"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Monday, August 9, 2010

Really good links - QE2 - Bernanke - Eurozone breakup - Housing boom - China bubble

Ambrose Evans-Pritchard - QE2 - "After digesting Friday's jobs report, Goldman Sachs' chief economist, Jan Hatzius, thinks the Fed will abandon its exit strategy and relaunch QE this week, taking the first "baby step" of rolling over mortgage securities. Future asset purchases may be "at least $1 trillion". He is not alone. Every bank seems to be gearing up for QE2, even the inflation bulls at Barclays. The unthinkable is becoming consensus.
        Unfortunately, such obscurantism is taking hold in the US as well. Alabama Senator Richard Shelby has blocked the appointment of MIT professor Peter Diamond to the Fed Board, ostensibly because he is a labour expert rather than a monetary economist but in reality because he is a dove in the ever-more bitter and polarised dispute over QE.
        The Senate has delayed confirmation of all three appointees for the board, who all happen to be doves and allies of Fed chairman Ben Bernanke. The Fed is in limbo until mid-September. So the regional hawks who so much misjudged matters in 2008 have unusual voting weight, and now they have a commodity spike as well to rationalise their Calvinist preferences.
        Whatever Dr Bernanke wants to do this week - and I suspect he is eyeing the $5 trillion button lovingly - he cannot risk dissent from three Fed chiefs: one yes, two maybe, but not three. He faces a populist revolt from the Tea Party movement, with its adherents in Congress and the commentariat."

Tim Duy - Bernanke does not appear overly concerned with the incipient second half slowdown - "Bottom Line: The Fed shows no sense of urgency with respect to the current economic situation, and appears prepared to endure a weaker second half with no policy shift. Moreover, even if the economy does worsen more than they expect, the likely candidates for policy action are more smoke than fire. The Fed knows this, and doesn't want to lose credibility on actions with little likelihood of success. A more aggressive policy stance Gagnon-style appears off the table as long as the Fed fears the possibility that such policy might actually work and push up long term rates. That means more significant action only after outright deflation expectations are evident. Appears extreme, but central bankers tend to be a conservative lot. Lacking a financial crisis, the need for more action is not apparent to them. They fundamentally believe they have done pretty much all that can be reasonably expected. Moreover, we need to reassess the Fed's inflation comfort level; they may think they are hitting one mandate just fine."

Tyler Cowen - Collapse of the Eurozone - "You might think that the collapse of the current Eurozone, and the devaluations, are good in the longer run (I do), but in the short run the entire process would be a nasty, volatility-laden, solvency-revaluing shock to the entire global economy."

Scott Sumner - Housing boom - "So here is my suggestion. Never reason from a price change. Don’t ever say “oil prices will be high next year; hence I expect oil consumption to decline.” That’s bad reasoning. And don’t ever talk about high or low interest rates causing some sort of change in the economy. Instead say something like ”I believe the high tech bust helped boost the housing industry.” That sort of reasoning is consistent with the central idea of economics—scarcity. If less resources are devoted to making one type of capital good, then you’d expect more resources to be devoted to making other types of capital goods. Interest rates are merely the transmission mechanism that facilitates the “recalculation.”
        Of course I am not suggesting that the tech bubble bursting caused the housing boom. GGG find only about 20% of the boom is explainable via interest rates, and the tech bubble bursting is just one of many variables that can affect real interest rates. High Asian savings rates are another factor, and Fed policy is a third. However, the liquidity effect is less significant than usually assumed, as interest rate changes far more often reflect economic conditions than exogenous changes in Fed policy. So even if low interest rates had caused the housing boom, you would still not be able to claim that a Fed easy money policy contributed to the housing boom. "

Edward Chancellor - How states nurture bubbles and strife - "The part played by governments in fostering financial crises is not just a matter of historical interest. Beijing is engaged in another risky experiment in bubble economics.
        Last year the Chinese authorities instructed state-controlled banks to boost their loan books by a third. The result has been a rapid pick-up in real estate prices and construction.
        A recent National Bureau of Economic Research paper, Evaluating Conditions in Major Chinese Housing Markets, notes that Beijing land prices have nearly tripled since early 2008. Land sales have become the main source of income for local governments.
        These sales also support some Rmb10,000bn (£946bn, €1,129bn, $1,475bn) of bank loans to local government infrastructure projects. Meanwhile, Chinese banks are repackaging their loans and selling them on to investors, says Fitch."

1 comment:

  1. Great blog. I just discovered it. Keep up the good work.


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