New Government Officials, Financial Market Rescues and Food Pantries
The saga of the troubled American financial system continues, although early this week, following still another frantic weekend of "rescue" negotiations, there are some positive developments to commemorate. There are also new needs, to which we call your attention in paragraph 5 below. You might even read that first!
1. President-Elect Obama yesterday introduced his choices for the most senior economic positions in his Administration. As the media speculated last week over Attorney General and Secretary of State, we kept saying, "but the one we really want to know about is the Secretary of the Treasury." That person, after all, is the one who has to hit the ground running right on Day 1, or even sooner. So finally Friday afternoon, we heard: Timothy Geithner, age 47, current President of the New York Federal Reserve Bank.
We are glad about this selection. Geithner has been in the midst of all the rescue work so far, and he has previous experience at Treasury and the International Monetary Fund. So he doesn't need a shakedown or training period. The New York Fed is the operations center for Federal Reserve policy actions. Its trading desk conducts daily reserve operations with banks and securities dealers and monitors foreign exchange activity. The bank is responsible for the management of new commercial paper lending programs and other recent outreaches. Geithner helped to design these programs, which mushroomed immediately into a giant financial support system. So his choice is a good one.
Further, at yesterday's news conference Obama stated clearly that he will not reverse or materially alter the actions of the Bush Administration in its closing weeks. Thus, institutions and investors can now be assured that efforts made so far will not be repealed or undone. This too is a good thing, whether we agree with all those actions or not, since the programs will not be disrupted at this sensitive time.
2. Other members of the new President's economic staff include Lawrence Summers as chair of the National Economic Council and Christina Romer at the Council of Economic Advisers. Summers, former president of Harvard, is a well-known economist whose job will be to coordinate economic policy among various departments and agencies. While this office has been of little importance in the Bush Administration, the current economic conditions make it totally appropriate to re-emphasize such a role now. Professor Romer is a widely respected researcher at the University of California at Berkeley. She specializes in monetary theory and macroeconomic policy issues; she is a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, the private organization that arbitrates the official state of the U.S. economy. In these personnel choices, Obama has picked mainstream macroeconomists who are not particularly ideologues, but mainly interested in economy-wide stabilization policies. They will be designing a sizable stimulus package in coming weeks, even before the Inauguration.
3. The weekend in Washington was spent in elaborate negotiations over the state of Citigroup, one of the world's largest banks. Late Sunday evening, current Treasury Secretary Paulson announced a kind of rescue effort involving government guarantees of troubled assets on Citi 's balance sheet totaling some $306 billion. These include residential and commercial mortgage-related instruments. The Treasury will add another $20 billion in capital funds to the $25 billion it granted in October. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) will participate in this support program.
The problems at Citi were already severe, but they took a real turn for the worse after Secretary Paulson announced two weeks ago that the TARP programs would not involve the "toxic asset" purchases originally planned. We wrote here last week how we were dismayed at the change in strategy for the use of the $700 billion in TARP funds, and apparently we weren't the only ones. Participants in the markets for the specific investments had factored the prospective Government purchases into the prices of those securities, and when they learned the Treasury wouldn't be buying them after all, they pushed the prices back down. Trading in those markets was again disrupted and debt markets were described as "seizing up" as they had back in September. Many investors have again run to the safety of Treasury securities, and demand is so strong and prices so high that the market yield on 3-month Treasury bills has been driven down to a mere 0.02%.
3a. This Just In. In this regard, the Federal Reserve announced just an hour ago that it will begin next week to purchase mortgage-backed bonds for its own account, up to $100 billion. These purchases will be from among the standardized Fannie Mae- and Freddie Mac-issued securities. Some years ago, the Fed routinely bought bonds directly issued by those agencies, but it has never acquired the mortgage-backed debt. The Fed's announcement says that the change today is in direct response to the seizing-up of that market last week. The Fed also said it will be looking to the development of a broader program to begin early in the new year. In addition, it will be establishing a consumer credit purchasing facility similar to the one recently put in place for companies' short-term commercial paper debt.
4. The stock market still has no idea what anything is really worth. Last week, it fell steeply Wednesday and Thursday, and then roared back Friday as word came of the key Obama economics nominations. That improvement continued yesterday, ostensibly on the back of the Citigroup rescue. While we'd like to say that the rebound is a concrete move that will have some staying power, volatility has simply been too great recently to let us conclude anything; we recall having hopeful expectations when earlier bailout actions were taken, but gains then proved fleeting. In particular, there is still no systematic approach in the government's rescue policy; they seem to be taking one line one week and something different the next. Further, all of this action prevents the painful but necessary cleansing of money-losing operations which would allow the formation of a solid base on which to move forward. "Too big to fail" needs some definition. We hope Summers, Geithner and Company, will provide that.
5. It's Thanksgiving. Obviously, we wish all of you a Happy Day, with a break from all of this. We also urge you to give generously to the Food Pantry of your choice. From several unrelated sources, we've heard that these important institutions are having their budgets cut at the very time when more people need them. Supermarket chains that have given away turkeys in recent years are not doing so now, cutting off a significant source of donated food. Please pitch in; help food-pantry patrons have a Happy Thanksgiving too!
1. President-Elect Obama yesterday introduced his choices for the most senior economic positions in his Administration. As the media speculated last week over Attorney General and Secretary of State, we kept saying, "but the one we really want to know about is the Secretary of the Treasury." That person, after all, is the one who has to hit the ground running right on Day 1, or even sooner. So finally Friday afternoon, we heard: Timothy Geithner, age 47, current President of the New York Federal Reserve Bank.
We are glad about this selection. Geithner has been in the midst of all the rescue work so far, and he has previous experience at Treasury and the International Monetary Fund. So he doesn't need a shakedown or training period. The New York Fed is the operations center for Federal Reserve policy actions. Its trading desk conducts daily reserve operations with banks and securities dealers and monitors foreign exchange activity. The bank is responsible for the management of new commercial paper lending programs and other recent outreaches. Geithner helped to design these programs, which mushroomed immediately into a giant financial support system. So his choice is a good one.
Further, at yesterday's news conference Obama stated clearly that he will not reverse or materially alter the actions of the Bush Administration in its closing weeks. Thus, institutions and investors can now be assured that efforts made so far will not be repealed or undone. This too is a good thing, whether we agree with all those actions or not, since the programs will not be disrupted at this sensitive time.
2. Other members of the new President's economic staff include Lawrence Summers as chair of the National Economic Council and Christina Romer at the Council of Economic Advisers. Summers, former president of Harvard, is a well-known economist whose job will be to coordinate economic policy among various departments and agencies. While this office has been of little importance in the Bush Administration, the current economic conditions make it totally appropriate to re-emphasize such a role now. Professor Romer is a widely respected researcher at the University of California at Berkeley. She specializes in monetary theory and macroeconomic policy issues; she is a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, the private organization that arbitrates the official state of the U.S. economy. In these personnel choices, Obama has picked mainstream macroeconomists who are not particularly ideologues, but mainly interested in economy-wide stabilization policies. They will be designing a sizable stimulus package in coming weeks, even before the Inauguration.
3. The weekend in Washington was spent in elaborate negotiations over the state of Citigroup, one of the world's largest banks. Late Sunday evening, current Treasury Secretary Paulson announced a kind of rescue effort involving government guarantees of troubled assets on Citi 's balance sheet totaling some $306 billion. These include residential and commercial mortgage-related instruments. The Treasury will add another $20 billion in capital funds to the $25 billion it granted in October. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) will participate in this support program.
The problems at Citi were already severe, but they took a real turn for the worse after Secretary Paulson announced two weeks ago that the TARP programs would not involve the "toxic asset" purchases originally planned. We wrote here last week how we were dismayed at the change in strategy for the use of the $700 billion in TARP funds, and apparently we weren't the only ones. Participants in the markets for the specific investments had factored the prospective Government purchases into the prices of those securities, and when they learned the Treasury wouldn't be buying them after all, they pushed the prices back down. Trading in those markets was again disrupted and debt markets were described as "seizing up" as they had back in September. Many investors have again run to the safety of Treasury securities, and demand is so strong and prices so high that the market yield on 3-month Treasury bills has been driven down to a mere 0.02%.
3a. This Just In. In this regard, the Federal Reserve announced just an hour ago that it will begin next week to purchase mortgage-backed bonds for its own account, up to $100 billion. These purchases will be from among the standardized Fannie Mae- and Freddie Mac-issued securities. Some years ago, the Fed routinely bought bonds directly issued by those agencies, but it has never acquired the mortgage-backed debt. The Fed's announcement says that the change today is in direct response to the seizing-up of that market last week. The Fed also said it will be looking to the development of a broader program to begin early in the new year. In addition, it will be establishing a consumer credit purchasing facility similar to the one recently put in place for companies' short-term commercial paper debt.
4. The stock market still has no idea what anything is really worth. Last week, it fell steeply Wednesday and Thursday, and then roared back Friday as word came of the key Obama economics nominations. That improvement continued yesterday, ostensibly on the back of the Citigroup rescue. While we'd like to say that the rebound is a concrete move that will have some staying power, volatility has simply been too great recently to let us conclude anything; we recall having hopeful expectations when earlier bailout actions were taken, but gains then proved fleeting. In particular, there is still no systematic approach in the government's rescue policy; they seem to be taking one line one week and something different the next. Further, all of this action prevents the painful but necessary cleansing of money-losing operations which would allow the formation of a solid base on which to move forward. "Too big to fail" needs some definition. We hope Summers, Geithner and Company, will provide that.
5. It's Thanksgiving. Obviously, we wish all of you a Happy Day, with a break from all of this. We also urge you to give generously to the Food Pantry of your choice. From several unrelated sources, we've heard that these important institutions are having their budgets cut at the very time when more people need them. Supermarket chains that have given away turkeys in recent years are not doing so now, cutting off a significant source of donated food. Please pitch in; help food-pantry patrons have a Happy Thanksgiving too!
posted by Carol S. | 11/25/2008 09:27:00 AM
4 Comments:
I don't quite understand what Jason means here, but I think we covered his main point in describing the inconsistencies between Paulson's original plan and the actions he eventually implemented.
That said, the capital funds the Treasury injected into the banks are certainly helpful. The effect is less visible because the funds support the banks' general business operations, instead of announced purchases of specific assets.
More important at this time is the fact that the new Administration is starting to function in its transition, so we can now look ahead instead of just standing by, wringing our hands.
I finally got around to this part of the Farm, so I am a little late spreading my analysis here that I have discussed at length elsewhere.
My view is that the "rescue" was completely unnecessary, that the so-called "Stabilization Act" was in fact drastically destabilizing and that its implementation would bring the next Great Depression, preceded by wild swings in the stock market during an obvious downward spiral.
Please visit my web site by clicking on my name here for more information. I will briefly outline my points below:
1. "Rescue" unnecessary: The problem with mortgages is intrinsic to that instrument, namely that it is leveraged, i.e. a way of using other people's money to place economic bets. Leveraging produces speculative bubbles and crashes, such as what has happened in real estate. By replacing mortgages with non-leveraged instruments, such as my Adjustable Equity Mortgage, we can avoid future bubbles and crashes. Also, the conversion process ascribes the loss based on the percentage equity stake so there is no negative equity and (a bit of hand-waving here) no further downward pressure on real estate prices. This requires $0 of bailing out and a relatively minor amount of administrative cost through a Third Bank of the United States.
2. The destabilizing "Stabilization Act": It basically placed a $700 Billion hold on the credit markets. This crowds out other uses of credit but holds out the prospect that, perhaps, some portion might be released from the hold and some of the money wasted might find its way to potential borrowers. The market is wildly guessing which way the $700 Billion Gorilla is going to move and these wild guesses are indicated by wild swings in the Dow.
3. Great Depression Here We Come! The key here is business credit or the lack thereof. The song goes like this:
||: Small businesses with short-term cash flow problems will fail because of the credit crunch: Jobs are lost. Small businesses which are otherwise ready to expand will shelve their plans because the credit is not available: New jobs are not created. Small businesses, the jobs engine of our economy, will net massive job losses. The loss of income leads to further losses in sales. Recession deepens and the only thing the party politicians can come up with are more "rescue" plans, squeezing more private money out of the credit market and causing wilder swings in the stock market. :||
(Ramp until the economy is completely depressed)
Carl Peter Klapper
Soon-to-be-declared independent, free-market Populist candidate for Governor of New Jersey.
I finally got around to this part of the Farm, so I am a little late spreading my analysis here that I have discussed at length elsewhere.
My view is that the "rescue" was completely unnecessary, that the so-called "Stabilization Act" was in fact drastically destabilizing and that its implementation would bring the next Great Depression, preceded by wild swings in the stock market during an obvious downward spiral.
Please visit my web site by clicking on the link for more information. I will briefly outline my points below:
1. "Rescue" unnecessary: The problem with mortgages is intrinsic to that instrument, namely that it is leveraged, i.e. a way of using other people's money to place economic bets. Leveraging produces speculative bubbles and crashes, such as what has happened in real estate. By replacing mortgages with non-leveraged instruments, such as my Adjustable Equity Mortgage, we can avoid future bubbles and crashes. Also, the conversion process ascribes the loss based on the percentage equity stake so there is no negative equity and (a bit of hand-waving here) no further downward pressure on real estate prices. This requires $0 of bailing out and a relatively minor amount of administrative cost through a Third Bank of the United States.
2. The destabilizing "Stabilization Act": It basically placed a $700 Billion hold on the credit markets. This crowds out other uses of credit but holds out the prospect that, perhaps, some portion might be released from the hold and some of the money wasted might find its way to potential borrowers. The market is wildly guessing which way the $700 Billion Gorilla is going to move and these wild guesses are indicated by wild swings in the Dow.
3. Great Depression Here We Come! The key here is business credit or the lack thereof. The song goes like this:
||: Small businesses with short-term cash flow problems will fail because of the credit crunch: Jobs are lost. Small businesses which are otherwise ready to expand will shelve their plans because the credit is not available: New jobs are not created. Small businesses, the jobs engine of our economy, will net massive job losses. The loss of income leads to further losses in sales. Recession deepens and the only thing the party politicians can come up with are more "rescue" plans, squeezing more private money out of the credit market and causing wilder swings in the stock market. :||
(Ramp until the economy is completely depressed)
Carl Peter Klapper
Soon-to-be-declared independent, free-market Populist candidate for Governor of New Jersey.
We note with interest Mr. Klapper's comment above and thank him for taking the time to write. We take this opportunity to remind readers that the views of individual commentators are theirs alone, not necessarily mine nor those of the Geranium Farm.
Carol Stone
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