Is the Ireland Bailout About to Become Bear Redux? – – Yves Smith – Not being an expert in either the Lisbon Treaty or the rules governing the ECB, I’m restricted in my ability to interpret an article in the Financial Times and the underlying position paper at the ECB on the legality of the Irish bailout. The Irish finance minister asked for a reading on the “draft law”, which is the Credit Institutions (Stabilisation) Bill 2010. There is a certain amount of grumpy harrumphing in the ECB response, namely, that it should have been consulted earlier and its preliminary reading has been made in more haste than it would like. Regardless, it does not take a lot of expertise to get the drift of this gist: In particular, the ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the Eurosystem. For example, problems of legal uncertainty relate to the impact of, inter alia, Article 61 (effects of orders on certain other obligations) of the draft law on the rights of the Central Bank, the ECB and possibly other central banks within the ESCB, the scope of collateral rights of central banks given as security against ELA, as well as other issues. The ECB would expect that nothing in this Act would affect operations, rights or entitlements of the Central Bank or the European Central Bank, or any other central banks within the ESCB. The FT reads the big issue as being the adequacy of collateral for lending:
Chinese growth in 2011 – For the past two months there have been very strong rumors in the markets that next year’s new lending quota was going to be set somewhere between RMB 6.5 trillion and RMB 7.0 trillion. For comparison’s sake, total new lending last year amounted to RMB 9.6 trillion, and this year the quota was RMB 7.5 trillion.But to me RMB 6.6-7.0 trillion seemed likely to be low (and ”low” is a relative word here – compared to the years before 2009 these are actually very large numbers). We have been telling clients for months, for example, that even ignoring the reportedly large amounts of loans shifted off bank balance sheets this year, it was very unlikely that 2010 would end with new lending below the RMB 7.5 trillion quota. In fact by the end of November we were already over RMB 7.4 trillion, so I suspect we are going to finish the year with total new lending at pretty close to RMB 8 trillion. Add in the loans taken off bank balance sheets and we have easily blown through the 2010 quota. Tuesday’s South China Morning Post has an article suggesting that we may have been right:
Some lessons from recent global macro events – I’ve just attended a conference sponsored by the Reinventing Bretton Woods Committee, entitled "The International Monetary System: Old and New Debates", which took place against the backdrop of France’s chairmanship of the G-20. Numerous topics were discussed, including the deficiencies of the international monetary system, externalities of international financial capital flows, multiple reserve currency regimes, and balance of payments adjustment. I was on the panel dealing with the last topic. I made the following comments: (Or, things I would not have thought two years ago)
- Even surplus countries can be faced with unpleasant choices (the Trilemma strikes!)
- Exchange rate adjustment can occur without nominal exchange rate changes
- Exchange rates matter for trade flows
- Difficulties in monetary/exchange rate coordination do not rule out positive outcomes.
Money and metaphysics — Paul Krugman and Kevin Drum recently wrote about the problematic definition of “money” in the modern world. I think this issue can be helpfully illuminating by dusting off one’s BA in philosophy and attempting a little metaphysical analysis that will help clarify what the actual issue is here. What is money? Well money is currency. And it’s easy to say what the currency of the United States of America is: dollars. So what’s a dollar? Well the word is ambiguous. But a dollar is a unit of account—you can give the price of things that aren’t dollars in terms of dollars. And a dollar is also a medium of exchange. One dollar, is a perfectly safe perfect liquid asset with a value of $1. Four quarters are a perfect safe investment in dollars. Four quarters are worth one dollar by definition so they can never lose value in dollar terms. And they’re perfectly liquid: as long as you’re in the USA, anyone will accept four quarters in exchange for goods or services valued at $1. The problem of the “broader aggregates” is that there are lots of things that have properties closely resembling those of dollars. My checking account with PNC Bank is basically perfectly safe (thanks to the FDIC) and it’s almost as liquid as quarters. The vast majority of stores will accept my debit card and there are ATM machines all over the place where I can exchange electronic checking account commitments for physical dollars.
Is regulation really for sale? – Relationships between London banks and their regulators are not especially warm just now. The latest bonus rules issued by the Committee of European Banking Supervisors (soon to morph into the European Banking Authority), have left those sensitive souls on the trading floors feeling rather bruised and unloved. In the future, 70% of their bonuses will have to be deferred. Imagine living on only $3 million a year, with the other $7 million paid only if the profits you earned turn out to be real? It is a shocking turn of events. Yet, in narratives of the financial crisis, regulatory capture is often an important part of the story. Will Hutton, a prominent British commentator, has described the Financial Services Authority, which I chaired from 1997-2003 (the date things began to go wrong!) as a trade association for the financial sector. Even more aggressive criticism has been advanced about American regulators – and, indeed, about Congress – alleging that they were in the pockets of investment banks, hedge funds, and anyone else with lots of money to spend on Capitol Hill. How plausible is this argument? Can benign regulation really be bought?
Joseph Mason on the Myth of Good Servicers – Yves Smith – Joseph Mason has a post up at Housing Wire that not only struck both of us as more than a tad off beam, but even elicited critical e-mails from real estate industry participants. In addition, at a couple of junctures is it so unclearly written as to be difficult to parse. The post is misguided from at least three perspectives. First, Mason claims that his take on servicing as of October 2007 was so correct that there is virtually nothing to be added. That is tantamount to saying a recommendation for urban planning for New Orleans made pre-Katrina is the pretty much the only thing worth considering now. Like New Orleans, the servicing industry has been hit by devastation, in this case a level of foreclosures that has overwhelmed the industry, that with the benefit of hindsight should have been anticipated. Mason’s 2007 paper did foresee a large increase in delinquencies, but his estimate of the cost of the crisis was $150 billion, consistent with the prevailing “subprime is contained” forecasts. Moreover, his view of borrowers was based on the subprime ARM resets of 2007 and 2008. Many of those borrowers were simply not viable once a reset hit. Many of them have already lost their homes. One of his premises in that paper, that a mod might not leave the investors any better off, is quite different now, when loss severities are now averaging over 70%.
2011 Income Tax Withholding Tables – IRS employees must have had a busy weekend, as they already have the 2011 withholding tables that take into account the tax compromise bill signed into law by President Obama on Friday. Key changes are the end of the Making Work Pay credit and the 2 percentage point reduction in payroll taxes. Check out the tables here (PDF).