"There is a $1 trillion stash of cash idling in the banking system. It's too big to ignore, and it's a cause for concern.
In normal times, banks hold a bare minimum of funds in reserve to support their liabilities. But these bank reserves now exceed the U.S. Federal Reserve's regulatory floor by $1 trillion. Before the credit crisis intensified in September last year, excess reserves—effectively cash banks hold above their regulatory requirements and usually hate holding—totaled just $2 billion.
The Fed's extraordinary policies aimed at shoring up the economy and banking system are the reason excess reserves have ballooned. As the central bank prints money to buy, say, mortgage-backed securities, much of that extra cash ends up in the banking system, potentially as excess reserves.
So why do excess reserves create disquiet?
First, inflation hawks view them with distrust. In theory, these sleeping funds could be 'activated' to support a huge volume of new loans, which in turn could fuel demand and inflation. True, the Fed can increase interest payments it makes on excess reserves, which would encourage banks to keep holding them and not activate new lending. But that works only if the Fed doesn't wait too long to raise that rate."
Monday, November 30, 2009
Saturday, November 28, 2009
Treasurys Rally on Dubai Trouble - WSJ.com
"Treasury prices rallied Friday and the market posted a weekly gain, as investors dumped stocks and commodities and sought safety in low-risk government debt amid worries about the unfolding debt problems in Dubai.
The safe-haven flows added to demand for Treasurys .... Investors at home and abroad snapped up this week's record $118 billion in sales of two-year, five-year and seven-year note supply, allowing the U.S. government to easily fund its budget shortfalls.
Friday, the 10-year Treasury note was up 21/32 point, or $6.5625 for every $1,000 invested, to yield 3.202%, down from 3.279% Wednesday as bond yields fall when prices rise.
The two-year note, a haven in times of uncertainty, was up 4/32 point to yield 0.687%. It touched an overnight low of 0.609%, close to the record low of 0.601% set on Dec. 17, 2008.
In the scramble for safety, rates on four Treasury bills maturing in January 2010 traded around negative 0.01% Friday, dipping below zero for the second time since last week. That means investors were willing to forgo the chance of earning interest and take a small loss instead to get their hands on bills—government securities of less than a year's maturity that are sold at a discount. These are typically seen as the safest types of securities."
The safe-haven flows added to demand for Treasurys .... Investors at home and abroad snapped up this week's record $118 billion in sales of two-year, five-year and seven-year note supply, allowing the U.S. government to easily fund its budget shortfalls.
Friday, the 10-year Treasury note was up 21/32 point, or $6.5625 for every $1,000 invested, to yield 3.202%, down from 3.279% Wednesday as bond yields fall when prices rise.
The two-year note, a haven in times of uncertainty, was up 4/32 point to yield 0.687%. It touched an overnight low of 0.609%, close to the record low of 0.601% set on Dec. 17, 2008.
In the scramble for safety, rates on four Treasury bills maturing in January 2010 traded around negative 0.01% Friday, dipping below zero for the second time since last week. That means investors were willing to forgo the chance of earning interest and take a small loss instead to get their hands on bills—government securities of less than a year's maturity that are sold at a discount. These are typically seen as the safest types of securities."
Lack of Candor and the AIG Bailout - Peter J. Wallison, WSJ.com
EXCERPT:
"The fact that the government itself either bought these bad loans or required them to be made shows that the most plausible explanation for the large number of subprime loans in our economy is not a lack of regulation at the mortgage origination level, but government-created demand for these loans.
.... In the administration's proposed legislation, the Consumer Financial Protection Agency would cover any business that provides consumer credit of any kind, including the common layaway plans and Christmas clubs that small retailers offer their customers.
Under the guise of addressing the causes of a global financial crisis, the Obama administration's bill would have regulated credit counseling, educational courses on finance, financial-data processing, money transmission and custodial services, and dozens more small businesses that could not possibly cause a financial crisis. ...."
"The fact that the government itself either bought these bad loans or required them to be made shows that the most plausible explanation for the large number of subprime loans in our economy is not a lack of regulation at the mortgage origination level, but government-created demand for these loans.
.... In the administration's proposed legislation, the Consumer Financial Protection Agency would cover any business that provides consumer credit of any kind, including the common layaway plans and Christmas clubs that small retailers offer their customers.
Under the guise of addressing the causes of a global financial crisis, the Obama administration's bill would have regulated credit counseling, educational courses on finance, financial-data processing, money transmission and custodial services, and dozens more small businesses that could not possibly cause a financial crisis. ...."
Tuesday, November 24, 2009
Government Deficits and Private Growth - George Melloan, WSJ.com
EXCERPT:
"For anyone who wondered if last winter's federal seizure of the financial services industry would have adverse economic consequences, an answer is now available. The credit market has been tilted to favor a single borrower with a huge appetite for money, Washington. Private borrowers, particularly small businesses, have been sent to the end of the queue.
The Federal Reserve, which supervises some 7,000 banks, has been telling bankers that they must cut risk. The most spectacular step in that effort was the Fed announcement last month that it will evaluate the salaries of bank officers on how carefully they manage risk."
"For anyone who wondered if last winter's federal seizure of the financial services industry would have adverse economic consequences, an answer is now available. The credit market has been tilted to favor a single borrower with a huge appetite for money, Washington. Private borrowers, particularly small businesses, have been sent to the end of the queue.
The Federal Reserve, which supervises some 7,000 banks, has been telling bankers that they must cut risk. The most spectacular step in that effort was the Fed announcement last month that it will evaluate the salaries of bank officers on how carefully they manage risk."
One in Four Borrowers Is Underwater - WSJ.com
EXCERPTS:
"Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.
More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value...."
"Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.
More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value...."
Lunsford put 20% down when he bought his home in Las Vegas for $530,000 in 2004. Now, he said, his home was worth less than $300,000.
"I'm to the point where I feel I will never get my head above water," said Mr. Lunsford, a retired state trooper who works for an insurance company. He said his bank won't modify his loan because he can afford his payments, and he's unwilling to walk away, he said: "We're too honest."
Monday, November 23, 2009
The Coming Deficit Disaster - Douglas Holtz-Eakin, WSJ.com
"Our fiscal situation has deteriorated rapidly in just the past few years. The federal government ran a 2009 deficit of $1.4 trillion—the highest since World War II—as spending reached nearly 25% of GDP and total revenues fell below 15% of GDP. Shortfalls like these have not been seen in more than 50 years."
Saturday, November 14, 2009
Bank of America Hits New Hurdle in CEO Hunt - WSJ.com
"Bank of AmericaCorp. directors are hitting a new hurdle as they hunt for the giant bank's next CEO: Obama administration pay czar Kenneth Feinberg.
William Demchak, senior vice chairman at PNC Financial Services Group Inc., spurned a feeler last week from a recruiter for the Charlotte, N.C., bank, according to a person familiar with the situation.
Mr. Feinberg's required approval of the compensation package for whomever succeeds Kenneth D. Lewis was a major factor in the decision, this person said. Mr. Demchak also didn't see the bank's situation as fixable given the government's heavy influence over the company.
The bank would 'get blasted' for buying out Mr. Demchak's shares in PNC, this person said. The 46-year-old executive helped turn around the Pittsburgh bank and is widely viewed as the likely successor to PNC Chief Executive James Rohr.
Such purchases are common in hirings of top company executives. According to a securities filing, Mr. Demchak earlier this year held PNC shares valued at $34.3 million based on the bank's stock price Friday.
Mr. Feinberg's role as overseer of seven companies that received huge government aid gives him enormous influence in the succession process at Bank of America. Once directors make a decision and negotiate contract terms with their chosen CEO, the compensation package must be submitted to Mr. Feinberg for approval. Mr. Feinberg declined to comment.
Some directors at Bank of America worried even before Mr. Demchak's rejection that the limits imposed by Mr. Feinberg were snarling the succession process, said a person familiar with the board's deliberations. For example, cash salaries paid to the highest-earning executives at the seven companies getting exceptional federal aid were capped at $500,000 for 2009. Without the restrictions, the pool of available candidates to succeed Mr. Lewis would be larger, this person said."
William Demchak, senior vice chairman at PNC Financial Services Group Inc., spurned a feeler last week from a recruiter for the Charlotte, N.C., bank, according to a person familiar with the situation.
Mr. Feinberg's required approval of the compensation package for whomever succeeds Kenneth D. Lewis was a major factor in the decision, this person said. Mr. Demchak also didn't see the bank's situation as fixable given the government's heavy influence over the company.
The bank would 'get blasted' for buying out Mr. Demchak's shares in PNC, this person said. The 46-year-old executive helped turn around the Pittsburgh bank and is widely viewed as the likely successor to PNC Chief Executive James Rohr.
Such purchases are common in hirings of top company executives. According to a securities filing, Mr. Demchak earlier this year held PNC shares valued at $34.3 million based on the bank's stock price Friday.
Mr. Feinberg's role as overseer of seven companies that received huge government aid gives him enormous influence in the succession process at Bank of America. Once directors make a decision and negotiate contract terms with their chosen CEO, the compensation package must be submitted to Mr. Feinberg for approval. Mr. Feinberg declined to comment.
Some directors at Bank of America worried even before Mr. Demchak's rejection that the limits imposed by Mr. Feinberg were snarling the succession process, said a person familiar with the board's deliberations. For example, cash salaries paid to the highest-earning executives at the seven companies getting exceptional federal aid were capped at $500,000 for 2009. Without the restrictions, the pool of available candidates to succeed Mr. Lewis would be larger, this person said."
Thursday, November 12, 2009
Health-Care Bill Doesn't Index for Inflation; Hits Young and Rising Middle Class Hard - WSJ.com
EXCERPT: "Buried in Nancy Pelosi's health-care bill is a provision that will partially repeal tax indexing for inflation, meaning that as their earnings rise over a lifetime these youngsters can look forward to paying higher rates even if their income gains aren't real.
In order to raise enough money to make their plan look like it won't add to the deficit, House Democrats have deliberately not indexed two main tax features of their plan: the $500,000 threshold for the 5.4-percentage-point income tax surcharge; and the payroll level at which small businesses must pay a new 8% tax penalty for not offering health insurance.
This is a sneaky way for politicians to pry more money out of workers every year without having to legislate tax increases. The negative effects of failing to index compound over time, yielding a revenue windfall for government as the years go on. The House tax surcharge is estimated to raise $460.5 billion over 10 years, but only $30.9 billion in 2011, rising to $68.4 billion in 2019, according to the Joint Tax Committee.
Americans of a certain age have seen this movie before. In 1960, only 3% of tax filers paid a 30% or higher marginal tax rate. By 1980, after the inflation of the 1970s, the share was closer to 33%, according to a Heritage Foundation analysis of tax returns...."
The return of the inflation tax demonstrates once again the stealth radicalism that animates ObamaCare. In the case of inflation indexing, Democrats would repeal a 30-year bipartisan consensus that it is unfair to tax unreal gains in income, thus hitting millions of middle-class Americans over time with tax rates advertised as only hitting "the rich...."
In order to raise enough money to make their plan look like it won't add to the deficit, House Democrats have deliberately not indexed two main tax features of their plan: the $500,000 threshold for the 5.4-percentage-point income tax surcharge; and the payroll level at which small businesses must pay a new 8% tax penalty for not offering health insurance.
This is a sneaky way for politicians to pry more money out of workers every year without having to legislate tax increases. The negative effects of failing to index compound over time, yielding a revenue windfall for government as the years go on. The House tax surcharge is estimated to raise $460.5 billion over 10 years, but only $30.9 billion in 2011, rising to $68.4 billion in 2019, according to the Joint Tax Committee.
Americans of a certain age have seen this movie before. In 1960, only 3% of tax filers paid a 30% or higher marginal tax rate. By 1980, after the inflation of the 1970s, the share was closer to 33%, according to a Heritage Foundation analysis of tax returns...."
The return of the inflation tax demonstrates once again the stealth radicalism that animates ObamaCare. In the case of inflation indexing, Democrats would repeal a 30-year bipartisan consensus that it is unfair to tax unreal gains in income, thus hitting millions of middle-class Americans over time with tax rates advertised as only hitting "the rich...."
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