Finance news. My opinion.

December 31, 2008

ECB Pressured to Cut Rates by Weaker Sales, Lending

Filed under: economics — Tags: , — Professor @ 3:32 am

The European Central Bank will begin the new year under pressure to keep cutting interest rates after retail sales fell for a seventh successive month and loans to households and companies grew at the slowest pace in four years.

Retailers reported sales, jobs and profit margins all contracted this month as the deepening recession curbed consumer confidence and spending, the Bloomberg purchasing managers’ index showed. Tighter credit standards at banks meant private sector lending slowed for an 11th month in November, rising 7.1 percent after a 7.8 percent increase in October, the ECB said.

The deteriorations mean the 15-nation euro area will mark a decade of the single currency on Jan. 1 facing a deepening recession. That leaves investors betting the ECB will reduce interest rates as early as next month even as its officials signal a reluctance to do so after cutting their benchmark by 175 basis points to 2.5 percent since early October.

“The ECB will have to go further,” said Gilles Moec, an economist at Bank of America Corp. in London and a former Bank of France official. The euro region faces “a severe and protracted recession.”

The measure of retail sales in the euro area rose to 41.4 in December from 40.6 in November, remaining below the 50 limit that indicates shrinkage. The Bloomberg index, based on a poll of around 1,000 executives by Markit Economics, also showed that retailers sliced jobs for a ninth month and by the most in four years. Profit margins fell at a record pace.

Gauging Inflation

“Consumer spending going forward will remain as weak as it has been in the last few months,” said Nick Kounis, chief European economist at Fortis in Amsterdam.

M3 money supply, which the ECB uses as a gauge of future inflation, slowed to 7.8 percent from a year earlier as demand for the most liquid assets retreated. Economists had expected the rate to decelerate to 8.5 percent from 8.7 percent in October, according to the median of 28 forecasts in a Bloomberg survey.

“The recent steady downward trend suggests that tighter credit conditions are impacting more,” said Howard Archer, chief European economist at Global Insight Inc. in London.

Today’s reports were the latest to suggest the euro-area’s recession deepened this quarter online cash advances. Consumer confidence fell to a 15- year low in November, while manufacturing and services industries contracted in December at the fastest pace in at least a decade.

Oil Prices

Price pressures are also fading throughout the region as the recession continues and after the price of crude oil fell more than 70 percent from a July peak of $147 a barrel, the Bank of Spain said in a report today. The inflation rate in Germany this month dropped to the lowest level in more than two years after, the Federal statistics Office said in Wiesbaden today.

Investors are predicting slumping growth and fading inflation will force the ECB to lower rates by 50 basis points when its governing council convenes Jan. 15, Eonia forward contracts show. BlackRock Inc., Schroder Investment Management and Standard Life Investments Ltd., which together oversee $1.6 trillion, are buying German debt securities in a sign they expect deeper cuts from the ECB next year.

That’s despite recent comments from ECB officials such as President Jean-Claude Trichet that suggest the bank may pause in January after its unprecedented 75-basis-point rate cut on Dec. 8.

Rate-Cut Limit

Trichet told Boesen-Zeitung that the rate cuts executed since early October are “far from having been fully transmitted to the economy,” the newspaper cited him as saying in an interview to be published tomorrow.

Governing Council member Ewald Nowotny said in an interview with the newspaper Die Zeit that the ECB may have to react quickly as the economy slides. “We will see a decline of gross domestic product, which we haven’t had in the postwar period,” Zeit reported Nowotny as saying in an e-mailed pre-release of an interview to be published tomorrow.

“They are reluctant to cut rates, but the numbers today tip the balance in favor of a cut,” said Martin van Vliet, an economist at ING Group in Amsterdam. “The data is consistent with a sharp contraction in the economy.”


December 29, 2008

Refi madness

Filed under: online — Tags: , , — Professor @ 3:08 pm

Falling interest rates are fueling a mortgage refinance frenzy as homeowners rush to reduce their housing payments.

The average rate for a 30-year, fixed mortgage dropped to 5.08% last week, according to the Mortgage Bankers Association, more than a full point lower than just a month ago.

Mortgage applications were up a whopping 48% last week, according to the MBA and more than 80% were from homeowners looking to lower housing costs.

"It’s snowing loans," said Steve Habetz, a Connecticut mortgage broker, "and they’re all refis."

Among those were Elizabeth Mayer and Michael Keohane, who bought their Manhattan condo just a little over a year ago, financing $220,000 of the purchase price with a 30-year, fixed rate loan of 6.5%. That was affordable, with monthly payments of less than $1,400. But their new 5.25% loan will lower their payment to about $1,215, saving about $175 a month.

"It was a nice holiday gift," said Mayer.

With savings like that, it’s no wonder that homeowners are coming out of the woodwork. And mortgage brokers are beating the drums too, advising their clients to let the good times roll.

Mayer said her mortgage broker had kept her informed of interest rate declines ever since she originally purchased her home. "He’s been encouraging whenever opportunities arose," she said. "We missed one opportunity last spring when we just weren’t able to act on it."

The broker made sure they didn’t miss this chance. "He e-mailed me [about it] from South Africa and called when he got back," said Mayer.

Who should refi…

Anyone with high adjustable-rate loans. Folks in this group should try to get into a low fixed rate if they can. Not only will they lower their payments immediately but it would also eliminate the possibility of future increases.

Those who would lower their rate by a percentage point or more. Borrowers who already have a reasonable fixed rate shouldn’t jump into a new loan every time rates inch down, according to Orawin Velz, an economist for the Mortgage Bankers Association.

"You should have at least a percentage point difference before you even think about it," Velz said. "If you have a 6.5% loan right now, it would be a great time to refi."

Waiting for a substantial rate decrease makes sense because getting a new mortgage incurs some expenses. There are the costs of a new appraisal and origination and application fees payday loans. Plus, a title search and title insurance are usually required.

All those costs, which can add up to $2,000 or $3,000 or more for a typical $200,000 loan, are often rolled back into the mortgage, increasing the principal upon which the interest rates are applied. If that goes up so much that it offsets the interest rate drop, it doesn’t make sense to refi.

Those who are planning to stay in their homes for a while. The increased balances usually take a year or two to be wiped out by lower monthly payments, so anyone planning to sell the home during the next few years probably should not refinance, unless the difference in interest rates is very substantial.

The actual rate borrowers get depends, just as with purchase mortgages, on credit scores, income and assets and the value of the home.

"If you have a high credit score and your equity is good, it’s like a vanilla cream puff," said Velz. "You’re going to get a great rate."

Borrowers with significant equity in their homes. Many homeowners have had much of their home values erased in the post-bubble bust, eliminating much or all of their home equity - the difference between the value of the home and the amount owed on the mortgage.

If a refi borrower’s home equity has fallen below 20% of the total appraised home value, the borrower will likely have to purchase private mortgage insurance. The insurance adds a point or two to the monthly mortgage costs, which turns a 5% loan into a 6% or 7% loan, erasing any advantage of refinancing.

"That’s the biggest hurdle for refinancing right now," said Velz.

Borrowers who don’t think rates will decline much further. Everyone considering refis has to decide whether to wait for interest rates to go even lower, which the Mortgage Bankers Association has been forecasting.

That’s only a prediction, though, not a certainty. Rates could turn higher instead.

Borrowers must weigh the advantages of gambling on rates turning around or locking in savings at the present very low rates.

All news is bad news in real estate right now. Have you recently bought a house anyway? Send your story and photos to and you could be featured in an upcoming article.  


December 26, 2008

BOJ May Consider ‘Extraordinary Steps,’ Kamezaki Says

Filed under: technology — Tags: , , — Professor @ 4:32 pm

The Bank of Japan may consider “extraordinary steps” to counter financial-market turmoil and a deepening recession, policy board member Hidetoshi Kamezaki said.

“The Bank of Japan is committed to doing its utmost to contribute to stabilizing financial markets,” Kamezaki, 65, said today at a business meeting in Takamatsu, western Japan. “Extraordinary times demand extraordinary steps.”

The central bank lowered the overnight lending rate on Dec. 19 to 0.1 percent from 0.3 percent, the second cut in two months, and decided to buy corporate debt for the first time to pump money into the ailing economy. Kamezaki later told reporters that room for cutting the rate further is “limited” and the bank’s next policy steps should focus on improving funding for companies and influencing longer-term borrowing costs.

“The sense of crisis about the economy and financial markets mounted drastically within the central bank over the past month,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “We expect the bank to start buying corporate bonds, and it may resume purchasing stocks and even go further if credit markets face a crisis.”

Japanese companies have struggled to find investors who are willing to buy their debt since the global financial crisis intensified in September. Kamezaki said taking on businesses’ credit risk is a “very extraordinary step for a central bank.”

Credit Risk

Purchasing commercial paper, or short-term corporate securities, means the central bank assumes the risk that companies will default on the debt, a concern highlighted by board members at their November meeting, minutes showed today. Japan needs to discuss how far the bank should go to support funding for companies, Governor Masaaki Shirakawa said Dec. 22.

Central bank officials are examining the feasibility of buying a wider range of securities, including corporate bonds and stocks, and the policy board will make a decision based on their findings, Kamezaki said at today’s press conference.

Kamezaki echoed remarks by Shirakawa that a key rate at 0 payday loan.1 percent barely keeps the money market working and the bank should avoid a policy that impedes its function. The former executive at trading company Mitsubishi Corp. said he has no preconceptions about future interest-rate policy.

The bank “has virtually exhausted what it can do with rates to support the economy,” said Mamoru Yamazaki, an international strategist at RBS Securities Japan Ltd. in Tokyo. “The question now is how far the BOJ can expand the range of assets it buys to provide money, particularly to companies.”

‘Aggressive Measures’

Japanese banks’ borrowing costs eased for a sixth day. The Tokyo three-month interbank offered rate, or Tibor, fell to 0.76 percent after reaching a decade-high 0.922 percent on Dec. 16.

“The Bank of Japan has implemented aggressive measures and we expect they will help to lower money market rates,” said Nobuto Yamazaki, an executive fund manager at Diam Asset Management in Tokyo.

The global economy will decline more sharply in the near future because markets will remain unstable, Kamezaki said.

He said he’s “very concerned” about the outlook for exports, referring to November trade numbers that showed overseas shipments tumbled a record 26.7 percent from a year earlier. Spending by consumers at home will keep weakening because job prospects and wages are deteriorating, he said.

Reports tomorrow are likely to show industrial production fell in November, unemployment climbed and inflation eased.

Factory output tumbled 6.8 percent from a month earlier, according to economists surveyed by Bloomberg News. Consumer prices excluding fresh food rose 1.1 percent from a year earlier, slower than the 1.9 percent in October, analysts predict.

Consumer-price inflation will keep slowing, even as a growing number of companies manage to pass costs on to households, Kamezaki said.


December 22, 2008

Aid to Homeowners May Double Under Bush-Backed Loan Initiative

Filed under: management — Tags: , , — Professor @ 10:56 pm

The mortgage-industry effort to stem foreclosures aims to double the number of borrowers getting help next year, as Democrats call for using taxpayer money to address the crisis.

The Hope Now Alliance, a group created at the behest of Treasury Secretary Henry Paulson last year, expects to modify about 2 million mortgages next year, according to a report to be released today in Washington. The group, which includes JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp., also plans a new campaign to boost participation in the program.

Democrats have repeatedly dismissed the effectiveness of Hope Now, the Bush administration’s main initiative on mortgages. Top finance lawmakers plan legislation early next month that would deploy the second half of the government’s $700 billion bank-bailout fund to stem foreclosures.

Voluntary modifications by mortgage lenders are “too little, too late,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. As mounting job losses cause foreclosure rates to rise, “we clearly need a more activist government intervention,” he said.

Hope Now projects 950,000 loan modifications for 2008, including 208,000 for the month of November. Including repayment plans and other assistance, the group estimates that about 2.2 million foreclosures will have been prevented this year, bringing to 3 million the total averted since the program began in 2007.

‘Buck Up’

“We have to buck up and be smarter and faster and more effective going forward because the problem hasn’t gone away,” Faith Schwartz, the alliance’s director, said in a telephone interview.

Hope Now, which also includes Fannie Mae, Freddie Mac and securities and banking industry lobbying groups, is scheduled to release its report at 10 a.m. in Washington.

The Hope Now programs are voluntary and privately funded. Critics say they don’t go far enough to stem the housing crisis, which has mushroomed into a broader wave of economic distress. The U.S. economy may shrink more than 6 percent in the last three months of this year, the worst performance in a quarter century, private forecasters are projecting.

“We’re in a crisis now — how many people’s homes will be foreclosed?” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said in a Dec. 19 interview.

Frank said he’s drafting legislation with Senate Banking Committee Chairman Christopher Dodd that would release the remaining $350 billion of the financial-rescue fund in exchange for foreclosure help.

TARP Request

Paulson exhausted the first half of the fund, known as the Troubled Asset Relief Program, last week with $13.4 billion of loans to prevent General Motors Corp. and Chrysler LLC from collapsing in coming weeks. The Treasury used most of the rest for injecting capital into banks, after abandoning an original plan to purchase mortgages and related securities.

Frank and Dodd want an agreement with Paulson and President-elect Barack Obama’s team on how to use the next half of TARP. “Why wait three weeks” until Obama takes office, Frank said. “Let’s do it.”

The Democratic plan includes provisions to hold banks accountable for stepped-up lending to consumers.

Paulson last week urged Congress to release the next $350 billion. A Treasury official said he expected talks to start soon between the administration, lawmakers and Obama transition officials on the matter.

New Initiatives

The proposal by Frank incorporates a number of different ideas for using taxpayer funds.

The legislation will include Federal Deposit Insurance Corp. Chairman Sheila Bair’s foreclosure-prevention plan, which provides a U health insurance plans.S. guarantee for troubled mortgages to spur loan modifications, Frank said. Bair says using $24 billion from TARP for the effort might prevent 1.5 million foreclosures.

Frank also wants to revise the Hope for Homeowners program. That initiative, run by the Federal Housing Administration and begun in July, intends to aid 400,000 homeowners by insuring as much as $300 billion in refinanced mortgages after servicers forgive part of the balance. Few lenders have signed up because of the fees and portion of loans that must be written down.

A Paulson proposal to drive down mortgage rates through new securities would also be incorporated. The program would use Fannie and Freddie, the federally chartered mortgage financiers the government seized in September, to reduce 30-year, fixed rates for new loans to about 4.5 percent from an average of about 5.54 percent.

Agency Purchases

The Federal Reserve and Treasury are already purchasing mortgage-backed securities from Fannie and Freddie in an effort to shore up lending. The Fed has bought $13.4 billion of so- called agency debt through a program started three weeks ago, which has had some impact on borrowing costs.

The yield gap between Fannie’s two-year debt and two-year Treasuries, which can affect the mortgage rates consumers pay, narrowed Dec. 19 to 0.55 percentage point, the smallest since Sept. 12, compared with a record 1.82 percentage point on Nov. 20, data compiled by Bloomberg show.

To access the rest of TARP, Paulson has to report to Congress on how the funds would be used. Lawmakers then have 15 days to pass legislation blocking the money. The president could then veto the congressional vote, forcing lawmakers to come up with a bigger majority to prevent the disbursement.

The Hope Now Alliance will continue its work whether or not the government commits money to a homeowner-assistance program, Steve Bartlett, president of the Financial Services Roundtable, a Washington-based industry group, said in an interview.

‘More Money’

“Prior to this, the Treasury has not chosen to do that,” Bartlett said. “If they do it, we’ll be able to get more modifications, because there’s more money to go around.”

Hope Now is using a mixture of lower interest rates, loan extensions and principal deferments to help borrowers stay in their homes. In some cases, lenders also may take principal writedowns to reflect lower home values.

Some studies say loan-modification efforts aren’t very effective because many homeowners fall back into default. A report released last week from the Association of Consumer Bankruptcy Attorneys said lender-driven programs are “flopping” by putting some borrowers further into debt.

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record as home prices fell and stricter mortgage standards made it harder for homeowners to sell or refinance, RealtyTrac Inc., the Irvine, California-based provider of default data, reported last month.

Outreach Efforts

Next year, Hope Now aims to reach twice as many troubled homeowners through workshops held around the country, which this year drew about 20,000 people. The group plans to increase publicity for its Web site and telephone hotline, 1-888-955-HOPE, while also backing efforts that would allow borrowers to seek loan modifications before their mortgage is formally in default.

“We think we’ll be able to modify every single mortgage where the person has sufficient income to pay a mortgage that reflects the value of their home,” Bartlett said.


December 20, 2008

Sarkozy Considers New Stimulus as GDP, Optimism Slump

Filed under: economics — Tags: , , — Professor @ 9:02 pm

French President Nicolas Sarkozy is prepared to add to this month’s 26 billion-euro ($37 billion) stimulus package, his chief of staff said, as business confidence fell to the lowest in 15 years and an economic slump deepened.

“The government will take all measures adapted to the situation” to support the economy, Claude Gueant told France 2 television. “Today there is nothing that leads us to think we might need more, but if needed, other measures would be taken.”

His remarks follow signals from leaders in Germany and the U.K. that an initial round of bank bailouts and economic stimulus won’t be enough to counter the recession. President- elect Barack Obama may propose a stimulus plan of $850 billion, an amount that has grown as the U.S. economy sinks deeper into a recession.

France’s economy, the second largest of the 15 countries sharing the euro, will contract by the most since 1974 this quarter and slip into a recession early next year, Insee, the national statistics office, forecast today. Separately, Insee’s confidence index slid to the lowest in 15 years in December.

“You need some big symbolic measure to break the circle of pessimism among manufacturers and households,” Jean-Louis Mourier, an economist at Paris-based brokerage Aurel Leven SA, said in an interview with Bloomberg Television today.

Sarkozy is convening his Cabinet to discuss plans to support France’s economy.

Recession Strikes

No European country will avoid a recession, Prime Minister Francois Fillon said yesterday. Germany, Europe’s biggest economy, is on course for its worst contraction since 1993 next year as a global slowdown saps export demand. The European Central Bank has cut its benchmark rate by 175 basis points to 2.5 percent since early October to buffer the economy from the impact of the global financial crisis.

Gross domestic product in France will probably decline 0.8 percent this quarter, after a 0.1 percent increase in the three months through September. The economy will shrink 0 instant payday loan no telecheck.4 percent in the first quarter, and 0.1 percent in the following three months, Insee predicted.

The global credit crisis is aggravating a world economic slowdown, damping exports and hurting corporate investment. While Sarkozy’s initial package may provide some support for growth, rising unemployment is likely to put a lid on consumer spending, Insee predicts.

Car Sales

“Almost all developed countries will be in a recession next year and France will be no exception,” Insee chief forecaster Eric Dubois said at a briefing in Paris yesterday. “The tightening of credit conditions and a general aversion to risk prompts companies to cut investment and reduce inventories, such as in the car sector.”

European car sales fell 26 percent in November, the biggest monthly drop since 1999. Automakers Renault SA and PSA Peugeot Citroen are both cutting jobs and idling plants to confront the slump in demand. Valeo SA, France’s second-biggest maker of auto components, said yesterday it will eliminate 1,600 positions in France and 1,800 in other European countries.

Insee expects the economy to lose 191,000 jobs in the first half of next year after an estimated drop of 125,000 in the second half of 2008.

“We should create 150,000 jobs with the stimulus package in 2009,” Patrick Devedjian, the minister in charge of implementing the package, said on Europe 1 radio today.

France has already agreed to aid the auto industry and has pledged 1 billion euros of low-interest loans to carmakers’ financing units, of which 779 million euros has already been paid out. The government is also funding 220 million euros in sales incentives on new cars and 100 million euros in assistance to smaller auto-parts suppliers.

Growth in France this year, at 0.8 percent will lag behind the euro region for a third year this year, according to the Insee forecasts.


December 19, 2008

Tarullo, Former Clinton Aide, Is Obama Pick for Fed

Filed under: news — Tags: , , — Professor @ 2:45 am

President-elect Barack Obama today picked one of his economic policy advisers, Daniel Tarullo, to serve on the Federal Reserve Board.

Tarullo, 57, a professor at Georgetown University’s law school, will probably play a key role working with the Fed’s counterparts to craft changes in global regulation of banking and finance. He served as President Bill Clinton’s top adviser on international economic policy.

If confirmed by the Senate, Tarullo would join Chairman Ben S. Bernanke and other members of the Board of Governors as they seek to ease the worst credit crunch in seven decades and reverse a deepening, yearlong recession.

He “will bring a lifetime of experience to the Fed in economic policy and financial regulation,” Obama said in a news conference in Chicago today. His “academic and policy work has anticipated some of the problems we have observed,” Obama said, praising Tarullo for “knowledge, experience and independence.”

Obama also named brokerage regulator Mary Schapiro to head the Securities and Exchange Commission and Gary Gensler, a former Treasury undersecretary, to lead the Commodity Futures Trading Commission.

Tarullo would fill a seat on the board currently held by Fed Governor Randall Kroszner, an Obama transition official said on condition of anonymity. Kroszner’s term expired in January, and he has continued to serve since then under Fed rules that allow him to stay until the Senate confirms him or a successor.

Two Slots

Fed board terms last 14 years, though governors often resign before the full period is up. The term of Kroszner’s seat ends in January 2022. The other two slots are for terms that end in 2010 and 2014.

The central bank seeks to “have at least somebody that’s well versed in international aspects of finance and economics,” said David Cohen, director of Asian forecasting at Action Economics in Singapore and a former Fed official.

The Fed board has two other vacancies on its seven-member panel, after the departures of Columbia University Professor Frederic Mishkin in August and former banker Susan Bies in March 2007.

The Democratic-majority Senate declined to hold a vote on President George W. Bush’s nomination of Kroszner, 46, to a new, full 14-year term. Kroszner, an economics professor on leave from the University of Chicago, has focused on financial regulation at the Fed.

High-Cost Loans

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, said in January that consumer protection rules on high-cost loans which Kroszner helped draft “did not go far enough.”

Dodd has repeatedly said the central bank failed to adequately supervise the subprime mortgage market. At a two-hour hearing in August 2007, he criticized the Fed’s approach to subprime lending and credit cards as “unsatisfactory.”

Tarullo was an early supporter of Obama, frequently representing the president-elect’s campaign in economic discussions and debate. He was President Bill Clinton’s personal representative, or sherpa, to the Group of Eight countries, overseeing and coordinating policy with America’s partners for four summits.

Before joining the Clinton administration in 1993, he served as chief counsel for employment policy on the staff of Democratic Senator Edward M on line pay day loans. Kennedy of Massachusetts. He also worked in the antitrust division of the Justice Department.

‘Keen Understanding’

Tarullo is “a seasoned policy maker who has a keen understanding of the challenges confronting global financial markets and the economy,” said Timothy Adams, a former Treasury undersecretary and now managing director at the Lindsey Group in Washington.

In a book published in October by the Peterson Institute for International Economics in Washington, Tarullo was critical of the international regulatory and banking capital regime created under so-called Basel Two. The new structure may have worsened the credit crisis if it had been fully in place because it put a low risk weighting on residential mortgages, he said.

Tarullo proposed a number of reforms, including adoption of a simple leverage ratio that international banks would need to meet and a requirement that they issue subordinated debt. He also recommended that the Basel Committee — the panel of international regulators that fashioned Basel Two — be given the role of monitoring and scrutinizing banking regulation in individual countries.

John Podesta, the former Clinton chief of staff who’s now co-chairman of Obama’s transition team, has described Tarullo as a policy maker who “escapes easy labeling.”

‘Especially Valuable’

“That makes him especially valuable in finding new solutions to a new set of thorny problems,” added Podesta, who is president of the Center for American Progress, a self- described progressive advocacy group in Washington.

William Antholis, who served with Tarullo in the Clinton White House and is now at the Brookings Institution in Washington, said the Fed nominee’s ties with the incoming Obama administration should also prove helpful to the central bank as policy makers work to surmount the current crisis.

“The recent crisis hasn’t been purely economic, but instead one about economics and regulation,” said Antholis.

Tarullo would stand out from current Fed governors. He doesn’t have an academic background in economics or a career history in banking, with law being the focus of his educational background. Among the current five Fed board members, three have doctorates in economics, one is a former investment banker and one is a former community banker.

Emergency Lending

The Fed cut the benchmark interest rate this week to a record low ranging from zero to 0.25 percent and pledged to “employ all available tools” to revive the economy, including emergency lending that has expanded the central bank’s balance sheet to a record $2.3 trillion.

The economy has yet to show signs of vitality after nine rate cuts by the Fed in 14 months and $1.4 trillion in extra liquidity. Unemployment rose to 6.7 percent last month, the highest level since 1993, while builders broke ground on the fewest new homes since record-keeping began in 1947.

“Our country faces financial and economic challenges of a greater magnitude than we’ve seen for decades,” Tarullo told reporters today in Chicago.


December 17, 2008

Fed May Buy Lower-Rated Assets to Ease Credit Crunch

Filed under: legal — Tags: , , — Professor @ 5:03 pm

The Federal Reserve is open to the idea of buying lower-rated securities to ease the credit crunch, and plans to discuss possible strategies with President-elect Barack Obama’s Treasury.

Because the Fed must lend only against good collateral, the Treasury would need to take the credit risk of assets that are rated below AAA, a senior Fed official said today in a conference call with reporters in Washington.

Fed officials today shifted to using the size and composition of the central bank’s assets as the main tool of monetary policy after cutting the benchmark interest rate as low as zero. The senior official said that policy makers will make decisions on new lending programs or expanding existing ones based on how housing markets and the overall economy evolve.

The central bank can make a difference in credit markets where yields are higher than they would otherwise be because of a lack of liquidity due to the financial crisis, the official said on condition of anonymity.

The official said that the central bank will collaborate through the Federal Open Market Committee, which includes five presidents of Fed district banks, on policy decisions that grow the central bank’s balance sheet. The Fed’s Board of Governors in Washington has been the key decision-making body for emergency lending programs up to now.

Assets Soar

The central bank has expanded its balance sheet to $2.26 trillion from $868 billion in July 2007 through several facilities designed to ease liquidity in money markets and interbank lending markets.

The U.S. central bank has taken care to limit credit risk by financing only the highest-rated securities, having the Treasury post an equity stake that would take the first loss, or loaning less than the value of collateral when it is of less quality than U sam day payday loan.S. Treasuries.

Fed lending programs could become larger, and even more targeted with the aid of the Treasury in the future, the official indicated. The approach will depend on discussions with the new Treasury team after Obama takes office, the person said.

Today’s press briefing by telephone set a new precedent for transparency, after decades of reluctance by Fed officials to explain their moves beyond the FOMC statement.

The official said the FOMC didn’t see deflation as an immediate risk, and added that the current policies of the U.S. central bank are distinct from Japanese-style quantitative easing in that the U.S. central bank is instead focusing on assets.

Asked why the Fed shouldn’t set a target for market rates such as mortgages, the official said that such a step could be dangerous because it might lead to the central bank owning a large part of the market. It’s better to set quantitative indicators and adjust the size of intended purchases as officials take in the markets’ responses, the official said said.

No determination has been made about what maturities of Treasury securities the Fed might buy, the official said when asked to define the FOMC’s reference today to possible purchases of “longer-term” Treasuries.


December 15, 2008

China Industrial-Output Growth Is Weakest Since 1999

Filed under: finance — Tags: , , — Professor @ 7:09 pm

China’s industrial production grew at the weakest pace in almost a decade as export growth collapsed, increasing pressure on the government to do more to revive the slumping economy.

Output rose 5.4 percent in November from a year earlier, the statistics bureau said today. None of 14 economists surveyed by Bloomberg News predicted such a small increase. Production grew 8.2 percent in October.

The central bank may add to the steepest interest-rate cut in 11 years to revive consumer and business confidence after the CSI 300 Index of stocks fell 63 percent this year and exports declined last month. Money-supply growth slowed to the weakest pace in three years, a second statement showed two days after China’s cabinet pledged to boost liquidity to spur consumption.

“You have weak demand everywhere,” said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. “There will probably be another aggressive rate cut before the end of the year.”

Output grew the least since Bloomberg data began in 1999. The yuan traded at 6.8475 against the dollar as of 3:10 p.m. in Shanghai, from 6.8458 before the announcement. The CSI 300 closed 0.8 percent higher on the plan to boost money supply.

The central bank has reduced the one-year lending rate to 5.58 percent from 7.47 percent in September and dropped quotas limiting lending by banks. Wang expects up to 54 basis points of reductions before year’s end.

Growth Rate May Halve

China’s economic growth may slump to 5 percent in the first half of next year, less than half of the 11.9 percent expansion in all of 2007, Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong, said today.

The government has set an 8 percent growth target for next year to generate jobs and avoid social instability in the world’s most populous nation, China Banking Regulatory Commission Chairman Liu Mingkang said in Beijing on Dec. 13.

“If China’s GDP growth slips to 6 percent or 7 percent at any time, it will affect the employment rate and also social stability.”

The State Council last month announced a 4 trillion yuan ($584 billion) infrastructure spending package to sustain growth through 2010.

China’s economic slowdown contributed to Australia, the world’s largest shipper of coal and iron ore, cutting today a forecast for its commodity exports for the year to June 30, 2009, by 10 percent.

“Commodity-producing countries will be very worried,” said Huang Yiping, chief Asia Pacific economist at Citigroup Inc. in Hong Kong.

Electricity Output Falls

Industrial production is plunging around the world as demand dries up. China’s electricity output fell by 9 low fee payday loans.6 percent in November from a year earlier, today’s figures showed. Pig- iron production fell 16.2 percent. Raw steel declined 12.4 percent. Steel products tumbled 11 percent.

Maanshan Iron & Steel Co. has cut output because of tumbling demand from builders and automakers.

President Hu Jintao visited Angang Steel Co. during a three-day visit to Liaoning province, a center for heavy industry, the state-run Xinhua News Agency reported yesterday. He pledged efforts to maintain stable growth in the face of “serious challenges and difficulties.”

Vehicle production fell 15.9 percent and car output declined 10.1 percent.

“The number is quite awful,” said Kevin Lai, an economist with the Daiwa Institute of Research in Hong Kong. “Enterprises continue to run down inventories and inevitably will reduce production quite massively.”

Money-Supply Target

China aims to boost money supply by 17 percent in 2009, the State Council said Dec. 13. That compares with the 14.8 percent increase in M2, the broadest measure which includes cash and all deposits, last month from a year earlier.

M1, which includes cash and demand deposits, increased by the least in almost 13 years, while term deposits climbed because of a lack of confidence in the economy, said Li Wei, an economist at Standard Chartered Bank Plc in Shanghai.

New yuan lending surged to 476.9 billion yuan in November from 181.9 billion yuan in October, after the central bank reduced interest rates and reserve requirements for lenders.

Banks may have “rushed to lend to the most attractive projects that are relatively ease to identify in the early stage of implementation of the fiscal stimulus package,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.

Spending, Tax Cuts

The government warned Dec. 10 of “increasing downward pressure on the economy” and pledged to boost spending, cut taxes and do more to create jobs to maintain social stability. At stake is the 60 percent share of global growth Merrill Lynch & Co. forecasts China will contribute next year if its economy expands 8.6 percent.

“If China’s stimulus spending is implemented correctly, it will create enough growth momentum to offset the macro impact of the global slowdown,” Yu Yongding, a former adviser to the central bank, said Dec. 10. “There should be no problem for the Chinese economy to maintain growth as high as 8 percent next year.”

Merrill Lynch cut today its forecast for growth next year to 8 percent from 8.6 percent.


December 10, 2008

U.K. Economy May Shrink Most Since 1990, Niesr Says

Filed under: technology — Tags: , , — Professor @ 11:42 pm

The U.K. economy may contract at the fastest pace since 1990 in the current quarter as the recession intensifies, the National Institute for Economic and Social Research said.

Gross domestic product fell 1 percent in the three months through November and will probably plunge more than that in the last three months of the year, the London-based institute, whose clients include the central bank, said in a statement today. The economy last shrank at such a speed in the third quarter of 1990, when it contracted 1.2 percent.

“The figures make clear that the rate of output decline is accelerating,” Niesr said in a statement. “The problem that” the government “needs to address very urgently is the availability of bank credit; further interest-rate reductions are unlikely to have much effect.”

Bank of England policy maker Andrew Sentance said yesterday that the recession will likely be as long and deep as any since the 1970s. Prime Minister Gordon Brown has cut taxes and pledged 50 billion pounds ($74 billion) in a bank rescue to bolster the economy, while the central bank has reduced the key interest rate to 2 percent, the lowest since 1951.

Banks are shunning new lending as they rebuild their balance sheets, which were damaged by the global financial crisis. Housing sales fell by the most since 1978 last month, the Royal Institution of Chartered Surveyors said yesterday.

Loan Guarantees

Chancellor of the Exchequer Alistair Darling is considering credit guarantees for households and companies to spur bank lending, a person familiar with the plan said. That would mark an unprecedented step by U free car insurance quotes.K. authorities to underwrite commercial loans after the government took stakes in HBOS Plc, Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc.

Mortgage lenders passed on less than half the 1.5 percentage point Bank of England interest-rate reduction last month to customers, data showed yesterday. The central bank, which predicted in November that the economy will contract through much of next year, followed up with a one-point cut on Dec. 4.

Manufacturing output fell 1.4 percent in October from September, extending its worst stretch since 1980, the statistics office said yesterday. Jobless claims rose at the fastest pace since 1992 in October.

“This recession is likely to be comparable in length and depth with the previous three major post-war U.K. downturns in the mid-70s, early-80s and early-90s,” Sentance said. “In each of these earlier episodes, the output of the economy fell by at least 2.5 percent over a period of a year or more.”

Tax Cuts

Brown bolstered his popularity by promising a 20-billion pound stimulus package on Nov. 24, the biggest in two decades, reducing sales tax to bolster consumer spending.

“The government faces the real risk that, despite the measures it took, output will fall more sharply than it expected to the end of next year,” Niesr said. “There is every reason to believe that the output decline in the fourth calendar quarter of the year will be larger than 1 percent in magnitude.”


December 9, 2008

U.K. November Producer Prices Drop for a Fourth Month

Filed under: management — Tags: , , — Professor @ 4:51 am

U.K. factories cut prices for a fourth month in November as the cost of petroleum products fell the most in more than two decades and the recession defused inflation pressures.

Producer prices fell 0.7 percent, after declining 1 percent in October, the Office for National Statistics said in London today. The drop matched the median prediction of 21 economists in a Bloomberg News survey. Petroleum product prices declined 8.3 percent, the fastest pace since records began in 1986.

The Bank of England cut the benchmark interest rate last week to 2 percent, the lowest level since 1951, as policy makers battled to prevent deflation from taking hold. Recessions in Britain and around the world have blunted manufacturers’ ability to push through price increases as factory production shrinks.

“There’s more of this to come, given the effects of the recession,” said Alan Clarke, an economist at BNP Paribas in London. “Demand is haemorrhaging so it’s very hard for manufacturers to raise prices. Deflation is highly possible.”

The pound stayed higher against the dollar and the euro after the report. The U.K. currency strengthened 2.2 percent to $1.5006 by 9:44 a.m. in London, from $1.4685 at the end of last week. It appreciated 0.8 percent to 85.97 pence per euro.

Producer prices increased 5.1 percent on the year, the least since December 2007, the statistics office said. On the month, costs of petroleum products, food and other items fell, offsetting increases in seven other categories.

Weakening economic growth has made it harder for companies to compensate for costs by raising prices. RPC Group Plc, the U.K. maker of plastic containers for Nivea sun cream, on Nov. 28 posted a first-half loss after rising polymer prices and energy costs squeezed margins quick pay day loans.

Raw Materials

Raw material costs dropped 3.3 percent, declining for a fifth month, the statistics office said. On the year, they increased 7.5 percent, less than half the rate in October and the slowest pace since September 2007.

Britain’s inflation rate fell the most in at least 11 years in October to 4.5 percent. Bank of England Governor Mervyn King has refused to rule out the risk of deflation.

Gross domestic product dropped by 0.5 percent in the third quarter, the first decline in 16 years. The number of people claiming jobless benefits rose 36,500 to 980,900 in October, the most in 16 years.

Manufacturing, accounting for 14 percent of the economy, is suffering its longest streak of contraction since 1980. The Chartered Institute of Purchasing and Supply’s factory index, based on a survey of about 700 companies, dropped to 34.4 in November, the weakest since the data began in 1992.

The slump in Britain’s housing market is also deepening. Home values fell the most since 1992 in November, HBOS Plc said on Dec. 4. Home repossessions by banks rose 12 percent in the third quarter as higher unemployment and a contraction in the economy left more Britons unable to pay their debts.

“We’re probably going to see further cuts in interest rates, down to 1 percent by the end of the first quarter,” said Paul Dales, an economist at Capital Economics Ltd. in London. “Thereafter, the Monetary Policy Committee may go the whole hog and take them down to zero.”


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