Category Archives: Japan

Philip Pilkington: Is QE/ZIRP Killing Demand?

em>By Philip Pilkington, a journalist and writer living in Dublin, Ireland

Warren Mosler recently ran a very succinct account of why the Fed/Bank of England’s easy monetary policies – that is, the combination of Quantitative Easing and their Zero Interest Rate Programs – might actually be killing demand in the economy.

Warren Mosler recently ran a very succinct account of why the Fed/Bank of England’s easy monetary policies – that is, the combination of Quantitative Easing and their Zero Interest Rate Programs – might actually be killing demand in the economy.

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Yes, Virginia, Servicers Lie to Investors Too: $175 Billion in Loan Losses Not Allocated to Mortgage Backed Securities (and Another $300 Billion on the Way)

he structured credit analytics/research firm R&R Consulting released a bombshell today, and it strongly suggests that prevailing prices on non-GSE (non Freddie and Fannie) residential mortgage backed securities, which are typically referred to as “private label” are considerably overvalued.

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What if We Focus on Boosting Employment Rather Than Growth?

Although it is remarkably difficult to come up with decent data, from what I can tell, the Japanese bubble was considerably bigger relative to the size of its economy than the US debt binge was. Yet even though the Japanese aftermath has been remarkably protracted, and arguably worsened by a slow and cautious initial response, visitors to Japan find the country wearing its malaise remarkably well.

One of the reasons may be the Japanese preoccupation with employment. Entrepreneurs are revered not for making money but for creating jobs. Japanese companies went to great lengths to keep workers, cutting senior pay to preserve manning. That was done largely for cultural reasons, since companies are seen as being like families.

But was this preoccupation also good economic policy, and might it have played a more direct role in buffering the worse effects of the bubble aftermath?

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Extreme Predictions 2012

I tend to avoid the year end retrospective/forecast blizzard, although some of the more creative compilations can be fun.

However, some 2012 forecasts crossed my screen, and two were such striking outliers that I thought I’d call them to your attention and seeing if readers have come across other Extreme Predictions for the new year (aside from the Mayan end of the world sort).

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Wray: Krugman has shined the headlights on the crucial currency issuer-currency user difference

Edward Harrison here. The post by Randall Wray below is an interesting one because it points out how the world has changed since the end of the gold standard and why the sovereign debt crisis is centered in the euro zone. While I have an Austrian bias overall, for me, MMT is the best way […]

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Turning Japanese is a Boon

By Rumplestatskin, a professional economist with a broad range of interests and a diverse background in property development, environmental economics research and economic regulation. Cross posted from MacroBusiness.

What few seem to appreciate, either inside or outside of Japan, is just how strong the resulting Japanese recovery from 2002-2008 was. It was the longest unbroken recovery of Japan’s postwar history, and, while not as strong as pre-bubble Japanese performance, was in fact stronger than the growth in comparable economies even when fuelled by their own bubbles.

How on Earth did Japan manage that with their ageing population and zero population growth?

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From QE to Communism

By Zarathustra, who is the founder of Hong Kong blog Also sprach Analyst. He was educated at the London School of Economics and the Chinese University of Hong Kong and was once a Hong Kong-based equity research analyst focusing on Hong Kong real estate (which he did not really like), with a secondary coverage on China real estate sector (which he actually hated). Cross posted from MacroBusiness

Zero interest rate policy and quantitative easing is not working to stimulate the real economy. No country has succeeded. The pioneer of quantitative easing, the Bank of Japan, failed (and Japanese yen is uber-strong). The Federal Reserve has failed, and the Bank of England has failed.

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Dimon Says US Banks Should Dictate to Regulators

Now that Steve Jobs has retired from Apple, Jamie Dimon seems determined to assume his role as the CEO with the most effective reality distortion sphere. You can infer that from the magnitude of the whoppers he is telling and the size of the audience he is trying to bamboozle.

But while Jobs’ Svengali tendencies have gotten more than occasional mention, they weren’t a major failing. Jobs not only saved Apple, but he spearheaded the development of important new product categories. By contrast, Dimon has long been a bully, a smart and capable bully, but a bully nevertheless (I have reports going back to his first year at Harvard Business School, and it takes some doing to be memorably obnoxious by dint of the competition in that category).

Now on the surface, Dimon’s latest brazen statement isn’t quite as gross as my headline suggests. He is merely saying that US banks should not be subject to the new incoming international bank rules, known as Basel III. That might seem to be a narrower statement, but as we show, when you parse his logic, it amounts to banking uber alles.

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Marshall Auerback: Are We Approaching the Endgame for the Euro?

By Marshall Auerback, a hedge fund manager, portfolio strategist, and Roosevelt Institute fellow. A version of this post appeared at New Economic Perspectives.

Forget about the S&P downgrade, which has had ZERO impact on the global equity markets. The downgrade was supposed to mean that it would be more likely that the US government would not be able to pay its debt than previously assumed. IF the markets took this warning seriously, then they would have attached a higher risk premium to US government bonds. Of course, the opposite occurred. US bonds soared in price. In other words, investors, both here and abroad, voted with money as loudly as possible that they view the US government debt as a very safe haven in a time of financial turmoil

So if it wasn’t the S&P downgrade which caused this downward cascade in the global equity markets, then what was it? By far, the most important factor currently driving the market’s bear trends is Europe or, more specifically, the future of the euro and the European Monetary Union. Systemic risk has migrated across the Atlantic to the euro zone.

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Market Rout Continues

After a very bad day in the US, Asian markets swooned and European markets fell again, but their declines are less gut wrenching. 2-3% falls in most Euromarkets at the opening (2.5% for the FTSE, 2% for the Dax, and 3.5%.for the Milan’s FTSE-MIB) but for the most part, they have come back somewhat as of this hour. The FTSE is now down 2.2%, the CAC 40 a mere 1.2%, the DAX 2.7%, and the FTSE-MIB has is in positive territory, up 0.25%. This follows plunges of 3.7% for the Nikkei and 4.5% for the Hang Seng indexes.

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Third Way Document Proves Democratic Party Supports Institutionalized Looting by Banks

It is one thing to suspect that something is rotten in Denmark, quite another to have proof. Ever since Obama appointed his Rubinite economics team, it was blindingly obvious that he was aligning himself with Wall Street. The strength of the connection became even more evident in March 2009, when Team Obama embarked on its “stress test” charade and bank stock cheerleading. Rather than bring vested banking interests to heel, the administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff.

But now we see evidence in a new paper by the think tank Third Way of an even deeper commitment to pro-financier policies. The Democratic party has made clear that it supports institutionalized looting by banks, via the innocuous-seemeing device of rejecting the idea of writedowns on bonds they hold.

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So What Might Happen if We Get to August 3 With No Deficit Deal?

So they are now motivated to get something done.

A lot of Democrats, by contrast, are fiercely opposed to the pact under discussion, which consists of $3 trillion of cuts and no tax increases, or more accurately, an immediate commitment to cuts, and tax increases possibly coming via a to-be-brokered tax reform. The Democrats see the trap being laid for them; reform/increases later is likely to be no reform. (Separately, this package will kill the economy, a consideration that pretty much everyone is ignoring, proving Keynes correct: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”).

The latest update at the Wall Street Journal was cautious:

With prospects of a government default looming in early August, leaders on both sides denied Thursday that a deal was close…Both sides warned that an agreement is not near. “There is no deal,” Mr. Boehner told radio host Rush Limbaugh. White House spokesman Jay Carney used similar language. And White House officials said Mr. Obama has never considered an agreement that did not include revenue increases.

A good deal can change in the next few days, but the window of opportunity narrows as time passes. And that is why the Treasury’s apparent refusal to consider options for working around the debt ceiling looks colossally irresponsible. This is similar to the behavior of the financial regulators pre-Lehman: they placed all their chips on one outcome, that of a private sector bailout, and failed even to find out what a bankruptcy would look like (at a minimum, if Lehman had prepared a longer-form filing, the implosion would have been less disruptive).

But this “all in” strategy is by design. Obama has long wanted entitlement “reform,” as in gutting; Paul Jay of Real News Network pointed out to me today that Obama told conservatives at a dinner hosted by George Will in the first week after his inauguration that he planned to turn to it once he got the economy in better shape. So this is a variant of a negotiating strategy famously used by J.P. Morgan: lock people in a room until they come up with a deal. But the J.P. Morgan approach used time to his advantage; here the fixed time frame makes this more like a form of Russian roulette with more than one cylinder loaded.

It is also worth noting that what starts happening on August 3, assuming no deal, is “selective” default. It isn’t clear if and when Treasuries would be at risk of having payments skipped, and I would assume Social Security would also get high priority. But with Treasuries, the bigger risk is not a missed payment (which would certainly be made up later) but a downgrade, which is expected to force certain types of investors who are limited to AAA securities to dump their holdings.

A useful article in the Economist describes how Wall Street, which had heretofore assumed that there was no way the US would (effectively) voluntarily skip some interest payment, is now scrambling to figure out how to position themselves should such an event come to pass. Many observers had assumed that the repo market, on which dealers depend to fund themselves and collateralize derivatives positions, would go into chaos (the belief was that counterparties would demand bigger haircuts). But the Economist argues that does not appear to be the case:

SIFMA, a trade group for large banks and fund managers, recently gathered members together to discuss issues like how to rewire their systems to pass IOUs rather than actual interest payments to investors, should a default occur. “It’s one of those Murphy’s Law things. If we do it, it won’t prove necessary. If we don’t, we’ll be scrambling like crazy with a day to go,” says one participant.

But the moneymen hardly have all the bases covered. “I really thought I understood this market, until I tried to map all of the possible consequences of a breakdown,” sighs a bond-market veteran. That is hardly surprising, given that Treasury prices are used as the reference rate for most other credit markets. Moreover, some $4 trillion of Treasury debt—nearly half of the total—is used as collateral in futures, over-the-counter derivatives and the repurchase (repo) markets, a crucial source of short-term loans for financial firms, according to analysts at JPMorgan Chase.

Some fear that a default could cause a 2008-style crunch in repo markets, with the raising of “haircuts” on Treasuries leading to margin calls. The reality would be more complicated. For one thing, it’s not clear that there is a viable alternative as the “risk-free” benchmark. One banker jokes that AAA-rated Johnson & Johnson is “not quite as liquid”. In a flight to safety triggered by a default, much of the money bailing out of risky assets could end up in Treasury debt. Increased demand for collateral to secure loans could even push up its price.

Then there is the impact of a ratings downgrade. Money-market funds, which hold $684 billion of government and agency securities, are allowed to hold government paper that has been downgraded a notch. Other investors, such as some insurers, can only hold top-rated securities but their investment boards are likely to approve requests to rewrite their covenants, especially if a lower rating looks temporary. “It would be a full-employment act for lawyers,” says Lou Crandall of Wrightson ICAP, a research firm. There’s a surprise.

In other words, this event is focusing enough minds that a lot of parties are looking at ways to get waivers or other variances to allow them to continue to hold Treasuries even in the event of a downgrade or delayed payment. But a report from Reuters on the Fed’s contingency planning makes them sound markedly less creative than their private sector counterparts (but it is important to note that Charles Plosser of the Philadelphia Fed, the key source for his story, has been a critic of the Fed’s fancy footwork in the crisis. In fact, the New York Fed is the key actor, and it has been notably, um accommodating in the past).

In addition, the New York Times reported yesterday that some hedge funds are moving into cash to buy up Treasuries in case other investors dump them. I’ve even heard of retail investors planning the same move. That does not mean the volume of buyers will be enough to offset forced sales, but it does say that fundamentally oriented investors would see this event as an opportunity, not a cause for panic.

The financial system is so tightly coupled and there are so many potential points of failure that I’m hesitant to say that the consequences of a default may be far less serious than are widely imagined. But in the Y2K scare, the considerable panic about potential catastrophic outcomes led to a tremendous amount of remediation, which served to limit problems to a few hiccups. Unlike Y2K, the remediation efforts have started very late in the game, so their is a lot more potential for disruption.

But even so, why is the Administration so willing to engage in brinksmanship? S&P expects a 50 basis point rise on the short end of the Treasury yield curve and 100 basis points on the long end, which they expect to reverberate through dollar funding markets and cause all sorts of hell. Remember, we have both Geithner and Bernanke again in powerful positions, and both went to extreme efforts to prevent damage to the financial system. Why are they merely handwringing at such a critical juncture? Might they have a trick or two up their sleeve?

I can think of at least one. I was working for Sumitomo Bank (and the only gaijin hired into the Japanese hierarchy) and was in Japan during and shortly after the 1987 crash. Initially, the reaction in Japan was one of horrified fascination, of watching a neighbor’s house burn down. It then began to occur to them that their house might burn down too.

The volume of margin calls on Black Monday and Tuesday were putting serious pressure on the Treasury market, which was beginning to seize up. On top of that, bank were understandably loath to extend credit to clearinghouses and exchanges (as we’ve discussed elsewhere, the Merc almost failed to open and would have collapsed if the head of Continental Illinois had not approved an emergency extension of credit after a $400 million failure to pay by a major customer. Had the Merc failed, the NYSE would not have opened, and its then CEO John Phelan has said it too might have failed). So keeping the Treasury markets liquid was a key priority in stabilizing the markets.

Japan is a military protectorate of the US. The Fed called the Bank of Japan and told it to support the Treasury market. The BoJ called the Japanese banks and told them to buy Treasuries. Sumitomo and the other Japanese banks complied.

I could see the same phone call being made again in the event of a default or downgrade. First, the yen is already at 78 and change, which is nosebleed territory from the Japanese perspective. The BoJ intervened once in the recent past when the yen got slightly above this level. Purchases of Treasuries is a purchase of dollars, and done on big enough scale would help lower the yen. Second, if you buy the hedgie view, buying in the face of forced (as in AAA mandate driven) and not economically motivated selling means this trade would have near term upside.

Is this scenario likely? I have no idea. Is it possible? Absolutely.

Again, I would not bet on happy outcomes. As Cate Blanchette muttered in the movie Elizabeth, “I do not like wars. They have uncertain outcomes.” And while the negotiators finally seem to have awakened to the risk of entering uncharted territory, the old rule of dealmaking is if one side’s bid is below the other side’s offer, you can’t get to a resolution. That’s where the two sides appear to be now, and even though it would be rational for both to give a bit of ground, rationality has been missing in action on this front for quite some time.

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“Trade Imbalances Lead to Debt Imbalances” or Why Mercantilist Nations Shouldn’t Beef About Their “Profligate” Customers

Michael Pettis, a respected economist and commentator on China, provides an important contribution on the global imbalances theme. Many observers have pointed fingers at debtor nations like Greece, Portugal, Spain, and the US and argue that they need to start consuming less. While narrowly there is some merit to that argument, Pettis points out that the trade deficit countries (the debtors) are not the ones in the driver’s seat and it it the trade surplus countries that must take the lead in making adjustments.

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