Treasuries headed for the worst year in at least three decades as the U.S. stepped up debt sales to help spur growth in an economy recovering from the biggest slump since the Great Depression.

The current seven-year note was little changed after a $32 billion of sale of the debt drew a yield of 3.345 percent, compared with an average forecast of 3.372 percent in a Bloomberg News survey of four of the Federal Reserve’s 18 primary dealers. U.S. government securities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, the worst performance since 1978.

“Sevens came in well enough given the environment, year- end, lack of liquidity; things could have been much worse,” said Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York. “Given the fact that short-term rates are exceedingly low, there’s been a grab for yield a little bit farther out the yield curve.”

The yield on the current seven-year note fell one basis point, or 0.01 percentage point, to 3.30 percent at 4:11 p.m. in New York, according to BGCantor Market Data. The 10-year note yield slipped one basis point to 3.79 percent, and the yield on the 30-year bond dropped three basis points to 4.61 percent.

Source/Full Story: Bloomberg.com

Last weekend, Liu Mingkang, China’s banking regulator, criticised the US Federal Reserve for fuelling the “dollar carry-trade”, in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad.

Speaking at a banking conference in Frankfurt on Friday, Mr Schäuble said it would be “naive” to assume the next asset price bubble would take the same guise as the last.

He said: “More likely today is a scenario in which excess liquidity globally creates a new [sort of] asset market bubble.”

He added: “That low interest rate currencies such as the US dollar are increasingly being used as a basis for currency carry trades should give pause for thought. If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets.”

Mr Schäuble, a political veteran, took over the German finance ministry after Angela Merkel began her second term as chancellor last month.

Source/Full Story: FT.com

An influential US Senate committee has proposed a sweeping overhaul of the country’s regulatory architecture that would strip powers from the Federal Reserve and create a single banking regulator.

Chris Dodd, chairman of the Senate banking committee, on Tuesday presented a more radical vision of regulatory reform than that proposed by the Obama administration. The move ushered into the open a behind-the-scenes struggle between banks, policymakers and regulators.

Democrats lined up behind Mr Dodd as he presented the bill. But senior Republicans were missing from a press conference in spite of attempts by President Barack Obama to secure their support for one of his most important legislative goals.

The proposal to consolidate regulators faces strident opposition from the Fed, the Federal Deposit Insurance Corporation and smaller regulators, which argue they are best placed to supervise banks.

Mr Dodd said most institutions should benefit from a regulator that would provide “clarity, cut red tape and make it easier to compete”, but banks would “no longer be able to shop for the weakest regulator”.

Source/Full Story: FT.com
Technorati Tags: Federal Reserve

White House economic adviser Paul Volcker said his meeting on Monday with President Barack Obama focused in part on reducing U.S. economic reliance on consumer spending.

The alternatives to help bolster future economic growth include boosting exports, applying innovative technology to green issues and improving the nation’s infrastructure, Volcker said.

The former Federal Reserve chairman, who now heads the White House Economic Recovery Advisory Board, said Obama understands that “We cannot have so much consumption.”

Consumer spending accounted for 70 percent of the U.S. economy before last year’s economic meltdown, a level that Volcker said was sustained only by “the magic of financial engineering.”

“We cannot rebuild the economy to the tune of 70 percent consumption or housing booms. It will just break down again,” Volcker said.

Source/Full Story:  Reuters
Technorati Tags: consumer spending

President Barack Obama wants smaller community banks to have greater access to the government’s $700 billion financial rescue fund as the administration refocuses the bailout money on small businesses and homeowners and winds down programs aimed at big banks.

Obama on Wednesday plans to announce a package of initiatives designed to increase lending, including a request that Congress increase caps for existing Small Business Administration loans, the administration said.

The new effort comes as the administration is under pressure from liberals to shift the massive bailout fund’s spending away from big financial institutions and toward reducing foreclosures and creating jobs. But it also comes as Republicans press Obama to end the rescue program and use bank repayments to reduce the national debt.

An administration official said the Treasury Department intends wind down and terminate bailout programs launched at the height of the financial crisis to stabilize Wall Street and aid the struggling auto industry.

The official, speaking on the condition of anonymity because the details had not yet been made public, said the $218 billion Capital Purchase Program would effectively conclude at the end of the year. The program has been a central element of the bailout program, infusing banks with government money in exchange for preferred stock.

The administration also plans to cap two programs at levels below initial projections. One program designed to rid big banks of their bad assets will spend $30 billion instead of $75 billion, and another that supports a Federal Reserve effort to ease bank credit will top off at $30 billion instead of $80 billion. An initiative aimed at banks — the Capital Assistance Program — had no applicants and will also end, the official said.

Source/Full Story: FOXNews.com

Ben Bernanke said on Monday that it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs.

The Federal Reserve chairman warned that global imbalances – the big gaps between national saving, consumption and investment rates reflected in large trade deficits and surpluses – had helped cause the crisis and needed to be corrected.

Mr Bernanke said the US must establish “a sustainable fiscal trajectory anchored by a clear commitment to substantially reduce federal deficits over time”.

He said the US faced a “difficult fiscal situation” but insisted that US policymakers “recognise that we need to develop a fiscal exit strategy” that would put the US on a sustainable long-term fiscal path.

Linking the fiscal situation to the fate of the dollar, which slid further on Monday, he said the development of such a plan was “critically important to maintain confidence in our economy and confidence in our currency”.

Speaking at a conference on Asia and the world economy hosted by the San Francisco Fed, Mr Bernanke urged Asian nations not to slip back into export-led growth and called on them to build up domestic consumption instead.

He said that Asia, which is leading the rebound, risked seeing asset bubbles fuelled by capital inflows. He said one way to mitigate this risk would be “through some greater exchange rate flexibility” offset by fiscal consolidation.

“As the global economy recovers and trade volumes rebound . . . global imbalances may reassert themselves,” the Fed chief warned. “Policymakers around the world must guard against this outcome.”

Source/Full Story: FT.com
Technorati Tags: Bernanke

Former Federal Reserve Chairman Alan Greenspan predicted on Sunday that the jobless rate will pass 10 per cent and stay there for a while, and a second stimulus plan is not needed now.

He spoke favourably of extending unemployment benefits and tax credits for health insurance, options the Obama administration is considering for helping people laid off during the recession. With more than 15 million people out of work, unemployment reached 9.8 per cent in September, the highest rate in 26 years.

“This is an extraordinary period and temporary actions must be taken, especially to assuage the angst of a very substantial part of our population,” Mr. Greenspan said on ABC’s This Week .

“I don’t actually consider those types of actions stimulus programs. I think that they are essentially programs which support people – essentially their living standards in part. I grant you it has a stimulus effect, but that would be my primary focus,” he said.

Calling the jobs report released Friday “pretty awful,” Mr. Greenspan said he is particularly concerned with statistics showing the number of people out of work for six months or more has reached 5 million after going up sharply last month.

“People who are out of work for very protracted periods of time lose their skills eventually,” he said. “What makes an economy great is a combination of the capital assets of the economy and the people who run it. And if you erode the human skills that are involved there, there is a real and, in one sense, an irretrievable loss.”

Looking ahead on the unemployment picture, he said his “own suspicion is that we’re going to penetrate the 10 per cent barrier and stay there for a while before we start down.”

The former Fed chief said he would recommend that President Barack Obama focus on trying to get the economy going but without doing so much that the government’s action are counterproductive. With growth for the third quarter appearing to reach or surpass 3 per cent, Mr. Greenspan said he would not propose a second stimulus package.

“In my judgment it’s far better to wait and see how this momentum that has already begun to develop in the economy carries forward,” he said.

Mr. Greenspan against expressed his concern over the growing size of the federal deficit and the federal debt.

Sen. Evan Bayh, who’s on the Senate Banking, Housing and Urban Affairs Committee, said he, too, is waiting for the remainder of the job-related stimulus initiatives to take effect.

“If I’d been drafting the package, I would have tried to have it go into effect sooner and have more of it directly related to jobs,” Mr. Bayh, a Democrat from Indiana, said on Fox News Sunday. “But it is what it is at this point. It continues to go into the economic bloodstream and to keep things, which, as unsatisfying as they are, from being a whole lot worse.”

Source/Full Story:  The Globe and Mail
Technorati Tags: Alan Greenspan, unemployment

Oh really. Well I guess the party should be at Ben’s house, shouldn’t it?  Does consumer spending account for 2 thirds of the US GPD?  Businessweek doesn’t think so, but even so it seems only logical that the average citizen won’t start recovering until employment recovers.  In that regard Benny is a bit more cautious in his statements.

Federal Reserve Board Chairman Ben Bernanke said Tuesday that the recession has ended – at least based on the numbers. “From a technical point [of view], the recession is very likely over at this point,” Bernanke told a conference at the Brookings Institution. Bernanke said there is a “risk” that labor markets will remain weak through 2010 because growth will be too anemic to create jobs. Bernanke noted that many economists now expect the labor market to recover slowly. But he said this was only a forecast and might be wrong.

Source/Full Story:: Bernanke: Recession is over – MarketWatch

President Barack Obama announced his intention to reappoint Ben Bernanke as chairman of the Federal Reserve on Tuesday as the White House warned of a sharp deterioration in the US fiscal outlook.

Mr Obama said it was Mr Bernanke’s “bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall”. The Fed chief pledged to do everything in his power to “restore a more stable economic and financial environment in which opportunity can again flourish”.

The announcement came as the White House pro jected the budget deficit would be $2,000bn higher over the next 10 years than it had predicted. Taken with a separate forecast by the independent Congressional Budget Office, the news presented a bleak picture of America’s deteriorating debt position.

The CBO released sharply higher deficit projections predicting the 10-year deficit would reach $7,140bn, some $2,700bn more than it had thought in March. Unlike the White House’s calculations, the CBO estimate assumes all policies will stay exactly as they are.

“If you include the administration’s fiscal plans, this implies a deficit increase way in excess of $10 trillion over the next decade – the numbers are deeply alarming,” said Bill Gale, a senior economist at the Brookings Institution.

Source/Full Story: FT.com

The economy could spiral into hyperinflation not seen since the early 1980s if the Federal Reserve does not tighten its monetary policy soon, Sen. Chuck Grassley (R-Iowa) warned Tuesday.

Grassley, speaking about the renomination of Federal Reserve Chairman Ben Bernanke to a second term as head of the Fed, asserted that Bernanke’s ability to hold down inflation would be the metric by which the Fed’s success would be measured.

“We won’t know for a year if he’s done a good job so far, because he shoveled money out of an airplane to save banks and the financial system,” Grassley said in a conference call with Iowa reporters. “But shoveling money out of an airplane to solve problems can be inflationary — in this case, hyperinflationary — if he doesn’t start mopping up some of the money that’s out there.”

Source/Full Story: The Hill’s Blog Briefing Room

The Federal Reserve Bank of New York is aggressively hiring traders as its seeks to manage its burgeoning securities holdings, making the central bank one of Wall Street’s most active recruiters of financial talent.

The New York Fed – the arm of the US central bank that implements its monetary policy – plans to increase the staff in its markets group to 400 by the end of the year – up from 240 at the end of 2007.

The Fed, which says that most of its new recruits come from private sector financial firms, is hiring employees as many banks, rating agencies, hedge funds and private equity groups shed staff. New York city officials recently estimated that the sector’s woes would lead to a loss of up to 140,000 jobs.

The Fed’s need for more traders is a direct consequence of the central bank’s efforts to keep credit flowing through the US economy. The Fed has been buying fixed-income securities at such a rate that its assets have more than doubled to $2,000bn in the past year, leading the central bank to conclude that it needs more people to monitor the markets and to manage its credit risks.

Patricia Mosser, senior adviser, said: “Once we started to have to implement programmes that were clearly outside the traditional credit-easing tools that the Fed has used before, it became illogical to manage some of the new programmes inside the current structure.”

Source/Full Story: FT.com

The Obama administration’s plan to increase the powers of the Federal Reserve, says one critic, is like giving a teenager “a bigger, faster car right after he crashed the family station wagon.” Treasury Secretary Timothy Geithner disagrees. He argues that the Fed is “best positioned” to oversee key financial companies, and that the Obama plan would give the Fed only “modest additional authority.”

Mr. Geithner is right about one thing: The Fed’s power is already vast.But it wasn’t even well-positioned to supervise the likes of Citicorp. Broadening the Fed’s responsibilities won’t help. Instead, we should think of how best to dismantle an overextended Fed.

Though advanced economies like ours require organizations capable of taking on a wide range of activities, there are limits. As Frank Knight, the great Chicago economist, pointed out in his 1921 classic “Risk, Uncertainty, and Profit,” individuals who control large organizations have to delegate many decisions to subordinates. Entities like hedge funds, where individuals such as George Soros make most of the consequential choices, are exceptions.

Therefore, good judgments about people—picking the right subordinates, refereeing staff conflicts, evaluating performance, and so on—are crucial.

Good judgment requires experience, not just exceptional intelligence or raw ability. Although many lessons about managing people can be applied to different fields, good judgment also requires some specific expertise. You can’t manage plumbers without knowing something about plumbing.

Unfortunately no one can learn everything about everything. Yes, Lou Gerstner turned around IBM without any prior experience in the computer business. But he had decades of general management experience, was an exceptionally quick study, and had to come up to speed in just one industry. Individuals who can learn how to effectively lead conglomerates, especially during periods of transition, are exceedingly rare.

This mismatch between what even the most talented minds can learn and the challenges of controlling widely disparate businesses has helped bring our financial system to the brink of collapse. The great names in finance once had distinctive identities and capabilities: Salomon Brothers was the champion in bond trading; Merrill Lynch’s thundering herd was tops in retail brokerage; Morgan Stanley and J.P. Morgan’s white-shoe bankers built formidable blue-chip client lists; and Bear Stearns’s PSDs—poor, smart and driven staff—cultivated scrappy entrepreneurs. Willy-nilly diversification turned these focused outfits into highly leveraged, unwieldy agglomerations of unrelated fiefdoms.

Likewise, the Fed has been incapacitated by its transformation into an omnibus enterprise with responsibilities ranging from boots-on-the-ground regulation to high-level monetary policy. The Federal Reserve Act of 1913, which created the Federal Reserve System, did so to forestall financial panics rather than pursue macroeconomic policies. The gold standard defined monetary policy. The Fed was merely meant to “provide an elastic currency” by serving as lender of last resort in times of crisis. The Act also assigned the Fed routine responsibilities for maintaining and improving the financial system—examining banks, issuing currency notes, and helping clear checks.

The adoption of Keynesian and monetarist ideas by central bankers and elected officials subsequently cast the Fed in a proactive macroeconomic role. William McChesney Martin, who served as chairman from 1951 to 1970, said that the job of the Fed was “to take away the punch bowl just as the party gets going.” This might have been wise in theory, but it wasn’t mandated by the law. In 1977, an amendment to the 1913 Act explicitly charged the Fed with promoting “maximum” employment and “stable” prices. The Humphrey-Hawkins Full Employment Act that followed in 1978 mandated the Fed to promote “full” employment and while maintaining “reasonable” price stability.

Legislation also has increased the Fed’s responsibilities for overseeing the mechanics of the financial system. The Bank Holding Company Act of 1956 gave the Fed responsibility over holding companies designed to circumvent restrictions placed on individual banks. It was tasked with regulating the formation and acquisition of such companies.

Congress further tasked the Fed with enforcing consumer-protection and fair-lending rules. The Fed was made the primary regulator of the 1968 Truth in Lending Act that required proper disclosure of interest rates and terms. Similarly, the Community Reinvestment Act of 1977 forced the Fed to address discrimination against borrowers from poor neighborhoods.

The expansion of bank holding companies into activities such as investment banking and off-balance-sheet exposures to complex instruments such as credit-default swaps also required the Fed to increase the scope of its supervisory capabilities.

In principle, an exceptionally talented theorist might capably run a Fed focused just on monetary policy. Setting the discount rate and regulating the money supply are centralized, top-down activities that do not require much administrative capacity. But without deep managerial experience and considerable industry knowledge, effective chairmanship of a Fed that relies on far-flung staff to regulate financial institutions and practices is almost unimaginable. The vast territory the Fed covers would challenge the most exceptional and experienced executives.

As it happens, the Fed has been led for more than 20 years by chairmen who had no senior management experience. Prior to running the Fed, Alan Greenspan started a small consulting firm and Ben Bernanke was head of Princeton’s economics department. Given their understandable preoccupation with monetary and macroeconomic matters, how much attention could they be expected to devote to mastering and managing the plumbing side of the Fed? While the record of the Fed’s monetary policy has been mixed, its supervision of financial institutions has been a predictable and comprehensive failure.

The Fed’s excessively broad mandate also has thwarted accountability. The CEOs of Citibank, AIG, Bear Stearns, Lehman and Countrywide are all gone—albeit with too much delay and with no clawback of unmerited compensation. At the Fed, no high-level heads have rolled. Mr. Geithner was promoted to treasury secretary. Mr. Bernanke is treated with great deference as he solemnly testifies that if it weren’t for the Fed, the crisis would have been much worse. But then, how can anyone be held responsible for failing at a job no human could do?

At the very least we should split the monetary policy and regulatory functions of the Fed, as was done through the Maastricht Treaty that established the European Central Bank. What we need now is a debate about how to break up the Fed—and some of the sprawling financial institutions it supervises—in order to make both the regulator and the regulated more manageable and accountable.

Mr. Bhidé, a visiting scholar at Harvard, is the author of “The Venturesome Economy” (Princeton University Press, 2008). He is currently writing a book about the financial crisis.

Source/Full Story: WSJ.com

U.S. officials are considering giving CIT Group Inc a temporary loan as part of an aid package to help the lender avoid collapse, a source familiar with regulators’ thinking said on Tuesday.

The temporary loan is one option being considered to give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, said the source who requested anonymity because the plans could change.

Other options include access to the U.S. Federal Reserve’s discount window and asset transfers, the source said. The source said there was no guarantee a plan would be reached.

CIT, a lender to thousands of small businesses, is pushing for government aid in its fight to survive. CIT clients tapped their credit lines, drawing some $750 million from the company in two days, the Wall Street Journal reported, citing unnamed sources.

The government’s plan calls for CIT to transfer assets to its bank, use some of them to pledge at the Federal Reserve’s discount window and refinance some debt, the paper reported on its website.

Chief Executive Jeffrey Peek’s future role was also unclear, it said.

Source/Full Story:: Reuters

Right…..

The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 billion rescue package launched in February, an adviser to President Barack Obama said.

“We should be planning on a contingency basis for a second round of stimulus,” Laura D’Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis. said on Tuesday.

Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment.

“The stimulus is performing close to expectations but not in timing,” Tyson said, referring to the slow pace at which the first round of stimulus had been spent on the economy.

Tyson, who is a dean of the Haas School of Business at University of California, Berkeley and was also a White House economic adviser to former President Bill Clinton, said an additional factor affecting the stimulus was that the economy was in a far worse shape than the administration had estimated.

INFLATION NOT A CONCERN

Tyson dispelled concerns about the ballooning U.S. fiscal deficit that is estimated to hit nearly 10 percent of gross domestic product, and its possible inflationary consequences.

“The Federal Reserve is not going to allow the U.S. to inflate away its debt,” she said.

Source/Full Story: Reuters

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank.

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

Source/Full Story:: Telegraph