Twisting in the Wind

While waiting for TALF

Bernanke did everything he could last week, short of a QE3 expansion of the Fed’s balance sheet, but apparently the market was expecting more.   A creature of habit, the market was fixated on the balance sheet that has done the global heavy lifting since Lehman, rather than on the balance sheets that are poised to do the heavy lifting now, namely the other central banks that jointly announced unlimited dollar lending last week, especially the ECB. Read more

China as bank of the world?

By Daniel H. Neilson

Can the renminbi displace the dollar as the world's international money?

Writing in the FT last week, Arvind Subramanian argues that, "sooner than almost anyone thinks," the renminbi will begin to take the dollar's place in that role.

[T]he renminbi could displace the dollar as the premier, reserve currency within the next decade or soon thereafter. Sceptics will scoff for two reasons.

First, even if China’s economy overtakes America’s, the renminbi’s rise could be delayed...


Understanding QE3

Liquidity is not a problem within the Eurozone, insisted European Central Bank president Trichet last Monday.  But the markets didn’t believe him.  The question now is whether the announcement last Thursday of a coordinated central bank intervention—by the ECB and also the Swiss National Bank, Bank of Japan, Bank of England, and the Fed--gives more reason to believe.  Read more

Bank of the world, three ways

By Daniel H. Neilson

The U.S., in aggregate, acts as a bank to the rest of the world. The precise role of that bank has evolved over the course of the crisis. Read more

Bank of the World

The first graph shows US financial flows over the past five years. The BIS recently reminded us to look at gross flows, which I think is good advice. Just so, the blue line shows increases in US liabilities1 to the rest of the world, the green line increases in US financial assets abroad. The red line is the difference between them, plus a (sometimes considerable) statistical discrepancy. Read more

Fizzle at Jackson Hole

One silence, and one silo

So no QE3, at least not on the Fed’s own balance sheet, and not yet, but that was no surprise since expectations had been managed down by the time Bernanke gave his speech.  

What Bernanke did not say, maybe could not say, is that the major worry confronting central bankers today is Europe, and contagion from whatever happens there.  He didn’t say it, because he remembers all too well being dragged over the coals in Congress for the $600 billion credit line he opened for foreign central banks after Lehman, when the Fed stepped in as international lender of last resort at a time when global dollar funding markets were frozen. Read more

Copper standard

I am late to the party on the inventive use of copper by Chinese companies seeking alternative sources of funds. FT Alphaville and Michael Pettis had the story in the spring: Chinese companies would obtain trade finance to purchase copper abroad, warehouse it, and use the inventory as collateral to obtain letters of credit on Chinese banks, which could be used to fund investments totally unrelated to copper. Goldman says the authorities have cracked down on this scheme, as does Pettis.

On its surface the scheme seems to be just another way to access credit in a constrained financial system, a spigot that has now been sealed off. The urgency of the situation thus removed, it is worth giving this a deeper read. Read more

Sympathy for the Devil

Privatizing QE3

Pity the plight of the central banker.   The halcyon days of inflation targeting recede ever farther into the past, along with the glorious simplicity of agonizing whether 25 bp is enough.  Instead, the fate of the world seems to hang in the balance, even while the Fed Funds rate remains stuck at zero.

All over the world, central banks are stepping in to catch the falling knife dropped by their ostensible political masters, the issuers of sovereign debt.   Most notably, the ECB has extended its bond-buying to Spain and Italy, and the Fed has guaranteed another two years of ZIRP. Read more

Okay, leadership, but by whom?

And heading where?

The deficit in political leadership, both in the US and Europe, is the focus of FT commentary today (see herehere, and here).  It seems clear that another financial crisis is brewing, with its epicentre this time in European sovereign debt problems rather than U.S. subprime mortgages, but policy response has so far been woefully inadequate to the task.

But what would you have them do?  

As John Authers points out, "sovereign credits are no longer available for use.  The rebound of 2009 came once it was clear that governments were prepared to put their own credit behind the troubled banks.  This time around, sovereign credit itself is at issue."   Read more

Haircuts and Instability

Updating Hawtrey for the Shadow Banking System

Notwithstanding the U.S. debt deal—which takes default off the table--dollar money markets remain queasy, and longer term capital markets show clear signs of flight to safety, as market rates on the best stuff fall and rate spreads to the next best stuff widen.

Slowly, but surely

Slowly, but surely

Most people seem to be reading this as Wall Street reaction to changed expectations about the fortunes of Main Street.  Economic slowdown in the real economy is coming, probably globally, and consequently there is a premium on safe assets to ride out the storm. Read more