Crisis interventions: TARP on the instalment plan

 Fed Opens Books, Revealing European Megabanks Were Biggest Beneficiaries  – The Federal Reserve on Wednesday reluctantly opened the books on its monumental campaign to save the financial system in the midst of the recent crisis, revealing how it distributed some $3.3 trillion in relief. The data revealed that the Fed’s aid was scattered much more widely than previously understood. Two European megabanks — Deutsche Bank and Credit Suisse — were the largest beneficiaries of the Fed’s purchase of mortgage-backed securities. The Fed’s dollars also flowed to major American companies that are not financial players, including McDonald’s and Harley-Davidson, through unsecured short-term loans.  Deutsche Bank, a German lender, has sold the Fed more than $290 billion worth of mortgage securities, Fed data through July shows. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds.  The data had previously been secret. It was released Wednesday per the recently-enacted law overhauling the federal financial regulation. The Fed, ferociously backed by the Obama administration, fought lawmakers’ desire for full disclosure throughout the financial reform debate.
The Non-TARP Bailout – While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage credit initiatives to FHA, the government’s original subprime lender. Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. So far, the government has lost very little money buying troubled mortgage assets through TARP. That is because TARP never bought many troubled mortgage assets to begin with.  Meanwhile, we have this huge expansion of FHA. Should taxpayers be high-fiving about TARP’s success if FHA winds up losing hundreds of billions instead?

Crisis interventions: TARP on the instalment plan – THE Congressional Budget Office has once again revised down the estimated budget cost of TARP—the bank rescue bill passed in 2008. The government is now expected to get back all but $25 billion of the money dispensed under the bill. As of August, the total loss was anticipated to be around $66 billion, and back in March the cost was pegged at $109 billion. The revision has prompted another round of TARP praise. Ezra Klein writes this morning that, "There’s an increasingly strong case that TARP may have been the most cost-effective economic policy ever passed". Jon Chait muses that, "TARP may end up going down as one of the most successful policy initiatives in American history". This is bad news. TARP was a necessity; the availability of a pool of funds to help recapitalise the banking system—and the message Congress sent in passing the measure—calmed markets that were on the verge of a meltdown. But to cite the dollar cost of the bill and declare it a roaring success is to totally misunderstand what TARP actually did.

FT Alphaville » Insolvent – Greece, Ireland, Portugal and probably Spain – Former FT blogger Willem, ‘Maverecon’, Buiter has lost none of his power to shock. He may be the chief economist of Citigroup but that doesn’t mean he can’t speak his mind as his latest essay for the bank’s clients proves. In it, Buiter claims Ireland is insolvent, Portugal is quietly insolvent, Greece is de facto insolvent and Spain will be insolvent once the problems in its banking sector are recognised. At which point things get really interesting. Buiter predicts the ECB could be forced to buy Spanish government paper and fund its banking system by purchasing the debt from the European Financial Stability Facility if things get really bad.

Trust and Temperature – Trust lies at the heart of person perception and interpersonal decision making. In two studies, we investigated physical temperature as one factor that can influence human trust behavior, and the insula as a possible neural substrate. Participants briefly touched either a cold or warm pack, and then played an economic trust game. Those primed with cold invested less with an anonymous partner, revealing lesser interpersonal trust, as compared to those who touched a warm pack. In Study 2, we examined neural activity during trust-related processes after a temperature manipulation using functional magnetic resonance imaging. The left-anterior insular region activated more strongly than baseline only when the trust decision was preceded by touching a cold pack, and not a warm pack. In addition, greater activation within bilateral insula was identified during the decision phase followed by a cold manipulation, contrasted to warm.

Concern on debt crisis deepens –Global concern about the debt crisis rocking the euro zone mounted today, with Washington sending a top US Treasury envoy to Europe and G20 officials discussing the turmoil in a conference call. A day after investors pushed the risk premiums on Spanish and Italian government debt to new highs, the bond spreads of countries on Europe’s southern periphery narrowed and the euro steadied on speculation that the European Central Bank could unveil new anti-crisis steps at a meeting tomorrow. But calmer markets failed to remove deep worries about contagion in the 16-country euro region that has pushed European policymakers onto the defensive and forced them to search for new ways to stabilise their 12-year-old currency project.

Ireland crisis loan conditions become clearer – Ireland’s department of finance has released the draft loan program agreement with the European Union and IMF.  It is still preliminary and subject to various approvals, but the government was under pressure to show the basics of what had been agreed prior to the budget vote on 7 December.  A quick perusal of the document reveals the following:The EFSF apparently asked the government to post collateral for the EFSF loan.  This rumour had circulated during the negotiations but a reference in the letter confirms it.  But the government found “legal and economic constraints” to do it … those acquired-helpnessness Irish lawyers strike again.   Anyway, the apparent disagreement over collateral provides indications both of the risk EFSF may see in the package, and so the interest rate that has drawn so much attention. “The Irish owned banks were much larger than the size of the economy.”  The government may be groping towards an understanding of the difference between “Irish banking system” and “Irish banks.”

Water, Wheat and Russia – In a time when there is much discussion of peak oil and the idea that other commodities are less abundant or more costly to access, one issue that might not get enough attention among investors is the shortage of water.  Some political scientists, for example, have suggested that the next war in the Middle East may be over water not oil. Grain is very water intensive.  Roughly speaking, it takes 1000 tons (100 cubic meters) to grow a ton of grain.  Find a country that is importing grain, and you’ll find a country that has a water deficit. There has been a drought around the Black Sea that has limited the wheat production in Russia and the Ukraine especially.  The price of wheat rose about 65% form late June through early August as the market priced in the export restrictions imposed in Russia and to a lesser extent Ukraine.  There was a drought in Australia and some flooding in Canada that also limited projections of the crop size.

Some Thoughts On The Fed and Bank Bailouts – The US Federal Reserve has been forced to open its books to reveal to whom it lent trillions of dollars and against what collateral. In my view, the Federal Reserve is as much a political organisation as it is a financial organisation. The real power behind the Fed rests with the Federal Reserve Board and the New York Fed in Washington D.C. and New York City respectively, owing to its dual financial and political roles.  The Board of the New York Fed, which is responsible for most of the Fed’s market-making and crisis-preventing activity, is comprised of the very bankers which control America’s private sector financial resources. This puts the Fed in an untenable position, the outgrowth of which is regulatory capture by the financial services sector. My view is that the Fed’s role should be circumscribed. Nevertheless, the Fed serves an important function in the US and global economy in providing liquidity, as we have witnessed during the crisis. It is the American – and in many respects, the global – lender of last resort

Some Thoughts On The IMF And Europe – Newswire story reporting increased US support for Europe does not have a lot of substance behind it, in our view.  If we are reading the comments correctly, the US official was simply saying that the US would back an extra commitment of funds from the IMF for Europe, not that the US would give more money to the IMF for use in supporting Europe.  As we have pointed out in the past, the IMF total contribution to the European rescue fund is not a solid one.  That is, the IMF responds to country-by-country requests for aid, not to regions.  Thus, the IMF really does not have EUR250 bln set aside just for Europe.  And the thinking goes that whatever the true number is, the IMF has enough funds to help Greece, Portugal, and Ireland but not enough to fund either of the bigger peripheral countries of Spain and Italy.  As a point of reference, Greece (GDP of $330 bln) received $39 bln from the IMF.  Ireland (GDP of $227 bln) and Portugal (GDP of $228 bln) are similarly sized, so perhaps total IMF aid could end up being around $115-120 bln for these three.  Spain (GDP of $1.46 trln) is almost twice the size of these three combined and so back of the envelope calculations suggest the need for a potential IMF package of over $225 bln for Spain alone.


The Irish Economy » Barry Eichengreen on the Irish bailout – The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position. The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan.  Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year.  This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

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