Cafe Hayek, meet the Treasury Department

The US Treasury Department on Thursday said it agreed with Abu Dhabi and Singapore on a set of principles for sovereign wealth funds that specifies politics should not influence their decisions.

The foreign-controlled funds, many based in the Middle East, have aroused U.S. lawmakers’ concern because they have poured billions of dollars into large stakes in Wall Street firms and other businesses and fanned fears the U.S. was losing control of its destiny.

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The Treasury has been pressing since last autumn for the IMF to develop the ”best practices” guide. The funds have become increasingly active in buying U.S. assets with growing foreign exchange reserves from oil and international trade.

And that would be Don Boudreaux of Cafe Hayek – who would most likely remind us of the practicalities of trade: running up monster deficits, needing and attracting capital, one gets the idea.

Mostly I’m just unsympathetic to such boorishness by a system that desperately needs the food, even while it bites the hand providing it. I sure do like to see tribalism weed its way into both international relations and international finance, though.

Numbers, numbers: the Fed has committed half its money so far

An answer, an answer! To my question about just how much “money” has been handed out at the altar of M3. From Krugman’s blog:

If Steve Waldman has his math right — that is, if we’re interpreting the Fed’s statements correctly — Bernanke and co. have now committed $400 billion to TAF, repos, TSLF. That’s almost half the Fed’s balance sheet effectively placed in non-standard assets. Wow.

That’s Steve Waldman of Interfluidity, whose extensive posts on the matter are most satisfying.

Krugman also mentions the latest foray (the quite daft Term Securities Lending Facility):

So basically the Fed is going to be swapping Treasuries for dubious securities, in an attempt to give the market a REALLY BIG slap in the face.

Similarly panned at the blog the Big Picture, who also advises going “crazy short” if the market’s spiv rally starts to fade (I would say “when”, but I’m a pessimist. “Spiv”, by the way, is an Australian term – actually it’s from all over, but used still in Australia to describe something that looks good on the surface, but whose sheen will soon fade as it falls to bits around you).

“Spiv” economy is, for me, a pretty decent catch-all for this government, its economy and all of its economic credentials (their orchestra isn’t too too bad). Good on the surface, talked-up like all good games but, faced with the famous question of Donald Sutherland:

Pinkley: [impersonating a general] Very pretty, General. Very pretty. But, can they fight?

No – it/they cannot fight. Oh, for a body of government that hadn’t eaten Fukuyama for bloody breakfast every morning for a decade!

Microfinance loans – for Americans

Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.

The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.

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Grameen has lent $50,000 in the past month to groups of immigrant women in Jackson Heights in New York’s borough of Queens. During the next five years, it plans to offer $176m in loans within New York city, and then expand to the rest of the US.

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In the US, about 28m people have no bank accounts and 44.7m have only limited access to financial institutions. People often do not hold bank accounts because they have had credit problems, have no access to a local branch or they distrust the mainstream financial system, said Jonathan Morduch, a microfinance expert at New York University.

Some microfinance experts doubt that Grameen could make an impact in the US where credit is widely available, and businesses and tax systems are much trickier to navigate than in developing countries.

Very amusing. And to think of all the bad press Hugo Chavez got with his oil. From a previous article:

The US presents a ripe market for Grameen, Mr Yunus claims, because it has a large population that sits outside the formal banking system. As many as 28m people, earning $510bn a year, do not have any relationship with a financial institution, according to the Federal Deposit Insurance Corporation.

Those who have no bank accounts rely on fringe banking services such as cheque cashers, pawnshops and payday lenders.

Payday lenders can charge as much as 1,560 per cent for a week’s cash ad- vance against forward-dated cheques, according to the Consumer Federation of America. Payday lenders made $48bn (€33bn, £24bn) in loans last year, while pawnshops’ business has been soaring as the US heads into a slowdown.

“You have the payday loans, you have the cheque cashing companies, and they’re flourishing, and they are pretty bold, the big advertisements in the newspapers, big ads on television . . . so this shows how much [of a] gap there is in the system,” Mr Yunus said.

I can understand the argument about the greater complexity of the tax system here – although that supposes that recipients are engaging with the tax system fully. A decent proportion of those Americans without bank accounts are Americans without papers, too, I would expect. One hopes his doesn’t wind up leading to a load of poor dream-chasers simply having those hopes dashed by the cruelty of the tax system (you know, the one that now doesn’t chase rich tax-evaders/avoiders, just middle-class-and-lower tax-evaders/avoiders).

Was the Fed Tricked?

If you’ve missed it, this is the big story today. It’s pretty funny, at least for me. I’m sick like that.

When the Federal Reserve surprised markets with a 0.75 percentage-point cut in the federal-funds target Tuesday morning, the thinking was that concerns about a U.S. recession had so fully enveloped the markets that just about anything could happen. Sure, the thinking went, the Fed was in danger of looking like it had responded to market action rather than an economic report, but if markets were reacting to economic reports, well, it’s all the same in this world these days.

However.

The revelation that Societe Generale is taking a $7 billion write-down due to the activities of one rogue trader — and additional reports that the French bank may have been unwinding those positions on Monday, a thinly traded, volatile day when Asian and European markets were rocked with losses, puts the Fed’s move in a new light. Namely, that they were taken in.

The answer of course, is yes – they were. And it serves them bloody right, but not us. The Fed’s job is to know that this sort of thing is going on – not see equities being pummeled and jump in to bail them out. It’s our Money Supply and the stability of our prices. Stewardship of these things is the Fed’s responsibility.

Hence, we quickly learn what sheer folly and utter irresponsibility it is for the Fed to use its limited ammunition to intervene in equity prices. Their panicky rate cute were not to insure the smooth functioning of the markets, but rather, to guarantee prices.

As we have been saying for the past two days, this is not the Fed’s charge. They are supposed to be maintaining price stability (fighting inflation) and maximizing employment (supporting growth) — NOT guaranteeing stock prices.

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Tuesday’s panicked 75 basis cut will prove to be an historical embarrassment, a blot on the Fed for all its days. Failing to understand what their responsibilities are is bad enough; allowing themselves to be bossed around by Futures traders is inexcusable.

And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete.

Macroeconomic lexicon

Watching the Wall Street Journal’s page tick over…

“Contained”

“De-coupled”

“Calm”

The Federal Reserve Board, confronted with a global stock sell-off fanned by increased fears of a recession, on Tuesday cut its target for the federal funds rate by three-quarters of a percentage point to 3.5%.

The blog the Big Picture is running through the Futures markets, too (since it saves me messing about with more screenshots of my own. Short version: not good). He also point out that the overnight falls were all very near the limits allowed (before ‘time’ is called on the bets).

Interest rates, currency, foreign ownership, politics. The new banking.

So “China” is buying into Australian banks.

Little more than 18 months ago Australian banks such as the market leader Commonwealth Bank and the ANZ were aggressively expanding into China and being welcomed as significant investors in the country’s relatively young though fast-developing financial institutions.

Yesterday one of the offshoots of a sector that has access to $US1.46 trillion ($1.7 trillion) of foreign exchange reserves showed there were two sides to an investment “partnership” by popping up as a shareholder in Australia’s three largest banks. Industry sources confirmed a report by the Financial Times in London that China’s State Administration of Foreign Exchange had acquired through a Hong Kong subsidiary, SAFE Investment Company, small parcels of shares in ANZ, Commonwealth and National Australia Bank.

Have Sydney Morning Herald readers been hit with a quota on commas? For Cliff’s sake, people: punctuation is your friend.

This story comes on the same day that Australian banks increased their variable rates on their mortgages.

A day after National Australia Bank lifted its variable mortgage rate to a decade-long high without waiting for official prompting, ANZ announced late yesterday it would raise fixed-rate mortgages by 0.25 percentage points from Monday to 8.54 per cent, just under the standard variable mortgage rate of 8.55 per cent.

The bank will have to increase variable mortgage rates by just as much or more so that borrowers have a reason to lock in a fixed rate.

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Borrowers have been hit by rising interest rates on a range of products since the US subprime mortgage debacle triggered a global crisis.

Credit card and fixed interest mortgage rates have increased steeply, and well above Reserve rate rises.

The NAB’s new standard variable mortgage rate of 8.69 per cent is the highest charged by a major bank since 1996.

“The cycle has definitely passed us by,” the general manager of the research house InfoChoice, Denis Orrock, said. “There is no more cheap money.”

This is interesting for a few reasons. The latter story contains this incredible quote from our new Treasurer:

The Treasurer, Wayne Swan, repeated his call for banks to consider the impact on families of more rate increases.

“I would still ask them to be extremely mindful of the impact of those decisions on average Australian households with mortgages and, of course, business,” Mr Swan told ABC radio’s AM program.

That’s just plain funny. I wish him luck with that, although he clearly has forgotten that he’s referring to banks. Branch-closing, job-shedding, sector-consolidating multi-billion dollar profit-making banks. I’m just saying. I don’t think banks halt their march of profits for the sake of families, so much as laugh all the way to, well, themselves.

Of more relevance to debate is the foreign ownership issue, especially with regards to today’s macro – and global – economic bogey-man. In fact, the block-quotes above are deliberately misleading, not containing this piece of information:

It is understood SAFE has invested the equivalent of several hundred million of Australian dollars purchasing stakes of less than 1 per cent of each of the bank’s share capital as it seeks to get a better return on its money as opposed to what it could make on local currency markets.

In the case of the ANZ, the most active and biggest investor of the domestic banks in the Chinese financial services industry, it is believed that SAFE recently bought $200 million shares – about 0.3 per cent of the issued stock.

ANZ is capitalised at more than $52.4 billion, so SAFE’s investment is tiny compared with the shareholdings of the big institutions and superannuation funds that make up a significant proportion of the bank’s register.

As for the Commonwealth and NAB, which are valued at $76 billion and $60 billion respectively, SAFE’s share buying has been on a proportionally smaller scale, although the Chinese company is not obliged to publicly disclose the size of its investment until it exceeds 3 per cent.

Which is standard, textbook macroeconomics, now. Strong currency with interest-rate increases? Foreign capital is going to want some exposure to those margins. The very interesting aspect of this is two-fold: First, how will this play out in the court of public opinion (formed by garbage reporting/editorials), both now and if/as the level of investment increases? We’re talking about non-significant levels of foreign investment (along this vector, in this story), but that doesn’t mean it won’t affect hearts and (small) minds, even now.

Second, assuming specifically that this sort of thing continues, do we need, in a global economy, to start thinking more about how we measure competitiveness. Concentration ratios, for example, tell us that four firms make 99% of the cigarettes in the US. Already in 2000, Australia’s 5-bank concentration ratio was 72.5% – and it will only have been increasing, since.

Do we need, then, multivalent indices that include concentration in shareholder votes? Boards of directors are already ridiculously incestuous, but that one has gotten by Economics. Here is an opportunity to really construct a significant measure of who owns exactly how much of a given market, irrespective of where those owners are.

I’m not the first to this. At least one paper [Dahlquist, M and Robertsson, G. 2001. Direct foreign ownership, institutional investors, and firm characteristics,
Journal of Financial Economics, 59(3): 413-440], for example, considers concentration as a factor in foreign investment – not quite the same things, but similar thinking.

There is another excellent paper [Denis, C and Huizinga, H. 2004. Are Foreign Ownership and Good Institutions Substitutes? The Case of Non-Traded Equity. CEPR Discussion Paper No. 4339] looking at shareholder concentration specifically, and what factors make concentrated foreign ownership likely. Directly in their abstract, they make the point relevant to globalisation, “Empirical evidence supports the hypothesis that foreign ownership of non-traded equity is higher in countries with poor investor protection.” We will get worked up about foreign ownership when it comes from (let alone is concentrated in) countries with poor disclosure/oversight, but I’m willing to bet that we, in turn, go to markets with fewer prying eyes as well.

Anyway. Just a thought. I’m sure many PhD students at least are already working on it.

Pop stars and personal finance

This article is wonderful. In part, yes, it is wonderful because of the humour. In terms of teaching a lesson in terms to which a lay audience can relate, though, it is fantastic. Really, really nicely put-together.

Would You Marry Britney Spears?

Recent court papers show that blonde quasi-bombshell Britney Spears allocates none of her $737,000 monthly income to savings and investment.

OK, she’s rich enough that it doesn’t matter. But it’s not (just) pantyless peek-a-boos or feeding frenzies at McDonald’s that cry out to us for help. It’s millions of children who lack role models in finance. If I may be blunt, we’ve got a nation of financial numbskulls in the making.

Fortunately, we can stop it.

Britney isn’t the only one. Scores of less-flush celebs (witness the reportedly broke Lindsay Lohan, or net-worth-around-their-neck hip-hop artists) set a financial mis-example for kids. Our kids. Your kids. And our poorest, least-educated children suffer the most. High-interest credit cards, poor credit, abusive loan rates: They’re headed toward our kids like Lindsay in an SUV, and nothing short of our national competitiveness is at stake.

The quick-and-dirty numerical illustration within is entirely worth the journey over to the Motley Fool.

Retail dot co dot uk

Retail is something on which I harp(ed) often. Specifically, throughout the semester. My students must think I’m the most miserable bastard they’ve ever come across.

But. Like interest rates vs. inflation, I’ve found the English (or rather, the English media) to be more sincere and open about risks in the economy. The Big Picture, for example, routinely comes down on the scam of retail numbers, or that of housing sales (which he has been doing long before this piece popped up in the Wall Street Journal). Perhaps the Guardian is just staffed with miserable bastards like me. It would explain it.

Well. After exporting their sub-prime mess, it was inevitable that the retail mess would follow.

Britain’s retailers experienced tough trading conditions at the start of their crucial Christmas period and expect weak consumer demand to persist through the January sales, the CBI reported today.

In its monthly snapshot of the high street, the employers’ organisation said shops and stores had recorded their weakest sales growth in more than a year during the first two weeks of December.

While 42% of firms said business volumes were up on a year earlier, 33% said they were lower. The rounded balance of +8 percentage points was the weakest since November 2006 and the fourth successive month in which retailers had seen their sales expectations disappointed.

Should be interesting. I’ve explained frequently to students that the UK and the US have similar, and similarly, wicked problems: massive levels of unsecured debt holding up a retail-heavy economy. The problem is how to ‘fix’ both public and private dissavings without bringing the walls down around our ears (this was a question on the final exam, in fact – few students did a good job with it, though).

Apparently the Bank of England is also ready for another go-around. Add that to yesterday’s enormous intervention by the European Central Bank and to the US’ now-negative real interest rates. I’d be interested to see, around next February or so, some numbers on the total cash pumped into the OECD economies – dollar-terms, but also relative. I’d like to see the percentage increases in the money supply during this period (it’s that Austrian thing again).

“Fed shrugged” – excellent allusion

The New York Times – via the Big Picture – had a super critique (including this splendid graphic – click for larger version) of Greenspan’s Federal Reserve, his incurious attitude towards subprime and adjustable-rate (and stated income, and piggyback, and…) mortgage lending, and his orchestra.

Nice, eh?

Today, as the mortgage crisis of 2007 worsens and threatens to tip the economy into a recession, many are asking: where was Washington?

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses. Both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and what President Bush has called the “ownership society.”

On top of that, many Fed officials counted on the housing boom to prop up the economy after the stock market collapsed in 2000.

The article is mostly a list of qualified observers who warned the Fed that shit was piling up and the fans were being turned on. It also criticises Greenspan for his (as we saw in a previous post, ongoing) defense of his policy, based upon the salvation of appreciating house values.

People are piling on, back over on the Big Picture. The comments are worth the few minutes’ read.

“If we could wave a wand and housing prices go up 10 percent, the subprime mortgage problem would disappear”

This was the wisdom offered by Greenspan, former Chair of the Federal Reserve, back in March of this year. His argument being that, if only house prices would continue their tropish long march forward, people could keep borrowing and re-financing against their Magic Home Equity, and the problem would go away.

Meaning, of course, that the problem would simply go forward, and wait for us, bigger and badder, a little farther down the road.

Jim Kunstler pulled out the back of a handy envelope, for his rejoinder at the time:

The median price for a house in my region of the US (northeast) was $380,000 in the third quarter of 2006. Median annual income, meanwhile, was about $46,000.

If, by some miracle (in a land of negative savings) someone with an income of $46,000 had managed to save enough to make a 20 percent down payment ($76,000) on the aforesaid median-priced house and got a 30-year mortgage for the remainder ($314,000) at 7 percent interest, his monthly payment would be $2089.

Add to that $250 a month in local property and school taxes and insurance and that brings it up to $2339. That adds up to $28,068 a year in house payments. Let’s say the poor bastard pays $8,000 a year in combined income tax and FICA witholding. That leaves him with a grand total of $9,932 for everything else.

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So, if housing prices went up 10 percent, how fucked would Mr. Median Income be?

But now we have a new Alan Greenspan: Greenspan 2K, Greenspan 2.0:

Alan Greenspan, former chairman of the Federal Reserve, suggested Sunday that a tax break or other government financial help for homeowners facing the mortgage crunch would be the best political fix for the economy.

He cautioned against meddling with home prices or interest rates to address the housing problem.

Greenspan did not specifically call for a tax cut. Instead, he called for the government to apply money to the severe housing market slump. Such a cash infusion would typically come through a tax break or a new government spending program.

Yes, because meddling with the incomes of specific homeowners is a much safer route to follow than meddling with the prices of the incomes they own. Meanwhile we should, of course follow the svengalian wisdom of the man who blithely set us up for the bankrupted Fiscal policies and woefully under-regulated debt markets in the first place.

Separately, Greenspan said he is concerned about signs of a resurgence of inflation.

“Core inflation is up. Wholesale prices had their highest increase I think in a generation. That raises the specter of stagflation again,” said Greenspan, referring to a simultaneous stagnant economy and upward pressure on prices.

He said the Federal Reserve should “do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period.”

Greenspan said a large number of people are in major financial stress, even when they’ve tried exceptionally hard to make their monthly mortgage payment. But some political solutions would only prolong their agony, he said.

On this one, he should know. I believe he’s come back around to cashing in on criticising those monster deficits, off on which he signed (and around which he can dance like an angel on the head of a goddamn pin. It’s a sight to behold).