Weekday NEWS to Comfort the Disturbed and Disturb the Comfortable.
Mon 08.25.2008
At the Fed, a Debate Over Countering Inflation Grows Louder JACKSON HOLE, Wyo. - With the decline in oil prices, inflationary pressures are easing for the moment. The Federal Reserve’s policy makers all acknowledge as much. But that has not halted their debate over whether to raise interest rates now to avoid higher inflation in the future. The issue moved to a broader forum over the weekend: the Fed's annual gathering in this mountain resort. The event drew central bankers and economists from abroad, the latter sometimes quite critical of what America’s central bank has done. "The Fed overreacted to the slowdown in economic activity," Willem H. Buiter, a professor of European political economy at the London School of Economics and Political Science, declared in his presentation, offering harsh criticism of his hosts. The Fed, he added, "cut the official policy rate too fast and too far and risked its reputation for being serious about inflation."
Bernanke, Buiter, Draghi Diverge on How to Forestall Crises One year into the financial crisis, central bankers and scholars at the Federal Reserve's annual retreat this weekend couldn't agree on how to prevent a repeat. Fed Chairman Ben S. Bernanke, European counterpart Jean- Claude Trichet, former officials and economists meeting in Jackson Hole, Wyoming, split over whether central banks should be made responsible for financial stability and how closely to heed the concerns of Wall Street. "We shouldn't delude ourselves into thinking we are going to build a panic-proof system,'' former Fed Vice Chairman Alan Blinder, who attended the conference, said in an interview with Bloomberg Television. "But there are choices between less and more panics, more virulent ones, less virulent ones, and that is the way we want to push the system.''
Worrisome Stagflation Becomes More Real All the Time U.S. Federal Reserve Chairman Ben S. Bernanke didn’t use the "S" word - stagflation - but he might as well have. On Friday, the U.S. central bank chief said that the financial crisis that has hammered the U.S. market is combining with rising inflation to eviscerate American economy. Together, the two forces are making it extremely difficult for the Fed to restore economic stability in the U.S. market. Bernanke apparently welcomed the recent drop-off in the prices of oil and other key commodities - and says that inflationary pressures will moderate over the next year and a half, but also cautioned that the current inflation outlook remains highly uncertain. The upshot: The Fed will monitor the economic situation closely and will "act as necessary" to make sure that inflation doesn’t get out of hand. These dueling cross-currents - a sputtering economy and racing prices - is stagflation, the potentially ruinous manifestation that was once thought to be a theory only, meaning it couldn’t possibly show up in real life. That changed in the 1970s, when soaring energy costs and a collapsing U.S. global competitiveness combined to send the American economy into a tailspin. When the inflation rate peaked at 13.5% in 1981, then-Fed Chairman Paul A. Volcker had to put short-term interest rates up to more than 20% to finally break inflation’s back. Let’s hope that’s not happening again.
Home Buyers Hold Fate of U.S. Economy The willingness and ability of Americans to come back into the housing market over the next few months will determine whether the U.S. economy experiences a mild downturn or the deepest recession in 30 years. Many economists say that home prices have another 10 percent to fall to bring them into balance with rents and incomes. A fall of that magnitude would elicit a huge sigh of relief from Wall Street and Washington. But it wouldn't take much — a further clampdown by private lenders or a meltdown at mortgage finance companies Fannie Mae and Freddie Mac — to push home prices down much more severely, perhaps more than 20 percent. "That's how you could quickly get into this darker scenario," said Mark Zandi, chief economist with Moody's Economy.com. If banks tighten lending standards further, denying loans to borrowers with good credit histories, affordability won't be enough to keep people buying homes. And a sharper housing bust would leave deep scars in consumer sentiment, which would likely lead to a deep recession.
Lehman's clock is ticking As a Korean bank signals interest in a deal, pressure mounts on CEO Dick Fuld to do something fast. Lehman Brothers' latest march toward the once-unthinkable price of $10 a share was interrupted when a Korean bank expressed interest Friday in the struggling brokerage firm. The question now is whether CEO Dick Fuld is willing to reciprocate. A spokesman at the Korea Development Bank in Seoul said Friday that the state-run firm "is considering all kinds of options [with respect to] Lehman Brothers," including an outright purchase. The news sent Lehman's stock, which has lost three-quarters of its value this year as investors worry about potential losses on the firm's big mortgage portfolio, up more than $2, to $15.93 a share in heavy trading. The shares closed up 69 cents at $14.41. A Lehman spokesman declined comment on the story. But the market was upbeat because Fuld - after weeks scouring the globe for a strategic investor and getting rebuffed at every turn - now has a chance to do a deal that will put the firm on stronger footing.
Rapid rise of dollar may endanger U.S. and world economies The dollar is enjoying its strongest rally in three years largely because of bad news outside the United States rather than good news at home. Just as the dollar's swift decline earlier this year set off alarm bells with world policy makers who were worried that it was contributing to inflation, a swift rise that hurts U.S. exports would not be welcome, either. Currencies are typically viewed as proxies for their underlying economies, and the dollar is no exception. What makes it somewhat unusual is that it is the dominant currency of global trade. And its movements are intricately linked to the price of oil, which in turn has vital importance for the world economy.
What Will Mac ’n’ Mae Cost You and Me? THE inevitability of a taxpayer-funded bailout of Freddie Mac and Fannie Mae, the hobbled mortgage behemoths, shook investors last week, and shares in both companies plummeted on fears that existing stockholders would be wiped out. These government-sponsored entities guarantee or hold $5.2 trillion in mortgages and have been hammered by defaults across the nation. Fannie Mae’s shares closed on Friday at $5, down from almost $70 a year ago. Freddie Mac fell to $2.61, which is down from about $65. Their heavily leveraged balance sheets magnify even a small rise in delinquencies. There is no certainty about what form a Mac ’n’ Mae rescue would take. Naturally, this is giving investors the jitters. Up and down Fannie’s and Freddie’s capital structure, debt and equity holders want to know how a bailout would affect them. It is widely assumed that debt issued by Fannie and Freddie will be backed by the taxpayers. Call it “too big to fail times two."
Seeing Red: Buffett, Others Clash On Danger Posed by U.S. Debt Two long-term views of the U.S. economy were on vivid display at a town hall meeting here Thursday night, with the world's richest person on one side and pretty much everybody else on the other. there is general agreement that times are tough in the short term -- the markets are flighty, foreclosures are widespread and jobless claims remain high -- there is sharp disagreement on what the future holds. Some, such as super-investor Warren E. Buffett, believe that the economy is merely experiencing a "correction" and that subsequent generations of Americans will have a much higher standard of living than those alive today.
Libor Signals Tighter Credit as Banks Balk at Lending Most of the bond strategists and salesmen that Resolution Investment Management Ltd.'s Stuart Thomson talked to last August expected the credit crunch to be long over by now. Instead, money markets show there's no end in sight, and it may even worsen. "It's like an ongoing nightmare and no one is sure when we're going to wake up,'' said Thomson, a money manager in Glasgow at Resolution, which oversees $46 billion in bonds. "Things are going to get worse before they get better.'' In a replay of the last four months of 2007, interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens. Binit Patel, an economist in London at Goldman Sachs Group Inc., said in an Aug. 21 report that nations accounting for half of the world's economy face a recession.
U.S. and global economies slipping in unison Economic trouble has spread far beyond the United States to major countries in Europe and Asia, threatening businesses around the world with the loss of the international sales and investment that have become increasingly vital to their sustenance. Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Foreign demand for American goods and services was supposed to continue compensating for waning demand in the United States.
In the Ruins of the Housing Boom, the Price of an Illusion ELLIE WOOTEN, the likable mayor of this likable Central Valley city, is on her way to the office when her cellphone rings. A constituent wants her mortgage payments reduced, and is hoping that the mayor has some clout with her lender. Although Merced has one of the highest foreclosure rates in the country, this borrower isn't in such dire straits. She's not even behind on her mortgage. But her oldest daughter is turning 18, which means an end to $500 a month in child support. She just wants a better deal. The mayor hangs up and shrugs: "It's a surprise her daughter is turning 18? You'd think she could have planned ahead." But hardly anyone in Merced planned very far ahead. Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth.
Bad Begets WorseHow the Mortgage Giants Lead The Market Deeper Into Crisis Fannie Mae and Freddie Mac are giants of the mortgage finance industry. But to investors, they're rapidly shrinking. And as they struggle, they're taking the housing market with them, reinforcing a downward spiral in which their troubles translate into pricier home loans and increasing foreclosures, in turn further undermining the companies. "Right now you have a giant negative feedback loop," said Paul Miller, an industry analyst at Friedman, Billings, Ramsey Group. "How you break it, I don't know." About 70 percent of newly issued mortgages are owned or guaranteed by Fannie Mae and Freddie Mac. Without this financial backing, the banks and other lenders who typically make home loans would no longer be able to do so. The housing market could collapse.
Oil rises as dollar weakens Oil up near $115 a barrel, dollar weakness seen as main driver Oil prices edged up to nearly $115 a barrel Monday as the U.S. dollar lost some ground against the euro and the Japanese yen, making commodities more attractive to investors. By afternoon in Europe, light, sweet crude for October delivery was up 38 cents to $114.97 a barrel in electronic trading on the New York Mercantile Exchange. The contract tumbled $6.59 on Friday to settle at $114.59 a barrel. Analysts said this week -- with U.S. markets headed toward the Labor Day holiday next Monday -- would likely be characterized by volatile prices and low trading volumes.
Merrill Lynch settlement with SEC worth up to $7B Federal regulators said Friday that investors who bought risky auction-rate securities from Merrill Lynch & Co. before the market for those bonds collapsed will be able to recover up to $7 billion under a new agreement. The largest U.S. brokerage will buy back the securities from thousands of investors under a settlement with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators over its role in selling the high-risk bonds to retail investors. Under that deal, announced Thursday, Merrill agreed to hasten its voluntary buyback plan by repurchasing $10 billion to $12 billion of the securities from investors by Jan. 2. Merrill also agreed to pay a $125 million fine in a separate accord with state regulators. The $330 billion market for auction-rate securities collapsed in mid-February.
Wall Street bailout aid questioned at Fed event JACKSON, Wyo. (AP) -- Do Washington policymakers listen too much to Wall Street? A possible bailout of Fannie Mae and Freddie Mac, on the heels of similar action involving investment firm Bear Stearns, seems to send a loud signal to financial companies that the government will clean up their messes. That's the feeling of some analysts and academics here Saturday, the final day of a high-profile economics conference. The Federal Reserve's handling of the worst financial crisis to hit the country in decades spurred much debate. "The Fed listens to Wall Street," said Willem Buiter, professor of European political economy at the London School of Economics and Political Science. "Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole," he wrote in a paper presented to the conference.
Fed's Bernanke Proposes 'Macroprudential' Systemwide Oversight The experience of the Bear Stearns liquidity crisis has led Federal Reserve Chairman Ben Bernanke to suggest that financial infrastructure needs to be improved at both the "software" and "hardware" levels. He said a systemwide focus for financial regulation, or macroprudential oversight, could reduce moral hazard, broaden the mandate of regulators and even develop a more fully integrated overview of the entire financial system. Bernanke said the Fed's actions to bail out Bear Stearns in March were necessary and justified, yet he noted "particularly thorny issues" arise when the government intervenes in a financial crisis. In order to mitigate increased moral hazard from the assumption that the Fed views some firms as "too big to fail," he said countervailing action must be taken.
Fed Funds Futures Hold off Rate Hike Speculation after Bernanke Speech In the aftermath of Federal Reserve Chairman Bernanke's speech on financial stability, Fed funds futures are pricing in a 90% chance that the Federal Reserve will hold off on increasing rates at the next meeting scheduled for September 16. Bernanke, speaking at the annual Federal Reserve retreat, said the inflation outlook is uncertain but added that the Fed will act as needed to ensure "medium term" price stability. Bernanke added that falling commodity prices and the rising U.S. dollar will help moderate inflation for this year and the next year.
Falling Commodity Prices and Rising Dollar Are Promising Signs, Says Bernanke Falling commodity prices and a stable U.S. dollar are encouraging signs for the American economy, Federal Reserve Chairman Ben Bernanke said while speaking in Jackson Hole, Wyoming on Friday. Bernanke, speaking at the annual Federal Reserve retreat, said the inflation outlook is uncertain but added that the Fed will act as needed to ensure "medium term" price stability. "Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided," Bernanke said. "Its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment."
Police Raid Islamic Offices in Galilee Dozens of police and intelligence personnel swooped down on Al Aqsa offices of the Islamic Movement in the Lower Galilee city of Um el Fahm Saturday night and seized money, computers and documents that linked the organization with Hamas. The money was intended for activities in Jerusalem, which were sponsored by the movement's leader, Sheikh Raad Salah. He has accused Israel of building a synagogue under the Temple Mount's Al Aqsa mosque. Um al Fahm is a large Arab city located several miles east of Hadera, southeast of Haifa, and has increasingly become a hotbed of anti-Israeli incitement. Rice's Visit is 17th Trip in Two Years American Secretary of State Condoleezza Rice's visit to Israel this week will be the 17th time in two years she has visited the region. Expectations are low that she will succeed in her newest bid to forge an agreement by Prime Minister Ehud Olmert and Palestinian Authority (PA) chairman Mahmoud Abbas on the establishment of a new Arab country. She is expected to meet together with Foreign Minister Tzipi Livni and senior PA negotiator Ahmed Qureia. American President George W. Bush has said he wants an agreement signed before he leaves office in January. Prime Minister Olmert told a Knesset committee weeks ago that there was "no practical possibility" of reaching an agreement within the time frame set by President Bush.
Area around Nano car plant at Singur turned into a fortress Singur, Aug 24 (PTI) The area around the Tata Motors Nano car plant here turned into a fortress with massive deployment of security for Trinamool Congress' indefinite dharna from today. Over 2,000 police personnel were deployed and the gate of the Tata Motors unit was barricaded with policemen on watch towers keeping close watch and water cannons kept ready. Trinamool Congress chief Mamata Banerjee is scheduled to address a meeting from a specially erected platform near the gate of the Tata Motors project to demand return of 400 acre to farmers who were unwilling to part with their land.
Columbian Bank and Trust of Kansas Closed by U.S. Regulators Columbian Bank and Trust Co. of Topeka, Kansas, was closed by U.S. regulators, the nation's ninth bank to collapse this year amid bad real-estate loans and writedowns stemming from a drop in home prices. The bank, with $752 million in assets and $622 million in total deposits, was shuttered by the Kansas state bank commissioner's office and the Federal Deposit Insurance Corp., the FDIC said yesterday in a statement. Citizens Bank and Trust will assume the failed bank's insured deposits. Columbian Bank's nine branches will open Aug. 25 as Citizens Bank and Trust offices, the FDIC said. Customers can access their accounts over the weekend by writing checks or using ATM or debit cards.
Regulators close Kansas bank State and Federal regulators shut down Columbian Bank and Trust of Topeka, Kan. -- the ninth bank to fail so far this year and the fifth since mid-July. The Federal Deposit Insurance Corp. estimates the failure will cost its deposit insurance fund $60 million. Columbian Bank and Trust had $752 million of assets and $622 million of deposits as of June 30, the FDIC said. The insured deposits of the failed bank, which had nine branches, were sold to Citizens Bank and Trust of Chillicothe, Mo. Also, Citizens Bank and Trust agreed to buy $85.5 million of Columbian Bank and Trust's assets.
----------------- Election News ------------
Clinton delegates back Obama, but poll shows concern Delegates to the Democratic National Convention arrive in Denver having largely put aside the deep divisions of the primary fight between Senators Barack Obama and Hillary Rodham Clinton, although some hold lingering concerns about Obama's level of experience, according to a New York Times/CBS News poll. More than half of the delegates that Clinton won in the primaries now say they are enthusiastic supporters of Obama, and they also believe he will win the presidential election in November, the poll found. Three in 10 say they support Obama but have reservations about him or they support him only because he is the party's nominee. Five percent say they do not support him yet.
It's official: Joe Biden is Barack Obama's pick Joe Biden would bring considerable foreign policy experience to the Democratic ticket. Sen. Barack Obama has chosen Delaware Sen. Joe Biden as his running mate on the Democratic ticket in the race for the White House. Obama announced the selection of Biden on his Web site early Saturday, and a text message went out shortly thereafter: "Barack has chosen Senator Joe Biden to be our VP nominee." The new teammates were to make their first public appearance together later in the day at a rally at the Old State Capitol in Springfield. News started circulating of Biden's selection late Friday as media reported Obama had alerted a number of his top candidates for vice president that he had chosen another. Then speculation swirled around Biden. Biden, 65, has been a fixture in the Senate since 1973 when Obama was 11 years old. He is the chairman of the Foreign Relations Committee and would bring considerable foreign policy heft to the ticket at a time when Republicans increasingly are focusing on Obama's lack of experience in that arena.
Obama VP Pick Joe Biden: Good on Civil Liberties, Friendly to Hollywood Though he's known best for his foreign policy credentials, the 66-year-old senator's work on the Senate Judiciary Committee has put him in the middle of most of the defining issues of the internet age -- epic fights over intellectual property, privacy and antitrust law. The role of the vice president in influencing an administration's tone and policy varies with the character of the executive teams occupying the White House, but as Al Gore demonstrated while Bill Clinton's vice president, there are plenty of opportunities for the veep to push specific items to the top of the agenda. "They can be a thought leader, a convener, a driver of national strategy, an exhorter to industry," said Larry Irving, a former adviser to the Clinton White House, earlier this week. Biden Joins Obama on Democratic Ticket $$ Barack Obama used his first joint appearance with his vice-presidential nominee, Sen. Joseph Biden, to push a more populist economic message, emphasizing his running mate's blue-collar roots and painting Republican Sen. John McCain as out of touch. "This working class kid from Scranton and Wilmington has always been a friend to the underdog," Sen. Obama said of Sen. Biden, of Delaware, to the 35,000 people gathered outside the Old State Capital, the same site where he declared his candidacy 19 months ago. The two men plan to take a tour of economically stressed swing states before arriving together in Denver for their party's nominating convention, which opens on Monday.
RSS
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/quotes_7a.gif)