Sunday, April 26, 2009

Will Doha Bounce?

Much has been made lately in equities that even a dead cat will bounce if dropped hard enough. Bears use this quip to dismiss market gains as temporary reactions to very low levels. But will this theory of stock rebounds work for a trade round that has been pronounced dead many times in its seven year run?

In their communique yesterday, the IMF hopes that some face time with pavement will do more than play on a cadaver's little-known elasticity but bring it back to live. The communique calls for completion of the Doha trade round via the World Trade Organization. The communique calls for:

4. We stress the importance of members taking account of the effects of their economic, financial, and investment policies on others, and refraining from protectionism in any form. The IMFC calls for urgently concluding an ambitious and balanced Doha Development Round, which will help boost the recovery of the global economy, and emphasizes the importance of ensuring the availability of sufficient trade finance.

As part of its crisis management solutions. Given that Doha has been held up in part over the developed world's unwillingness to make concessions on issues like agricultural subsidies, which could cost farming jobs in the US and Europe, I doubt those countries will be willing to budge now during a period of rising unemployment.  

Wednesday, April 22, 2009

Detroit Businesses Create their own Currency

It’s been a week for 19th century ideas.  Congressman Ron Paul called for the US to encourage privateers to fight piracy, Rasmussen found that some Texans are still for succession, and now Detroit businesses have invested money (US$) to form their own currencies.

Private currencies are not themselves new (see Liberty Dollars) but two things are surprising here.

1. This initiative is being sponsored by businesses. They are taking on a lot of cost for something that may not work. Especially given that deflation, not inflation, is the policy concern right now, the timing may be bad.

2. This new money is stil backed by and convertible to the US$. While convertibility is good for trade, it doesn't do much for inflation risk, especially if you are committed to a one-to-one fixed exchange rate. Unlike China, who is accused of undervaluing it's peg, the Cheers likely overvalues itself at one-to-one convertibility. Convincing new businesses to take these notes difficult.

At the same time, The Associated Press reported earlier this year that bartering, essentially a form a currency with similar liquidity problems of a private currency but without the legal restrictions is making a comeback. Of course the dollar faces little threat for a small amount of barter but all this does remind that there are alternatives to the dollar. SDR anyone?

Sunday, April 19, 2009

Are Negative Fed rates really possible?

Harvard Economics Professor Gregory Mankiw thinks so. In this morning's New York Times, Mankiw proposes having the Federal Reserve decrease the Federal Funds rate below 0 percent. The zero bound has been considered binding because reducing it further would make potential lenders better off simply holding cash than lending. Mankiw, who is well aware of the problem of hording cash provides two unlikely solutions.

The first would be a "tax" on money. Likely by dissolving all money ending in a randomly selected serial number a year from now.  Of course such a move would require some enforcement. Someone would actually have to check serial numbers in a way that would discourages businesses from accepting the now worthless bills. Not to mention the way such a move could strain both domestic and international trust in the US dollar.

Mankiw's simpler solution is to simply have the Fed promise future inflation. He writes:

Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Yet commitments from the government are difficult to obtain and even more difficult to keep and have people trust. Mankiw mentions that Bernanke seems well equipped to make such a commitment. Bernanke’s term as chairman expires at the start of 2011. The possibility of President Obama appointing an new chairman could be enough to break faith in an inflation promise. More importantly, while inflation helps borrowers, it hurts anyone whose wages are not adjusting upward to meet the new price level. While many employees have contracts that include inflation-based cost of living adjustments, non-contract, hourly workers are likely to be negatively impacted; a situation that the Fed would be pressured to avoid.

Wednesday, April 15, 2009

Fed press Confernces?

The snarky blog LoLFed scans a report from Reuters saying that the Federal Reserve is considering holding more regular press conferences. While such press meetings seek to improve communications with the general public, I'm not convinced they will add a lot. The Federal Reserve, for all it's opacity, has already added a great deal to the information it releases this year. It even put out an extensive web overview of how it conducts monetary policy and its host of new liquidity facilities.

Besides today is Beige Book day. At 2pm, the Fed will release an almost 50 page document on regional economic activity across the country. The total number of readers, probably about a dozen. I'm not sure that Fed press conferences would be any more popular.

Tuesday, April 14, 2009

Credibility: a security the Fed cannot purchase

In a speech today, Federal Reserve Chairman Ben Bernanke addressed concerns that the Federal Reserve's recent expansion could cause inflation down the road.

As a general rule, my strong preference is that any firm that cannot meet its obligations should bear the consequences of the marketplace. But recent circumstances have been truly extraordinary.
Bernanke went on to discuss the "waves of panic and fear" that impacted markets and lead to action by Treasury.
Yet these extreme cases are the ones that make providing credible threats not to intervene in the future difficult. It's easy to not intervene when only one institution is set to fail (see Lehman Brothers) but it's the systemically risky cases (see AIG one day later), where the Fed and other government agencies have the hardest time keeping their hands-off policy. This difficulty has been part of why Bernanke has asked Congress for more rules lately. While not looking to eliminate the freedom under Section 13 (3), rules from Congress could act as a backstop to the Fed's credibility.
A great post by Mark Thoma over at Economist's View, provides a great primer on Fed credibility, plus a few helpful charts.

Monday, April 13, 2009

Government Incentivizes Bigness

Actions taken under the TARP's Capital Purchase Program as of 4/2/09

This blog earlier reported criticism of Treasury’s slowness in launching its financial stability clearing house web shop. The site has been up and running for several weeks now. The site has offered little new information since launch and the data provided has been more limited than I would have expected. Yet the treasure trove that is here has barely been examined. The new site allows users to download all the purchases made under the Capital Purchase Program (CPP), one of the largest TARP measures.

A quick look at the data shows that CPP has been a program for big banks. The program gave out 54.5 percent of the $183.6 billion spent so far in its first week of operations. In that time, only seven firms received funds. The top names were not surprising: Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, and State Street Corp. Following that massive first round injection, more than five hundred firms have been funded through the program. Above I’ve carted the value of money given and the number of firms receiving funds (right axis). The smaller banks all received much smaller injections.
Additionally, while almost all the injections have involved warrants, essentially options to convert to stock the government’s investment, smaller institutions are the ones who have seen those warrants exercised. No institution in the top 40 distributions has had warrants exercised against it.

Of course, TARP passed amid financial panic; concerns about providing incentives for excessive risk-taking were subordinated to preventing a system-wide meltdown. Yet the application of CPP should be a concern for moral hazard, excessive risk-taking by those who believe they can get government bailouts, going forward.

Yet with the threat of an immediate collapse receding, the Obama administration’s Financial Stability Plan (FSP) has provided little change regarding the focus on large institutions. The new plan to buy toxic assets, the Public Private Investment Partnership, draws heavily from Paulson’s original plans for TARP. The new plan requires that applicants to manage the government subsidized funds must have at least $10 billion under management. The size restriction is designed to attract the most talented managers to the funds, without pesky executive compensation provisions, and will allow the largest firms to extract the most gains. Treasury also seeks to create a “systemic regulator” to regulate specially designated institutions. This opens opportunities mostly to the large institutions that seem to have too much risk. Allowing smaller agents to manage funds could shift risk to institutions that currently have little and reduce the chance of one large firm defaulting.

Thursday, April 9, 2009

Can I pay for that in SDR?

No, of course not.

A brief yesterday from The Economist explains why the IMF's Special Drawing Rights are not currency.

The SDR, a unit of account based on the US$, yen, pound, and the euro does allow countries to access real currency in hard times. The countries take on debt from the IMF in SDRs in exchange for currency. The SDR gained new attention late last month when members of China's central bank called for greater use of SDR in global accounting, displacing the US dollar as the standard reserve currency.

Yet as The Economist points out the SDR only really provides one of the functions of money: it's a unit of account. It's not currently a store of real value, since its essentially used to account sovereign debt, and it's not a medium of exchange. Even if you could get SDRs printed, you wouldn't be able to get your local McDonald's to take them as payment. In fact, unlike foreign currency, you wouldn't be able to find a McDonald's anywhere willing to take the SDR.

The Economist article also provides a chart that touches on another IMF issue. The injection of $750 billion proposed to the IMF at the G-20 last week will change the voting patterns of the organization. Votes are determined by funding and the new funds will re-balance this. I've copied The Economist chart to show that while the US losses a small vote share, that the UK, France, Belgium, and Russia are the big losers; they all lose more than 10 percent of their current share. Hence The Economist's chart title "Unfair."

Thursday, April 2, 2009

To Global Economy: G-20 Supports You

The G-20 released the final version of the communique that will leave the London Summit today.

The take away I'm getting from a word cloud is: support. The G-20 intends to support a range of broad concepts like market discipline, financial stability, and sustainable compensation.

Wordle: G-20 Final Communique 4-2-09

The communique also lends quantifiable support to several institutions. The IMF will get more funds through an allocation of $250 billion in Special Drawing Rights (SDR), the IMF "currency" that Chinese central bank president, Wen Jiabao, recently said should be used for more international transactions rather than the dollar. The world's Multilateral Development Banks (MDBs) will receive at least $100 billion to loan to low income countries.