Wells Fargo "taken behind the woodshed" - time to Breakup Wells Fargo?

Source

The Fed's unprecedented slap at Wells Fargo may cost the bank more than just $400 million this year

Excerpt:

Last week's unprecedented rebuke on Wells Fargo from the Federal Reserve was noteworthy in a number of ways. Never before has the Fed placed a firmwide limit on a bank, stopping them from growing.

Outgoing Fed Chair Janet Yellen described the growth restriction as "unique and more stringent then the penalties the Board has imposed against other bank holding companies for similar unsafe and unsound practices, but is appropriate given the pervasiveness and persistence of the problems at Wells Fargo."

The Fed has enacted this by preventing the bank from growing assets. This means, that all else equal, the bank cannot write any new loans. However, there are some changes within their balance sheet that they can make in order to be able to lend, such that they remain "open for business" in CEO Tim Sloan's words.

Still, these changes may cost them in the region of $400 million of earnings for this year alone, according to the bank's estimates. The rationale for this particular form of punishment stems from the bank having prioritized growth since the financial crisis. In the Fed's view, Wells Fargo failed to increase risk management and oversight alongside that growth. Thus, the central bank decided to limit growth until things like risk management catches up. It also felt the incentive for Wells Fargo to act will be strong, since they will be starved of the growth they seek in the meantime.

Maxine Waters: I want to break up Wells Fargo (9/2016)

Excerpt:

The top Democrat on the House Financial Services Committee said Thursday that she is actively working to break up Wells Fargo. Rep. Maxine Waters (D-Calif.) announced that the creation of potentially 2 million fake accounts by bank employees has led her to believe the bank is too large to be effectively managed.

“I have come to the conclusion that Wells Fargo should be broken up. It’s too big to manage,” she said. “I’m moving forward to break up Wells Fargo bank.” Waters made her announcement at a hearing with John Stumpf, the bank’s CEO and board chairman. For several hours, Stumpf was excoriated by members of both parties by the wrongdoing at his bank. The bank potentially created more than 2 million accounts without authorization from customers in order to meet sales goals.

Warren Statement on Fed Chair Yellen's Regulatory Actions Against Wells Fargo

Excerpt:

Today, United States Senator Elizabeth Warren (D-Mass.) released the following statement on the Federal Reserve's decision to freeze the growth of Wells Fargo and remove four of its board members:

"For months, I have repeatedly pressed Janet Yellen to hold Wells Fargo accountable for its fake accounts scam and push out responsible Board Members. Today she did it - in her last act as Fed Chair. Fines alone will never rein in fraudulent behavior at the big banks and by pushing out Board Members at Wells Fargo, Chair Yellen sends a strong message. Her decision today demonstrates that we have the tools to rein in Wall Street - if our regulators have the guts to use them," said Senator Warren. "The massive fraud at Wells Fargo showed the whole country that we need more accountability on Wall Street. But for more than a year, we've watched as President Trump and his administration raced to turn big banks loose again to once again threaten our whole economy. Trump has filled our top economic jobs with people obsessed with sucking up to Wall Street. Today is Chair Yellen's last day at the Fed. Tomorrow, her replacement will face a choice: show the same kind of courage - or own the next financial crisis." Today, Chair Yellen sent a letter in response to Senator Warren's many calls for removing Wells Fargo Board Members. Read the letter detailing the Fed's actions against Wells Fargo here.

Comment: Reader may think that I care (or am biased) because I am a Wells Fargo retiree. I actually am neutral. As a customer I am very happy with Wells Fargo but I could just as easily be with Charles Schwab.  While we are very diversified, we are also Wells Fargo investors. The stock did take a hit today!

What the Wells Fargo board could decide is that a self-initiated breakup could be best for investors!  Imagine this (a hypothetical even split):

Final: Look ahead to the mid-terms. Imagine a Democratic sweep! Maxine Waters as the chair of the House Financial Services Committee and Elizabeth Warren as the chair of the United States Senate Banking Subcommittee on Financial Institutions and Consumer Protection Update:

Statement from $WFC #WellsFargo #TimSloan

https://t.co/pullb5f5rv pic.twitter.com/vyNTtto0Lo

— James Peet (@jrpeet) February 5, 2018

Jelly donuts: an allegory on why the Fed's policy is unhealthy in the long run

Wall Street Has A New Worry Now That The Economy Is Recovering

Excerpt:

Before the Federal Reserve lowered rates to keep money flowing during the recession, it was easy for people to retire on their savings. The interest on their money could fund visits to grandchildren and tennis club memberships — life was good. ... And the longer rates stay low without a clear sign from the Fed as to when that policy will change, the more people are beginning to think that savers need saving. While Robertson has been saying this for some time, this hasn't always been an issue people felt they needed to take up. Now it's as if there's a new sense of urgency about it. "I want to get off the lower bound as soon as possible, in part because it will benefit savers," said Dudley. Back in 2012 David Einhorn blasted Ben Bernanke for this issue in a column that used The Simpsons and jelly donuts as an allegory for why the Fed's policy could be unhealthy in the long run. "I know this isn't conventional thinking, and it certainly isn't the way the Fed looks at it, but I believe that raising short rates -- not to a high level, but to a still low level of 2 or 3% -- would be much more conducive to both growth and stability," Einhorn wrote.

The Fed's Jelly Donut Policy

Excerpt:

A Jelly Donut is a yummy mid-afternoon energy boost. Two Jelly Donuts are an indulgent breakfast. Three Jelly Donuts may induce a tummy ache. Six Jelly Donuts -- that's an eating disorder. Twelve Jelly Donuts is fraternity pledge hazing. My point is that you can have too much of a good thing and overdoses are destructive. [The Fed] is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn't giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish. ... Consider my neighbors, Homer, Marge, and their three adult children, Bart, Lisa and Maggie. Homer has retired from the nuclear plant, and he and Marge live off savings and Homer's pension. Bart is in a bit of trouble with too much credit card debt and an underwater mortgage. Lisa has been putting away her salary and has enough for a downpayment on her first home. Maggie owns her own business and is ready to expand. When interest rates are high, Homer and Marge park their savings in CDs or Money Market accounts and get a decent return. There is no incentive for them to take much risk with their money. Bart gets into trouble very quickly and defaults on his loans. Lisa decides she can't afford a mortgage until rates fall. And Maggie, who's been helping out Bart with some of his expenses, believes that she'd make money if she grew the business, but possibly not enough to service the debt she'd be undertaking. When interest rates are low, everything changes. Homer and Marge are getting only a little interest on their savings, and are struggling to live off Homer's pension. They need to rethink their finances. Bart can manage to keep up the minimum payments on his credit cards and stay in his house. Lisa can get a cheap mortgage, and Maggie doesn't need to make such optimistic assumptions in order to expand her business.

Comment: The 2nd article is 2 years old. But the point still stands. Wouldn't it be nice to make 3% on a savings account?! Mortgages would be at 6% and the stock market would decline.

"Suntory" time at the Fed

The 2008 FOMC Laugh Track: Gallows Humor at the Federal Reserve

Excerpt:

“I liken the fed funds rate to a good single malt whiskey—it takes time to have its ameliorative or stimulative effect.” [Laughter]

Comment: Image ... Bill Murray in Lost in Translation

The Fed’s “Dirty Little Secret”

The Fed’s “Dirty Little Secret”

Excerpt:

The dollar hit its lowest level since July 2008 Thursday, putting more pressure on savers, people living on a fixed-income and all consumers facing soaring commodity prices, most notably in energy.

Somewhere, Ben Bernanke is probably smiling.

Yes, Bernanke — and Treasury Secretary Tim Geithner — talked tough about the dollar this week but "currency depreciation is always a central bankers dirty little secret," says Vincent Reinhart, a former director of the Fed's Division of Monetary Affairs. "They don't mind some depreciation at time…The trick is to generate some depreciation but not a lot."

It depends on your definition of "a lot"…

Since Bernanke took office on Feb 1, 2006, the dollar's purchasing power has fallen 11%, and its down 21% in the past decade and 82% since the U.S. got off the gold standard in 1971, according to Miller Tabak.

Apparently, that doesn't count as "a lot" or "too much" depreciation for Bernanke's tastes.

"A design principle of Federal Reserve policy is to get inflation up — to create more dollars so inflation doesn't fall anymore; that's associated with currency depreciation," Reinhart explains. "Nothing the Fed chairman or Secretary of Treasury says is going to change that. [But] they've got to say 'a strong dollar is in the national interest' because they don't want to be seen as promoting a weak dollar."

Comment: My first job out of college (actually was 2 years after graduation) was as a new hire as a sales trainee with IBM in 1973. My starting salary was $ 9,600. That was enough to buy a brand new Plymouth for $ 4,200 and rent a nice apartment in Tampa Florida. In 1974 Kathee and I got married (December 28th). We purchased a new home (3 bedroom, LR, dining room, den, 2 car garage, 2 bath) for $ 42,000. (The two years after college before IBM: 1 year with Campus Crusade for Christ, 1 month at chemical plant, 2 months as a Summer ministry intern, and 6 months teaching adult education at Chattanooga Public Schools.) (see earlier post for our first house)

Jack Booted Feds Stomp on Christmas in Payne

Federal Reserve Orders Private Bank to Remove Crosses and Bible Verse

Excerpt:

While the Injustice Department is suing an Illinois school district on behalf of a Muslim teacher and a federal judge has issued an injunction against an Oklahoma measure prohibiting the use of Sharia law in court decisions, a private business in the Sooner State no longer seems to have First Amendment rights. Outrageously, the Federal Reserve has ordered the small Payne County Bank in Perkins, OK to remove religious symbols and sentiments in deference to an anti-discrimination regulation.

Reporting on the story, Koco.com writes that Federal Reserve examiners "deemed [that] a Bible verse of the day, crosses on the teller's [sic] counter and buttons that say ‘Merry Christmas, God With Us' were inappropriate. The Bible verse of the day on the bank's Internet site also had to be taken down." The officials claimed that the bank was in violation of, writes Koco.com, "the discouragement clause of Regulation B of the bank regulations. According to the clause, ‘...the use of words, symbols, models and other forms of communication ... [that] express, imply or suggest a discriminatory preference or policy of exclusion [is prohibited].'"

Comment: Local Reporting, Payne County Bank. Looks like issue was resolved. Suggest that all my readers deposit $ 1000 in this bank!

Quantitative Easing Explained

Is the Federal Reserve Destroying the Dollar?

Excerpt:

It is hard to accept that the head of the Chicago Federal Reserve Bank, or any other Federal Reserve Bank president, or Ben Bernanke, the head of the whole system, believes that by driving long-term interest rates lower than they already are (thirty-year U.S. Treasury Note near 4%), one can convince anyone, much less one half of Americans who did not go broke, to want to borrow enough money to accelerate this economy. It is a preposterous concept.

The most probable outcome will be to ignite inflation. The U.S. dollar is the top reserve currency in the world primarily because of its reliability for maintaining its value. When the Fed, the fiduciary custodian of the world's current top reserve currency, tells all the holders of the dollar that they are going to deliberately depreciate it at 2% to 4% a year, a whole lot of people are going to be listening very closely. It is a little like yelling "fire" in a movie theatre. You want to be first to get out of the door.

If you are holding a ten-year U.S. Treasury Note yielding 2% and the Fed assures you that inflation is going to increase by 2%, you have a potential problem. Any prospective buyer of your Treasury will want to make at least 4% to compensate him for the new inflation. Thus, he will not want to pay you as much for your ten-year U.S. Treasury Note as you paid for it. When you paid $1,000 for your ten-year U.S. Treasury Note, you got it with a 2% interest payment. Because your new buyer requires at least a 4% interest payment, he will pay you only $833 for your $1,000 bond. You will lose $167, or 16.7% on the transaction. If inflation increases by 4%, your bond will be worth only $696, and your loss will be $304, or 30.4%.

But the Fed cannot control everybody's reaction to their hoped-for 2% increase in inflation. What they are expecting to do is very imprecise. People's expectations about inflation may run ahead of actual inflation, with the result being that inflation becomes self-propelling. Commodities' futures go up immediately to anticipate future inflation. These future prices drive up current costs of raw materials, retailers pass it along quickly, and employees want wage increases, and thus, the dollar declines in value.

Comment: I'm trying to stay hopeful but I'm skeptical about the Fed's moves

Charles Schwab: No incentive for saving

Low Interest Rates Are Squeezing Seniors

Excerpt:

In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.

Today's average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years.

Some would argue that today's low inflation rate offsets the decline. But even at an inflation rate of zero, a 76% decline in spending power is painful. And we're already seeing signs of inflation this year. The first two months of 2010 showed an annualized inflation rate of 2%, further exacerbating the spending power problem for retirees by eroding the value of their principal.

To be sure, the country's recent financial crisis required unprecedented action by the Fed, including lowering rates to levels not seen in more than 50 years. In particular, the infusion of capital into the banking system through historically low fed-funds target rates pulled many banks from the precipice of collapse. By that measure it has been a resounding success.

Yet these unprecedented low rates have now been in place for almost 18 months. As a result, banks have enjoyed virtually free access to money while retirees have been deprived of any meaningful yield on their fixed-income portfolios. For a large segment of our population—people who worked long and hard, who followed the rules by spending less than they earned and putting the remainder away to keep themselves independent in retirement—the ultra-low interest rate is more than a hardship. It's a potential disaster striking at core American principles of self–reliance, individual responsibility and fairness.

To put the scale of this problem in context, consider the fact that more than $7.5 trillion in American household wealth is held today in short-term, interest-bearing products such as checking and savings accounts, retail money funds and CDs. At today's low interest rates, the return on those savings is hundreds of billions less than it would have been at 2006 interest rates. Retirees feel the consequences disproportionately, but because much of that income would have made its way into the economy, spending and job creation also suffer.

...

It's not just retirees on fixed income we should be concerned about. Let's not forget that savers of all ages—even the young person opening his first savings account—need some incentive of future reward for saving. Today, there is none.

Comment: The problem is that if interest rates rise (and they will and they should!), the cost of money for the debt laden Federal government will also rise! But back to personal finances: there is little incentive to save. But save you must!

Plan to mop up excess cash

To Inhibit Inflation, Fed Offers to Set Up Interest-Bearing Deposits

Excerpt:

The Fed would create the equivalent of a certificate of deposit that pays interest to banks for keeping some of their reserves — which are currently estimated at more than $1 trillion — for up to one year. That would help offset some of the $2.2 trillion the central bank has fanned out into the economy during the financial crisis. It also would allow the Fed to quickly entice banks to take more money out of circulation in case inflation emerged as a serious threat in the near future.

The proposal was the latest sign the Fed is intensifying its efforts to scale back the vast amounts of money it pumped into the economy at the height of the crisis.

As the economy recovers, Fed officials worry that if banks keep too much cash tied up in reserves that might later lead to a boom in credit and result in inflation. Low interest rates and a weak dollar have raised concerns about rising prices, although the Fed chairman, Ben S. Bernanke, has said inflation is not a near-term danger.

Comment: Unsure how this would impact consumers.

Have we started down "the Zimbabwean path"?

Is the Medicine Worse Than the Illness?

Excerpts:

... Federal Reserve's announcement last Tuesday that it intends to debase its own paper money. The year just ending has been a time of confusion as much as it has been of loss. But here, at least, was the bright beam of clarity. Specifically, the Fed pledged to print dollars in unlimited volume and to trim its funds rate, if necessary, all the way to zero. Nor would it rest on its laurels even at an interest rate low enough to drive the creditor class back to work. It would, on the contrary, "continue to consider ways of using its balance sheet to further support credit markets and economic activity."

....

One market, only, registered a protest. The Fed's declaration of inflationary intent knocked the dollar for a loop against gold and foreign currencies. In many different languages and from many time zones came the question, "Tell me, again, now that the dollar yields so little, why do we own it?"

...

If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them? Who will finance the Obama administration's looming titanic fiscal deficits? Who will finance America's annual surplus of consumption over production (after 25 more or less continuous years, almost a national trait)? Inflation is a kind of governmentally sanctioned white-collar crime.

...

In ages past, it was so simple. A central banker had one job only, and that was to assure that the currency under his care was exchangeable into gold at the lawfully stipulated rate. It was his office to make the public indifferent between currency or gold. In a crisis, the banker's job description expanded to permit emergency lending against good collateral at a high rate of interest. But no self-respecting central banker did much more. Certainly, none arrogated to himself the job of steering the economy by fixing an interest rate. None, I believe, had an economist on the payroll. None facilitated deficit spending by buying up his government's bonds. None cared about the average level of prices, which rose in wartime and sank in peacetime. It sank in peacetime because technological progress and the opening of new regions to agricultural production made merchandise and commodities cheaper and more abundant.

...

Gold is a hard master, and a capricious one, too, insofar as growth in the world's monetary base depends on the enterprise of mining engineers. But, as we have seen lately, there is no caprice like the caprice of sleep-deprived Mandarins improvising a monetary solution to a credit crisis (or, for that matter, of fully rested Mandarins setting interest rates by the lights of their econometric models).

The times were hard in the 1870s and, for that matter, again in the 1890s, but Americans repeatedly spurned the Populist cries for a dollar you didn't have to dig out of the ground but could rather print up by the job lot. "If the Government can create money," as a hard-money propagandist put it in an 1892 broadside entitled "Cheap Money," "why should not it create all that everybody wants? Why should anybody work for a living?" And -- in a most prescient rhetorical question -- he went on to ask, "Why should we have any limit put to the volume of our currency?"

...

starting in 1971, there would be nothing behind it more than the good intentions of the U.S. government and (somewhat more substantively) the demonstrated strength of the U.S. economy. Still less could he have guessed that the world would nonetheless fall in love with that uncollateralized piece of paper or -- even more astoundingly -- that the United States would enjoy so great a reservoir of good will that it would be allowed to borrow its way to a net international investment position of minus $2.44 trillion ($17.64 trillion of foreign assets held by Americans vs. $20.08 trillion of American assets held by foreigners). "It goes up and up," Mr. Root said of the inflationary cycle, but just how high he could not have dreamt.

Knowledge of the precepts of classical central banking prepared no one to understand, much less to anticipate, the Fed's conduct in this credit crackup. The central bank is lending freely, all right, but not at the stipulated "high" interest rate. As a matter of fact, it is starting to lend at a rate below which there is no positive rate. The gold standard was objective. Modern monetary management is subjective (under Alan Greenspan, it was intuitive). The gold standard was rules-based. The 21st century Fed goes with what works -- or seems to work. What it hopes is going to work for the fellow who fell off the stepladder is more debt and more dollars. Just how much of each can be found every Thursday evening on the Fed's own Web site. Open up form H4.1 and prepare to be amazed. Since Labor Day, the Fed's assets have zoomed to $2.31 trillion from $905.7 billion. And what is the significance of this stunning rate of asset growth? Simply this: The Fed pays for its assets with freshly made dollars. It conjures them into existence on a computer; "printing" is a figure of speech.

Excerpt:

Thatcher Wouldn't Have Gone Wobbly on Detroit - Keynsianism is proof you shouldn't 'leave economics to economists.'Thatcherite principles remain as valid as ever. The freedom of the marketplace is still the only effective mechanism for eliminating poor business practices, identifying productive investment, and providing long-term growth.

...

President-elect Barack Obama has said that he expects things to get worse before they get better. If the experience of the first Thatcher administration is anything to go by, that will certainly be the case. For one thing, some "hidden unemployment," as Mrs. Thatcher called it, will be flushed out into the open. This will be the case with the expected closure of the Big Three's "job banks," which pay almost full wages and benefits to several thousand auto workers for doing nothing.

Comments: Easy money created our credit crisis and yet we continue to make it EZ'r. Buy yourselves some real money: http://www.apmex.com/

Deal by end of day?

Citigroup Lays Out Wachovia Claims

Excerpts:

“I think we will have one today” that is in accord with the public interest, the F.D.I.C. chairman, Sheila Bair, said at a conference in Washington, according to The Associated Press. She did not elaborate.

...
A showdown between two of the nation’s largest banks over Wachovia has grown into a widening battle involving two courts and a cast including the Federal Reserve chairman, Ben S. Bernanke, and an army of bankers, lawyers and other regulators. With financial markets already unnerved by the crisis in the global economy, Mr. Bernanke and Timothy F. Geithner, the president of the Federal Reserve Bank of New York, have sought to spur the parties toward a resolution over the weekend. One option is to split Wachovia’s banking operations into two regions.

Mr. Bernanke had several telephone calls with Citigroup’s chief, Vikram S. Pandit, and Wells Fargo’s chairman, Richard M. Kovacevich, to try to resolve the dispute, according to two people briefed on the calls. The two banking executives never spoke directly to each other, one of those people said. Mr. Bernanke also briefed Treasury Secretary Henry M. Paulson Jr. on the discussions.

The Fed: "between a rock and a hard place"

Higher inflation makes Fed’s job a lot tougher

Excerpt:

With the economy slowing and the housing market stuck in reverse, Wednesday’s surprise pop in the government's monthly inflation data was not good news for the Federal Reserve.

The problem: Central bankers now find themselves between a rock and a hard place in trying to meet their dual goal of setting interest rates low enough to get the economy moving again while keeping rates high enough to keep prices in check.

The Fed can’t do both. But given the ongoing turmoil in the capital markets — and the risk of a credit crunch that could do even more damage to the fragile economy — Fed watchers say inflation-fighting is taking a back seat.

Comment: Add this: The need to avoid Stagflation

---

Funny thing at work today:

The three rules of public speaking: know your audience, your your limitations, and keep it simple.

I was in a meeting today that was over Net-Meeting. I was in a conference room with the presenter and a guy from finance. The presentation was via PowerPoint and had over 30 slides. Midway through the meeting, my eyes were growing dim but I fought to stay awake. The finance guy to my left dozed off completely. At one time he had his head on the conference table. The humor of this kept me alert.

The downside of interest rate cuts

The darker side of interest rate cuts

Excerpt:

Compelling as it may be, a rate-cutting policy may not always have the desired salutary effect; after all, Japan effectively had interest rates of near-zero percent for years without emerging from its economic gloom. And it carries its own costs. Lower rates boost the economy by making big purchases such as houses more affordable. They can also help banks rebuild their balance sheets, by enabling them to borrow at lower rates and lend at higher ones. But lower rates also tend to reduce the value of the dollar, which has already fallen sharply in recent years amid a surge in U.S. consumption funded by overseas borrowing. Further declines in the dollar raise the risk of boosting inflation, which hurts consumers by reducing their purchasing power.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., says the Fed's latest round of rate cuts risks adding to pressure on the dollar. He notes that unlike the Fed, the European Central Bank has been holding its interest rate target steady. So the latest Fed rate cut puts U.S. short-term interest rates, at 3.5 percent, below the 4 percent level of the euro zone. That differential tends to make the euro, which has already appreciated sharply against the dollar in recent years, even more attractive to investors shopping for places to put their money.

Indeed, currency analysts at Merrill Lynch wrote this week that they expect the dollar to fall further if the Fed continues to cut rates. The analysts write that they see dollar negatives in the "the erosion of the [dollar] as a safe haven, the lack of private sector buying, central bank flows and a widening interest rate differential." The worries about the strength of the dollar point to the Achilles heel of the U.S. economy: the fact that U.S. consumers have been financing their consumption by borrowing cheaply overseas.


Comment: Summary: rates go down, Dollar devalues. Gold goes up (most people don't care) but so does oil (and most people do!)

Central banks: "between Scylla and Charybdis"

Crisis may make 1929 look a 'walk in the park'

Excerpt:

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.

The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other," he says.

New York's Federal Reserve chief Tim Geithner echoed the words, warning of an "adverse self-reinforcing dynamic", banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.

...

Yet still the central banks shrink from seriously grasping the rate-cut nettle. Understandably so. They are caught between the Scylla of the debt crunch and the Charybdis of inflation. It is not yet certain which is the more powerful force.

America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.

This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.



Comment: Meaning of "between Scylla and Charybdis" (EQ "between a rock and a hard place")

The dilemma is this: Normally declining interest rates fuel the economy by stimulating borrowing and spending. But this action also pushes inflation. The credit markets are so uncertain becauase investors are unclear about the real value of the underlying securities (compare Caveat Emptor in the financial markets). The fear is stagflation: out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually recession.

The right answer: absolutely nothing

How to Avoid Recession? Let the Fed Work

Excerpt:

The question on the minds of many in Congress and in the White House is this: What they should be doing now to keep the economy on track? The right answer: absolutely nothing.

This advice isn’t easy for politicians to follow. Because economic downturns mean fewer jobs and falling incomes, they are painful for many families. Voters can confuse inaction with nonchalance and send incumbents packing. But just as patients should avoid doctors who recommend radical surgery for every ailment, voters should be wary of politicians eager to treat every economic ill. Sometimes, bed rest and wait-and-see are the best we can do.

Congress made its most important contribution to taming the business cycle back in 1913, when it created the Federal Reserve System. Today, the Fed remains the first line of defense against recession.

The Fed’s control over the money supply is a powerful lever to move overall demand for goods and services. When its trading desk buys bonds and expands the money supply, it lowers interest rates and encourages the private sector to borrow and spend more. The influence of interest rates on the economy is particularly strong in housing, where buyers are rate-sensitive. Because housing woes are the source of the current slowdown, the Fed’s tool kit is well suited for the task at hand.

The recession-fighting effects of monetary expansion, however, are not limited to the housing market. When lower interest rates make fixed-income investments less attractive, investors turn to the equity market and bid up stock prices. Higher stock prices, in turn, make consumers wealthier and more eager to spend. They also make it easier for corporations to expand their businesses with equity financing.

By making United States bonds less attractive to world investors, lower interest rates from a monetary expansion also weaken the dollar in currency markets. A depreciation of the currency is not in itself to be feared. Treasury secretaries often repeat the mantra of favoring a strong dollar, but these pronouncements are based more on public relations than hard-headed analysis.

Comment: Good article about "The Fed"

What will the Fed do?

Fed will act as needed to protect economy from market turmoil, official says

"The Federal Reserve will continue to monitor developments in financial markets and act as needed to support the effective functioning of these markets and to foster sustainable economic growth and price stability," Kroszner said in a speech here to the Institute of International Bankers.

....

Some economists believe the Fed will lower an important interest rate at the end of a two-day meeting next Wednesday, to help bolster economic activity. But others, citing the economy's resiliency and worries about an inflation flareup, think the Fed will leave rates alone. Oil prices, which had surged to record highs in recent weeks, have eased a bit but are still hovering above $86 a barrel.

It's a delicate situation facing the Fed.

To prevent the ill effects of the credit crunch and housing troubles from sinking the economy, the Fed in September sliced a key interest rate by a bold one-half percentage point to 4.75 percent. It was the first rate cut in more than four years.

Before that aggressive move, the Fed had taken other actions to deal with the credit crises, which had taken a turn for the worse in August. The Fed pumped billions of dollars into the financial system to help banks and other institutions get over the credit hump. It also reduced its lending rate to banks.


Comments: I predict a .25% rate cute. Not a good time to be selling a house! Still a good time to be buying stocks! I don't see the housing market recovering for some time (perhaps more than a year!). Meanwhile ...

IMF chief warns dollar may suffer 'abrupt fall'

Excerpt:

The head of the International Monetary Fund, Rodrigo Rato, warned Monday there are risks of an "abrupt fall" in the dollar, linked to a loss of confidence in dollar assets.

"There are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets," Rato told the IMF board of governors.

He also appeared to suggest that Europe could take steps to temper the strong appreciation of the euro.

"There is a risk that exchange rate appreciation in countries with flexible exchange rates -- including the euro area -- could hurt their growth prospects, and that in these circumstances protectionist pressures could worsen," he said on the final day of the annual meetings of the IMF and the World Bank.

The outgoing IMF managing director spoke as the European single currency hit a new high of 1.4347 dollars and global equity markets tumbled amid growing fears a US housing-related credit crunch could pitch the world's biggest economy into recession.

"The uncertainty ... comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign economic environment of recent years for granted," he said.

"We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn."

A crisis in the risky US subprime mortgage sector, where loans are given to homebuyers with poor credit histories, erupted this year as borrowers defaulted on mortgages amid rising interest rates and a sharp slump in US housing prices.


The spillover of the US credit crunch into global financial markets roiled stock markets worldwide in August and although they have recovered somewhat, the uncertainties of the extent of the credit problems continues to weigh on investors.