Von der Leyen elogia proposta de Trump de dar garantias de segurança à Ucrânia

[Keyser Soze]

John Galt Plan Might Save US Financial System
By Caroline Baum

Let's face it: The Federal Reserve must be scared to death as it watches the financial system unravel.

Unravel would appear to be the operative word as leverage proves to be as toxic on the way down as it was intoxicating on the way up.

By late last week, events seemed to be spinning out of control. Credit spreads were blowing out, with tax-exempt municipal bonds out-yielding Treasuries by a record and the spread between Fannie Mae mortgage-backed securities and government bonds hitting a 22-year high. Treasury bill yields were collapsing (further). The U.S. dollar was sinking like a stone. And commodity prices, in their lofty ascent, had all the makings of a market unhinged from the fundamentals, which, after all, is the definition of a bubble.

Mortgage foreclosures hit an all-time high in the fourth quarter of last year while homeowners' equity, or the value of a home less the outstanding mortgage, sank to an all-time low of 47.9 percent.

This measure of owners' equity has been declining since the Fed started collecting data in 1945. (This isn't your father's housing market.) More unusual was the drop in the value of household real estate in the fourth quarter, one of a handful of declines in the half-century life of the series.

Margin calls are causing forced selling of assets (often what investors can sell, not what they'd like to sell), which makes them cheaper, which triggers additional margin calls and more forced selling. No wonder the Fed announced two initiatives early Friday before the New York Stock Exchange opened to address "heightened liquidity pressures."

Temporarily Permanent

The Fed said it was increasing the amount banks could borrow at the Term Auction Facility (TAF) to $100 billion this month compared with $60 billion in January and February. "The Federal Reserve will increase these auction sizes further if conditions warrant," the central bank said in its press release.

In addition, the Fed will make $100 billion available through term repurchase agreements, collateralized loans to Wall Street primary dealers.

Fifteen minutes after the Fed's announcement, the Labor Department reminded us that the economy's problems aren't strictly financial. Non-farm payrolls fell 63,000 in February, following a revised 22,000 drop in January. Employment has always been the most visible, and perhaps the most important, of coincident economic indicators. Your average Joe doesn't know, and probably doesn't care, if industrial production is expanding or contracting in any given month.

Waiting for a Plan

Jobs are a different story. Statistically there isn't much difference between a decline of 63,000 and a similar-sized increase. It's the sign, and the trend, that matter. Private payrolls fell 101,000 last month, the third consecutive monthly decline.

What is to be done? The Fed has lowered its benchmark rate by 225 basis points since September, with another 75 basis points expected on March 18, based on the prices of fed funds futures. It introduced, and now enhanced, the TAF to address liquidity needs.

President George W. Bush and Congress worked together to pass a $168 billion fiscal stimulus package, including tax rebates for savings-short households and tax breaks for business. The pace of mortgage delinquencies and foreclosures is outpacing Treasury Secretary Hank Paulson's ability to keep up with them.

Paulson said last week that the administration was looking at the mortgage-origination and securitization process, disclosure, regulatory and capital issues, and the rating companies. We can expect new proposals "in the weeks ahead," he said.

Galt's Solution

The following day, Fed Chairman Ben Bernanke encouraged mortgage servicers to write down a portion of the principal on home loans, which would give owners some equity and discourage foreclosure. He advocated a bigger role for the Federal Housing Administration, a Depression-era agency that insures mortgages. Congress envisions an even larger role for the federal government.

Any day, I expect some government official to unveil the John Galt plan to save the economy.

Galt, the hero of Ayn Rand's magnum opus "Atlas Shrugged," stops the world by going on strike. He and the "men of the mind" literally withdraw from the world after watching their wealth confiscated by the looters (the government).

Toward the end of Rand's 1,000-plus page novel (or polemic), the economy is in shambles. Desperate, the looters kidnap Galt and prod him to "tell us what to do."

Galt refuses, or rather tells them "to get out of the way."

Road Is Cleared

You probably can sense where I'm going. Today's economic and financial crisis would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

That's not going to happen. The bigger the mess, the more urgent the calls for a government solution, the more willing government is to oblige.

We want laissez-faire capitalism in good times and a government backstop against losses in bad times. It's a tough way to run an economy.

(Caroline Baum, author of "Just What I Said," is a Bloomberg News columnist. The opinions expressed are her own.)

[Keyser Soze]

March 9, 2008
Downturn Tests the Fed’s Ability to Avert a Crisis
By VIKAS BAJAJ



In the last seven months, policy makers have cut interest rates, injected money into the banking system and approved a fiscal stimulus package in an effort to keep the economy from slipping into a recession. Often, the moves seemed to work at first, only to be overtaken by more bad news.

The failure of any of the usual fiscal and monetary policy tools so far raises questions about what the Federal Reserve and federal government can do in the near term to counter the forces that have battered housing prices and pushed down the stock market and are now causing a hiring slowdown.

“There are times when there is only so much the Fed can do,” said Barry Ritholtz, chief executive of FusionIQ, an investment firm in New York. “It can smooth out the business cycle a little bit, but last I checked, we haven’t done away with the business cycle.”

One of the main problems now is a deepening crisis of confidence that is compounding the ill effects from the housing downturn. As lenders and businesses become more cautious about whom they lend to and hire, they are slowing an already weakened economy.

If the housing boom was a manifestation of irrational exuberance, some say it has swung too far in the other direction, to irrational despondency.

“Banks went from giving money away like drunken sailors to not lending to the most credit-worthy borrowers,” Mr. Ritholtz, who writes the popular economics blog The Big Picture, said.

The latest signs of panic in the markets came last week. Banks began calling in loans they had made to hedge funds, mortgage companies and others, forcing them to sell billions of bonds. The moves prompted concern about securities backed by Fannie Mae and Freddie Mac, the large government-chartered buyers of mortgages that many investors believe have the implicit backing of the federal government.

When big investors are forced to quickly dump billions of dollars in securities, trading can seize up, especially when buyers are scarce, as they are now. Just a few weeks earlier, a similar bout of forced selling drove down the prices of municipal bonds issued by states and cities.

In mid-January, the Fed moved to arrest the crisis in the financial system after markets plunged around the world and a French bank announced a big trading loss; markets in the United States were closed because of a holiday. The Fed cut interest rates three-quarters of a point and cut them another half-point a week later at a scheduled meeting.

With the exception of a few days, the market rallied those two weeks, and investors even drove down mortgage interest rates, sending millions of homeowners shopping for new loans.

But the relief was short-lived. Mortgage interest rates headed back up almost immediately, and by early February the stock market was falling again after reports showed a drop in employment and a slackening in the service sector.

“The Fed rate cuts aren’t doing anything for my clients except confuse them,” Steve Walsh, a mortgage broker in the Phoenix area, wrote in an e-mail message at the end of January.

Fed officials would say that mortgage rates would be higher still had they done nothing. But given the shortcomings of the response so far, the Fed and members of Congress are working on more aggressive tactics.

The Fed is expected to cut rates further when its policy-making committee meets next week. It will also increase the money it lends to banks in periodic auctions to $100 billion, from $30 billion.

Fed officials have been meeting with aides to Representative Barney Frank, Democrat from Massachusetts, who is chairman of the House Financial Services Committee and has argued for more government intervention. The Fed supports some of the ideas Mr. Frank has been discussing, including having onerous mortgages refinanced and guaranteed through the Federal Housing Administration. But the central bank, at least so far, opposes the purchase of troubled loans by the federal government, an idea suggested by Mr. Frank and other Democrats.

Much of the focus will remain on housing, because policy makers and analysts think banks and investors will not regain confidence until the real estate market stabilizes. Uncertainty about how far home prices will fall has made banks less willing to lend and consumers reluctant to buy.

Banks are also unwilling to lend because they are worried they will not be paid back. Nearly 7.9 percent of home loans were in foreclosure or past due at the end of last year, and most economists expect that more borrowers will encounter trouble.

Some lenders are also trying to preserve their capital because they expect to have more losses. Last week, Citibank said it would reduce its holdings of home loans by 20 percent.

“Lenders can’t lend in this environment because they fear they are not going to get paid back,” said Daniel Alpert, a managing director at Westwood Capital, an investment bank in New York. “And guys who own homes have no value left to hock.”

The interest rate on 30-year fixed mortgages is back above 6 percent, still historically low, after falling below 5.5 percent in December. Banks are demanding bigger down payments and cutting off home equity lines of credit to borrowers, especially those who live in states where home prices are falling fastest.

Mr. Alpert and others see a parallel between the credit problems today in the United States and the economic crisis in Japan in the 1990s. In both cases, reckless lending and a bubble in real estate contributed to enormous losses and tightening of loans.

There are significant differences, however. American banks have been quick to recognize losses, and policy makers have moved to contain the damage and protect the broader economy. In Japan, many lenders did not write off bad loans and the central bank was much slower to respond. The 1990s is broadly seen as a “lost decade” for that country.

Mr. Alpert, who bought troubled loans from Japanese banks for pennies on the dollar, said that while American financial institutions are moving fast, policy makers should encourage or even force them to write down and restructure bad mortgages faster so they can get back to lending.

“If you fail to clean up the problem and take aggressive action, you are going to have years and years of stagnation as Japan did,” he said.

There are signs that the logjam in some markets is loosening as bargain hunters move in to take advantage of the turmoil. When enough investors step in to buy beaten-down securities, it can restore confidence and make banks willing to lend more freely.

In the municipal bond market, for instance, prices rose steadily last week as retail investors and mutual funds bought bonds that distressed hedge funds were selling at deep discounts, said Douglas A. Dachille, the chief executive of First Principles Capital Management, a firm that specializes in bonds. Prices on one index compiled by The Bond Buyer, a trade publication, rose 5.7 percent last week after falling 6.2 percent in the last week of February.

That “problem was solved,” Mr. Dachille said Friday. “By the end of this week, the muni market is functioning well again.”