Fed Balance Sheet Rises by $908 Million on Treasuries Purchases – The Federal Reserve’s balance sheet rose $908 million to $2.35 trillion as the central bank increased its holdings of Treasury securities. Treasuries held by the Fed increased by $16.2 billion to $917.5 billion as of Dec. 1, according to a weekly release today, while mortgage-backed securities on the balance sheet fell by $15.2 billion to $1.02 trillion and federal agency debt securities were unchanged. The Fed today bought $8.309 billion of Treasuries as part of plan to purchase $600 billion of government debt through June 2011 and to reinvest maturing mortgage holdings. M2 money supply rose by $10.3 billion in the week ended Nov. 22, the Fed said. That left M2 growing at an annual rate of 3.1 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target. For the latest reporting week, M1 rose by $18.3 billion, and over the past 52 weeks M1 rose 6.9 percent, according to the central bank. The Fed no longer publishes figures for M3.
US Fed Total Discount Window Borrowings Wed $46.85 Billion – The U.S. Federal Reserve’s balance sheet continued to grow in the latest week as the central bank kept buying up government in an effort to stimulate economic growth. The Fed’s asset holdings in the week ended Dec. 1 crept up to $2.350 trillion, from $2.349 trillion a week earlier, it said in a weekly report released Thursday. The Fed’s holdings of U.S. Treasury securities rose to $917.45 billion Wednesday from $901.24 billion a week earlier. Thursday’s report also showed total borrowing from the Fed’s discount lending window climbed to $46.85 billion Wednesday from $46.69 billion a week earlier. Still, borrowing by commercial banks slid to $40 million Wednesday after spiking to $1.04 billion a week earlier. Thursday’s report also showed U.S. government securities held in custody on behalf of foreign official accounts grew to $3.345 trillion, from $3.336 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts expanded to $2.611 trillion from $2.602 trillion in the previous week. Holdings of agency securities fell to $733.80 billion from the prior week’s $ 734.36 billion.
Fed’s Pianalto: Asset Purchases Were Right Thing To Do – The Federal Reserve’s now-embarked upon plan to flood markets with liquidity was the right thing to do, a top Fed official said Thursday. Federal Reserve Bank of Cleveland President Sandra Pianalto said her vote on the Fed’s policymaking committee to support the $600 billion in Treasury purchases would support the U.S. economic recovery, while guarding against deflation. Not only did Pianalto launch a defense of the asset purchases, but she said removing stimulus too early could risk stymieing a recovery, as it did during the Great Depression of the 1930s and in Japan’s more recent experiences with protracted deflation. Amid heated debate over whether the Fed is erroneous in trying to jolt growth with its so-called quantitative easing program, Pianalto said the Fed was not targeting a weaker dollar in an effort to "manipulate" the U.S. currency.
Fed’s Plosser ‘Skeptical’ Of Bond Buying Benefits – Federal Reserve Bank of Philadelphia President Charles Plosser on Thursday said he was "still somewhat skeptical" about the benefits of the US new round of bond buying, adding any benefits from the program are likely to be modest. Plosser also warned that expanding the Fed’s balance sheet will further complicate the exit strategy from the bank’s accommodative monetary policy setting. "One might ask why adding $600 billion of additional excess reserves would help anchor expectations of inflation any more so than the $1 trillion currently in the system," he said in Rochester, New York. Plosser said the Fed is developing and testing a range of tools to curb the effects of quantitative easing from fueling inflationary pressures, but warned the effectiveness of such tools will only be known for certain when they are implemented during the central bank’s exit strategy.
Fed’s Plosser Says QE Will Complicate Withdrawal of Stimulus – Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank’s program to expand its assets by $600 billion will hinder future efforts to withdraw stimulus and avert a rise in prices. “One cost of expanding the Fed’s balance sheet is that it will complicate our exit strategy from a very accommodative monetary policy, when that time comes,” Plosser said in a speech today in Rochester, New York. Policy makers led by Chairman Ben S. Bernanke plan to meet in Washington on Dec. 14 to review a program to buy Treasury securities to spur growth and keep inflation from falling too low. Such “quantitative easing” may provide stimulus for too long, fueling inflation, Plosser said to a seminar sponsored by the University of Rochester’s Simon Graduate School of Business. “Even with the best of intentions, if we don’t act aggressively and promptly, we may find ourselves behind the curve and at risk for substantial inflation,”
New Economic Perspectives: Is Bernanke’s QE2 an act of desperation? – In his scholarly work Bernanke has clearly stated that governments like those in the U.S. and Japan (but unlike those in the European Union) do not have a solvency problem. He also seems to understand that only fiscal policy produces net new financial assets in the private sector. By contrast, purchases of government securities by the Fed only replace interest-earning financial assets (bonds) with non-interest earning assets (reserves), leaving the net wealth position of the private sector unchanged. Yet, paradoxically, in his congressional testimonies over the last two years he has continually raised concerns with the sustainability of the debt and the deficit. If Bernanke believes that the U.S. government cannot become insolvent and that fiscal policy should be allowed to dominate in recessions, why is he talking at cross purposes and fueling the misguided deficit hawk rhetoric about government spending? As a policy maker, he has failed to lend his support to any meaningful and sizeable fiscal response, which is why his latest QE2 move seems like an act of desperation. All this and more is explained in Professor Tcherneva’s paper “Bernanke’s Paradox” and her Bloomberg radio interview with Kathleen Hays on The Hayes Advantage
Lawmaker calls for end to Obama mortgage aid program (Reuters) – The incoming head of a House of Representatives panel overseeing the Obama White House on Thursday called for pulling the plug on a widely criticized program to help struggling borrowers stay in their homes. "This program seems to have outlived its usefulness," Representative Darrell Issa, the top Republican on the House Oversight and Government Reform Committee said, referring to the administration’s Home Affordable Modification Program, HAMP. Issa, who is expected to head the panel when Republicans take control of the House in January, made the comments at a hearing of the House Judiciary Committee. Issa said the program, which has helped just under 500,000 homeowners get permanent loan modifications, has only managed to provide payments to financial institutions which would have modified those loans without the government’s money.
"Inexcusable" breakdown of foreclosure process cited (Reuters) – Regulators have found widespread and "inexcusable" problems in the way banks have foreclosed on homes and a fix is needed, a senior Treasury Department official said on Tuesday. Michael Barr, assistant Treasury secretary for financial institutions, took mortgage service companies to task in summarizing the preliminary findings of a probe regulators have launched into how lenders have seized homes on which mortgage payments have fallen behind. "The bulk of the examination work to date focused on the foreclosure process has found widespread and, in our judgment, inexcusable breakdowns in the foreclosure process," Barr told the second meeting of the Financial Stability Oversight Council. Its task is to make the financial system less prone to systemic breakdowns. The task force includes the federal financial regulators, the Federal Trade Commission, the Department of Justice and the Department of Housing and Urban Development, as well as state attorneys general and bank supervisors.
Fed’s Tarullo sees big costs for banks to fix foreclosures (Reuters) – Banks will have to make "significant investments" to clean up foreclosure practices and some lenders potentially face strong pressure from investors to buy back faulty mortgages, a top Federal Reserve official said on Wednesday. Fed Governor Daniel Tarullo was hesitant to put a number on the potential costs and told a Senate hearing regulators are trying to get a handle on the threat to the financial system. Tarullo’s comments underline the problem banks are facing now as they wrestle with processing billions of dollars of foreclosures: many do not have the technology or personnel in place to follow proper practices, but are reluctant to invest in these areas while profits are under pressure. Tarullo told the Senate Banking Committee hearing regulators expanded their probe into foreclosure practices after a preliminary review suggested "significant weaknesses" in how banks dealt with millions of troubled mortgages.
Tarullo testifies putbacks could surpass robo-signing mortgage controversy – Major structural problems at the nation’s largest mortgage servicers will continue to hinder operations, with potential financial exposure from putbacks perhaps trumping robo-signing, according to a Federal Reserve official’s testimony Wednesday during a Senate banking committee hearing. Fed Gov. Daniel Tarullo also said a preliminary multiagency review of servicing companies found shortcomings at major shops. Findings "suggest significant weaknesses in risk-management, quality control, audit and compliance practices" related to mortgage servicing and foreclosure documentation, Tarullo said."We have also found shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of third-party service providers, including legal services." As a result, the review has been expanded to include a look at past-due loans that are not yet in the foreclosure process.
ADP November Jobs Improvement Not Enough – November 2010 private sector non-farm payrolls rose 93,000 – the largest increase so far this year. The headlines: Private-sector employment increased by 93,000 from October to November on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from September to October was revised up from the previously reported increase of 43,000 to an increase of 82,000. This month’s ADP National Employment Report shows an acceleration of employment and suggests the nation’s employment situation is brightening somewhat. November’s gain in private-sector employment is the largest in three years. This is the tenth consecutive month of gains, which have averaged 47,000 during that period. Nevertheless, employment gains of this magnitude are not sufficient to lower the unemployment rate, which likely will remain above 9% for all of 2011.
State guarantee to banks second highest in EU at €723bn – IRISH banks have been state-guaranteed to the tune of €723bn since the start of the crisis, the second-highest figure in the 27-member bloc. The European Commission’s state aid scoreboard, which ranks countries in order of their reliance on government support, places Ireland second only to Britain, which has gained EU approval for over €850bn worth of guarantees, capital injections and other support schemes. The Irish figure includes the €400bn blanket guarantee issued in September 2008, which is no longer in place. The Department of Finance says that at the end of September 2010 the state was on the hook for €146.7bn in guarantees. The state has received over €1.33bn in fees under the guarantee schemes.
Mounting calls for ‘nuclear response’ to save monetary union – As Europe’s debt crisis spreads ever wider, the EU authorities are coming under intense pressure to move beyond piecemeal rescues and resort to radical action on a nuclear scale. Spain’s former leader Felipe Gonzalez warned that unless the European Central Bank steps into the market with mass bond purchases, the EMU system will lurch from one emergency to the next until it blows up. Alluding to Portugal and Spain, he said a third country will need a rescue as soon as "January or February", and fourth soon after, at which point it will "contaminate the whole of Europe and get out of hand". "If the ECB bought just a third as much public debt as the US Federal Reserve is doing, we could stop the speculation," he said.
Will it work? No. What can Ireland do? Remove the bank guarantee and default – THE DEAL is done, but there is no joy. The agreement that was supposed to end the financial crisis gave rise to its next wave. We are now in the unique situation that financial markets are taking a longer term view than national governments. The governments are saying: There is no liquidity crisis. Greece and Ireland are safe for the next few years. The markets are saying: There is a solvency crisis; there is no way that Greece and Ireland will be able to prevent an explosion of their national debt. The markets, for once, are correct. At an interest rate of 5.8 per cent, the loan from the European Financial Stability Facility will at best plug a temporary funding gap. It will not improve – and quite possibly worsen – Ireland’s underlying solvency position. The interest rate is very likely to be higher than Ireland’s nominal annual growth during the period of the loan. And that means that the real value of the debt will increase. Revoke the guarantee for the banking system and then convert senior and subordinate bondholders into equity holders.