What can you say about yesterday's equity index responses to the announcement that six large-country central banks, and the ECB, provided coordinated dollar funding support to European financial concerns? This news, along with a optimistic ADP payroll forecast, drove the S&P500 Index up 4.3%.
But if you listened to various pundits on CNBC and Bloomberg television, the news wasn't actually so good. It gradually dribbled out that un unnamed European bank was set to go bankrupt over this coming weekend from insolvency due to an inability to replace lost dollar funding. The credible pundits, people like El Erian of PIMCO and Alan Meltzer, for example, were relieved with the immediate move, but remain concerned that the longer-term problems in the Euro zone remain unresolved. Meltzer advocated a two-track Euro, effectively saying he believes the currency, as we now know it, is finished.
But let's be blunt, if seemingly cynical.
What you heard from the asset management community was a gigantic sigh of relief that these six central banks have put their taxpayers' incomes behind promises to dollar-fund failing European banks, thus providing a free floor under the values of those managers' portfolios.
This is the sort of hyper-global crony capitalism against which Occupy Wall Street rails, only most of them aren't actually sufficiently knowledgeable to understand that.
Does anyone who is informed about the history of markets actually believe that a handful of central banks, several of which, I believe, aren't exactly all that significant (Canada, Switzerland), can outgun the world's hedge funds? Recall how George Soros gained a huge leg up in his net worth by betting against the British pound, allegedly on an inside tip, and won?
What about the Baker Plaza Accords of the 1980s? When central banks go to war in the markets with fund managers, the managers typically bring more assets to bear. Yes, the banks can 'create' money, but, in doing so, depreciate the value of the currency they are printing. There's a relevant range of effective expansionary monetary policy, i.e., printing or borrowing money, with respect to time, quantity and fiscal context. Right now, the Euro nations don't have much range, the US a bit more, but, in total, global economies are phenomenally over-leveraged already.
So how is it that a Euro-zone crisis caused by over-borrowing will be solved by central banks....borrowing or printing more money to magically produce dollar funding for near-insolvent European banks?
That said, I hope you enjoyed yesterday's landmark US equities rally. I'm sure the hedge fund managers whose asset values have been saved, provided they weren't naked short Euros, or can wait out the short-term pop in the currency's value, are very pleased. Everybody who was in the market got a nice 4% or so boost in value before selling the top in the coming months.
But as Rick Santelli said on CNBC this morning, the Fed is now 'all in' backing the Euro-zone and ECB. Helicopter Ben has linked the US economy and dollar to a bunch of entitlement-loving Euro nations and their failed fiscal policies.
Showing posts with label Central Banks. Show all posts
Showing posts with label Central Banks. Show all posts
Thursday, December 01, 2011
Tuesday, June 21, 2011
Holman Jenkins On Bank Bashing
Holman Jenkins, Jr., of the Wall Street Journal wrote a thoughtful, if somewhat murky piece in this past weekend's edition of the paper.
Entitled Why We Aren't Bashing Banks, Mr. Jenkins seemed to attempt to address a number of specific topics related to the Greek and European debt/bank crisis, including responding to left-wing economist Paul Krugman.
What interested me about Jenkins' article, however, were two of his contentions.
The first is that
"politicians find no upside in bashing bankers right now for good reason, since the whole game- 100%- is maneuvering the European Central Bank and its chief Jean-Claude Trichet into a more pliant mood so they will prop up Europe's banking system to permit sovereign debt restructuring to go ahead."
In effect, Jenkins, along with others, alleges that the truth is that bankers bought now-nearly-worthless Greek sovereign debt which, if carried at its correct value, would result in insolvent banks, a severely damaged European banking system, and, for good measure, no more private banking institutions to roll over and hold more of the rotten paper while the European Union figures out what to do about the mounting financial problems of larger EU countries, such as Ireland and Spain.
Thus, despite criticisms of cronyism, the regulators and central bankers are seen to be bailing out Greece, in order to bail out Europe's banks. And right now, that more or less equates to Germany bailing out the EU's banking sector.
My own fascination with this situation is how twisted and selective our international central banking and regulating authorities have become, such that they implicitly suspend the need for banks to recognize losses in value of assets they hold, so soon after the recent financial crises which involved precisely this sort of phenomenon.
Ask yourself why anyone in his right mind would own equities of large banks when such flagrant misstatement of asset values is allowed. If it weren't sanctioned by regulators, it would be called what it is- fraud.
Jenkins' second topic of interest was this passage,
"Here's guessing that a world without too-big-to-fail banks would not be bereft of financial innovation or diversified services aimed at every kind of customer."
He's probably right. My original research on consistent total return performance took place when I headed the research function at then-independent Oliver, Wyman & Co, revealed that the worst-performing financial institutions were the broadly-diversified banks. They hit every financial pothole which occurred- credit cards, mortgage lending, third-world debt, etc. The most consistently-superior performing firms were the more focused asset managers, credit card lenders and mortgage banking firms.
When income from diversified business mixes isn't used to prop up ailing units and mask weaknesses, firms tend to either succeed or fail rather dramatically.
Whether that would happen again, or not, I can't say. It may well be that we've had more financial innovation than any global economy can stand for a while. But, as Jenkins implies, with smaller, more nimble and focused financial institutions, profitable innovations would succeed, others would not, and investors in and lenders to such enterprises, rather than taxpayers, would enjoy the appropriate consequences.
Entitled Why We Aren't Bashing Banks, Mr. Jenkins seemed to attempt to address a number of specific topics related to the Greek and European debt/bank crisis, including responding to left-wing economist Paul Krugman.
What interested me about Jenkins' article, however, were two of his contentions.
The first is that
"politicians find no upside in bashing bankers right now for good reason, since the whole game- 100%- is maneuvering the European Central Bank and its chief Jean-Claude Trichet into a more pliant mood so they will prop up Europe's banking system to permit sovereign debt restructuring to go ahead."
In effect, Jenkins, along with others, alleges that the truth is that bankers bought now-nearly-worthless Greek sovereign debt which, if carried at its correct value, would result in insolvent banks, a severely damaged European banking system, and, for good measure, no more private banking institutions to roll over and hold more of the rotten paper while the European Union figures out what to do about the mounting financial problems of larger EU countries, such as Ireland and Spain.
Thus, despite criticisms of cronyism, the regulators and central bankers are seen to be bailing out Greece, in order to bail out Europe's banks. And right now, that more or less equates to Germany bailing out the EU's banking sector.
My own fascination with this situation is how twisted and selective our international central banking and regulating authorities have become, such that they implicitly suspend the need for banks to recognize losses in value of assets they hold, so soon after the recent financial crises which involved precisely this sort of phenomenon.
Ask yourself why anyone in his right mind would own equities of large banks when such flagrant misstatement of asset values is allowed. If it weren't sanctioned by regulators, it would be called what it is- fraud.
Jenkins' second topic of interest was this passage,
"Here's guessing that a world without too-big-to-fail banks would not be bereft of financial innovation or diversified services aimed at every kind of customer."
He's probably right. My original research on consistent total return performance took place when I headed the research function at then-independent Oliver, Wyman & Co, revealed that the worst-performing financial institutions were the broadly-diversified banks. They hit every financial pothole which occurred- credit cards, mortgage lending, third-world debt, etc. The most consistently-superior performing firms were the more focused asset managers, credit card lenders and mortgage banking firms.
When income from diversified business mixes isn't used to prop up ailing units and mask weaknesses, firms tend to either succeed or fail rather dramatically.
Whether that would happen again, or not, I can't say. It may well be that we've had more financial innovation than any global economy can stand for a while. But, as Jenkins implies, with smaller, more nimble and focused financial institutions, profitable innovations would succeed, others would not, and investors in and lenders to such enterprises, rather than taxpayers, would enjoy the appropriate consequences.
Tuesday, August 26, 2008
Recent Central Banking Errors
The Wall Street Journal carried an article last Saturday written by 'breakingviews.com,' the outfit that occasionally targets a good topic with substandard analysis, entitled "Honest Central Bankers..."
According to the crew at the tiny research outfit, the world's influential central bankers committed three mistakes in the recent past:
1. Failure to consider the "dangers of financial deregulation."
2. Excessive pride in managing "steady economic expansion and moderate inflation, but we should have been humble about wild asset-price inflation."
3. They were "remiss in not considering the distortions created by an annual US trade deficit the size of the Dutch economy."
I continue to be mystified as to why, with their equity interest in breakingviews.com going to zero, the Journal still publishes these lightweight pieces on the valuable top-left of the back page of the paper's Money & Investing section.
That said, the topic is worthwhile. Looking back over the past 12-14 months, we see the greatest dysfunction in credit markets at least since the late 1990s sovereign reneging on debt by Russia and the LTCM mess.
How much of this recent- and continuing- debacle is really the fault of the two major central banks, the American Fed and the EU's central bank?
If central bankers made mistakes, I don't actually think they were the three identified by breakingviews' analysts.
Once a nation decides to allow substantial private monetization of future valuation potential, the central bank isn't really in control of the supply of liquidity or even 'money,' in its practical meaning, anymore.
When private enterprises can routinely issue large amounts of bonds, similar to what occurs in a Fed open market action, they pump up money supply totally out of the control of the Fed. There's a reason the old 1950s-era credit controls were in place. But having moved beyond that era, we really cannot now return.
The Fed and the EU central bank don't really control asset-price inflation, nor can they, except, for example, by some slight regulatory oversight to at least assure the creation of high-quality mortgage assets, instead of low- or no-down payment mortgages.
Thus, mistakes one and two aren't, in my opinion, valid accusations of central banks in this era.
Alleged mistake number three is also incorrect. Ricardian economics assumes all participants are doing something of value. Exchange rates take care of the imbalances of trade flows.
What, exactly, do the geniuses at breakingviews suggest the central banks should have done to affect commercial trade flows between nations and currencies? Return to old-style, fixed or pegged exchange rates?
Once again, this is a non-issue for central banks.
The one thing I believe of which the central bankers were and are guilty is simple misperception of the consistency and non-normalcy of the drivers of recent inflation- energy and commodities- as Brian Wesbury pointed out in a Wall Street Journal editorial about which I wrote, here. There was another fine editorial covering some of the same ground in the past week in the Journal, although I have forgotten who were its authors. Essentially, they correctly accused Greenspan of freely spending the credibility Paul Volcker had bought for the Fed with his effective breaking of inflation in the late 1970s and early 1980s, in concert with Ronal Reagan's equally-effective fiscal discipline.
Largely due to Alan Greenspan, we now see, the Fed began to unwisely pump money supply in the early 2000s, leading to today's inflation. While there are other monetizers besides the central banks in our modern economy, when the central banks inflate, it still causes inflation.
Between Greenspan's cavalier dissipation of the Fed's inflation-fighting credentials of the Volcker era, and Bernanke's political timidity last year in keeping rates high while using the Fed's discount window to assure liquidity to the collapsing financial fixed-income sector, the US central bank has all but lost its ability to convince holders of dollars that they will not be robbed of value by inflation.
Would it really have been so hard for Bernanke and his colleagues to see recent energy and other commodities price rises as the results of growing demand in economically-maturing India and China for these products in the face of poor demand forecasting by their producers?
That inflation measures including food and energy were valid because what was occurring was not seasonal or occasional price volatility, but a secular, if temporary, upward trend due to forces of supply and demand?
I honestly thought that Bernanke was smarter than he has appeared to be in the past year. Adding his indecision to the results of Greenspan's egotism have given us an inflation rate heading to heights we haven't seen since Reagan took office.
Funny, isn't it, how both US economics and political choices seem to both stand at crossroads last faced when the Gipper- and Tall Paul- were there to help our country make wise choices.
Sadly, too few Americans are of an age who recall this.
According to the crew at the tiny research outfit, the world's influential central bankers committed three mistakes in the recent past:
1. Failure to consider the "dangers of financial deregulation."
2. Excessive pride in managing "steady economic expansion and moderate inflation, but we should have been humble about wild asset-price inflation."
3. They were "remiss in not considering the distortions created by an annual US trade deficit the size of the Dutch economy."
I continue to be mystified as to why, with their equity interest in breakingviews.com going to zero, the Journal still publishes these lightweight pieces on the valuable top-left of the back page of the paper's Money & Investing section.
That said, the topic is worthwhile. Looking back over the past 12-14 months, we see the greatest dysfunction in credit markets at least since the late 1990s sovereign reneging on debt by Russia and the LTCM mess.
How much of this recent- and continuing- debacle is really the fault of the two major central banks, the American Fed and the EU's central bank?
If central bankers made mistakes, I don't actually think they were the three identified by breakingviews' analysts.
Once a nation decides to allow substantial private monetization of future valuation potential, the central bank isn't really in control of the supply of liquidity or even 'money,' in its practical meaning, anymore.
When private enterprises can routinely issue large amounts of bonds, similar to what occurs in a Fed open market action, they pump up money supply totally out of the control of the Fed. There's a reason the old 1950s-era credit controls were in place. But having moved beyond that era, we really cannot now return.
The Fed and the EU central bank don't really control asset-price inflation, nor can they, except, for example, by some slight regulatory oversight to at least assure the creation of high-quality mortgage assets, instead of low- or no-down payment mortgages.
Thus, mistakes one and two aren't, in my opinion, valid accusations of central banks in this era.
Alleged mistake number three is also incorrect. Ricardian economics assumes all participants are doing something of value. Exchange rates take care of the imbalances of trade flows.
What, exactly, do the geniuses at breakingviews suggest the central banks should have done to affect commercial trade flows between nations and currencies? Return to old-style, fixed or pegged exchange rates?
Once again, this is a non-issue for central banks.
The one thing I believe of which the central bankers were and are guilty is simple misperception of the consistency and non-normalcy of the drivers of recent inflation- energy and commodities- as Brian Wesbury pointed out in a Wall Street Journal editorial about which I wrote, here. There was another fine editorial covering some of the same ground in the past week in the Journal, although I have forgotten who were its authors. Essentially, they correctly accused Greenspan of freely spending the credibility Paul Volcker had bought for the Fed with his effective breaking of inflation in the late 1970s and early 1980s, in concert with Ronal Reagan's equally-effective fiscal discipline.
Largely due to Alan Greenspan, we now see, the Fed began to unwisely pump money supply in the early 2000s, leading to today's inflation. While there are other monetizers besides the central banks in our modern economy, when the central banks inflate, it still causes inflation.
Between Greenspan's cavalier dissipation of the Fed's inflation-fighting credentials of the Volcker era, and Bernanke's political timidity last year in keeping rates high while using the Fed's discount window to assure liquidity to the collapsing financial fixed-income sector, the US central bank has all but lost its ability to convince holders of dollars that they will not be robbed of value by inflation.
Would it really have been so hard for Bernanke and his colleagues to see recent energy and other commodities price rises as the results of growing demand in economically-maturing India and China for these products in the face of poor demand forecasting by their producers?
That inflation measures including food and energy were valid because what was occurring was not seasonal or occasional price volatility, but a secular, if temporary, upward trend due to forces of supply and demand?
I honestly thought that Bernanke was smarter than he has appeared to be in the past year. Adding his indecision to the results of Greenspan's egotism have given us an inflation rate heading to heights we haven't seen since Reagan took office.
Funny, isn't it, how both US economics and political choices seem to both stand at crossroads last faced when the Gipper- and Tall Paul- were there to help our country make wise choices.
Sadly, too few Americans are of an age who recall this.
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