Archive for September, 2009

• WaPo Rewrites History
  Eddy Elfenbein, September 28th, 2009 at 11:23 am

  The Washington Post runs a very deceptive article today claiming that community groups warned the Federal Reserve about subprime loans and the Fed repeatedly ignored them.
  In fact, the groups were complaining about the interest rate charged on the loans, not on the subsequent housing bubble. The Post writes: “Subprime mortgage lending sneaked up on the Federal Reserve.”
  Not at all. The Fed knew about subprime and fully encouraged it. Here’s Greenspan quoted four years ago in, of all places, The Washington Post:

  “Where once-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately,” he said in a speech. “These improvements have led to rapid growth in sub-prime mortgage lending; indeed, sub-prime mortgages account for roughly 10 percent of the number of mortgages outstanding, up from just 1 or 2 percent in the early 1990s.”

  That’s not all. In June, Connie Bruck wrote in the New Yorker:

  In 1992, a landmark study by the Federal Reserve Bank of Boston made it clear that there were systemic underwriting issues relating to the treatment of African American and Hispanic borrowers. Policymakers called upon the mortgage industry to change their practices and redouble their efforts to better serve minorities and underserved communities.

  If the community organizers had their way, the bubble would have been far worse, and their communities would be far more disorganized.

• Earnings Revisions At Two-Year High
  Eddy Elfenbein, September 28th, 2009 at 10:18 am

  Bespoke notes that analysts are becoming more bullish:

  Our daily tracking of analyst revisions for stocks in the S&P 1500 shows that over the last four weeks, 578 companies in the S&P 1500 have seen their earnings estimates increase, while 389 have seen their numbers cut. This works out to a net of 189, or 12.6% of the index. As shown in the chart below, this is the highest level since at least the start of 2008 (red line), and is a major improvement off of where we were six months ago, when the net earnings revision ratio was closer to “-50%”. While analysts are typically thought of as being behind the curve, so far this year they have done a good job of leading the market. When equities bottomed in March (blue line), analyst revisions were already well off their lows of the year.

  I should add that analysts aren’t so much as increasing their earnings estimates, they’re softening the earnings plunges. Still, it’s how bull markets start and it’s another reason why this isn’t a bear-market rally.

• Taleb Watch
  Eddy Elfenbein, September 28th, 2009 at 10:03 am

  Joe Weisenthal spots bigmouth Nassim Taleb in the news again.

  “Bernanke, Geithner and Summers didn’t see the crisis coming so why are they still there?” Taleb told a group of business people in Hong Kong. Bernanke is like “a pilot who didn’t see a hurricane,” he added.

  Joe shrewdly notes, “We thought prediction was basically impossible.” Not only is Taleb’s comment silly, which they usually are, but this time Taleb’s metaphor shows a fundamentally misunderstanding of what a central does. And as far as predictions go, Taleb isn’t doing so hot. Just five months, he was saying that today’s crisis is “vastly worse” than the Great Depression.
  Now that it looks like the recession has past, the GDP numbers will soon reveal how far off the market Taleb was. He also chimed in on financial regulation.

  Many people, such as traders, benefit from these black-swan events and it’s up to regulators to ensure rules and disincentives are in place to discourage them from triggering these occurrences, he said.

  That’s exactly the wrong approach. The problem is that our regulators have tried to design a system that’s impossible to break. Instead, their focus should be on making a system that’s easy to fix.

• Time May Sell Time Magazine
  Eddy Elfenbein, September 26th, 2009 at 12:42 pm

  Unthinkable.

  Time Warner Inc will eventually sell the Time Inc magazine unit and could buy holdings in its core entertainment category, Gordon Crawford, its largest shareholder, said during a presentation this week.
  “Time Warner just spun off their cable division, they are going to sell their print division, they are going to spin off AOL and they’re just going to be Warner Brothers, HBO and the Turner Networks,” said Crawford, managing director of The Capital Group.
  “Now, they will make acquisitions … but they’re probably going to buy just stuff in their wheel house of those businesses. They’re not going to, I don’t think, go very far afield from their core competency.”

• Guess What Bank Has Made $33 Billion This Year?
  Eddy Elfenbein, September 26th, 2009 at 12:20 pm

  Give up?

  (more…)

• Sand Animation
  Eddy Elfenbein, September 26th, 2009 at 11:54 am

• Museum Day
  Eddy Elfenbein, September 25th, 2009 at 4:01 pm

  Tomorrow is Museum Day! Hundred of museums are letting folks in free of charge.
  You can download an admissions card here, and see what museums are participating.

• Kevin Warsh In Today’s WSJ
  Eddy Elfenbein, September 25th, 2009 at 3:11 pm

  Kevin M. Warsh of the Federal Reserve wrote an op-ed in today’s Wall Street Journal titled “The Fed’s Job Is Only Half Over.”
  I’ve read the article twice and it’s one of the platitudinal pieces I’ve ever read. I’m not expecting high prose from an economist, but man, this writing is dry. It reads like a committee report, which it may be. All Warsh does is restate the title about a dozen times.
  Here are some choice excerpts:
  “We are at a critical transition period, of still unknown duration, and we must prepare diligently for an uneven road race ahead.”
  “And our policy judgments will ultimately prove worthy of the accolades, and tender the ultimate rejoinder to our critics, if we rise to meet this heightened responsibility. I am confident we will.”
  “That outcome will require that policy makers have equal parts capability, clairvoyance and courage—perhaps the most important of which is courage.”
  “A nimble, even-handed approach toward our risk-management challenges will prove necessary.”
  “Today, even more than usual, we should maintain considerable humility about optimal policy.”
  “Financial market developments bear especially careful watching.”
  “Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.”

• The Argument Against HR 1207
  Eddy Elfenbein, September 25th, 2009 at 11:39 am

  You don’t hear it much, but there is principled opposition to Ron Paul’s HR 1207 bill to conduct full audits of the Federal Reserve. This is from Scott G. Alvarez’s testimony today to the House Financial Services Committee:

  Through its investigations and audits, the GAO typically makes its own judgments about policy actions and the manner in which they are implemented and makes recommendations to the audited agency and to the Congress for policy changes or future policy actions. Accordingly, financial markets likely would see the grant of audit authority to the GAO with respect to monetary policy as undermining the Federal Reserve’s independence in this crucial area, particularly because GAO audits or the threat of a GAO audit could be used both to second-guess the Federal Reserve’s monetary policy judgments and to try to influence subsequent monetary policy decisions.
  Permitting GAO audits of monetary policy also would likely cast a chill on monetary policy deliberations if policymakers believed that GAO audits would result in early publication and analyses of their policy discussions. Unfettered and wide-ranging internal debates are essential to identifying the best possible policy options for achieving maximum employment and stable prices in light of data that may be conflicting or, at best, ambiguous as to the optimum policy path.
  Moreover, publication of the results of GAO audits related to monetary policy actions and deliberations would complicate and interfere with the FOMC’s communications to the markets and the public about current economic conditions and the appropriate stance of monetary policy. Households, businesses, and financial market participants would understandably be uncertain about the implications of the GAO’s findings for future decisions of the FOMC, thereby increasing market volatility and weakening the ability of monetary policy actions to achieve their desired effects.
  The exception from GAO audit for monetary policy matters rightfully extends to the Federal Reserve’s use of market credit and liquidity programs to support the functioning of financial markets, stimulate the economy, and unfreeze credit markets. During the crisis, as use of the federal funds rate and discount rate to achieve policy objectives became constrained by the zero bound, the Federal Reserve established several broadly available market credit facilities.8 These broad-based facilities are fundamentally different from the institution-specific loans that the Federal Reserve has made and that are already subject to GAO audit. These broader market facilities are designed to unfreeze credit markets and lower interest rate spreads and are a natural extension of the traditional central bank responsibility to serve as a backup source of liquidity during periods of financial strain.9 In this way, these facilities represent an essential part of the Federal Reserve’s efforts to promote financial stability and its monetary policy objectives.
  Permitting GAO audits of discount window lending and the broad liquidity facilities that the Federal Reserve uses to affect credit conditions generally could reduce the effectiveness of these facilities in promoting financial stability, maximum employment, and price stability. Experience, including during the current financial crisis, shows that banks’ unwillingness to use the discount window can result in high and volatile short-term interest rates and greatly limit the effectiveness of the discount window as a tool to enhance financial stability. Indeed, one of the important difficulties that hampered the effectiveness of the Federal Reserve’s early response to the crisis was the unwillingness of many banks to draw discount window credit because of concerns about stigma; institutions were concerned that, if their discount window borrowing from the Federal Reserve became known, they would be subject to adverse reactions from the market or other sources. Authorizing the GAO to audit the discount window and other broad-based lending programs could significantly increase potential borrowers’ fears of stigma and adverse reactions.
  H.R. 1207 would completely remove the exceptions from GAO audit in current law for monetary policy and discount window deliberations and operations, thereby allowing frequent and ongoing audits in these areas. Financial market participants likely would see passage of H.R. 1207 as a substantial erosion of the Federal Reserve’s monetary policy independence. Accordingly, enactment of the bill would tend to undermine public and investor confidence in monetary policy by raising concerns that monetary policy judgments in pursuit of our legislated objectives would become subject to political considerations.

  (Via: Alea)

• Tall Paul
  Eddy Elfenbein, September 24th, 2009 at 2:20 pm

  At 82, Paul Volcker is well worth listening to.