CA alone…The report made for the weakest September since 1981.

Another factor that depressed stocks on Wednesday was: Goldman lowered its Q3 GDP forecast to 2.7% from 3%. GS see 3% Q4 GDP and weaker 2010 GDP. GS’s day-before-release revisions to its NFP forecast the previous two months were bull’s eyes, so traders believed that Goldie knows something.

Due to the trillions of dollars thrown at or pledged to the economy and financial system many pundits thought GDP would surge 4% to 6% in Q3. Now, reality, which is evinced in jobs and income, is weighing on the economy, sentiment and finally stocks.

If GDP is less than 3% for Q3, people will have to readjust Q4 and 2010 GDP projections. This was the main factor in yesterday’s stock decline.

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Category: Think Tank

Economic data

GDP in Q3 grew 3.5%, faster than the consensus of 3.2% but Nominal GDP was below forecasts as it grew 4.3% vs an expected gain of 4.6%. It was thus an .8% gain in the deflator vs expectations of a 1.4% rise that helped in part lift the REAL GDP figure above estimates. Personal Consumption…Read More

Category: MacroNotes

Mark McGwire, Jose Canseco and Pablo Escobar would be so proud!

Just as the high in the housing industry from the home buying tax credit wears off, Congress is back with another injection with both parties bringing the drugs. It doesn’t matter if it makes economic sense or not, the temporary high feels so good and who cares what the long term implications are. Mark McGwire…Read More

Category: MacroNotes

Cash for Clunkers cost how much?

As the debate intensifies on whether and what form to extend the home buying tax credit, one argument against it is why give a credit to someone who planned on buying a home anyway. With 85% of 1st time home buyers who were eligible to collect the tax credit planning to buy a home anyway,…Read More

Category: MacroNotes

The Global Financial Crisis and Offshore Dollar Markets

Description: Facing a shortage of U.S. dollars and a growing need to support their dollar-denominated assets during the financial crisis, international firms increasingly turned to the foreign exchange swap market and other secured funding sources. An analysis of the ensuing strains in the swap market shows that the dollar “basis”—the premium international institutions pay for…Read More

Category: Currency, Federal Reserve, Think Tank

Attention about to shift back to the economic data

With most of the biggest companies having already reported Q3 earnings, attention shifts to a slew of important economic data over the next few weeks and also the two day FOMC meeting concluding a week from today. With the stock market getting tired (4 failed rallies in the past 5 trading days) and in correction…Read More

Category: MacroNotes